Yesterday’s
news may not have come as a big surprise to many:
“Cognizant with its strong Q2 revenue has overthrown Infosys as the second largest IT player after TCS (in revenue terms).”
Infosys Ltd.
- One of the most respected brands in the Indian IT space is in limelight for
all the wrong reasons. A string of poor results, leadership changes in the
helm, loss of top executives and fallout in brand ‘Infy’ has placed the company
in what can only be described as a mid-life crisis. So what exactly happened to
the company, which at least a few years ago, was piped as a major competitor
for the ‘Largest IT player in India’ tag?
Trouble
started with the global downturn. Clients in US and UK which formed the bulk of
Infosys Client pie was facing severe pressure in terms of cost and IT spending.
They naturally wanted more value from less cost. Infosys, a company which never
negotiated on margin reacted to the situation by offering discounts and even
free application development. The general strategy was thus not to compromise on
the margin. Their hope was that the situation would return to normalcy once the
economy recovers. The economy did recover but not the attitude of client
towards cost. The problem was aggravated with Cognizant offering its IT
services on a lesser margin. Infosys reasoned that if IT players started
playing this price war, then the situation will become worse over time. Their
reasoning does have a lot of merit but the refusal to play it out meant - less
deals, less clients and now the news that Cognizant has beaten Infosys for the
2nd spot. So is everything bad with Infosys? Not exactly!
The IT
sector is seeing a big shift. Most of the traditional ADM (Application
Development & Maintanance) is becoming commoditized (see definition below).
For e.g. Infosys reasons that the billing rates of ADM in 2012 are same as in
2002 while the cost base has increased by 70%. Infosys as a company is keeping
its productivity high because it gets 31% of its revenue from System
Integration and consulting. Also the ADM work got through consulting have
higher price points compared to traditional ADM. Thus Infosys wants to move
away (or at least decrease its exposure) in a commoditized ADM market. Infosys
which has always looked for high quality revenue base will find it tough to
fight in a commoditized business solely by waging a price war.
The
strategic decision made by Infosys to counter this shift was to move into PPS
(Products, platforms and solutions). It means investing in products, solutions,
intellectual properties, patents etc. By this Infosys can still keep its foot
in high quality software development. This is strategic decision which has very
little short term impact but is sure to help in the long run provided they can
penetrate into the market. One of the success stories of PPS is the money
wallet which it co-created with Airtel. It is an IP which allows customers to
do financial transactions over mobile. It is a non-linear business because the
company gets paid per transaction. Infosys is also heavily investing in
developing platforms. A simple look at Infosys website has thrown information
about 9 different platforms under the common name Infosys Edge. These include
platforms for digital marketing, social media, credit servicing etc. Products
and platforms are intellectual property-led businesses where unlike the time
and material model being followed so far, revenue is drawn from licences or as
a service.
So if
everything goes right, we are looking at a company which in the coming years
will rebound right back on top because of the strategic advantage of its PPS
portfolio. The other IT companies might be still fighting in the ADM space and
competing for lesser and lesser revenue. Of course this is better said than
done because Infosys has lot of challenges ahead of them on this rough journey.
But that is another article.
P.S. Commoditization
- The act of making a process, good or service easy to obtain by making it
as uniform, plentiful and affordable as possible. Something becomes
commoditized when one offering is nearly indistinguishable from
another. As a result of technological innovation, broad-based
education and frequent iteration, goods and services become commoditized
and, therefore, widely accessible.
