In an exclusive telephonic interview conducted by WallStAnalyst.com’s Sanjay Pandey on Tuesday, December 10th, 201,3 Sandeep Mahindroo, Principal Investor Relations of Infosys, talks about developments that have recently been creating a buzz around Infosys and explains how the tech giant plans to regains its lost glory. Edited excerpts from the exclusive interview:
Sanjay Pandey : Infosys has always believed in organic growth, but yesterday Mr Narayana Murthy said he is not averse to acquisitions. Has the strategy changed? If yes, what prompted that?
Sandeep Mahindroo : I think we have been quite open to inorganic growth for the last many years. We were not as focused on acquisitions three-four years ago as we are now. A reflection of this fact is our acquisition of Loadstone in September last year.
We are absolutely focused and open to acquisitions in certain areas. It should be a part of a much larger play rather than giving us something that is a one-time bump to the revenue. It should be an opportunity to integrate key synergies on the business side.
We don’t want to be forced into acquisitions just to increase our revenues. We are absolutely able to do it in certain areas provided there is some long-term strategic data involved in that.
Sanjay : Can you brief on the recent buzz on the Infosys management change? The top brass is still intact, so which level of management is leaving?
Sandeep : Well, I think there have been some media reports that talk about some very specific names at the top level. We had a board-level departure and one departure at the executive council-level. Actually, the media is referring to that.
What you are saying is right that the core team or most of the core team has been with us for a very long time. However, if you look at the Executive Council, we have a vast majority of the Council that has been with us for over a decade — some closer to even two decades.
Despite some churn or departure, most of the team is still intact. It is a well-knit and cohesive unit. At the same time, we have broadened the pool of Executive Council members so that the next set of leaders is identified and able to move to a higher level over a period of time.
Again, as part these departures that you have seen in the past few months, we have been able to identify the replacements very quickly. The replacements are now being taken through a formal transition plan. It certainly helps that the replacement is someone who is part of the same business unit. It enables them to come up to speed promptly.
It is not something that we are very worried about. We would have been better off without these attritions. We have done multiple things in the last few years. Firstly, we identified the pool and ensured that it is groomed to the next level and then, over a period of time, managed transitions actively.
Sanjay : Why does Infosys look within every time they have hired someone for a core top position? Shouldn’t they shed the inhibition and hire someone on merit from outside?
Sandeep : I don’t think it is about internal versus external. It is about hiring the right people for the right job. We have been very actively focusing in succession planning and grooming of leaders at the biggest level over the last decade or so. We do think that we have a broad set of talent pool available internally. That’s why we have been able to quickly fill up vacancies and positions that are created as a result of departure.
The set of capability that we have found internally has matched up with our requirement. This is why historically, the need to go to the external market has been very limited. I am not saying that we are absolutely closed to that option. If you are not getting right replacement internally, there is nothing that stops you from looking outside.
It is not about one versus the other. It is about hiring the best people for the right job.
Sanjay : Isn’t it because of these in-house people running the show, Infosys lost its momentum and had to bring Mr Murthy back from retirement?
Sandeep : I won’t necessarily react to everything that is being said in the media. Everything is not worth reacting to. What you are saying is true to some extent that we did have performance-related challenges. I don’t think we have come back totally on track.
But I think it would be wrong from our prospective to relate performance of individuals or leadership team. It’s been the same team that has been around for a better part of our existence as a company, right. I don’t think it can be proved anywhere that, with or without one or two leaders, our performance has been or would have been very different. The core team has been with us for around two decades. The company has done well for the better part of that period, except for the last couple of years. I think what you are saying in terms of performance not being good is right, but linking it to individuals who have contributed to the company for the last one or two decades and have not played a pivotal part would be wrong.
We do believe that performance challenges have been driven by several other factors. For example, we do have higher exposure of revenues coming from discretionary services. This is one area where you can see significant impact in client spending from CY 2011. This led to an impact on our revenue because discretionary services form about 2/3 of our business portfolio, compared to 30-35% of our peers.
When discretionary services were firm around 2009, we did better than most of our peers. But when spending on that was negatively affected, it showed up more on our performance – a lot more than our peers. Secondly, we also made multiple internal changes back in CY 2011. We restructured the company, came up with a new strategy. There were some forced transitions, as Mr Murthy had to retire at the age of 65, and that led to several changes at the highest level of the organization.
And because of these changes, it took us for a while as an organization to settle down. People had to change responsibilities within the company, and that led to a period of settling down so that everyone could have been more comfortable with the expansion and understanding new portfolios, understanding the client environment, and making a connect with the client. As far as these changes are concerned, some of them were voluntary and some were forced on us because of the retirement policy of the company. And that did make some kind of negative impact on our company. I think these are the two changes as well as our large exposure to consulting services that created some performance challenges.
Sanjay : Mr Rohan Murthy is rumoured to join the board or the management in the near future. If yes, what is the functional area where Junior Murthy is assisting or would be assisting the management?
Sandeep : We have said several times, his term will be a co-term with the Chairman. There is no reason for anyone to think that he will get into the board level. That’s complete speculation, we haven’t endorsed it anyway. That’s why I have a lot of issues with what the media is highlighting. He is assisting the Chairman. He is a part of the Chairman’s office. There are several others who are part of the Chairman’s office. Assuming that he will get to the board is complete speculation.
Sanjay : Is dynasty concept taking over Infosys’ much lauded fierce meritocracy?
Sandeep : If that happens, we will have to comment on this at that time. As of now, this is a hypothetical question. I don’t think we should be even commenting on it. We are governed by an independent board. We have a Chairman, a CEO, a Non-executive Chairman, and an Independent Director. At the same time, we have an expanded Executive Council. I don’t know where this talk about dynasty comes from. If what you are saying proves to be right, I can understand the accusation. It is not worth commenting at this point of time.
Sanjay : What is Infosys 3.0 era?
Sandeep : It is focused on moving up the value chain, increasing our relevance for our clients and establishing deeper connect with them. As part of the 3.0 strategy, we want to service our clients in three different ways – one is through the Business IT Services where we help our clients on the cost side of their operations by providing them services like applications, infrastructure, and BPO, among others. The second one is what we have gotten into about a decade back, is heavily discretionary consultant portfolio, which makes up about 1/3 of our revenue. Here we help our clients on the revenue side of their operations.
Last year, we have added the PPS division, which accounts for about 6% of our revenue. It is clearly our newest portfolio where we help our clients on differentiation side of the portfolio. Again, we came up with a product launch yesterday. The idea is to come up with individual solutions platform like TradeEdge, which can enable our clients on innovation side of the business. These three products are helping our clients on the cost side, helping them on the revenue side, and differentiation and innovation side. This is what we are trying to do at 3.0.
Again, it is a long term journey. It was never designed to be a one- or two-year story. These are long-term strategic steps that we took around two-and-a-half years ago, especially on the PPS side. The results of which should be seen over a period of time, as PPS continues to scale up, expand and grow, as we come up with more and more offerings like TradeEdge.
Sanjay : How sooner do you think you will be able to achieve the target of 33% from the PPS business?
Sandeep : Well, I think it is important to keep in mind that PPS is a different model. It is not our other 95% of the business where you hire experienced people, put them in front of the client, and start getting revenue for those people at the end of the month. This is a different business where you have to make a lot of upfront investments. It is about creating products and productising application platforms that have a much longer gestation period. So you need to invest in creating the product. You need to have an anchor client to support you for some time and, then eventually, you can take it to the market service requirements for a broader set of clients. I think the investment and return profile is very different. That’s why I don’t think we, as a company, are disheartened or not happy with the fact that it is only 6% of our revenue.
This was always destined to be a different business model with a different returns profile. The thing to look at here is the Total Contract Value (TCV) of the PPS business which has grown to over $750 million ever since we launched it about two-and-a-half years ago. The TCV will convert into revenue over a period of time. I think, we definitely are on the right track. Could we have accelerated, if we had more investments? Certainly, yes.
But as a business, we have struggled to make sure that all parts of the business are adequately funded. You always have competing choices. We have focused on PPS and it continues to be an integral part of our aspiration.
Sanjay : What is the current attrition rate? How do plan to cut down on that?
Sandeep : See, you can never have a 0% attrition rate. Nor do I think it is desirable to have 0% attrition rate. Because then, you will not have infusion of fresh talents coming in. Our attrition rate is about 17.5%. Out of which 1.5% is involuntary that is basically initiated by the company for performance reasons. So, the voluntary attrition is 16%. I would say it is probably a couple of percentage points higher when compared to where we wanted to be.
But then, it is a reflection of multiple things such as growth challenges that we have had in the past. It is a reflection of the fact that we have not given compensation increases on time. And obviously, we tried to correct it with the compensation increase in July. This is what we think that will eventually bring down attrition. Since everything has not gone right for the company over most of the last two-and-a-half years, it has resulted in attrition being a bit higher compared to our comfort levels.
Sanjay : The company has been generating most of its revenue from the US and the UK markets. Of late, there has been a lot of news on Infosys expanding in Australia and New Zealand. Are these the new target markets?
Sandeep : It is one of the growth markets that we have identified. I won’t say it is a new market because Australia is already one of our fairly large markets. We have recently created four growth markets — Australia and New Zealand, China, Japan, and the Middle East and South Asia. We have realised that these markets have more business potential. This is why we have created a structure that allows us to have a dedicated thrust and push on these growth markets.
Sanjay :What is flexible pricing?
Sandeep : Pricing is something which is a function of multiple things. I don’t know if there is anything actually called flexible pricing, because pricing varies from client to client, it varies from service to service and your own cost of operations. There has always been flexibility in pricing — not that we quote something with the client and we don’t change that level of pricing. If we think there are valid reasons for us to change, we go ahead and take a relook.
If I understand correctly, the question might have come because of some recent media reports that we are becoming a bit more flexible in competitive pricing. I think it’s true. That’s specific to a certain part of the business where there is lot more competition and pricing is becoming the key aspect of client decision making.
And obviously because we want to have a good growth profile that is in line with the offshore industry or better. It does require us to be far more competitive and far more flexible in pricing. I don’t think it is something very different from what we have seen being played out in the market for the last many years. To some extent, we have become a bit more open in the last few quarters.
Actually, it is very different from what you said. Pricing is actually dependent on the nature of the engagement. There are certain engagements that are one time in nature. Let’s say, you develop an application or you do some implementation in a set of jobs. This kind of engagements would be a one-off project. Once you complete the engagement, you move on and deploy those resources in other similar engagements. Then there are engagements that are long-term in nature, which requires you to maintain client systems application or process outsourcing services. I mean flexible pricing actually does not have much to do with this thing that we are talking about.
Sanjay : As was evident from yesterday’s product launch that the business model or revenue model is changing. Is it all changing?
Sandeep : It is changing and, I think, it is changing gradually. It is not a very fast or abrupt change. The pace of change is different in different parts of the business. Our end-markets have changed, the kind of clients that we are servicing have changed, what we are selling to the client has changed, the buyer of our services within the client organisation has changed. So, I think there have been multiple changes in last few years. The end-markets require us to change also. That’s why PPS has become significantly larger part of our focus. We do have aspirations of growing it further over the period of time. Definitely, there have been changes and we are reacting to that change as well.
Sanjay : Recently Wipro acquired a firm with 500 employees in the US. Are you also planning to acquire firms there to just to ensure that you have enough strength in the market if the proposed Anti-immigration Bill is passed?
Sandeep : Well, I talked about our objective earlier which is not necessarily influenced by what our peers do. It is what we think or we need to do. If there is certain gap our portfolio, then we try to fill it organically or inorganically. I don’t we want to be forced into making acquisitions just because our peers are doing it. Nor do our peers react to any acquisition that we do.
On the immigration side, I think it is certainly a set of events that can be fairly significantly if it gets passed in the worst form. We are monitoring the situation. We also think that the political path of this is not going to be particularly easy because both the houses of Senate have different views on that aspect. We have done a set of things in the last few months in terms of taking it to client, trying to solicit their help in ensuring that it gets a balanced hearing.
Making sure that they have a mitigation strategy, we have been increasing the quantum of our work offshore, doing lot more local hiring to be on the right side of the visa issue. So there are things that we have identified as to what we can do to mitigate that impact. We have necessarily actionized on it, for it is premature to do it until or unless we know what are the outcomes we are looking at, or what the timelines are to make that judgement are. As and when it becomes a reality, or it starts getting closer to reality, then we will see what needs to be done to mitigate that.
Sanjay : What is the new model that intends to reduce onsite jobs?
Sandeep : Well, there are certain initiatives that are prevalent or in force in the company presently. One aspect of that is how we can make our own model a lot more economical, make our internal operations more efficient and have a more competitive margin profile — compared to the industry and many of our leading peers.
As part of that, we are trying to see if there is a possibility of shifting work from onsite to offshore. It is not something that we can decide unilaterally because it’s a function of multiple other things. We need to take into account the clients’ concerns. If the clients are not very open to that, then obviously you cannot drive it unilaterally. There are certain engagements where you cannot increase of quantum of work options. At the same time, you also have to be mindful of internal things — whether the team is comfortable with increasing the quantum of offshore work.
So there are multiple considerations — internal and external. But definitely, this is the focus area. If we see a scope for increasing the quantum of offshore work, why not go ahead and do that because it is a win-win situation for both the client and the company. It is a win for us, as it improves our profit margins. It is also a win for our client because it also reduces overall cost of their operations. But that doesn’t mean that you can enforce it blatantly or unilaterally. The idea is to at least focus on that and do it wherever there is a possibility of doing it.
Sanjay : Recently, Infosys had to pay a hefty fine of $34 million for allegedly circumventing the visa rules. What is your take on that?
Sandeep : What you are saying is right to the extent of being allegations or not. However, it is also important to bear in mind that in the settlement resolution, we denied all the allegations except one. The only part that we accepted that there were some errors in the I-9 form. We denied all the other allegations that it is a systemic fraud or a desire to circumvent the visa provisions. Nevertheless, we wanted to get rid of the matter. We wanted to make sure that it doesn’t impact our ability to service our clients. It doesn’t become a massive distraction. That’s why we went ahead and did the settlement resolution.
Sanjay :What was the error in I-9?
Sandeep : I-9 is basically a document that we need to file as part of compliance wherever a worker is hired locally in the US or may be brought in from other location. There were some errors in the I-9 form, which is what they also found out. The corrections were done even before the regulators got involved.
Sanjay : What were the errors, can you elaborate?
Sandeep : Well, I don’t think we can comment on the specific aspect of the errors because that was between us and the regulators. But it is a part of the public filing, consistently over the last two years, ever since we made that disclosure before the investor community acknowledging that there were errors. But I don’t think we have been very specific in the past about what kind they were. I talked to you about what is the background of I-9. But we have not talked about the nature of error in the past also. That’s why I cannot comment on that at this point of time.