The burden of legacy

Outpaced by competitors and weighed down by its glory, India’s pioneering software services company struggles to find a life beyond the sheltering shadow of its founding father. Can the new CEO, Vishal Sikka, save Infosys?

At the Karnataka Golf Association (KGA) in downtown Bangalore where Thomas L Friedman’s bestseller The World is Flat begins, there are no signs of the ‘New World’ that the New York Times columnist dwelt upon in gushing narrative in 2005. Watching local golfers and Kannada-speaking caddies over idli-sambar and kaapi, it is tough to conjure up images of the world going flat or to conceive of this Indian location as country-neutral. Perhaps Friedman, standing on the first tee, was exaggerating; or, he may have been out of his depth about what ‘Indian’ is. Or, perhaps things have changed since the American’s visit. Friedman— whose book’s title was inspired by then Infosys Technologies CEO Nandan Nilekani’s pithy remark: “The playing field [in global business] has been levelled”—also referred to the Bangalore-based information technology (IT) services provider as one of the jewels of the local IT industry. Which it was. Just as Friedman’s loud talk of (in his own words) his “Columbus-like voyage” to explore modern India looks a bit laughable now, his jewels of the IT industry have lost their lustre, notably Infosys. Plagued by slow growth in clientele, startling jumps in attrition and slumps in sales and profits, the multinational has for the first time brought in a non-founder as CEO to set things right.

Until the nomination of German software company SAP AG’s former senior official, Vishal Sikka, only co-founders of the 33-year-old company had become CEOs, starting with the natural leader of the group, NR Narayana Murthy himself. This practice has, over time, inspired much heartache among a lot of senior employees who were not lucky enough to have been founders— the most famous being TV Mohandas Pai, the former Chief Financial Officer (CFO) and Human Resources chief of the company that was once the bellwether of India’s $100 billion-plus IT outsourcing industry.

“Yes, the ‘founders-only’ CEO policy was a mistake and has hurt the company,” Pai told Open, without elaborating. It was this policy which cost Pai the top job when SD Shibulal, much respected for his “COO [Chief Operating Officer] skills and as a nice human being” according to several Infosys employees that Open spoke to, became CEO and Managing Director three years ago. On 1 August, Shibulal will relinquish the CEO post— to which he was appointed just three years ago (Murthy was CEO for 21 years till Nilekani took over in 2002 for five years, and S Gopalakrishnan served for four years) —to 47-year-old Sikka.

How exactly has the founders’ legacy hurt the $8.4 billion company?

There aren’t any easy answers. But the behemoth that was once the employer- of-choice for young techies and fresh computer science graduates is now grappling with massive attrition rates, which are higher than average industry figures. As revenues and profit grow less quickly than those of Infosys’ competitors— Tata Consultancy Services Limited (TCSL) and New Jersey-based Cognizant Technology Solutions Corporation— the brightest of the lot now prefer other organisations over Infosys. Thanks to the raft of senior executive exits over the past year, at least three company workers surveyed by Open say they are worried about their career prospects. “This was not our dream when we joined this once highly reputed company. Infosys is no longer what it was,” says an employee based out of its headquarters in Bangalore’s Electronics City.

Sipping tea in a restaurant not far from the campus, he avers, “Murthy’s return to Infosys did inspire confidence. But that was short-lived. There are those who believe he has put the company back on track. I am not yet convinced.” At Infosys, the pay hike announced in April for its local employees was an average of six to seven per cent; rival TCS offered an average of 10 per cent and Wipro Limited managed eight per cent. Global financial consultant UBS, who changed Infosys’ stock rating from “buy” to “sell” recently, has warned that the attrition levels at Infosys—now at 18.7 per cent—will rise further.
 

As someone who has zealously campaigned against 60-year-old-plus executives clinging on to executive level positions of power in tech companies— someone who stepped down from day- to-day activities of the company before he himself turned 60—Murthy seems to have taken an about turn. The veteran IT industrialist showed no hesitation in returning from retirement to the Infosys fold at 66, with the aim of refurbishing the company that he helped found with a seed fund borrowed from his wife Sudha, back in 1981.

“The sad thing is he himself doesn’t seem to believe that he is authoritarian,” says a former senior company executive, who emphasises that co-founder and former CEO Nandan Nilekani alone managed to argue his way through Murthy’s defences. “In those years I was there, I realised he hardly listened to anyone else though Shibu and Kris (co-founder and former CEO S Gopalakrishnan) managed to do a balancing act, once Nandan disagreed with Murthy.”

The former executive reasons that times were different then, however; perhaps centralised command was necessary at the beginning of the ascent, when the company was planning for a big leap and there were many divergent opinions. But he insists that Murthy abandoned all corporate governance values by making a return a year ago with his son Rohan as executive assistant, promising to bring about an organisational turnaround in the company. After the company trailed industry earnings figures and failed at a mission to widen focus areas and to move higher in the value chain—popularly dubbed ‘Infosys 3.0’—Murthy was invited by the Infosys board in a surprise decision last year to return as executive chairman for the rev-up. The initial euphoria caused by Murthy’s comeback triggered rapid rise in stock prices but the excitement on the bourses soon died down. Still, the company managed to secure a few large bread-and-butter deals, in addition to cutting costs.

Having Murthy at the helm didn’t necessarily mean that the company won more clients and retained talent, leave alone surpassing competitors in sales and profit. Also, 13 very senior company officials quit, raising speculations that they may not have found working with a young Rohan Murthy easy. There were other rumours afloat as well. Officials who left the company included Basab Pradhan, head of global Sales and Marketing, who went on to join Hexaware; Sudhir Chaturvedi, senior Vice-President and head of financial services, Americas, who later joined NIIT; Ashok Vemuri, Director and Chief of Operations in the Americas, who joined iGate; Humberto Andrade of the Latin America BPO, who was picked up by Capgemini; Kartik Jayaraman, global Sales head-BPO of the energy/ utilities/services industry, who joined Accenture; Paul Gottsegen, Chief Marketing Officer, who was hired by Mindtree; and so on. The rest of the 13 included Stephen R Pratt, Subbu Goparaju, V Balakrishnan, Chandrashekar Kakal, Nithyanandan Radhakrishnan, BG Srinivas and Prasad Thrikutam.
 

No doubt a huge attrition rate is a problem in normal circumstances. But what if they were planned to make way for a new leader, ask a few devil’s advocates.

A senior IT executive close to senior Infosys officials posits that, in hindsight, Murthy’s efforts to lay the foundation for future growth have shown initial success. “It is noteworthy that 13 of the senior execs left without making a noise. The only noise was that of the media speculating. Mind you, this is not unusual in US corporate circles where senior executives, most often the highest- performing ones, leave the company ahead of a major hire. It is meant to give a free hand to the new leader.”

“There is no evidence to poke holes in the theory that these exits were planned and intentional,” he argues, having watched Infosys and competitors closely and over a long period. “There is at least equal probability that they left of their own volition because none of them hit out at the company when they left. If they were sacked there are contractual options to buy their silence because the goal was to hire a new honcho.”

This industry insider shares the views of at least two senior Infosys officials: that Murthy’s return was a success in that he managed a near-smooth transition from Infosys as a founders-dominated entity to the one in which professional leaders with no “company legacy” are at the helm. Sikka’s takeover completes this transition, with Murthy as midwife. “Murthy’s greatest achievement is to hand over the reins to professionals picked up through a search, who can steer the company in whichever direction they want.”

“Murthy’s task was to ensure the transition to steer the company to new heights, since by now he is convinced that the company has outgrown the founders. So he deserves credit for ending the era of the founder, though one could say it should have been done earlier,” says a senior Infosys official. Co- founders Murthy and Gopalakrishnan have already stepped down as executive Chairman and executive Vice Chairman, though they will continue on the board till 10 October 2014; as non-executive Chairman and non-executive Vice Chairman, respectively. Shibulal, another founder, steps down from the board on 31 July; so will Srinath Batni, whole-time director. Rohan, whose appointment was coterminous with the executive chairman’s, has left the company and returned to Harvard.

Pai, who is currently Chairman of Manipal Global Education, isn’t impressed with the praise Murthy has lavished on Rohan for assisting him in kickstarting the next level growth engines for the company. “I think his statement is surprising. It is a large global company which has great talent,” he told Open. Pai has often attacked IT behemoths such as Infosys that have struck gold in India’s Silicon Valley for not doing enough for Bangalore. “The big issue is that many people have created enormous wealth from the IT industry in Bangalore and have been residents of the city. People are looking for big institutions from them as (Wipro Limited founder Azim) Premji has done.”

Pai is happy with the new developments, however, and pleased Sikka will now steer Infosys: “I am enamoured of his global enterprise experience and exposure.”
 

A section of the Indian IT industry offers the view that the trouble of attrition, decline in sales, fewer clients and concomitant troubles at Infosys are symptoms of a structural problem and not a cyclical one. “We [India] went through the natural resources era soon after freedom, by exporting our natural resources for driving the economy. Then came the services era, which saw companies like Infosys hitting pay dirt. Now is the era of products. [The plight of Infosys] is similar to what AOL [the American multinational mass-media corporation previously known as ‘America online’] faced decades ago when it refused to believe that dial-up was destined to be outdated,” says Sharad Sharma, co-founder and governing council member of Indian Software Product Industry Round Table (iSPIRT), a lobby group formed by some 30 software products companies of the National Association of Software and Services Companies (NASSCOM). Sharma suggests that Infosys just happened to catch a cold first.

“TCS, Cognizant and others will follow,” he forecasts, adding that IT is on the threshold of a phenomenal change where customised delivery alone won’t fetch profits. According to him, when faced with a business juncture as crucial as AOL’s, companies such as Vodafone and Telefonica managed to cope in the late 1990s by expanding through inorganic growth, something that British Telecom didn’t do and ended up paying a huge price for.

IT services company officials beg to differ with this assessment. Pai refutes such statements, saying, “This is not a structural issue at all. Companies like IBM Global Services, Capgemini, too, are service companies. The big issue is the fight for market share in a stagnant market and the need for consolidation. This is not a tectonic tech shift. Services have not ended and will always remain. The established base of software is reckoned in trillions of dollars. Even enterprise products like SAP and Oracle have multiple services behind them.”

At least two Infosys officials admit that with small and medium firms availing of ‘readymade’ software products that do not require customisation, business opportunities for companies such as Infosys may shrink further. However, one contends that big companies will certainly need firms such as Infosys to keep customising software products. He also noted that making acquisitions of software products may not be a bad idea, going ahead.

Former Infosys CEO Gopalakrishnan refused to comment on the need for a “business shift” at Infosys. He noted that Infosys was on to the cloud and mobile revolution first. “But the business models and revenue models are different and take time to fructify,” he said.
 

Quite a few Infosys officials are relieved that investors will start looking up to their company as a professionally run enterprise managed by a world-class executive. Sikka will continue to be based out of Palo Alto, California and will have shared responsibilities, like COO UB Pravin Rao, whose appointment was announced at the same time as Sikka’s. Both emerge as power centres and will carry out different functions, and the company seems to hope this “power of two” will augur well. In the past, Nilekani and Kris and later Kris and Shibulal performed successfully within such an organisational structure.

But worries persist in Infosys because IT vendors expect any future growth to be driven by infrastructure services and Social, Mobile, Analytic and Cloud Services (SMAC); these are sub-segments where Infosys, according to experts, trails its competitors. Murthy has said it would take a few years before Infosys gained significant ground in the domain of SMAC. Infosys’ annual revenue, tallied this March, rose by 24.2 per cent; lagging behind the growth of 29.9 per cent at TCS.

“Sikka is a good choice considering IT services are increasingly becoming software-driven or have software-like characteristics in the digital or SMAC age,” said Viju George, in a JP Morgan report. “Having been the Chief Technology Officer at an innovative software firm, Sikka can probably appreciate the changing technology paradigm and articulate business models therein, which is a positive.”

A former Infosys executive says that Sikka could be in for a culture shock at Infosys, however, where the work culture is very different from SAP’s highly globalised work culture, with its flexible work hours. “But he will have a free hand. The situation looks tailor-made for him to act and take the company to the next levels of growth.”

When Sikka, a Gujarat-bred Punjabi, quit SAP, there were rumours that he was looking for a promotion and didn’t get it. Sikka hit out at such reports dismissively in his blog. “It [the report] is governed by base motivations one can only speculate upon, perhaps under even baser influences. What makes it truly irresponsible is that it is articulated to the world under the guise of a legitimate publication—a gross abuse of journalistic duties”. The blog also contains nostalgic memories of Delhi, from a visit late last year:

‘Delhi, India. I shouldn’t say Delhi. I should say Dilli. I found myself here with a few free hours today, out of an incredibly hectic week. So I went by some old spots, Bengali market, Hanuman Mandir, Connaught Place, Lajpat Nagar… The brain is immediately drawn to the sights, so different now, yet still familiar. The colours, the haze, the crowds, the structures, the spaces. And beyond the sights, the sounds, the tastes, and, especially, the smells. The smoky, dusty, musky air. The fragrance of flowers being sold and foods being cooked, and the foul smells of garbage. All mixed into an unforgettable reminder of the ephemeral present, that is also, yet, timeless. More than any other sense, the smell takes you back. But back where? I remember being here 30 years ago, shortly after Delhi had seen a great renewal, in preparation of the Asian games in 1982.’

The India connection seems strong for the Stanford PhD who is settled in Silicon Valley and well-respected there, who knew Murthy for years, before he was chosen to play saviour. Ramakrishna Yarlapati, a former member of SAP’s senior leadership team, vouches for Sikka’s abilities to spot opportunities. “He is very action-oriented, always likes to try out new things one after the other and never gives up.” As soon as his name was announced for the CEO’s post by Infosys, Sikka, who also studied at Vadodara’s Maharaja Sayajirao University and Syracuse University in New York, tweeted that he was humbled by the offer. A return tweet from Murthy proclaimed that Infosys was in capable hands.

Will Sikka, play the role of a rainmaker for a company weighed down by its own legacy? Indications are positive, for the time being. Infosys, once a darling of the stock markets, has risen in the Bombay Stock Exchange (BSE) Sensex, after a bad spell for months now. If he manages to remote-chaperone India’s second-largest information technology company into past glory from across the seas, he will certainly level the playing field in global business. But the world isn’t flat yet.

Infosysnew CEONR Narayana MurthyVishal Sikka