Infosys signals aggressive investments in digital while ditching product

Den Howlett Profile picture for user gonzodaddy April 17, 2018
Summary:
Examining Infosys CEO's latest strategy musings. There's little time and Infosys has a lot of catching up to do.

parekh infosys
Salil Parekh - CEO Infosys

That didn't take long. Salil Parekh, recently minted CEO at Infosys managed to kind of please the markets with the Q4 earnings announcement and then sent the stock price into something of a downward spiral with talk about margin pressure through to 2019. As predictably as night following day, the markets are panicking at what they perceive to be bad news and without considering the long-term prospects of this storied services provider.

Looking back to look forward

The Q4 2018 result was nothing to be alarmed about but it was in the discussion about future growth and margin where Parekh found himself on difficult terrain. Before getting into that, it's worth looking back at the Q3 FY2018 call to understand where Parekh's thinking is going.

At the end of my assessment then, Parekh said:

The challenge presented by digital and automation technologies can only be met successfully with a commitment to transformational change; incremental, tactical approaches will only yield limited results and risk failure.  As never before, senior executives in every industry face existential decisions about the future of their enterprises, and will need to “make themselves uncomfortable,” as one participant put it – to re-imagine their businesses based on the centrality of data and digital relationships (see Technology above).  They will need to shed the constraints of the “as is” and articulate the journey to the “to be.”  Success will be measured not on beating last quarter’s results but on the ability to see and grasp the scale of change required and create a viable and compelling digital vision for what one participant called the “journey to improvement.”

Now we have clues as to what he meant.

Following up on the earnings call, Parekh talked with analysts about his strategy. Having met with 48 of the company's top customers in the last three months across all major territories, he is convinced that those customers want 'digital' and they want it from Infosys.

Let's just take a breath here because if right, then the question comes - how does Infosys achieve that? Back in 2014, Phil Fersht said of then newly minted CEO Vishal Sikka:

Services firms are so much more than development labs - they are people environments the size of small cities that need very smart management which can manage their costs, while providing great careers for the brightest talent around.  Vishal needs to make sure he has the right management under him which knows services back-to-front to create a world class services organization that can support its home-grown disruptive and innovative platforms. He must resist the temptation not to surround himself with yes-men, but with people who can challenge his vision and make sure they are evolving it in the right way to be as competitive as their rivals.

At the time, I quoted Sikka as saying:

“The distinction between products and services is blurred, aircraft engines are delivered as services. If you look at some of the breakthrough innovations delivered recently, it is best to first co-innovate with a services and project based model. I feel very comfortable in having done this at SAP.”

Over time, it became clear that Infosys didn't really have its eye on the digital ball in the way that others have although it made solid progress on automation platforms and was able to note that over a quarter of the FY2018 revenue came from 'digital.' That adds up to a healthy $2.8 billion.

A seat in the C-suite?

The abiding problem that Sikka faced was that even among customers, they viewed Infosys as plumbers, not strategic thinkers. In my dealings with Infosys folk who were endeavoring to sell digital stories, they really weren't thinking about new business models or strategies but tinkering with existing. In short, Infosys had little way to get into the C-suite where the digital strategy questions were being asked.

What makes Parekh think he can operate a different model? Acquisitions and a whole ton of investment in people located in the U.S. rather than building up the troops in India. That will not sit comfortably with the homegrown behemoth but then Parekh has little alternative given the current U.S. administration's desire to restrict work visas for aliens. The short version then is that Parekh will sacrifice margin for growth. The alternative is unpalatable:

To build the future Infosys, we have to make those investments now. If we don’t do that now, the real concern is that we won’t be relevant to our clients in the future...We are best positioned to help clients navigate their journey into the future and take them to the next phase. Our clients are pushing us because they know we have the capabilities.

Really? From my perch, Infosys is sadly lacking, despite claiming annual revenue of $2.8 billion from digital services. That market lagging position didn't prevent Pravin Rao, COO Infosys from talking up achievements. For example:

Demand in financial services is strong in new services like digital, cloud, RPA, AI and automation. Variant budgets are being diverted from the bank and regulatory spending within the bank initiatives. Banks are engaging with us strategically in digital transformation and new services, which is helping us increase our wallet share.

All buzzword compliant. But - we don't know the extent to which Parekh has communicated his thoughts to the founders, who have a penchant for meddling when they see things they don't like.

Offloading Panaya

However, it will likely be music to their ears to learn that Infosys plans to offload Panaya, having already taken a $90 million hit on that investment - a write down of some 45%.

Despite the ongoing criticism about Panaya, my conversations with Infosys consultants was always positive. They saw Panaya as an opportunity to differentiate their implementation and upgrading of SAP and Oracle systems. One said to me that he refused to specifically charge for its use because the overall deal size made it a rounding error not worth emphasizing, especially in SAP HANA projects.

My take on the decision to sell Panaya is that it suggests the SAP/Oracle implementation work is going away and that developing Panaya from here on out won't generate a sensible ROI.

Other products being dumped include Skava and Kallidus.

That still leaves the question of investment.

Investing in digital

Colleagues believe Infosys has to make some large investments that are digitally focused. To that extent, the company has agreed to acquire the quirkily named WONGDOODY, a Seattle, U.S.-based, full-service creative and consumer insights agency for $75 million.

That's a drop in the proverbial ocean but it does mean Infosys has a credible U.S.-based digital agency that will be attractive to clients needing to up their customer experience game. It also slots into Infosys' broader Digital Studios division that includes London-based design firm Brilliant Basics, acquired last Fall for £7.5 million.

The bigger problem comes in terms of available cash to make a large acquisition. In the earnings statement, the company confirmed its commitment to paying out 70% of net profit in dividends. What does that leave? Not a lot and certainly not enough to make the kind of blockbuster acquisition Infosys may need to catapult it into the digital big league.

My take

Parekh is making the right noises and sounds quietly confident. But like Sikka before him, he has massive challenges, not all of which can be solved through acquisition.

Rolling back Sikka's software AND services strategy is questionable in light of acquisitions and development that is starting to feature more heavily by the likes of Accenture and Deloitte. In a recent conversation with an Accenture leader, he noted that Accenture has had to undertake its own services transformation to better reflect the digital age. IBM has done similar, creating a division devoted to that topic under fresh leadership. Both are masters of account control and can offset service office weakness with C-Suite smarts. Infosys has yet to prove it can do the same.

My guess is that Parekh has about two years to make the impact he needs to before the founders start getting grumpy again. As always, we shall see what happens as the story unfolds.

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