Why all is not bad with Infosys!

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 2^nd 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.