IT Gaints: Infosys Group - Change of Guard

The raison dtre of every corporate body is to ensure
Predictability, Sustainability, and Profitability of revenues year after
year," Infosys co-founder and chief mentor NR Narayana Murthy has been
quoted as saying in the investor page of Infosys website.

That is a promise Infosys has stood by. Strict adherence to this
principlewhat it internally calls PSPD (the D is for derisking)has paid
off immensely for Infosys in terms of investor confidence. Today, it is the most
valuable (pure play) IT services company in the world.

But there is one area of its business where Infosys has not been
able to apply the PSPD principle: consulting. The consulting business of Infosys
is today led by a subsidiary company, Texas, USA-based Infosys Consulting, Inc.
Started in 2004, with a couple of ex-Deloitte consultants at the helm, the idea
behind the company was to build a high value service line that would increase
revenue per employee, and at the same time build deeper client relationships at
the boardroom level. It was argued that unlike IT business where long-term
contracts rule and, hence, accurate revenue forecasting is possible, consulting
contracts are high-value, high-impact engagements with shorter cycles.
Predictability is not possible the way it is in the IT business. Infosys top
brass agreed.

In 2002, Infosys had got into the other end of the services
spectrum by starting a BPO company, Progeon, with 20% equity participation from
Citigroup. Unlike consulting, growth potential was the driver behind the
decision to get into BPO. But despite a separate branding, an outsider CEO, and
very different employee intake, Progeon was built with an Infosys DNA, measuring
operational metrics the same way as the parent (though their values looked quite
different). Moreover, it was situated right at the Infosys campus in the
Electronics City.

How the two subsidiaries have evolved tells much about Infosys
as a group.

Strictly speaking, Infosys is not a diverse group. It is one
company, with a few wholly owned subsidiaries. But analyzing its performance as
a group is important because as it gets into new areas by a mix of organic and
inorganic means, how it handles the governance as well as relationships with
different subsidiaries will become extremely important.

FY 07 saw the culmination of Infosys BPOs gradual
integration process with the parent. Soon after it started Progeon, Infosys
realized that BPO was a long-term game and held tremendous opportunity if it
could be effectively integrated with its core IT services. So, going against the
rules of the then call-center-dominated BPO marketplace, Infosys started
integrating it with its IT business: platformizing skills; pursuing
transformational deals with significant IT components; and above all, adding BPO
to its One Infy offering (where one client lead was responsible for selling
different services to a customer). In 2005-06, it bought Citis stakes to
further integrate it and, last year, it changed the units name from Progeon
to Infosys BPO. The business grew 75% last year to cross Rs 650 crore4.7% of
Infosys overall revenue from 0.5% in 2003

Infosys had identified BPO, along with testing, package
implementation, and consulting as the growth areas four years back. Though
testing and package implementation do not match BPOs growth, they too have
grown impressively.

The only dark spot has been consulting. The contribution of
consulting revenue to total revenues has declined from 4.3% in FY 03 to 3.6%
in FY 07. But that includes the parent companys revenues from consulting.
Infosys Consulting contributed just about 1.5%. Though it grew 49% last year on
a very small base, losses more than tripled. On revenues of Rs 213 crore, it
made losses of Rs 110 crore.

Infosys Consulting, even today, has a separate website. Its
composition of workforce is very different with 80% of its workforce
non-Indians. In Infosys overall, that is just about 4%. Though it has tested
success in some engagements the long-term impact that Infosys was expectingeither
in terms of revenue contribution or mind sharehas been negligible. Infosys
has to take a tough callit has to choose between completely integrating it
with IT (and probably stop measuring it as a separate service line) and
maintaining the structural status quo with added effort to make it viable as a
separate service line. We expect to see some strategic decisions this year on
that.

The other two subsidiaries of InfosysInfosys China and
Infosys Australiahave performed along expected lines. While the China
subsidiary did make losses, it is still clearly in the investment phase and
every company in China is figuring out how to make the business work. Analysts
say that, if anything, Infosys is a little ahead of other IT services players in
China. Infosys Australia, that it built through acquisition in 2004, has
stabilized and is making profits.

The Year that Was

The year 2006 was Infosys 25th year. It celebrated the
occasion in style, ringing the NASDAQ bell from its campus in Mysore. The year
also saw Infosys announce a change of guard. Nandan Nilekani, the man who gave
the idea of a "flat world" to Tom Friedman decided to relinquish the
post of CEO in favor of S Gopalakrishnan. In August, Narayana Murthy stepped
down as the executive chairman. Nilekani became executive chairman of the
company on June 22, 2007, the day Gopalakrishan became CEO.

Infosys denied rumors that it was bidding for Paris-based
European services major Capgemini.

Infosys not only grew much faster (45%) than peers Wipro and TCS,
it also saw net profits soaring by 56%. The contribution of application
development and maintenance came down to 58%. IP creation, another priority, got
a boost as Infosys had 81 patent filings at the end of FY 07.

The most important achievement, operationally, however, was an
impressive rise of close to 4% in revenue per employee. DQ