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Infosys, the country’s second largest information technology (IT) services company, says it underestimated the effect of implementing new and upcoming technologies. And, this could be one reason for a situation where it is battling a shrinking market share and declining profitability.
While Executive Chairman N R Narayana Murthy had earlier said the Bangalore-based company was in its current state due to a lost focus on its bread-and-butter traditional IT services, Executive Vice-Chairman S Gopalakrishnan has said another mistake was that it did not assess the change in business model in the wake of new technologies.
“We underestimated the effects of the adoption of these new technologies and the change in the business model,” he said in a note to investors in the company’s annual report for 2013-14.
“These newer services created smaller projects, since many of the engagements were pilots. They also changed the revenue profile, since clients preferred a subscription model to buy cloud services. Our traditional business, IT services, slowed down, perhaps due to a lack of focus,” the co-founder said in what is likely to be his last address to investors before he retires in April next year.
A little over three years earlier, Infosys had introduced its ‘3.0 strategy’, mainly aimed at widening the focus and looking to move higher in the value chain. Among other things, the strategy aimed at raising revenue share from the products and platforms business, as well as consulting. Chief Executive Officer S D Shibulal had said the strategy would be “relevant to clients in all facets of their enterprise”.
However, in retrospect, several experts have said the strategy’s timing was inappropriate. Several observers have also questioned the weakness in execution of the 3.0 strategy. In a conversation with Business Standard in September last year, Partha Iyengar, the India head of IT research firm Gartner, had said Infosys 3.0 was the company’s undoing.
“When Infosys says they want to be a product company based on a thin stream of IP (intellectual property) scattered around the company, it is a difficult choice. To truly be a product-led company, you need to have an absolute industry-leading product. Also, you cannot move to a product mindset company when you are such a mature player,” Iyengar had said.
While experts continue to be wary about Infosys’ CEO-succession process at a time when faced with a long-stretched management restructuring and top-level exits, Gopalakrishnan said he was confident they’d be able to manage the issue. He added the presence of Narayana Murthy would help in a smooth transition.
“The CEO transition is an important move that the board has to act on in the coming year,” he said. “With Murthy as executive chairman, the risk in the transition is reduced.”
With incumbent Shibulal set to retire by January 2015, there has been much discussion over Infosys appointing its first non-founding CEO. The company is taking the help of a couple of external agencies to identify internal and external candidates, best suited to lead the team of a little over 160,000 employees towards sector-leading growth.
Year gone by
Despite consecutive quarters of growth in line with expectations, in a note to investors Shibulal said the company had not yet achieved its desired growth levels.
“Although we exceeded our initial guidance (forecast) and feel encouraged as our growth rate doubled, we believe the results are below the benchmarks that we set for ourselves,” he said, in what could be his last address to investors as well.
Calling FY14 a year of “optimism and renewed vigour” for the company, Shibulal said Infosys succeeded in reaffirming its “commitment to all stakeholders” during 2013-14. During the year, the company posted two quarters of impressive growth, which has led several observers to believe it is now on the road to revival.
However, Infosys has said it expects only a tepid seven to nine per cent revenue growth for FY15, lower than sector body Nasscom’s estimate of 13-15 per cent growth in the entire segment.
