Infosys Analyst Event - Win in the Flat World

Source: ARC

Infosys Technologies had their annual analyst event in Boson on September 25th and 26th. The theme of the event was “Win in the Flat World,” a natural theme for a leading outsourcing company headquartered in India. At a high level, many of their comments would have been familiar to those who have read Tom Friedman’s best selling business book, “The World is Flat.” However, the company is trying to capitalize on this marketing windfall by doing research into what does a “flat world” mean in their core verticals? What activities in these verticals lend themselves to outsourcing? How will outsourcing in combination with reengineering impact Cash Flows, the Balance Sheet, and the Income Statement?

All of this is the kind of red meat you need to throw in front of analysts to show you are a thought leader, but in a candid conversation between Andy Chatha, ARC’s CEO, and Kris Gopalakrishnan, Infosys’s President and COO, Kris was willing to admit there may not be that much revenue that can be directly attributed to “flat world” work. Much of the conversation centered on how Infosys has achieved what they have achieved. After all, Infosys is a $2 billion company, and it is one of the most profitable service companies. They are growing remarkably quickly, and they project they will grow by a third, to $3 billion in the next fiscal year. What this means in terms of people they need to hire, train, and make a profitable member of the organization is almost unfathomable in the West.

In a company growing that fast, hiring and retaining good people is a key success factor. Is Infosys using options? Infosys stopped giving options in 2002 when the US legislature began to talk about expensing options (Infosys is listed on Nasdaq). From their perspective, they were ready to make the change anyway. They had begun to feel that there was a lottery element to stock options based on when a person joined the company.

Instead the company has a profit sharing program. Good performers can earn bonuses that are larger than their base salary. The company ties bonuses to corporate performance as measured by revenue growth, team performance and individual performance. Team and individual performance are tied to profitability. The top executives also receive retention bonuses.

One factor in retaining people in India that is not often talked about is the Indian infrastructure. For example, their people in Bangalore can spend as long as two hours commuting each way. One way they are responding to this is by opening new sites in Tier 2 cities, which have a better infrastructure and better quality of life.

Indian Services companies are always asked about their attrition rate. This is because a customer’s experience is adversely impacted if the rate is too high and the consulting firm is continually bringing in young new hires to support the contract. Infosys’s attrition rate is around 11 percent, which is good for Indian firms. What these companies are rarely asked to do is to drill down on that attrition rate. We asked Kris to do this. Of the 11 percent, 2 to 3 percent of the people that leave are the non-performing people they want to leave. Infosys rates their people in four categories: As are high performers, Bs are average, Cs need improvement, and Ds are people that are not a good fit for the company. About 3 to 4 percent of those that leave are young people that have worked in the industry for a few years and now want to pursue a graduate degree, particularly an MBA. It is really the A performers that they need to monitor and make every effort to retain. Currently, about 3 to 4 percent of those that leave are high performers, which they feel is not bad for their industry.

In competing against the IBMs and Accentures on one hand, and the other Indian service firms on the other, good people and good processes are critical. It is not cost that differentiates, that is only the point of entry to a deal, and there will always be other service firms with lower price points. Kris argues the only differentiators are speed, excellence in execution, and innovation. To achieve this, you need a process driven approach to services that is certified to various global quality standards such as ISO and CMMI. This process must be balanced with project teams that are empowered to make most of the decisions. In the long run, customers stay because of quality, and Infosys is creating new benchmarks around measuring customer service.

From a price perspective, they are continuing to innovate to increase the proportion of people that work offshore (as compared to on site) on a particular project. That offshore ratio will differ depending upon the service; it can be quite high, for example, for IT Outsourcing but will always be much lower for consulting. Nevertheless, across their service areas they have been able to drive that ratio higher, partially by gaining customer buy-in, by explicitly linking their price to do a service to the offshore ratio to support the customer.

Infosys manages profitability at the project level. They use pricing sheets that allow sales people only to reduce prices to a certain level. If the sales person believes the price must be reduced more to win the deal, the matter gets kicked up to higher level executives. Finally, they have focused on serving large companies, rather than Tier 2 and 3 companies, and continuing to grow those accounts. Currently they do repeat year over year business with 95 percent of their customers. Their top 10 clients represent nearly 30 percent of their revenue, and they have four clients that spend over $70 million per year with them. All this keeps their cost of selling down.

Kris was asked if new technologies, like Web Services and Service Oriented Architectures, could adversely impact Infosys’s revenues by making integration easier. He is seeing no evidence of that, and, if it does occur, he views it as being a long way off. For example, in recent quarters there has been little growth for software companies in license revenues. For them, however, their revenues from services are continuing to grow robustly as clients consolidate multiple releases and integrate software applications from a variety of suppliers. He points to new technologies like VoIP and emerging cell phone applications, and argues as long as technology evolves, integration will be required.

ARC also met with Infosys executive management team and leaders of their vertical industry practices. Discussions focused on Hi-tech and Discrete Manufacturing, Energy and Utilities, Automotive, Aerospace and Defense, as well as CPG and Retail. In regards to the Energy sector, of particular significance is the recently announced alliance with Schlumberger that will enable Infosys to provide comprehensive information management solutions that integrate upstream technical and business processes. One-on-one meetings were also held with the leaders of Infosys Consulting and Strategic Global Sourcing business units.

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