To reboot Infosys, Narayana Murthy must walk away

Whoever takes over from Vishal Sikka as CEO, and it probably will be an Infosys insider, will have to restore the company’s credibility.

 |  6-minute read |   22-08-2017
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Founders aren’t keepers. That’s the stark message to NR Narayana Murthy, one of the seven entrepreneurs who founded Infosys in a tiny Mumbai home-office in 1981.

Infosys is now a world-class infotech company but there’s no getting away from the fact that it started life as a body-shopping firm. It placed software engineers onsite at US corporate campuses at one-third the salary of an American software engineer.

The cost benefit was shared by the US client and Infosys. As a collateral benefit, the onsite Indian engineer received a salary many times he or she would have in India and, despite higher living costs in the US, had enough to send money home.

It was a nice business model, more sophisticated than the one practised by Indian migrant workers in the Gulf, where the skill sets were different, but with the same objective.

Infosys was hardly alone in employing this lucrative business strategy. TCS was an early mover. So was Wipro. Others followed. US clients lapped it up. They got great service, onsite and offsite, at competitive rates. Outsourcing IT from India strengthened their bottom line.

Indian IT services companies such as Infosys, TCS and Wipro clocked net margins of well over 25 per cent, double those of manufacturing firms and even FMCG majors. Not surprisingly, they became darlings of the stock market. After the Y2K IT revenue bonanza in 1999-2000, there was no looking back.

TCS became the Tatas’ cash cow. It was the gushing cash flow of TCS and its large dividends to Tata Sons that helped the Tatas make aggressive overseas acquisitions, starting with Tetley (by Tata Tea, later renamed Tata Global Beverages) in 2000 and peaking in 2006-08 with steelmaker Corus and automotive major Jaguar Land Rover.

At Infosys, meanwhile, things were changing rapidly. The founders each had a turn at being CEO. But as global outsourcing competition hotted up, margins began to fall. The move up the value chain was slow.

murthy-copy_082217061333.jpgMurthy made an ill-advised one-year return to Infosys in 2013, to put the house in order.

Infosys was criticised for two infirmities: first, for sitting on its pile of cash (over $6 billion) rather than making astute acquisitions that could diversify its IT portfolio; and second, for not creating a major IT product with great IPR potential, as Korean, Chinese and Japanese companies had done.

Services can be replicated. IPR properties in contrast have significant monetisable upside. The failure to create world-class IPR properties cuts across India’s IT services sector.

To make amends, Infosys and its peers went up the services value chain after 2010, offering complex IT solutions rather than plain-vanilla outsourcing where rates were dropping.

When Murthy stepped down as CEO in 2011, Infosys was at a fork in the road. Margins were down. The IT services story had been challenged by cheaper outsourced workforces in the Philippines and elsewhere.  

Murthy made an ill-advised one-year return to Infosys in 2013, to put the house in order. His son Rohan, engagingly, came in as his executive assistant. The experiment got Infosys nowhere. By the time Murthy’s one-year intervention was over, Infosys’s net margins had slipped further.

Sensibly, the board decided to hire the company’s first professional CEO, Vishal Sikka, a SAP executive with great tech credentials. Sikka focused on developing new technologies like Artificial Intelligence (AI) and fast-tracking acquisitions. In three years, Infosys’ margins had improved significantly. Based out of California, Sikka recognised that offering high-end technologies like AI was the future. The old IT back-office model was broken.

Unfortunately, by 2016 trust between Murthy and Sikka had also broken down. Murthy who had played mother hen to Infosys since stepping aside for the second time in 2014, constantly carped about falling corporate governance standards.

After several months of intrigue and “media attacks”, as the Infosys board termed Murthy’s angry personal outbursts at Sikka, the die was cast. Sikka quit.

Did he do a bad job in his three years as CEO? Here are the figures: in May 2014, Infosys’ market capitalisation was Rs 1,68,768 crore. On August 17, 2017, the day before Sikka resigned, it was Rs 2,34,549 crore, a rise of 38.98 per cent.

During the same three-year period, the market cap of TCS rose just 13.98 per cent. Wipro’s market cap during that three-year period actually fell by 5.29 per cent.

On the issue of corporate governance, the Infosys board refuted the serious charges Murthy had levelled with unprecedented bluntness:

"Mr Murthy’s continuous assault is the primary reason that the CEO, Dr Vishal Sikka, has resigned despite strong board support. Mr Murthy’s campaign against the board and the company has had the unfortunate effect to undermine the company’s efforts to transform itself. Infosys has continued to maintain the highest standards of corporate governance that the company is known for. 

Mr Murthy has repeatedly made inappropriate demands which are inconsistent with his stated desire for stronger governance. Mr Murthy has demanded that the board adopt certain changes in policy else he will attack board members in public, which threat was carried out when the board did not acquiesce; he has demanded operational and management changes under the threat of media attacks."

This was strong stuff. Murthy said he would reply to the Infosys board’s allegations in the "right manner, in the right forum and at the appropriate time".

Whoever takes over from Sikka as CEO – and it probably will be an Infosys insider – will have to restore the company’s credibility with shareholders and clients.

Global investors are already seeking legal redress for Infosys’ volatile stock price following the battle between Murthy and the company’s board.

The best thing Murthy can now do is to let the professional board do its job without a founder, who holds barely 3 per cent equity in the company, constantly looking over its shoulder.

Corporate governance is important and the forensic report on the $200 million Israel-based Panaya acquisition should be placed in the public domain to ensure transparency. The larger issue though is future growth. Sikka pulled Infosys back from a declining growth trajectory across profit and revenue by focusing on AI and the company’s "Nia" proprietary software product.

The future for Infosys – and the entire IT software industry – lies in developing machine automation software, AI and high-end engineering solutions. In a looming era of driverless electric cars and automation, the old business model that depended on body count will no longer work. Sikka’s successor will have to deal with a rapidly changing global tech economy.

Narayana Murthy and his co-founders built a great company. It can become even greater if they leave it to their professional successors to take it to the next level.

The objective now should be to transform Infosys into a marquee global brand like so many Korean, Chinese and Japanese companies have successfully done.

Also read: Narayana Murthy’s ‘response’ to Vishal Sikka resigning shows Infosys patriarch still doesn’t get it


Minhaz Merchant Minhaz Merchant @minhazmerchant

Biographer of Rajiv Gandhi and Aditya Birla. Ex-TOI & India Today. Media group chairman and editor. Author: The New Clash of Civilizations

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