India's Infosys Says It Needs to Increase Oveseas Presence

According to Business Week, India's second largest IT company, Infosys Technologies, has always experienced growth, unlike other competitors in India's technology arena which have gobbled up in acquisitions.Unlike its competitors, Wipro Technologies and Tata Consultancy Services who have been looking for acquisition in the U.S. and Europe, according to Business Week, Infosys, a Bangalore-based company, until recently had no reason to seek out acquisition. They have been steadily growing over the last five years at a rate of 40%.

However, per Business Week, as reported by Reuters on June 28th, Infosys was eyeing Europe's largest IT consulting and services firm, CAPP, Paris-based Capgemini. As rumors hit the marketplace, CFO, V. Balakrishnan of Infosys, denied the gossip because CAPP has a market capitalization of $10.5 million and Infosys is seeking acquisitions from companies whose worth is in the $100 to $200 million range.

As noted by Business Week, Infosys views consulting as a part of the market that could boost their bottom line and add value to its need for growth in its consulting services. Even though Infosys has experienced a rapid growth over in the past three years since its inception, and its sales were $111 million, the consulting side of the business lost $27 million this year through March, 2097. According to Business Week, VP of research firm Frost & Suillivan's IT practice in Mumbai, Alok Shende, said that as far as Infosys' stream of revenue, Infosys' consulting services have been sorely lacking.

The dollars to rupee currency swings have also had an effect on Indian outsourcers, even as U.S. accounts for over 70% of their revenue. The rupee, so far this year, has only grown 8% against the dollar. Unlike the U.S., Europe, per Business Week, has been unwilling to utilize Asian outsourcing which means, for Infosys, making major inroads in Europe is far more difficult.

Infosys, as reported by Business Week, is committed to bringing consulting competitors into the company on an executive level. For example, they approached Paul Cole, CAPP's former chief of global operations, Stephen Pratt, a former senior partner at Deloitte Consulting, and Romil Bahl, from EDS (EDS Consulting Services).

When CAPP acquired Kanbay International, it doubled its Indian workforce last year. This is significant in that if there were a deal between Infosys and CAPP, there would be an overlap in the workforce of about 18% of CAPP's global head count. According to Business Week, CAPP has already been struggling to find cost-cutting measures. Regardless, Infosys' desire to boost its share prices in the marketplace will still be seeking to make some kind acquisition deal.

Changes ahead at Infosys

By Nandini Lakshman, BusinessWeek

Unlike its acquisitive contemporaries in India's information technology sector, Infosys Technologies, India's second largest IT company, has long preferred organic growth.

Even as rivals Tata Consultancy Services and Wipro Technologies have scoured Europe and the United States for deals, Bangalore-based Infosys, which has been growing 40 percent a year over the last five years, until recently had little reason to go shopping.

Yet on June 28, it was reported that Infosys was eyeing Paris-based Capgemini, Europe's largest IT services and consulting outfit. The markets took the story seriously, despite management denials. Notably, Infosys Chief Financial Officer V. Balakrishnan dismissed the story as speculation, arguing that Infosys was looking at acquisitions in the US$100 million to US$200 million range, while Capgemini has a market capitalization of US$10.5 billion.

Nevertheless Capgemini's share price rose 3.7 percent on June 28 and a further 2.9 percent the following day. The French company's stock has only retreated slightly since. Stock movements at Infosys have been less spectacular. Since the story broke its share price has edged up 0.87 percent to US$47.40. Infosys has annual sales of US$3.1 billion and a market cap of US$29 billion.

Challenge for Consulting Arm
However this rumor plays out, Infosys will probably have to make a bold move soon. Consulting--the systematic examination of a company's IT problems and how they fit into a strategic corporate vision--has long been the coveted preserve of Western firms, most of them U.S.-based (Capgemini is the notable exception). The Indians see consulting as the next prize to conquer and another way to leverage their lower-cost software-writing power.

Infosys for one is desperate to grow its consulting arm. While outsourcing remains its core business, accounting for most of its sales, Infosys top brass see consulting as a way to add more value and boost profitability. "The challenge here is to grow the (consulting) business," Infosys co-founder Nandan Nilekani told BusinessWeek in an April interview.

Infosys' consulting business could do with a boost. Although the company as a whole has been experiencing rapid growth, its three-year-old U.S.-based consulting business actually lost US$27 million in the year through March, 2007, and had sales of just US$111 million. "Consulting has been a lacuna in Infosys' revenue stream," says Alok Shende, vice-president of research firm Frost & Sullivan's IT practice in Mumbai.

Wooing Big Names
Infosys also has to make major inroads in Europe, which has been more resistant to the attractions of Asian outsourcing than the United States. The United States. accounts for over 70 percent of revenues for Indian outsourcers and, while that has been a huge source of growth, it leaves them vulnerable to dollar-rupee currency swings. So far this year the rupee has appreciated 8 percent against the dollar.
What's more, there's no getting away from the company's commitment to bringing in consulting expertise at an executive level. Infosys has already wooed some big names from consulting competitors in the United States. These include Stephen Pratt, formerly a senior partner at Deloitte Consulting; Romil Bahl, from EDS Consulting Services; and Paul Cole, Capgemini's former head of global operations.

If an Infosys-Capgemini deal were to happen, experts warn that making it work would be a mammoth achievement. One possible problem would be the considerable overlap in India, which accounts for 18 percent of Capgemini's global head count. Last year Capgemini doubled its Indian workforce when it acquired Kanbay International which, while U.S.-based, has a large Indian presence.

Yet Capgemini so far has been struggling to find savings. "Capgemini doesn't have the cost advantage of Indian companies," says Ashish Basil, a partner in transaction advisory services at Ernst & Young, in Mumbai. Infosys would have to cut costs by restructuring, not just relying on a low-cost Indian workforce.

Even if a Capgemini deal doesn't materialize, Infosys has the cash and cash flow to make some sizable moves. The Bangalore company may also want to boost share prices in the long run. Though Infosys stock has performed heroically over the last five years, in the last 12 months it has trailed the Bombay Sensex index, rising 23 percent versus a 38 percent increase for the index. One way or another, action is likely at this paragon of Indian tech.

Infosys Consulting Hiring More Senior Level People

Infosys is overhauling its hiring practice to beef up its consulting business. From the existing pyramid staff structure, the Bangalore-based IT major is shifting towards the diamond pattern by going in for more senior-level executives.

S Gopalakrishnan, president, COO and deputy MD of Infosys, said: "The profile of people we are hiring for our consulting business has changed. We are now hiring more senior-level people and are happy with this change, as we are getting quality people in our quest for gaining a unique position in the global consulting arena."

Infosys Consulting is going in for this change to bring in more thought leadership, which is one of the critical factors for a consulting practice to succeed.

Infosys said its growth rate might come down if the US economy, as predicted by IMF, slowed down in the next one year.

"There are two schools of thought on this. One talks about the impending slowdown, while the other says growth will continue. If the US slowdown happens, our growth rate will come down too. But growth will be there," said COO and Deputy MD S Gopalakrishnan.

He also said there would be pressure on global corporations to cut down their costs during a slowdown, which could, however, be offset by outsourcing work to cost-effective destinations.

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