Bottom-up innovation strategy gives Infosys edge over peers

AT A time when domestic and multinational rivals are struggling to maintain profitability because of pricing pressures, India's secondbiggest software company Infosys Technologies continues to report an operating margin of over 25%, helped by better rates, a robust banking software product business and its reputation as an efficiently run and ethically governed company.

    "Margin is a function of how efficiently you run a company and we have been able to sustain our margins since 1993," S Gopalakrishnan, chief executive and one of Infosys' founders, told ET. "We believe in running business optimally, in good or bad."
    Not surprisingly then, when competitors such as TCS, Wipro and HCL Technologies are postponing joining dates for new recruits, Infosys is keeping its commitment, and that too at better salary levels than last year. Infosys will be inducting almost 20,000 engineering graduates this year —up from some 18,000 it had projected earlier — at salaries which are 8.3% higher than last year even as it tries to cope with lower demand for software services in its top markets in the US and Europe.
    Beyond business reasons, Infosys is doing this because it has never looked back after making a job offer. "We are very particular about this since it could impact the brand, and Infosys chairman and chief mentor NR Narayana Murthy himself has made it clear that the company must respect its commitments — no matter what the economic situation is," a company official said.
    Founded on July 2, 1981, in Pune by Mr Murthy, Nandan Nilekani, NS Raghavan, Mr Gopalakrishnan, SD Shibulal, K Dinesh and Ashok Arora, Infosys continues to attract thousands of software engineers every year. Mr Murthy, who borrowed around Rs 10,000 from his wife Sudha to start the company, is now chief mentor and brand ambassador of Infosys.
    "No one in the services business from across the globe has such margins — in the US, Infosys trades at 14-15 times its earnings when most others in the sector trade at 6-7 times their earnings," said James Friedman of financial firm Susquehanna International Group.
    According to a US-based expert, who is advising some top Indian tech firms on creating the next set of differentiators, Infosys is well-positioned to grow into one of the world's biggest IT companies. "Globally, companies such as IBM, Accenture and EDS, have followed differed models. Infosys, with its clear focus on high-value consulting, and research-led solutions, could be the next Accenture," he said. At the end of December 2008, Infosys had around 74 customers contributing at least $50 million in annual revenue. Its rate of repeat business is over 95%.
    In an industry primarily delivering commoditised application development and maintenance services, Infosys is able to command 5-10% premium over domestic rivals by investing almost nearly 2% of its revenues in research and development and offering more focussed solutions to large customers such as BT and American Express.
    "Our sales model competes on value and not on price, and we are very competitive when it comes to total cost of ownership in the medium to long term," Mr Gopalakrishnan said. "We were also the first company to offer a comprehensive employee stock option programme in India, and we believe that investments made in employees pay good dividends," he added.
    With many of Infosys' customers, including ABN Amro, getting acquired or merged with other financial institutions, experts have raised concerns about new business deals. However, Infosys is finding new business from these transactions as customers such as Bank of America and Merrill Lynch seek partners to help them integrate their banking systems. "M&A is a silver lining for us in the current environment because we are incumbents in some of these cases," Mr Gopalakrishnan observed in a recent interview.
    Despite the compelling need to grow its top line in challenging times, Infosys will stay away from troubled contracts. "We don't compete on price, and we will stay away from toxic contracts that can hurt in the long term," the Infosys CEO said.
    During quarter ended December last year, net income rose by almost a third to Rs 1, 641 crore on a 35.5% growth in revenues to Rs 5,786 crore. The company's banking software product Finacle is another reason why Infosys is able to sustain its margins, helped by licensing revenues from the product.
    "Infosys' value proposition is that they can author a solution right from consulting, to application development and up to customer care services, not to mention their growing banking product business," said Mr Friedman.
    In tough times, when customers are seeking more operational efficiency, "innovations coming out of our Software Engineering and Technology Labs (SET Labs) are critical because they help us win large transformational deals", Subu Goparaju, vice-president and head of Infosys' SET Labs told ET recently. "We are able to change the paradigm from being a typical vendor-customer relationship to partners in innovation."
    When BT wanted to integrate business data across different sources and make them available to its leadership and users on a real-time basis, Britain's biggest telco decided to integrate Infosys' Gradient solution with its own business intelligence platform.
    "We follow a bottom-up innovation programme, encouraging employees to develop and propose ideas across new technology areas such as grid computing and platforms such as Linux," said Mr Gopalakrishnan.
    With over 100,000 employees, Infosys now wants to adopt non-linear growth by aggressively growing its banking product business and seeking other solutions that do not require as many people to deliver a project.
    "Among all offshore service providers, TCS and Infosys are best positioned to arrest employee-led growth since they have been able to establish their footprints in the product business," Pankaj Ghemawat of Spain's University of Navarra said.
    pankaj.mishra1@timesgroup.com