'For IT, this year can be worse than 2002-03'

Q&A/ S Gopalakrishnan

For S Gopalakrishnan (53), who took over as CEO and managing director of Infosys Technologies last June, it has been a year of baptism by fire. The rupee appreciation had already made the top seat hot when he got in but worse was to follow. The US financial sector went into a tailspin from August over the sub-prime crisis, plunging the world's growth engine into a credit crisis. For the likes of Infosys, which relies heavily on the financial services sector for its business, this was the biggest challenge since the tech and telecom bubbles burst in 2000-01. But Kris, as everyone calls him, has soldiered on powerfully and most lately secured from the equity markets a hard won appreciation and enhanced value for Infosys. Excerpts from his conversation with Subir Roy:

Would you characterise the current market conditions as similar to those in 2002-03?

The difference is that the challenges then were created specifically by the technology sector, areas like telecom and internet, whereas the present challenges are created by the financial services sector. Since the sector is like the backbone of any economy, delivering credit and liquidity, it is starting to affect every other sector. I would say the present problems could be broader, deeper and last longer. Our clients are telling us they need time to figure out how to respond.

So people are sitting on deals.

Right, delay in decision-making. But they are also telling us that under the circumstances, the value of offshoring is attractive and they will require more support, asking us about our own recruitment plans, saying, the demand will come so don't stop everything.

The wait could be two quarters?

In the past we have seen when there is a pause like this, companies don't take a long time to figure out what they need to do. US companies respond very fast. We are giving them two quarters but it may actually happen earlier.

All the US presidential candidates are making the wrong noises on offshoring...

The business people are saying, we are really short of people. There is a mismatch between what businesses are looking for and what is available in the market. There is a transition on from one set of capabilities to another. Jobs are being lost in factories and being created in computers, software, high-tech. In many of the states where primaries have been held, there is a lot of traditional industry. Unless there is a concerted effort to retrain these people, you will find that businesses won't have the resources. That is the reason why they are looking at outsourcing, setting up captive units here.

Do you see any problem with your onshore effort in the current year?

For one or two years, we can manage with what we have (visas), but in the medium to long term, this is going to pose a challenge and the right debate should happen with relevant data. The visas we have applied for this year will only become available next year. Also visas are issued for five years, so what we are really looking at is what is in store two to five years from now and there, yes, I see challenges.

How is productivity growing?

In the last 12 months, our revenue per employee has gone up by about 5 per cent. We have achieved this through change in business mix, certain services of higher rates, higher margins. Second, the work productivity itself has increased. In order to take advantage of this we have increased our fixed price. And we are increasing the use of tools, reusable components.

If productivity and compensations go up by the same proportion, then margins remain flat.

Yes, our current goal is that we will be able to maintain margins going forward. The increase in cost, compensation and other things will be offset by increase in productivity and scale.

After winning price rises for several quarters, that is also likely to remain flat.

Yes, because the environment is challenging, we assume flat pricing.

There are three issues: how much of business are you getting in India, how much outside of the US and how quickly are you acquiring companies all over the world? There is a perception that in all three, Infosys is number three among the top three software companies. You are sitting on piles of cash.

We have not done big acquisitions really except one, in Australia, five years ago.

Except the Philips deal in which you broke one of your rules of not taking in employees.

Yes, we will go for Philips type of acquisitions more and more. We are open to taking over employees provided they fit the business model. The second type of acquisition is of a company in our own business "" growth through acquisition. Data shows that presently 75 per cent of acquisitions do not deliver the value they propose to deliver. That is why we are very cautious about acquiring. If you look at data from acquisitions even among the competition, it is not that great. The results are definitely mixed.

This applies to acquisitions made by them in the last three years?

Yes, it has not changed. That is why we are very cautious about acquisitions.

And transitioning to non-US geographies?

About seven-eight years back, we decided to focus on Europe. In 1999 Europe accounted for about 7-8 per cent of our revenue, five years back it was 14-15 per cent, today it is 30 per cent. Australia is today about 5 per cent of our revenue. Now we are saying we will focus on China, Latin America, Middle East. The US used to be about 75 per cent of our revenue, five years back it was 67-68 per cent, today it is 60 per cent. The dependence on the US is coming down with every quarter. I strongly believe in the next five years, our revenue profile will be very different from what it is today. So the company is continuously evolving and changing. We have made all these transitions without impacting growth and margins.

Indian business?

The global spend on IT is $600-800 billion, of which India accounts for only $ 5 billion. So, India was a small market. Now the Indian market is growing at 40 per cent. Over the next three to five years, the contribution from India will be significant enough to affect the growth and margins of the company. So, we are now pursuing large deals and the pipeline is looking very good and at some point in the current year we will be making some announcements about the deals we have won in India.

What is your big challenge?

The unknown is where the rupee is going to go. We believe that in the nearer term, the rupee will be volatile, not go in a particular direction, will not appreciate. We feel we can manage this.