Crisis at Infosys
Infosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services, headquartered in Bengaluru, India. Infosys is the second-largest Indian IT company by 2017 revenues ~10.5 billion US$.
Company was founded by group of 7 individuals in 1981, Infosys is a NYSE listed global consulting and IT services company with more than 200,000 employees. From a capital of US$250, Infosys have grown to become a US$10.5 billion company with a market capitalization of approximately US$33.5 billion. Four of the founding members N. R. Narayana Murthy (NRN), Nandan Nilekani, Kris Gopalkrishnan and S.D. Shibulal went on to become chief executives of Infosys.
NRN served as Infosys CEO from 1981 to 2002 and as chairman from 2002 to 2011. In 2011, he stepped down from the board and became chairman Emeritus. On 1 June 2013, Murthy was appointed as Additional Director and Executive Chairman of the board for a period of five years.
In journey of over 35 years, Infosys have catalysed some of the major changes that have led to India’s emergence as the global destination for software services talent. They pioneered the Global Delivery Model and became the first IT company from India to be listed on NASDAQ. Infosys employee stock options program created some of India’s first salaried millionaires.
Murthy credits success of Infosys to its strong C-life (exhibit 1) value system which is imbedded into company culture, he believes in preaching and living by it. Apart from below value systems Murthy’s personal traits have unspoken effects on company culture.
Until 2013 The chief executive officer’s post at Infosys has been the preserve of the founders of the firm. The company has drawn many criticism because of the practice, especially given the backdrop of its disappointing financial performance 2012-13 due to exodus of senior management, attrition of employees went up to 24% and inability to tap into high margin cloud computing market.
Infosys for the first time picked an outsider as chief executive officer, with aspiration to boost sales of high-margin services like cloud computing and stem a staff exodus.
Vishal Sikka (VS), a former member of executive board at German software company SAP AG, has the technical savvy to herald what analysts expect will be a strategy overhaul at Infosys, which, like its competitors Tata Consultancy Services Ltd and Wipro Ltd , has relied on labour-intensive, low-margin contracts from Western clients. But it could be at least a year before VS is able to turn around a company that was once a posterchild of India’s $100-plus billion IT services industry. Investors felt Infosys failed to move up the value-chain because of its risk-averse management culture. VS, 47, is considered to be an innovator in the global software industry. A computer scientist by training, he was key in developing and marketing SAP’s flagship product, HANA, which helps firms analyze large amounts of data quickly.He was seen bringing into Infosys his expertise in newer technology areas, like cloud computing which allows clients to ditch bulky and costly servers for network-based software and storage in remote data centres.
VS joined SAP in 2002 and became a member of the executive board on February 7, 2010, leading products and innovation globally. He also led research initiatives at the company. His successor in the SAP board, Bernd Leukert, called him an “ingenious visionary”.VS quit SAP in May amid rumours that he was passed over for the top job at the software company and was gearing up to take charge at Infosys. Before VS joined the executive board at SAP, he was the company’s first chief technology officer.
The exodus began shortly after Infosys brought NRN from retirement as its executive chairman to help the company better compete. The annualised rate of attrition at Infosys – the number of staff leaving or retiring – was a record 18.7 percent at end-March, 2.4 percentage points higher than a year earlier. That’s close to a sixth of its workforce of more than 200,000. The departures included some top executives.
During NRN’s tenure, he also brought in his son Rohan as an executive assistant, was marred by restructuring that triggered uncertainty, factors that dented Infosys market share, dimmed its status as the employer of choice for young IT workers and intensified investor pressure for a change of guard.
The board approved and announced in the shareholders meeting, the dissolution of the chairman’s office and Rohan Murthy (Son) left Infosys on 1st June 2014. President U.B. Pravin Rao, once widely seen as one of the internal candidates for the CEO role, was also promoted to chief operating officer. Infosys shares, the most widely held Indian stock, rose as much as 3.2 percent in early trade, but ended down 0.6 percent with some investors felt the new management would take time to turnaround the company.
VS’s biggest challenge was to fill the leadership vacuum created by the exodus of senior executives, many of whom were responsible for key business sectors and winning clients. To turnaround Infosys, VS had to bolster his management team and revive sales and expedite growth through acquisition utilising some of the company’s $5 billion worth of cash and cash equivalents balance. VS had to make significant changes to revive the confidence of investors, clients and staff, post Murthy’s departure, along with two other founders.
Infosys had witnessed newer heights (Exhibit 2) under the new leadership of Vishal Sikka who took reigns of the company as its CEO, but Infosys has been battling with perceptions of under-performance because of its inability to keep pace with its ambitious target of more than doubling its revenue to $20 billion by 2020.Sikka had performed fairly well. Under him, Infosys saw only 1 quarter where performance (in terms of growth%) was actually below than targeted. The only negativity Infosys carried on him was the higher than the industry average of attrition rate (21% vs 15% in IT service industry).A weak performance in 2017 hurt Sikka, who earned $6.8 million salary in 2016-17, less than the $7.3 million he earned in 2015-16. Sikka got $3.8 million of the promised $8 million performance-related pay, despite a clause in his employment contract that guaranteed him at least 90% of his $11 million salaries (including bonuses).
Rajiv Bansal severance package: The issue became a big talking point after founders targeted the company and its management, including Sikka, for the severance package offered to former CFO Rajiv Bansal. Infosys and Bansal had agreed on a severance payment of Rs 17.38 crore equivalent to 24-month pay during the latter’s departure from the firm. The company at the time said that the payment includes non-compete obligation, including other rights and obligations. The issue was flagged by the founders and the company had to issue a clarification over what was termed as an exorbitant amount.
Vishal Sikka’s salary: One of the highest paid executives, Sikka was eligible for a USD 11 million (about Rs 70 crore) pay including basic salary, variable pay, restricted stock units (RSUs) and performance stock options for 2016. While the company clarified that the salary component had gone down by as much as 40 per cent, and that the rise has been primarily in restricted stock units and stock options, which are directly linked to incredibly steep goals. The company, however, did not elaborate on what these goals were. VS salary was revised from USD 7.08 million to a handsome USD 11 million package with effect from April 2016, a move that did not go down well with the founders, including NR Narayana Murthy.
Anonymous complaints: A whistle-blower’s letter to market regulator SEBI in February this year over Infosys’ acquisition of Israeli automation technology company for USD 200 million or Rs 1,250 crore in cash stirred quite a controversy. The letter alleged that Infosys executives had personal interests in buying the Israel-based Panaya firm in February 2015 and that they benefitted from the deal personally. In an email to employees, VS said that the charges ” create a false alternate-reality out of events and dates, with embellishments that are calculated to mislead and sensationalise”. The charge came right in the middle of an ongoing feud between Infosys founders and Sikka.
COO pay hike: In April 2017, NR Narayana Murthy shot off an email to the company terming the board-approved compensation hike for Chief Operating Officer U.B. Pravin Rao as “not proper”. Murthy said it will “erode the trust and faith of the employees in the management and the board”. Murthy said giving nearly 60 per cent to 70 per cent increase in compensation for a top level person (even including performance-based variable pay) when the compensation for most of the employees in the company was increased by just 6-8 per cent is “in my opinion, not proper”. Murthy said he always believed in striving towards reducing differences in compensation and equity in a corporation.
Resistance to acquisitions: VS has often held that the current business of the IT sector is slowing down and has pushed for the need to innovate and offer value-added services. However, media reports have it that a section of the founders are against this acquisition-based approach to growth and business. This has been something that has reportedly frustrated the management quite a bit in the face of a slowdown in business and falling margins.
I)Somewhere NRN thought that VS was changing some of Infosys core values when VS raised employee salaries, increased the COO salary along with his own salary by 55%, and made the dress code informal. He did a lot to engage employees differently. Perhaps there must have been considerable heartburn in NRN and the issues of Ravi Bansal’s severance package, missing the revenue target by $ 5 billion all came in handy to train his guns on VS.
II) Most people seem to ignore that Murthy wears 2 hats. The prominent one that’s top of the mind is as the founder, while the subtle one is that of an activist shareholder with 3.5% shareholding (his family) and part of the promoters shareholding at 12%. It should also be known that it was NRN and K.V. Kamath who had hired VS with great confidence when the company was floundering during Murthy’s 2nd innings.
III) VS took charge perhaps ignoring the import of NRN’s oft repeated line “Infosys is my middle child”. He perhaps didn’t expect that Murthy will literally mean it and attempt to do backseat driving overseeing executive actions. He is entitled to monitor Board performance given his shareholding and his cult status. However he seemed unhappy with VS strategic direction with acquisitions and his getting few executives from his ex-employer.
IV) NRN somehow had a running feud with Seshasayee — the current Chairman. That’s a tussle borne out of an activist shareholder with the Board. Keeping his stature in mind, these could have been discussed within close doors rather than bringing this matter out in the open. All the barbs on corporate governance was directed at him. There were several attempts to placate NRN, but they all proved futile.
V) I guess the final straw came when NRN took a cheap potshot at VS when he told that 3 of the Infosys independent directors told him (NRN) in private that VS was a good CTO material but not a good CEO. He didn’t name them, of course. (Ironical that he wanted the committee reports on whistleblowing to be made public when the Board repeatedly assured that the committees found nothing wrong).
VI) VS wanted to run Infosys the tech-product way, but that, unfortunately, is not the way technology services companies are traditionally run. His intent to transform the firm in the direction of a consulting/product driven company entailed changes that didn’t go well with the founders of the company.
The conflict between the founders and the board led to way too many public brawls that led VS to relinquish his vision for the transformation and ultimately resign leading stock slumped by 13%, value erosion of US$ 3.8 billion (Exhibit 3). This is a travesty of truth since VS has grown business, maintained margins, introduced new services which rose to 8.3% of the total revenues from zero a couple of years back. Even if VS performance was an issue, the responsibility to fix that was with the Board. Murthy didn’t ask for VS’s resignation but began humiliating him. NRN just overplayed his hand and became the villain of the piece. VS had nothing to fall back on, he grew tired with his strategy being questioned, he became a new convert to Drucker’s famous maxim: “Culture eats strategy for breakfast everyday” .
VS’s resignation came a day ahead of an Infosys AGM to decide on a US$ 2 Billion share buyback to utilize excess cash in the reserves of the company. The board has now to revisit the approach to attain their goal of attaining $ 20 billion revenue by 2020. Hunting for a new CEO to replace the one that was widely accepted and celebrated by the entire pyramid of the Infosys’s structure would lead to “change management issues”.
On 3rd December 2017 Infosys named Salil S Parekh as its new CEO and managing director, nearly four months after its previous head Vishal Sikka quit following criticism from a group of founders. The appointment of Parekh, who was a top executive at global IT services giant Capgemini prior to his latest assignment, marks the second successive time that Infosys has chosen a rank outsider to helm the company.
Parekh lost out to Vishal Sikka the last time Infosys was hunting for a new chief executive officer in 2014, has now been tasked to lead the company.