NO EMPLOYEE WANTED to be away from the Infosys headquarters in Bangalore on June 13. More than 3,000 of them squeezed into an auditorium made for smaller crowds. Those that couldn’t find even standing room tried to get a place in the huge cafeteria, where they could watch the proceedings on large screens. The event: N.R. Narayana Murthy, Infosys’s celebrated founder, was going to address the troops he had been called out of retirement to lead. “It was one of the highest-attended seminars ever,” says an Infosys manager, who requested anonymity. “Everyone wanted to hear what NRN would say, and what change he would bring.”
What the Congress Party’s D.K. Baruah once said of then prime minister, Indira Gandhi: “India is Indira, Indira is India”, is being said today, albeit in whispers, about Infosys and its iconic founder. Murthy stepped down as CEO in 2002, making way for Nandan Nilekani. Two CEOs and one chairman have come and gone
since Murthy moved away from executive responsibilities in 2006. (After Nilekani came S. Gopalakrishnan, and K.V. Kamath was chairman for 21 months before S.D. Shibulal took over as CEO.) But the post is still, almost instinctively, assumed to be Murthy’s.
When, in May, the company was seen to be floundering, the board invited Murthy to take over, this time as executive chairman, barely two years after his retirement. Noises of shock and horror came from journalists who had bought into the Murthy ideal—a staunch advocate of strict corporate governance norms, standing against nepotism in all its forms, and so on. To have him return, with son Rohan Murty in tow, was disillusioning.
For years, Murthy had positioned Infosys against other family businesses by stating that family members would never form part of the Infosys top management. This principle was used to attract professional talent away from Patni Computer Systems and Sonata Software.
Murty came in as executive assistant to his father, and became a vice-president in four months. The CEO of a Bangalore-headquartered IT company says that if it was a Birla or an Ambani company, no questions would have been asked. “So why apply dual standards by questioning Infosys? Equally, why isn’t Murthy saying his son is one of the contenders to be the next CEO?”
Murthy made it clear that his son would have no leadership role, but has revised that view since. In September, at the Motilal Oswal global investor conference, he called his son “a stellar academician who can help us improve our software delivery effectiveness”. Little has been said about his elevation to vice-president, however.
An industry veteran says: “The difference from Rishad Premji [chief strategy officer and vice president, Wipro, and son of chairman Azim Premji] is that Murthy proclaimed for nearly 30 years that no member of the family would come into the business.” Also, he adds, Rishad Premji has been put through the paces; he demonstrated capabilities at consulting firm Bain & Company, and has been at Wipro since 2007. Most important, Azim Premji owns over 74% of Wipro, compared with the 4.47% held by Murthy’s family in Infosys.
It is a serious question in an industry that, owing to its global exposure, had set the benchmark for corporate governance. Soon after the June meeting, Institutional Investor Advisory Services (IiAS), which publishes voting recommendations on shareholder resolutions, voted against appointing Murthy as executive chairman. It lowered the governance premium accorded to Infosys. “His [Murthy’s] reappointment does not go against the values of corporate governance,” says Amit Tandon, managing director of IiAS in Mumbai. “But it is the manner in which he was [re]appointed—different things being said on different days... That bothers us.”
Also, Murthy has breached the age bar for retirement (60 for executive positions; 65 for non-executive roles according to the Infosys corporate governance policy drafted in 1993), much like A.M. Naik of L&T or Y.C. Deveshwar of ITC. Murthy seems well aware of the contradictions between what he once said and what he’s now doing. At the Infosys annual general meeting on June 15, he outlined his strategy for growth. Critically, he added that: “Executing this strategy may require me to change some of my long-held beliefs.” (Murthy refused to meet Fortune India, saying he would rather achieve certain goals before any media interaction.)
THE FACT IS that Murthy, despite all appearances to the contrary, never really left Infosys. If Infosys is a kaleidoscope that turns every time a new chief takes charge, each image ends up being a likeness of Murthy’s. He has always defined what Infosys should do—be it pricing at a premium for margins and client portfolio criteria in 1995, its aspiration to be a product and platforms developer taking a back seat to offshore delivery by 1997, and succession planning in 2002. By the time Murthy passed on the reins to Nilekani, he had outlined a framework that couldn’t be breached.
The only area where Murthy distanced himself from Infosys has been in employee affairs—the difficulties of managing its huge workforce.
To understand Infosys, it’s essential to understand Murthy’s original thesis, and recognise how his co-founders in executive functions never strayed from his philosophies even when the market called for it. In truth, it didn’t matter at all that Murthy was away. There was always somebody running Infosys with his perspective. This has been key to Murthy’s endurance at Infosys even when he was non-executive chairman.
“By the time Infosys was a 50,000-strong company, it needed both in-house and external leaders at the top for fresh mindsets,” says one of Infosys’s top performers who worked there for nearly two decades. “Senior employees got into a mode wherein any decision taken would have to pass Murthy’s test.” An ex-Infosys employee, who worked closely with all the CEOs, agrees: “Nilekani would argue with Murthy, whereas the other founders would figure out how to do a task like Murthy would do it.”
One of the most visible instances of the Murthy-centric thinking can be seen in the company’s strategy on products and platforms. This has its roots in Murthy assessing its core competence way back in the early ’90s. Would it be offshore delivery or software products? His rationale to determine the answer was based on a lofty ideal: Which option would create more jobs? At that time, Nilekani felt Infosys was capable of generating 40% of its revenue from the products businesses because of the technical calibre of Infosys’s top 100 techies under co-founder K. Dinesh, and because of the type of products it was developing.
Infosys, then, was building three product businesses—Yantra, Entark, and OnMobile. It had even designed and developed a router when Cisco was a rising star, as well as two operating systems before MS-DOS. The banking software Finacle, which would spearhead Infosys’s software products strategy, was in the works. It was Murthy’s call, and he called in favour of offshore delivery. “If he wanted, he could have taken the product to market,” says an engineer who worked on Entark, “but it would have meant a lot less jobs being created.” And so Entark, a project that was seen as way ahead of its time and could have competed with Sun Microsystems’ NetDynamics, was shut.
It was a justifiable business decision, and going the offshore delivery way allowed Infosys to grow globally. But it also meant that future CEOs hobbled when trying to expand the offshore strategy to include products, as in Nilekani’s case. Current CEO, S.D. Shibulal’s vision of PPS (products, platforms, and solutions) has lost focus with Murthy’s return. Murthy said as much at the AGM in June. During the last two years, he said, Infosys’s focus “was blurred” regarding highly competitive, large revenue-yielding outsourcing projects. “We have to refocus on our bread-and-butter business in the short term,” he said. Nearly 60% of Indian IT’s $76 billion (Rs 4.6 lakh crore) exports come from offshore services.
For the first time, in December 2012, there was a 13% fall in the number of large IT and BPO deals. The average contract value of large outsourcing deals fell from $17 billion in 2010 to $13.3 billion in 2012. (One large deal typically has many technology vendors, with the likes of IBM and Accenture bagging a lion’s share.)
By Shibulal’s estimate, the PPS approach has already yielded over $650 million in revenue, while preparing Infosys for a tech market that is increasingly relying on mobility, cloud, and analytics. Industry leaders TCS and Cognizant have positioned themselves on similar lines since 2011, even when going all out to bag deals.
Murthy is focussing on the big deals, and this has begun to yield fruit, starting with a BMW deal win in March. However, Shibulal’s PPS positioning would have helped clients view Infosys as being more upstream among technology service providers.
ANALYSTS ARE GETTING vocal about the fact that what Infosys needs more than anything is to be more flexible. It started in 2009, with client budgets getting challenged after the sub-prime and financial crises. But the company was reluctant to move away from the earlier Murthy diktat of premium pricing.
Few realise that he hit upon the premium pricing differentiator almost by accident because of the other and now disgraced Murthy—Phaneesh. By 1994, Phaneesh Murthy was a fast-rising salesman for Infosys based in Fremont, California. “When Phaneesh came in, we used to charge around $12 an hour,” recalls an onsite engineer from that era. One day, Phaneesh Murthy met his team to announce a win for $24.95 per hour. His astounded colleagues discovered that he had begun by tripling the Infosys rate, allowing the client to bargain it down to the $24 range.
Narayana Murthy thrived in converting this into a pricing philosophy. “It was clearly his approach: You didn’t get a deal if you couldn’t contribute to the high margin,” recalls a client account manager from the early 2000s. It was non-negotiable. “Murthy’s take was: once you go down on price and margin, you can’t go up as a premium price player. You won’t build or develop the mechanism to support that premium pricing. Solutions will remain at a certain level.”
Subsequent CEOs and senior managers found it difficult to implement any sort of margin reduction after this; there’s always been a Murthy camp at the very top. This is why it lost accounts such as insurance player MetLife in the early 2000s (a key account for Cognizant now). Gopalakrishnan—as CEO and co-chairman alongside short-lived chairman Kamath—belonged to that camp, and when Shibulal proposed reducing margins last year, he met with fierce opposition from V. Balakrishnan, then Infosys’s CFO who was later moved to oversee the India business unit.
It looks like only Murthy can break what Murthy has made. Because this June, the votary of keeping margins untouched, said: “An extra focus on commoditised businesses has the potential to accelerate our revenue growth, while reducing our margins.”
Questions have also been raised about the Infosys board’s independence, considering Murthy’s towering presence. Independent representation on the board from the corporate world—Kamath of ICICI Bank since May 2009, R. Seshasayee of Ashok Leyland, and Ravi Venkatesan, chairman of Microsoft India between 2004 and 2011—has rarely crossed Indian shores. The likes of David L. Boyles, who retired from the ANZ Banking Group as chief operating officer in December 2003, have been few and far between on the Infosys board.
Wipro, in comparison, has a fair share of international names on its board. In 2011, when Premji decided to abandon the joint CEO model, he wanted to give time to the CEOs because of their long contributions to the company. The American directors on his board advised him against this, with strong and logical reasons. Premji—a 74% shareholder—listened to the board.
Murthy’s comeback seems to mark a transition from a global corporation guided by its board of directors, to full-throttle management control. This may not be good from the board’s point of view, or from a corporate governance angle. Shareholders, however, seem happy to have Murthy back at the helm. A minor shareholder unequivocally repeated his view from the 2011 AGM. “No Murthy, no Infosys!” he pronounced.
Both Nilekani and Murthy emphasised longevity in its growth years, as they modelled the corporation on GE, which has endured and dominated for decades. Murthy’s greatest challenge will be to make the organisation open to outsiders—a seemingly impossible task given the legacy of Murthy and the culture of Infosys. Until now, it has been promoters who got to claim the post of CEO. If Murthy wants to ensure that Infosys, which he once called his middle child, is to grow, he’ll need to ensure that outsiders get a chance to run the show. Otherwise, there’s every chance that Infosys will follow the path of Patni Computer Systems—the company Murthy quit to start on his own.
