Innovation and attrition top Infosys to-do list as the final founder CEO steps aside for Sikka

[caption id="" align="alignright" width="250"] Incoming CEO Vishal Sikka (Photo credit: Tom Raftery)[/caption]

As he steps down from the top slot and hands over to Vishal Sikka, Infosys CEO S.D Shibulal could be forgiven for some mixed emotions after being at the helm during some of the Indian firm’s most turbulent times since he and six others set it up over 30 years ago.

In recent times, the outsourcing giant has faced pressure from within and without, he acknowledges:

Externally we were just coming out of an economic crisis and micro-economic conditions were uncertain and volatile. Our clients were tentative and the decision cycles were longer.

Internally we were faced with a number of Infosys specific challenges. On the legal and regulatory front, we were dealing with employee retaliation cases, investigation by the US Attorney’s Office and US Department of Homeland Security relating Visa matters.

We had not applied for adequate research in FY12, which resulted in shortage of talent, on-site talent in FY13. This led us to hiring large number of people on-site, as well as increasing our subcontractors cost and resulting in a reduction in our margins. We needed to relook and revamp our compliance procedures as a part of the investigation from the government.

We were also in the midst of the 3.0 transformation, which required us to put new structures and new organizational structures in place.

But that’s all in the past now, he insists:

We completed a civil settlement that concluded investigation by the US Attorney’s Office and the US Department of Homeland Security. A US courtdismissed the lawsuit filed by the employee. All other lawsuits are dismissed or settled. We have aggressively moved ahead in our strategic directions.

Our Infosys 3.0 transformation is complete and well understood. We renewed our focus on strategic sourcing deals to regain lost ground in the bid space. We made a strategic acquisition of Lodestone to increase our presence in consulting in Europe.

Shibulal is going on a relatively positive note. Last week the firm reported a 21% increase in quarterly profit and maintained its revenue growth forecast. Net profit for the first quarter rose to 28.86 billion rupees ($481 million) from 23.74 billion rupees a year earlier, on reported revenue of $2.1 billion.

Staunching the flow

But there's one major problem that the new CEO will have to tackle head on: hanging on to key staff. Shibulal admits:

Our attrition is above our comfort level and we are doing multiple interventions to bring it down. Many of them have been done and many more will be done. With that, we are hoping that the attrition will come down.

We have taken a number of steps to reduce attrition. We have improved our predictability for employees by giving timely compensation increases this year. We have introduced a quarterly promotion cycle to promote eligible employees quickly. We have increased the variable payout over the last few quarters. We have introduced a fast track career path for high performers. We hope to see a reduction in attrition as a result of these initiatives.

It's also still the case that the firm is subject to an ongoing hestitancy among customers towards non-essential spend:

Discretionary spending is steady, but the nature of spending is different. We’re not seeing large mega-transformation programs. We are seeing small lucrative kind of programs and in many cases clients actually look at some of it on the quarterly basis, based on their own individual performance. So to that extent, the spending is back, but clients continue to be cautious and the nature of spending is also varied.

But business transformation remains an agenda item and as such an opportunity for Infosys, he adds:

There are transformations happening in various sectors. If you look at the emergence of cloud, the acceptance of a different model of proving services where the client will pay-per-use, the emergence of Big Data and Analytics. Corporations [are] moving from information to insights and I also believe that they will move from insights into intelligence.

These moves are enormously transformational because these moves unlocks new value in business. They increase the return on investment. They make the clients much more relevant to their customers. And all of this today can only happen through technology. So the advances in mobile, social and cloud are drivers for new transformations in technology.

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Related articles:

• Amazeballs! Vishal Sikka lands at Infosys as CEO (diginomica.com)
• Sikka on Infosys - the emphasis is on education (diginomica.com)

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Infosys COO Pravin Rao argues that he sees two cross-industry trends emerging:

There is tremendous focus on taking cost out of the system and that in some sense is translating into opportunities around large application outsourcing deals, infrastructure consolidation deals and so on. And on the discretionary side, there is again all the savings from cost takeout has been pumped into discretionary side and most of the investment is around customer facing activities. So we see lot of opportunities around retail transformation, around analytics, around business intelligence and cloud and so on.

From a vertical perspective, we are seeing good pipeline in financial services, in manufacturing, in Retail and CPG. The pipeline is healthy. So by enlarge in most segments; we see descent traction, good traction. And from a services perspective we are a lot of traction in infrastructure management on digital transformation, cloud adoption and so on

In consulting and system integration, from a consulting perspective we see lot of opportunity. One part of it is around SAP and Oracle led transformation and this predominately in the manufacturing and in the CPG space. Then we are also seeing lot of opportunities across verticals on digital transformation where consulting also plays a big role.

So net-net, as long as we are able to tap into discretionary spend, a big part of it starts with consulting and then later on flows down to some of the other parts of the business. We continue to leverage and take advantage of opportunities there. And wherever there are discretionary spends, we have a lot of opportunities for our consulting play.

As he steps down to be replaced by former SAP CTO Sikka, Shibulal knows he’s handing over a work in progress, but argues that it is one where there has indeed been progress made:

I firmly believe that Infosys today is stronger than what it was few years back. We are investing in emerging areas like infrastructure services, emerging technologies and newer markets like Continental Europe. Through all this we have established a foundation which will take Infosys to greater heights. I wish Vishal and his team the very best in capitalizing on the opportunities that lie ahead.

Where now?

So it’s over to Sikka and the ‘new’ Infosys that will result when he formally takes over on 1 August. Analysts see a big challenge ahead for him. Techmarketview’s Anthony Miller reckons that starting with staunching the staff attrition issue would be a good start:

One of the first jobs Sikka must address is the now rampant attrition at Infosys, which hit 19.5% in the quarter. What you need to understand is that Infosys reports attrition only for the prior 12 months (‘LTM’) and only for the parent company Infosys Ltd, excluding all subsidiaries, most notably BPO. Given that LTM attrition has been rising quarter by quarter, the ‘real’ number for Q1 (i.e. total employee loss as a ratio of total headcount in the quarter) will likely be way over the 20% line.

Sikka faces a very steep learning curve. But he really needs to hit the ground running as that is exactly what Infosys employees appear to be doing – but out the door.

Bozhidar Hristov, Analyst at Technology Business Research, thinks the attrition problem will have knock-on impacts:

 As attrition remains one of the company’s pain points, Infosys will require an elevated effort and additional time to see improvement. This will steer the company’s leadership focus toward improving execution on initiatives such as sales efficiency and expanding its IP portfolio. Consequently, this will lead to subdued revenue growth and impact Infosys’ ambitions to climb the IT services value chain.

But Hristov thinks that Sikka’s background at SAP will help him to drive innovation into the Infosys strategic direction:

While Infosys will maintain its status as an IT services vendor, we anticipate the company under the leadership of Sikka will gain the image of a product and software provider, as the commoditization of IT services and adoption of cloud will compel it to expand its IP portfolio of vertical-specific offerings while implementing automation tools in low-level tasks.

My take

Despite some positive numbers, investors remain cautious about the journey Infosys is on, as a 4% dip in the share price showed on Friday after the first quarter results emerged.

Infosys has been placed in the 'follower' rather than 'leader' camp among the Indian outsourcing giants and it's this status that Sikka needs to address. From that perspective, his background in innovation will come to the fore.

But while he gets his feet under the table and shows what he plans to do, the market can perhaps be forgiven for some nervousness given the self-inflicted wounds the firm has endured in recent times.

This will be a decisive year. Shubulal is the last of the 7 founders of Infosys to act as CEO. From 1 August, the new era begins in earnest.