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Challenges abound for Narayana Murthy at Infosys

LiveMint logoLiveMint 25-05-2014 Anirban Sen

Bangalore: Early on Sunday, the 160,000-odd employees of Infosys Ltd received an email sent by co-founder and chairman N.R. Narayana Murthy.

“We have achieved much in the past year…reaching where we want to be won’t be easy,” Murthy said in the email, urging all employees to “think big and act boldly”. The message was similar in tone to the one addressed to shareholders earlier in May in the company’s annual report.

In the email, Murthy also conveyed a sense of the challenges ahead for India’s second largest software services company and the urgency in chasing more orders, especially large deals that would sustain the company’s core outsourcing business.

As the 67-year-old Murthy completes one year of his second innings at Infosys this week, the magnitude of the challenges facing the former information technology (IT) industry bellwether at a time when it is hunting for its first non-founder chief executive officer (CEO) appear daunting, a fact underscored in Sunday’s mail.

His biggest challenges include putting in place a succession plan, addressing the exodus of middle managers in the past 12 months and retaining the company’s biggest clients as a result of these exits.

For now, Murthy’s attention is focused on finding a successor who will take over as CEO after co-founder S.D. Shibulal retires and also take charge of Infosys after Murthy’s term as chairman comes to an end in a few years, according to two people familiar with Murthy’s thinking and the company’s plans. They spoke on condition of anonymity.

“Right now, everything else has taken a back seat,” said one of the people. “The near-term strategy and way forward will be defined only after the new CEO is in place.”

Murthy declined to be interviewed. “Since my work is still in progress, there is not much I can talk about,” he said in an email last week. “Whatever I want to say to outsiders has already been said by me. There is nothing more to add.”

Since Murthy returned, he has aggressively cut costs, especially those linked to doing business at client locations outside India, regularly met the company’s top 50 customers to protect contracts and get more business, and focused on increasing sales and efficient delivery.

To be sure, customers and experts are asking for a clearer indication of future plans and strategy, saying that the search for a new leader has distracted Infosys to a certain extent.

Infosys under Murthy is devoting all its attention on fixing its core outsourcing business, an area where it had lost focus as it pursued its controversial 3.0 strategy under Shibulal, and is ignoring the importance of increasing its share of revenues from newer areas of technology such as Big Data analytics and cloud computing, experts warned.

It stands the risk of losing crucial ground to the likes of US-based rivals Cognizant Technology Solutions Corp. in the area of newer technologies, a fact that is not lost on some of its top customers. “Some of the newer innovations that we are looking for are not really coming from the likes of Infosys, and that is disappointing,” said the chief information officer of a large US-based consumer goods firm, which has outsourcing contracts with Infosys and other Indian software exporters. He requested anonymity.

Under Murthy, another major area of concern is the high attrition rates the company is facing, especially of middle-level managers.

Such exits have the potential to hurt as these managers are responsible for maintaining client relationships and getting more business from big-ticket accounts.

“Middle-management employees are most in demand and Infosys’s ability to hold on to them could weaken further if it does not close the growth gap to peers,” Viju George and Amit Sharma of JP Morgan India Pvt. Ltd said in a recent research note. “It’s a bit of a circular loop—you lose critical middle-management talent and due to this, delivery and client satisfaction suffer, impacting growth.”

The euphoria of Murthy’s return last year has largely been replaced by concern over the company’s progress. Infosys does not enjoy its pole position of being a first-choice employer among managers and engineering graduates any more, Infosys executives, headhunters and recruiting firms interviewed for the story said. All of them declined to be named.

In Sunday’s letter, Murthy said Infosys had seen a 140% increase in job applications, as he sought to reassure employees that the company maintained its position of being an employer of choice despite high attrition.

At least 500 mid-level managers have left Infosys in the past 12 months, according to people familiar with the development, who too wanted to remain unnamed. Infosys has conceded that attrition, which stood at 18.7% in the March quarter, is an area of concern and the company was working hard to address the impact.

“While the demand for talented people has always been high, we are aggressively working towards addressing our attrition,” an Infosys spokeswoman said in an emailed response. “We have heard the concerns of our employees and have brought in the most important changes they have asked for. These include improving our compensation model, expanding career opportunities for our people and strengthening our talent base globally.”

Infosys has not conceded any large customer accounts or substantial business since Murthy returned. But some exits are starting to reflect in some accounts, where clients have shifted business from Infosys to rivals and experts warn this does not bode well.

For example, oil firm BP Plc shifted some business from Infosys to Bangalore-based rival Wipro Ltd when it was renewing its multi-million dollar outsourcing contract, after Wipro poached a mid-level executive from Infosys who was overseeing the client account for them, according to two other people familiar with the development, who also requested anonymity.

The board of Infosys needs to take bold steps and not be averse to hiring a candidate from outside the company, unlike its practice over the last three decades of giving each of its founders a turn in running the company, according to the chief executive of a rival firm.

“Infosys has no option but to go for an outsider who can come in and shake things up,” said the CEO of one of India’s top-five software services exporters. He requested anonymity. “They’re facing a huge crisis in leadership internally and the board needs to recognize that and act accordingly.”

“Infosys definitely needs a leader who is a visionary,” said Kavil Ramachandran, a professor at the Indian School of Business who specializes in the area of family businesses and succession planning. “They probably need someone who is doing well in some other rival company, but who has worked at Infosys in the past, so has a fairly good idea about how the organization works.”

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