Nilekani says Infy's business model stands vindicated

Infosys has redefined value for money in the global IT services industry," Nandan Nilekani, managing director and CEO of Infosys Technologies, said, explaining the meteoric success of the company whose turnover rose over eight times in five years (1999-2004), from $121 million to $1.06 billion.

This is a vindication of its "business model, which is resilient, robust, able to withstand market pressure and global competition" posed by MNCs deciding to have one leg in India.

The remarkable growth came at a time when the world first saw the tech bubble burst in 2000, followed by a huge business resistance to spending on IT.

"The focus on return on investment and business benefits from IT spend has been unprecedented. Customers have redefined value for money for this industry," and Infosys has been able to take up the challenge.

Fortunately for Infosys, these global developments played into its advantages. "Through our scalable business model we have been able to deliver more value at lower prices at higher quality and in quicker time. When a new way emerges in a business, substitution takes place and the incumbents have to replicate the new business model."

He sees the rise and rise of Infosys as the vindication of the distributed development model which others have had to emulate by opening their Indian operations.

The IT slowdown and business's reluctance to spend created pressure on prices and revenue productivity. Revenue per employee for Infosys fell consecutively for five quarters (December '02 to December 2003).

But it was able to maintain margins (net profit to revenue was virtually the same in 2003-04 as in 2002-03) through both spectacular growth and cost cutting. The volume growth "shows our ability to handle scale. We call Infosys a business platform with all the scalability engines. We plan for this scalability so as to have the underlying system. We pay a lot of attention to scale management - recruitment, training and adding infrastructure."

Last year, headcount in Infosys grew by 10,000 or 40 per cent and this year it is slated to grow by almost another 10,000. In a year Infosys handles one million job applications, it builds new centres in less than a year and has a huge ongoing training programme.

While scalability has ensured volume growth, margins have been protected by cutting costs. But the scope for cost cutting has been restricted by the need to raise compensations, paid in good part in rupees, and the impact of the appreciation of the rupee which has meant fewer rupees per dollar earned.

A key element in protecting margins was the ability to reap the benefits of scale by making savings in sales and general administration expenses.

Part of the success in containing the MNCs lay in the ability to retain skills which are the mainstay of this business.

Nilekani highlights the 17 per cent increase in compensations across the company last year, the reorganisation within the company along industry verticals, empowering the next level in business planning within verticals and the one time average bonus of $1,000 per employee as measures taken to retain skills and boost employee sentiment.

The company demonstrated its ability to fight back challenges by the change between the way financial 2003-04 began and ended. The markets plunged in April 2003 when guidance for the new year was below expectations.

In April 2003, recalls Nilekani, sentiment and guidance were influenced by the still-continuing Iraq war and the still-raging SARS epidemic. To that was added the pressure created by downward looking prices and the phenomenon of large software MNCs setting up India development centres to match Indian companies' costs.

By the time April 2004 came round, both the war and the epidemic threats were gone.

What is more, Infosys was able to withstand pricing pressure, and the threat of MNCs competing from Indian soil was contained. And sentiment jumped with the declaration of a hefty bonus issue, completing a remarkable cycle.