Infosys: Time for change

Conservatism has helped the company grow in double digits for over a decade now, but it’s no longer enough.

Sometimes playing it too safe can be a problem, as Infosys is slowly beginning to discover. For years, the company has almost effortlessly managed to grow at over 20 per cent without resorting to any pyrotechnics. While conservatism may no longer be such a good idea, what will come to the rescue is the company’s nimble “go to market” strategy. In recent times, the company has been beaten on several fronts by peers Cognizant and TCS. Even on margins, TCS has stolen a march over Infosys through.

One report on Infosys by a foreign brokerage house says that with revenues of $6.1 billion in FY11, the company will need $3.5 billion of “new” revenues over the next two years to keep growing around the 25 per cent mark. And since the company’s revenues are directly co-related to its headcount, Infosys may be a one million-strong army of people by 2020, if it continues to grow in double digits. Clearly, a people factory of that size is not desirable, which is why it’s perhaps the best time for the company to reinvent itself. The blueprint of its transformation was put in place in July 2010, codenamed TOI (transformation, operation and innovation). In time, the company would like all these three verticals to have an equal share of revenues. But currently transformation has a 26 per cent share and innovation less than 10 per cent.

If the company has to go up the value chain, then it’s clear that the company needs to improve billings per employee, which currently stands at $60-80/hour range for the majority and are billed at $150+. However, in recent times, the company has expressed desire to have employees who can be billed $100-120/hour. The reason for this is that there is more volume of work available in this space. Analysts believe that as the company focuses on winning more transformational work, it could lead to the formation of a Business Transformation Unit.

According to Sharekhan, the company has identified seven themes for growth going forward: (1) digital consumers, (2) emerging economies, (3) sustainable tomorrow, (4) new commerce, (5) healthcare economy, (6) smarter organisation, and (7) pervasive computing. Hence there could be a change in the organisational structure to re-align to these seven themes. The next few quarters and future revenue mix will show whether the transformation is working.

One report, while justifying its “buy” rating on the stock says: “From an investor’s perspective, the success of this strategy could well address the long-term concerns about the company’s revenue growth and margin prospects (removing dependence on headcount addition) and, hence, decide the levels at which long-term valuations could eventually settle.