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.

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10 comments on “Why Companies Like Infosys Consistently Fail

  1. Hello Sir You seem to be hell bent on criticism of Infosys by trying to compare it with the biggest corporations of the world. But you dont seem to notice the financials of infosys which has Return on Equity(without debt) of greater than 32% over a period greater than 10 years. Please go and find out one company which has been able to have ROE of 32% for period greater than 10 years(without having debt) and grown its PAT by more than 30% compounded over a period of 10 years. Go figure

    Second thing is for every facebook and zygna and Apple there are hundreds which have completely failed and gone bankrupt (remember Palm mobile company which was once a leader in smartphones ).

    Third I believe only that person is entitled to quote the way you have said about infy only if you can do better than infy . Had steve jobs said this I would have been fine but please dont just sit in your home and criticize infy n tcs et al .

    Fourth Indian like tend to pull down people who are working hard to do something productive .
    i cannot write more but hope you got my point . Do something and then speak up .

  2. Sanjay Gupta on said:

    Dear ak,

    My intent in writing the piece, as you apparently couldn’t ‘figure’, was to give a big jolt to the incremental thinking of Indians and Indian companies. Get a job, get a salary, get a higher salary, get another job, a little higher salary still…Same with the ‘billing-minded’ Infosys and its ilk – but with a difference, their rates are going down! They are still able to generate good returns through more efficient cost and cash management plus linear/geographic expansion, but how long before the cycle loses steam? I do not discount or dispute the returns that Infosys has given its shareholders over the years, but that’s precisely the point of my article. Instead of merely delivering on ROE day in and day out, why can’t Infosys or TCS or Wipro – with the kind of cash and resources at their disposal – also do something about developing and monetising lasting intellectual property?

    Secondly, you are worried about the multitudes of failures who couldn’t make it big in technology – but you are not ecstatic about the success of Facebook or Zynga? I can clearly guess you are not the entrepreneur type – and, unfortunately, even those in India who profess to be entrepreneurs would rather take a ‘calculated risk’ than bet their shirt on something that can truly transform a business or an industry.

    Thirdly, Steve Jobs wouldn’t bother talking about Infosys – the firm is too puny (yet) for his standards to notice. And most media pundits (especially in India) are usually too busy singing hymns for the biggies of India’s piddling tech industry that it’s left for writers like me to say out loud what must be said. What Infy and others have done is amply lauded already and now belongs in the past – what are they doing for the future?

    Finally, I don’t trade in Infosys’ or, for that matter, any other firm’s shares and pulling it (or the people behind it) down is certainly not my motive. Pulling them up by the collar for what they can do and perhaps should do so that the Indian tech industry becomes a dominant force in the world rather than remain a subservient linen-washer to the rich world – that’s what I was trying to do. And I did it as a proud Indian.

    My article seems to have touched a raw nerve with you for the wrong reasons. I hope it jangles the sinews of the arbiters of India’s hardworking but relatively small technology industry so that they can grow beyond being bean counters into visionaries and global achievers…

  3. the problem lies with our education system as well which attempts to train us than educate. thus producing factory workers with very little knowledge to come up with something new. innovation will happen if we are able to create universities like Stanford.

  4. Sanjay Gupta on said:

    Arorar, I think that’s a very core point: our education system. Even though many praise it for its rigor, there are gaping holes in it. There’s too much emphasis on learning by rote rather than real-world experience. Also, most students in India study in order to get clerical or repetitive types of jobs – few study to excel in their chosen field. The result: lack of innovation and visionary thinking and too much mediocrity.

  5. Well, there are few points here worth considering, but not all. These companies have continued employing coolies for software coding, which surely keeps them low end organizations and who could hardly reach $50bn figures. And due to the same reasons, intellectuals would probably never stay to work there for long, and would move to google, facebook, where they can convert their ideas into reality.

    But when you look at the macro picture, they’ve created hundreds of thousands of jobs for those, who would’ve otherwise worked for smaller salaries. They are partly responsible for the growing middle income group of India. Hats off to people like Narayan Murthys, who have created large organizations, maybe to employ average students of India (that run into millions now), which facebook, google or any other $50bn+ company can never think of.

  6. Sanjay Gupta on said:

    Well, Rishi, there’s no denying the contribution to large-scale job creation that Murthy, Kohli, Premji and others have done for lakhs of students in India – average as you rightly call them. And the few more intelligent ones leave for bigger challenges and, let me emphasize again, bigger salaries. But interestingly, a lot of MNCs who’ve set up huge bases here also employ tens of thousands of people in their organizations. And while initially they paid much higher salaries, they are now increasingly playing to the ‘low of averages’ (pun intended) – dangling benefits like bigger brands, more challenging projects, etc. So, where will that further leave Indian companies down the line? I’d love to know what the big mentors of Indian tech are thinking or doing about it (if at all!)

  7. I sometimes cannot figure out why we have to write on what is odvious and self explanatory. Today it has become a kind of fad to shed the responsibility of greater success on to those who are successful in some ways.

    It’s perhaps ingrained in us. So in our offices (and it happens mostly in government and public sector set ups) we mostly find tasks heaped on to those who work the most and shammers somehow get away.

    Well Sanjay if I have grasped it correctly your point is that the bellwethers of India’s IT industry have failed to inspire innovation that would bring sea change in the industry like the global MNC names you have mentioned.

    I would ask you why are you asking the likes of Infy, TCS and Wipro only to do the needful and why not other top Indian firms from other sectors who have been there longer and languishing barring a few exceptions.

    The L&Ts, the Tata Steels, BHELs, the BSNLs et al..Is there a any sea change in their business model do you see..they are in fact growing slower….Now compare this with the GEs, The GMs, the WalMarts, KFCs, McDonalds, Jhonson & Jhonson, the AT&T et al..all of these American or Western firms can be called to have given rise to innovation in their respective areas and not just Google, Apple or Facebook..they are only recent.

    You may even go beyond and see the number of inventions the western world did as compared to the Orient.

    One among many reasons for our stagnant state could be the political, social and economic millieu that we are in. So it was not surprising when Narayana Murthy lamented that during Infosys’s initial years it took him three years to get a computer imported..you can only imagine the degree of constraints that the sector grew in..Remember we had the CDACs, the NICs much before than these IT firms…Can I then ask what have they done..what prevented them from innovation? they had all the backing and patronage of the State and why cannot I ask..

    Why the companies that are responsible for a GDP contribution of about 7% and responsible for generating close to 7 million direct and indirect employment in a country where literacy, poverty levels are well below accepted standards, are singled out and being made the in-charge of innovation, and on top of that being labeled as failures!! You brought out the aspect of patriotism in one of your comments..Isn’t it more patriotic to create earning opportunity for our teeming millions..by your logic most Indian public sector firms should be just shut immediately for they are guzzling your and mine hard earned money and are only loss making ..they are the most unpatriotic lot, you must agree..

    Yes some of the top Indian IT firms are innovating in their own way, in their sector, mind you they are running businesses and not charity, some of them pledged their wife’s jewellery for the risk they took!

    If you see closely the evolution of Indian IT service industry, you would find in last six years Indian IT firms have weaned away business from the top global firms (concrete data is available on this on request), there is a business model there and some of these top Indian firms have been on top of it and still commanding..

    That is another reason why you see the IBMs, the HPs, and even out and out product companies like Oracle, SAP, Xerox, Dell jumping onto IT service bandwagon, in fact Oracle and SAP are now enjoying good cushion due to massive service revenue that they are reaping and their product revenue is only shrinking…So that is an area that was shown successfully by these Indian IT firms..you must have to name that as Blue Oean approach.. So one needs to be ecstatic of this achievement..

    Then the other achievement is the trickle down effect due to the success of this sector, that is now happening. I have already mentioned about Indian IT industry’s contribution in India’s GDP, but another softer aspect that is mostly neglected in success related pedagogy is the culture of entrepreneurship that this sector is largely responsible for in India in recent times. See the number of start ups, entrepreneurs who are setting up their venture every now and then..most of these people have had been connected to the IT industry in one way or the other.. One of the reasons why Nasscom has now set up a separate association called Emerge to support them..

    I believe Sanjay your questions are pertinent but thrown in wrong direction and lets be ecstatic of what Infosys, TCS, Wipro have done so far and what can they do in future..!! And they are the last ones to be termed failures..!!

  8. Sanjay Gupta on said:

    Amit, there’s an old quote prevalent since colonial times. It’s called “White man’s burden.” According to Collins English Dictionary, it means “the supposed duty of the White race to bring education and Western culture to the non-White inhabitants of their colonies.”

    Taking the racial undertone away and tweaking its meaning to suit my purpose, I’ll say in response to your comment that those in the top positions or in positions of power and leadership will always be asked to do more, will always be criticized more, will always be expected of more than what they have done. We question and prod the likes of Infosys precisely because it is these companies – and not the even more mediocre multitude of tech firms or the stodgy public sector organizations – that CAN jump from one orbit of growth to a much higher orbit of value creation and innovation.

    The task requires immense courage, constant innovation, deep risk-taking and ample resources. So the sluggish companies you mention just won’t cut it – and people and media know it and thus don’t question them as vehemently as they would an Infosys or a Wipro.

    Regarding the question of looking at sectors other than technology, I think we must ask leading companies in those the same questions of risk-taking, innovation, vision, etc. if we want to goad them into becoming world-class, leading organisations (Wal-Mart, GE, et al). At the same time, maybe Indian companies shouldn’t blindly follow in their footsteps but create their own models of excellence based on more inclusive growth and better business practices (for instance, Wal-Mart, which has been given the moniker of ‘the Bully of Bentonville’ has often been severely pulled up for its exploitative trade practices and charged with destroying the livelihoods of small store-owners).

    And as to bringing down bureaucratic and clerical jobs in pest-like public sector companies and making them into lean, efficient organisations – I’m all for it. In fact, I was happy when sometime back, the BJP government hinted at cutting down central goverment jobs to one-third the total number. But as we all know, such political and drastic changes take time to happen – too much time in case of India. The opponents of such changes say it will result in massive job losses, but to me most people employed in government organisations are not doing any job at all – they are just lazing around and collecting salaries at the taxpayers’ expense. Let them find useful, productive jobs and work a little hard to make money. That would be only fair, no?

  9. Infosys as a corporation has 5 stakeholders; employees, clients, shareholders, vendors and society-at-large. Your title says “Why companies like Infosys consistently fail”.
    Which out of these stakeholders have they failed and that too consistently? Please elaborate.
    thanks,
    -RD

  10. Kishore on said:

    Well said Sanjay, Indian IT industry is like the traditional rural agriculture farming, they do a lot of hard work compared to the western agriculture but the output is less than 40 % compared to the western farmer. Innovation is driving the western economy. Indian economy is driven by the vast population( only quantity but no efficiency and quality)

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