Why Companies Like Infosys Consistently Fail
Far from making it a software superpower, Indian technology firms seem to be struggling to remain relevant in the global market. The financial results of Infosys are just one indication. Here’s why.
By Sanjay Gupta
Once again, the financial results of the so-called Indian tech bellwether Infosys have disappointed – but there are much bigger concerns for its future.
In its recently declared results for the third quarter of 2010, Infosys made net income of $397 million on revenues of $1.58 billion for Q3 2010. This represents a year-on-year (YOY) growth of 28.7% in revenues and 18.9% in net income.
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Despite growth in the numbers, shares of the company fell on both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) on the news, mainly because analysts expected still better numbers. The company’s less-than-encouraging future outlook did little to help matters.
This is a story that keeps repeating in the media – with slight variations – each quarter when the big daddies of Indian tech industry (TCS, Infosys, Wipro, HCL and a couple others) declare financial results.
In most cases, analyst expectations are either barely met or missed by single-digit percentage points. Likewise, the stock of the company goes up or down a little – sometimes taking the BSE Sensex (sensitive index) down as well.
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While this little see-saw of results keeps anaylsts and media busy, few are asking the bigger questions that face the future of Indian software industry as a whole. How long can the likes of Infosys, TCS and Wipro grow linearly on the basis of hiring more code-writers?
Can they make the next big leap from $4-5 billion companies they are today to $50 billion or $100 billion global corporations in the foreseeable future? Can they rise significantly above their current minuscule share of 0.6% in the nearly $780 billion worldwide tech services market?
And most importantly, can their existing business models remain relevant in a world where sea changes are happening in the way consumers buy products, including software and applications? (Think of the app stores for anything from iPhones and iPads to Android-based smartphones.)
For decades, companies like Infosys have spawned an army of low-level software programmers, plunging them into projects for maintaining applications, providing technical support, managing systems, etc. Such work usually comes from big global corporations in various industry segments, who bought expensive hardware and software from companies that had the intellectual property (IBM, Oracle, SAP et al) and then began seeking cost reduction in maintaining or upgrading these systems.
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Indian firms like Infosys, TCS, Wipro, HCL and multinationals such as IBM and Accenture have been competing to get these tech projects, with Indian companies usually quoting lower and lower prices they charge clients on an hourly basis (now with large developer bases in India, MNCs can do that, too). Already, such rates seem to have hit rock bottom (around $10-15 per hour) and many Indian firms have increasingly focused on BPO (Business Process Outsourcing) for additional growth.
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But again with BPO, the business model has been ‘more bodies on the job for more projects’. And even in BPO, there has been a race to the bottom as far as pricing is concerned.
This is not the first time Indian firms are being criticized for their lack of vision and daring. But they have responded to such criticim with intermittent, half-hearted attempts like trying to ‘move up the value chain in consulting’ and developing or monetizing branded products. And they have consistently failed in achieving any speakable amount of success in anything other than hiring more people or spreading into more locations.
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To be fair, Indian tech industry has given a new recognition to the country of snake charmers and roadside bovinity. But its success has been only modest, to be polite. While many in the industry and media gave India the moniker of a ‘software superpower’, advanced economies such as US, Germany and Japan have tech behemoths whose turnover still far exceeds the scrapings of the whole Indian tech industry.
So, it is this failure to grow beyond their existing business models and become world-class global corporations that should be more worrying for Indian technology firms than short-term needs to meet analyst expectations.
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Unfortunately, keeping shareholders happy and stock price afloat is where they spend their time and energy – instead of developing something that creates higher and lasting value.
It is well known that most top tech companies in India are awash with funds and have ample human resources (the biggies employ 100,000-plus people). But they like to keep the cash in banks or use it for things like hedging on currency fluctuations. Likewise, they keep their armies of techies happy with flashy campuses and infrastructure. But they do little to ingite any sparks of creativity in their people so that they could come up with the next Facebook or Zynga.
As I said before, that’s where the likes of Infosys have consistently failed.
How long can they keep failing like this?
By Sanjay Gupta, contributing editor, Raman Media Network.