Rapid rupee appreciation a challenge, says Infosys CEO

BROAD FOOTPRINT: S. Gopalakrishnan (left), Chief Executive Officer and Managing Director, Infosys Technologies, with Amitabh Choudhary, Chief Executive Officer and Managing Director, Infosys BPO, addressing a press conference in Mumbai on Wednesday.

MUMBAI: The challenge for Infosys Technologies is dealing with a rapid appreciation of the Indian rupee against the U.S. dollar. Addressing the media, S. Gopalakrishnan, Chief Executive Officer (CEO) and Managing Director, said, “Actually, it is not a new phenomenon. From 2003, the rupee has been appreciating but in the first quarter of the current year, it appreciated by seven per cent.”

The company’s annual contracts come up for negotiation every January and according to Mr. Gopalakrishnan, “when the billing rates come up for renewal, we can ask for a rate hike. We expect new contracts to come in at 3-4 per cent higher rates and existing contracts to be renewed at 2-3 per cent higher rates. The environment is positive for higher rates.”

Geographical spread

On the impact of the rising rupee on the company’s business, Mr. Gopalakrishnan said, the seven per cent appreciation in the first quarter and nine per cent appreciation during the year takes time to absorb. “Typically, we use levers like utilisation, onsite-offshore ratios, services mix, customer group and regions, rate increases and internal efficiencies.”

Infosys earns around 60 per cent of revenues from the U.S. and it was looking at de-risking measures. “We have a broad services footprint and have a geographical spread. We have been investing proactively in Europe and the contribution to our revenues has gone up significantly from nine per cent of revenues in 1999 to 14 per cent in 2003-04 and to 26 per cent today. European companies have woken up to the need to leverage offshoring opportunities. In terms of geographical mix, going forward ideally, we would like 50 per cent from the U.S., 30 per cent from Europe and 20 per cent from the rest of the world.”

Wages

Wages in the Indian IT industry have, for the last decade, been going up 13-15 per cent annually. “Our model allows us to increase and maintain margins and we believe salaries will continue to rise as the economy is ‘hot’.” Attrition levels in the industry are at 17 per cent according to National Association of Software and Service Companies (Nasscom) and Infosys’ level is 13.7 per cent of which 1.7 per cent is lost in training.

Infosys BPO currently has 30 clients of which the top seven accounts for half the revenues. Amitabh Chaudhry, CEO and Managing Director, Infosys BPO, said the impact of the U.S. sub-prime crisis on revenues “this year is $1 million. The immediate impact is that volume and margins will come down.

China operations

Regarding the possible slowdown of the U.S. economy, Mr. Gopalakrishnan said, “The feedback till now is there is no sign but we are watching and clients will only increase off-shoring. Different sectors behave differently and currently, telecom, energy, retail, utilities and financial services are seeing growth and opportunities.”

Infosys has 700 employees in China with its BPO having 100 employees with offices in Shanghai and Guangzhou. “It is however, growing slower than we expected. Global customers have not taken to China as would have liked. India is still viewed as the ideal location for offshore outsourcing. We are pushing customers to look at China as an option.”

The Infosys CEO admitted that in the longer term, the biggest challenge for the industry was the talent pool crunch. Infosys is working with 330 engineering colleges and has a global education centre in Mysore where 10,000 students can train. There was an increasing sign of a reverse brain drain, he added.

“We are seeing more people coming back and we have programmes not just to attract Indians but foreign nationals here.”

Original Story

Infosys CEO Kris Gopalakrishnan Describes Exciting Times

Tiernan Ray (Barron's) submits: I chatted Monday afternoon with Kris Gopalakrishnan, who’s been chief executive of IT outsourcing firm Infosys (INFY) for barely two months. He was most passionate about a few broad themes in the changing technology landscape. “One of the biggest changes you will see is the rise of appliances, and appliance-to-person communications on the Internet,” he said.

He gave as an example the fact that consumers can now get real-time traffic updates from handheld devices talking with global positioning satellites that in turn talk to computers monitoring the roadways of the world. More and more people talking with more and more devices, which are all talking amongst themselves.

The soft-spoken Gopalakrishnan (bio is posted here) took over from the more well-known Nandan Nilekani. The New York Times’s Tom Friedman made Nilekani famous by ascribing to him the observation that outsourcing makes the modern world a “flat” world, in labor terms. Nilekani had taken over from N.R. Narayana Murthy, Infosys’s CEO for its first 20 years to 2002, but both of the latter two gentlemen still serve on the company’s board and show up to guide the company’s vision and culture.

All of which puts Gopalakrishnan in a unique position, as one of the few remaining founding employees in the executive suite, to try and build the management bench of a company growing by leaps and bounds with young Indian engineers fresh out of school.

Which is no mean feat when the company is growing in every possible direction. Infosys will Tuesday officially announce the opening of a facility in Monterey, Mexico to service Spanish-speaking clients in this hemisphere. And it has about 700 people working in facilities in China (Gopalakrishnan says the skills of Chinese software engineers is excellent, and improving dramatically these days).

At the same time, Gopalakrishnan expects U.S.-based employees will represent an increasing percentage of the company’s total headcount, because as deals with existing customers get bigger and more important, some of the work’s got to be done here. Which brings its own special dilemma: Does Infosys buy a firm here in the States, as its competitor Wipro (WIT) did last week with the acquisition of Infocrossing (IFOX), a firm that hosts clients’ computers in its data centers?

“Acquisitions can bring you clients,” as well as U.S.-based labor, Gopalakrishnan conceded. “But you are then in a financing business,” he observes, meaning, Infosys would be spending money on real-estate for data centers and for clients’ computers, in such a deal, and, “it’s not really clear we are going to be better at financing in that way than are our clients.”

The other option is to ship more Indian workers overseas to “near-shoring” positions in the States. While Infosys will hire some U.S. workers in coming years, Indian IT graduates are not only more plentiful, they also still study some of the exotic, aging technologies of the past that Infosys’s clients still require: things such as COBOL and CICS and other computer programs of the mainframe era.

“American engineers who know those technologies are retiring and it's not as much a part of the U.S. engineering curriculum,” which is caught up with technologies of the Internet. Infosys will run smack up against the limits on HB1 visas for foreign workers, which cap how many can be brought here. Amazingly, the company has no lobbyists on retainer in D.C., according to Gopalakrishnan.

Amidst all this, some of the challenges on a daily basis are prosaic: why hasn’t the company won more business in managing companies’ IT infrastructure remotely, from India? I asked. Because IBM (IBM) gets that business thanks to its years of so-called managed services, says Gopalakrishnan. “We need more references in that area to win more business,” he said. That, and continuing to refine Infosys’s rep as what is basically a big IT shop, but one that does its job better than Infosys’s clients.

Big banks have large IT staffs, but the implication Gopalakrishnan made was that Infosys is more adroit at seeing where programming is science, rather than a bespoke art, and turning those observations into codes inculcated into the company’s work ethic. Process, method, re-use, the gradual refining of software development is what Infosys is going after.

My overall impression is that with Infosys spreading its wings in many directions, the company has no limit to growth opportunities it can pursue both in India and in the developing world, and even here in the U.S. But it also means the challenges for the company become more diverse and complex, from increasing headcount thousands of miles from home, to dealing with higher attrition rates in China, to calculating just how much growth can be achieved internally versus through buying businesses, to cultivating the next group of executives who will take the helm after Gopalakrishnan. Exciting, modern times for a still-young company.