Infosys Technologies CEO Kris Gopalakrishnan has several unprecedented challenges to combat this year — more than 80 per cent of his top customers are set to lower their budgets, the spectre of recession in the West may bring down the number of orders and contracts. All this could put margins and earnings under severe pressure. Gopalakrishnan discusses the way forward with Aanand Pandey.
You have said two things that appear contradictory. At one point you said that you see no signs of recovery. At another point you said there are some signs. Please explain.
The context of both the statements was different. As for the first statement, we recently did a customer survey and polled about 135 of our clients who bring in about 83 per cent of our revenue. We asked them when they expect the recovery to happen. Most of them said the economy would recover in early- or mid-2010. They are still seeing 2009 as a very challenging year. Recovery is not going to be immediate from that perspective.
In another context, when you see results from the financial services firms right now, and you read some of the statements from the US, including those of President Obama, they indicate that the economic recovery may have begun. There are some signs and I am hoping that it’s real and sustained, but we still need to figure out what will be the nature and speed of the recovery because the downturn was sudden — for companies, it was like falling off the cliff. So one needs to see whether it will be a protracted or a faster recovery. We don’t know that right now.
You have been quite clear in saying that this crisis is unprecedented. Haven’t we faced other downturns before? Even 9/11 was quite painful for Indian companies.
If you look at 2001, it did not involve all sectors. It was restricted to telecom, high-tech and other industries which were directly dependent on US companies. It did not impact financial services — the backbone of any economy.
This crisis has impacted all sectors because credit has dried up. You are finding that large companies who have global reach are disappearing overnight. In other cases, questions about the future are being raised. And look at currency volatility — it also is a reflection of the challenges we are facing. At the beginning of this financial year, the dollar was at Rs 39. Now it is at Rs 52. There is a 26 per cent increase in a single year.
Even before September 2008, when the full impact of the downturn hit everyone, large US companies had started cutting budgets. Did you not see the crisis coming when the first signs appeared some time in the second quarter?
Before September, there were signs that there would be a slowdown but I don’t think anybody would have expected this to be as bad. In fact, remember that our Q2 was one of the best quarters of the year. The sequential growth was about 6 per cent. We did feel a downturn then and said that Q3 and Q4 are going to be dramatically different than Q1 and Q2. We revised and lowered our guidance for the full year in Q3 and we revised it downward again in Q4. We did react immediately: We cut down our expenses, we did many things and that is the reason you will find that we have done a reasonably good job on the margin side. Of course, growth will take time. Just that everybody is hurting right now and cutting budgets. So that will impact growth.
How will you maintain a high margin at a time when clients want better prices?
Our margins are not high because we are high priced. Our margin is because we are efficient. If you are not competitive and not delivering value, then people are not going to buy your services. Customers understand the value and that is why Infosys is doing well in the market. We are a premium player because we deliver value.
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You have said that clients have become more demanding and cutting budgets at the same time. How will Infosys respond to that?
We are giving them multiple options. We are telling them that the more work they do — using global delivery model — more will their cost come down. We are being flexible and saying that we can pass on some more benefits and savings to them. There are other models which we have introduced in the market. Transaction-based pricing and ticket-based pricing, for instance. What we want is a win-win scenario.
Rate-per-hour is a misleading indicator because in software, productivity differs from one person to the other. Second, quality of software is very important if you look at implementation and maintenance costs. So there are many other factors. We have to look at the total cost of ownership and productivity differently and look at cost per function point — that is a better measure than rate per hour. So there are certain views we have and that’s what we are trying to tell our clients.
What are the lessons you learnt last year?
One thing is very clear. No matter how remote is the probability of an event, it still can happen. We must consider all possibilities while assessing risk. So once in a while we must evaluate our response to even remotely possible events. There has to be scenarios built into your plan that can prepare the organisation to mitigate the risks.
Till something bad happens, our mindset takes an approach where it’s (our mind) in denial first, then there is a reluctant acceptance and then there is an active acceptance and then we start working towards mitigating the risks. A good risk assessment method can improve our response.
Second, you tend to get complacent when times are good. You don’t look at basics. That shows that you have to be much more paranoid about basics.
What are the basics one must look at all the time?
You must have a diversified portfolio. It is not that you don’t know that this (diversifying of portfolio) needs to be done, just that you don’t take it on a priority basis.
You have to look at the concentration of business. You may find that some accounts are good but you may not go beyond a point to see if it is increasing your exposure. We have managed it reasonably well, but the crisis reinforced the need for doing this.
Third, all of us have to figure out a mechanism that can put our bench to better use. We were all in a supply-constraint environment before and the demand was always there, so we didn’t worry about it. This crisis shows that we have to figure out a better way of managing our bench where the demand is low and supply is in excess.
Infosys maintains a huge war chest of $2 billion. Is there a philosophy behind it? How do you build it?
We focus on our receivables, we run a tight ship, we even look at how we have handled our currency exposure and so on. We have always maintained that we are not in the business of trading in currency. So the algorithm we have is, we look at the net receivable over a two-quarter period. That has helped us minimise forex losses — in fact, we have suffered the least on this account in the industry. We try and make sure that we are prudent. We understand that our business is providing software solutions. We have to mange our cash reserve prudently and collect our receivables in an intelligent manner.
As for building the reserves, there are certain things we do. We don’t make risky investments. Our cash is in fixed deposits and good institutions. There we have a conservative approach because we believe our role is to preserve that cash and not to generate a huge amount of return. Well, this is not to say we don’t get reasonable returns.
Our philosophy is that we must have sufficient amount of cash. We are in a risky business — we are in the technology business and technology is constantly changing. Companies in our sector do not have great longevity. Lot of companies come and go. Very few companies last 20 or 30 years. So we have believed that we must have enough cash in our hand to manage our business for one full year even if there is no revenue, which is the worst case scenario.
We also have certain parameters — return on invested capital, return on capital employed — and when we fall below a threshold we actually look at returning some cash through special dividend. We have a history of giving special dividends over the years.
The third is we have had rules regarding what the dividend payout ratio should be. Until last year, it was 20 per cent of the net income. Now we have raised it to 30 per cent.
At about $40,000, your revenue per employee is the highest in IT industry...
...it is among the highest in India. Outside India, we are among the lowest.
...so how do you ensure and maintain this ratio?
It is because of the business model. Our model calls for more work — around 70 per cent — to be delivered out of India and our rates are consistent with that.
It is all about choosing the right business, understanding the value we deliver to our clients and making sure that our rates are commensurate with the value we deliver to our clients.
What is your sales and marketing strategy for this year?
This year, we will consciously increase sales and marketing costs and continue to invest in future growth. When the growth comes along, the sales and marketing costs will fall in line with the standard model.
You are not giving any increment this year. How will you keep up employee morale?
Infosys employees understand the environment in which we are operating. They interact with the clients, they see the situation. There have been lay offs in the company, but that has been because of performance.
We have to communicate and talk to them about the situation. Infosys is still hiring. We will honour our commitments. So our goal is to make sure that in the larger context, we continue to create employment, protect the jobs of our employees, invest in our employees’ future by providing education and training. That, in turn, will work in the benefit of the consumer. When we do very well, we can still go back and give increments, we can also give more in terms of bonuses. We don’t see variable pay really being cut this year.