Infosys woes prompt calls for change at top

BANGALORE/MUMBAI Tue May 8, 2012 10:49am IST

Employees walk in front of a building dubbed the ''washing machine'', a well-known landmark built by Infosys at the Electronics City IT district in Bangalore, February 28, 2012. REUTERS/Vivek Prakash

Employees walk in front of a building dubbed the ''washing machine'', a well-known landmark built by Infosys at the Electronics City IT district in Bangalore, February 28, 2012.

Credit: Reuters/Vivek Prakash

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BANGALORE/MUMBAI (Reuters) - The conservatism that served Infosys Ltd (INFY.NS) so well for three decades is now stunting its growth, prompting calls from investors for new blood at the top of India's showpiece outsourcer.

Critics say Infosys also must shed its aversion to acquisitions, change its premium pricing strategy and make better headway in higher-end businesses like consulting to compete with global rivals IBM (IBM.N) and Accenture (ACN.N).

"It's one thing to get to the top and it's another to stay there. Infosys is clearly struggling to stay there," said Eric Mookherjee, a Paris-based fund manager for Shanti India, which holds Infosys shares.

"In this scenario, what would you lose by bringing in someone from outside who would not be infatuated with the Infosys culture?" he said.

The first signs all is not well at Infosys came a year ago with a disappointing sales forecast and the unexpected resignation of an executive many had expected to be its next CEO and the first from outside its fabled group of seven founders.

Last month, the company most identified with jobs being "Bangalored", or moved to India to be done at a fraction of the cost elsewhere, missed its annual sales guidance, gave a lacklustre outlook and froze salaries.

"For years, we loved Infosys for consistently delivering more than they promised and now we are seeing just the reverse," said Mads Kaiser, a fund manager in Denmark at JI India Equity, which holds $200 million in Indian shares including Infosys.

"They are having real problems and it is not just external because it hasn't impacted its rivals much," he said.

Sales growth vs rivals: link.reuters.com/qat87s

Infosys quarterly results: link.reuters.com/jaf67s

The story of Infosys's founding in 1981 - seven engineers pooling together $250, mostly scraped together from their wives - is the stuff of corporate legend.

The seeds of Infosys's current woes may well be the unwritten pact that each of its core founders get a shot at running it.

Chief Executive S.D. Shibulal, known in the informal Infosys style as "Shibu", is the company's fourth, having taken the helm last year from fellow co-founder Kris Gopalakrishnan. Shibulal, 57, was previously chief operating officer.

"The company has had two operational leaders and operational leaders tend to make a company very inward focused," said a senior executive at a technology company who previously worked at Infosys and declined to be identified.

Infosys, India's most widely-held company and the first to list on Nasdaq INFY.O, played down concerns about its recent performance.

"Just a couple of quarters of ups and downs can happen to any company that is built to last," said Chandrashekar Kakal, a senior vice president.

UNDER-PROMISE, OVER-DELIVER

Infosys, most famously under the leadership of N.R. Narayana Murthy and Nandan Nilekani, came to define an industry that symbolises modern entrepreneurial India, with legions of young workers converging on its Silicon Valley-style campuses.

With about 150,000 staff and $7 billion in revenue, Infosys has long been No.2 to Tata Consultancy Services (TCS.NS), but was seen as the sector bellwether for being the only member of the Top 3 to provide year-ahead guidance, which it usually exceeded.

T.V. Mohandas Pai, who was a board member and head of human resources and had also been chief financial officer during a decade-and-a-half stint at Infosys, had widely been expected to be the first non-founder CEO, but quit unexpectedly a year ago when the lower-profile Shibulal got the top job.

Pai has denied that he left because he was not made CEO.

Pai, Shibulal, Murthy and Nilekani all declined to speak with Reuters for this article.

Critics say Infosys is overly focused on service delivery and not enough on sales; that it is slavish to preserving margins at the expense of winning new business; that its core service offerings differ little from those of the competition.

Smaller rivals Cognizant (CTSH.O), HCL Technologies (HCLT.NS), and iGate (IGTE.O) are winning market share partly due to Infosys' reluctance to lower prices in a tough market.

"Some of the problems are cultural and I think a change in top management can bring in a change in culture," said Kaiser.

Infosys investors are running out of patience with the lack of a clear plan for its $4 billion in cash. It has shied away from acquisitions that could help it enter new markets and has not realised a long-stated plan to boost its presence in Europe by buying a company.

"You have to either pay it back to the shareholders or you use it to grow," said Sam Mahtani, a London-based fund manager at F&C Asset Management, which owns India shares worth $300 million, including Infosys shares.

Despite the problems, Infosys still has believers.

"I think it's too early to say that Infosys has lost the game," said Taina Erajuuri, a portfolio manager at FIM India in Helsinki. "The company is in a tough spot, but I am prepared to give them some more time."

(Editing by Tony Munroe and Matt Driskill)

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