Infosys CEO Vishal Sikka on Friday denied reports that the technology giant’s founders led by Narayana Murthy and Nandan Nilekani were looking to sell their stakes.
Murthy very categorically denied it and I think that we should leave it at that, Sikka told CNBC-TV18 in an exclusive interview. “I have deep trust for them (founders) and respect them,” he said.
Governance Concerns
Sikka said Infosys board is working on the corporate governance issues raised by the founders. “There has been a lot of communication (between board & founders),” he said. An advisory panel ensures there is high bandwidth connection between board and founders for transformational work that Infosys is trying to do, he added.
In January, Murthy and other founders had raised had raised concerns over governance norms at the IT major and suggested bringing in value-based people into the firm. Severance packages given to former Chief Financial Officer Rajiv Bansal and General Counsel David Kennedy were also questioned.
Layoffs and Replacements
The IT industry is undergoing a lot of churn lately due to global and domestic uncertainties which is pushing companies to trim their workforce. Jobs are also being lost to automation.
Amid talk of Infosys reportedly planning to hire 10,000 Americans to cope with stricter H-1B visa norms, Sikka said there have been no layoffs in India. “The rumours of 10,000 hires in US to replace Indians is also not true,” he said. The company has been working on a plan to hire 10,000 executives since past one year, he added.
Infosys is “hiring people” and will continue to be a “job creator”, Sikka asserted, adding that the US still presents a great opportunity for Infosys – “the need is new tech, more local people”.
Mission 2020
Infosys hasn’t shelved its 2020 revenue target, but the company may not be able to achieve USD 20 billion revenue in the next three years, Sikka said. The target put forward three years ago was aspirational and a way to get growth gears clicking, he added.
“We’re clear that we will not sacrifice margins to get to the 2020 target,” Sikka said.
Cost cut demand
Sikka also said there is nothing new in what Infosys COO Pravin Rao said on pricing pressures on the run-side of the business.
About 65 percent of the workforce is working on 55 percent of revenues, while 35 percent of workforce produces 45 percent of revenues, Sikka said. The transformational part of business (build part) has tremendous opportunity, he added.
Below is the transcript of the interview.
Q: Let me ask you about today’s headline which has of course been denied by the Infosys founders, the possibility of Infosys founders exiting the company. Have you any information on where this has come from? Was there any conversation that you have had with the founders on the possibility of this at all?
A: I have no idea where it is coming from. Murthy very categorically denied it and I think that we should leave it at that and not further spread that. This is what I also mentioned in my response and in our companies response.
The founders are incredibly distinguished people with an achievement. It is now three years since I was announced as CEO and what they have done is something absolutely extraordinary. Still three years later I look at it as something amazing that they have done. So, whatever they do is something that I have a very deep trust for and respect for. However they have clearly denied it and I think we should leave it at that and not further stretch that.
Q: Has there been any effort to try and bridge the communication deficit that seems to have crept in? Is there any effort on both sides to try and build bridges so to speak?
A: There has been a lot of communication. I think you should really ask the board this question. Looking back on the last six months I appreciate the fact that there is a tremendous amount of interest in these areas but if you look at the atmosphere that we are managing and steering the company in, it is an incredibly challenging atmosphere. We are doing some really big things, really powerful things, really difficult things. We need all our attention, all our focus on getting that done for our clients, for our employees and especially for our shareholders.
It is hard enough to do that and not have to deal with these things. I have always said, I was hire by Mr Murthy and I have always had a very fond warm relationship with him and the other founders and that has not changed in all of this. The governance related matters, they have raised that, company and the board has repeatedly addressed this and I would like to just leave it at that.
Q: Cyril Shroff mandate is to try and sort out or put together a framework when it comes to corporate governance but there is another committee that has been setup and this is a panel that R Seshasayee, Ravi Venkatesan the co-chairman as well as board member DN Prahlad are now part of this committee. What exactly is the role and relevance of this committee? My understanding is that this committee is a sort of bridge between the board and the management but why the need for a committee to be a bridge between the board and the management?
A: Every once in a while the board forms a committee to do things. For example few years ago we did not have a finance and investment committee and we created one. I believe we also created recently a risk committee. So, different boards have different committees at different moments in time given the nature of the business environment and the circumstances that we find ourselves in.
If you look at the last couple of years, the pace of automation has increased, the geopolitical environment that we find ourselves in and so forth, so one of the things that we decided this year was that these three members who are particularly from the board, who are particularly close to the business – DN Prahlad used to be a part of Infosys and he is a software guy his entire life, Ravi obviously was at Microsoft before and R Seshasayee has spent a lot of time with me and so on. So, one of the things that they have done is established this group of three to help management.
If you look at our management – I live in California, I am constantly on the road. Our leadership team is all around the world. So, ensure that the kinds of transformational work that needs to be done, that there is a high bandwidth connection between the management and the board, that this committee was created.
Q: Another important clarification that we would like from you is, what is the status as far as performance related layoffs are concerned? There have been all kinds of numbers that have been doing the rounds. Give me a sense of where things stand when we talk about performance related layoffs?
A: There are absolutely no layoffs happening at Infosys. This a complete rumour, it is malicious, it is wrong. I want to categorically deny.
Q: You haven’t laid off anybody?
A: We haven’t laid off anybody.
Q: Performance related layoffs have not happened?
A: There are no layoffs, period. What we do is every year at this time of the year when the financial year ends and new one begins, we do the performance evaluation and over the last couple of years we have transformed our performance evaluation process to be a much more continuous one and that happens at the end of the year. This impacts a very small number of people. I think it is less than 0.5 percent of the people.
Q: Less than 0.5 percent of the employee base?
A: Yes.
Q: All kinds of numbers were doing the rounds between 3 percent and so on and so forth.
A: This is completely wrong, instead we are once again at a part of our cycle – if you look at our last year’s performance, we grew by 8.3 percent in revenue but in terms of number of people, the year before we had added 17000 net people. This past year we have added something in the neighbourhood of 6000. We are still adding people, we are adding lots of people. These two rumours are particularly troubling to me – one is this layoff rumour. There are no layoffs, in fact we are hiring people. Even in certain areas where we need to ensure that the workforce is aligned to where the future is going to be, whatever number of people we lose, we are actually hiring many more. So, we continue to be one the great job creators.
The other rumour that I was particularly troubled by was that somehow there was a correlation between the hiring of the 10000 people in the US and not hiring people in India. This is also completely nonsense. We will end up hiring same 10000 number that we have to do in US in two years, in India we will probably do this in 2 or 3 quarters. So, it is an entirely different league. I want to categorically deny, refute that there layoffs. There are no layoffs, we are hiring and we are hiring in very large numbers.
Q: What about the fact that increments have been held back for instance, increments have been deferred?
A: I was talking to Ranganath about this. If you look back over the last 10-15 years, we have routinely done that based on the circumstances, the situation and things of this nature. He told me that for many years 5 or 6 times in the last decade or so we have done that. It is a function of the environment that we are in, the demand, the nature of the workforce and so forth. So, we wrote that letter that we were going to take a little bit longer. We took a little bit longer this year to get the details of the financial plan done simply because of the nature of the industry and where we find ourselves at this point in time. So, that is why this was delayed by 3 months. However it is happening already now, we are in June now and this is happening.
Q: Let me also ask you about one of the key risks to the business and you talked about the US so let me just pick up on that. Wipro in its annual filling to the SEC has said that significant developments stemming from the US, the Presidential elections could have a material adverse impact on our business. So, they have actually put this down as one of the risks. How bad is it looking at this point in time in the US?
A: I don’t see it that way. We at Infosys don’t see it that way. We see this as still a great opportunity. When I started, in June I was announced, in August I took over, within a couple of months we announced a plan to bring 2000 people into the US, that was I think in November of 2014. We did that, that was highly successful. Over a 12-18 months period we hired around 2500 people locally from local colleges and universities and that went very well.
We started our foundation in the US and they have done some incredibly inspiring work to bring computer science education to the US. This 10000 is something that we started working on more than a year ago in advance because of the changing nature of the workforce. The new areas of business, every business today has a deep need for figuring out what the future is all about, what the digital transformation is all about and work in those areas. If you are a manufacturing company, creating that digital trend and the internet of things, that work is of a very different sort. It requires more onsite presence, it requires rapid iterations, people sitting in a room like the entrepreneurship that we are talking about here. So, that is the real underlying reason. If you look at the big shift that are happening in the world, around jobs and so on, what we are doing in the US is in response to that. The visa, if you just look at the math on this, there are something like 65000 visas that are granted every year. In the last 13 years we have grown by 10 times, Infosys has become 10 times bigger in the last 13 years or something like this. Other companies as well in the industry, they all have grown to be 10x and yet the number has stayed at 65000. So, you have basically in 10 years 650000 visas that have come out. Our percentage of that is a very small percentage. I think over emphasising this point, I don’t see it that way.
Q: So you are saying that this threat of the H1B impact on margins etc is an exaggerated threat today?
A: Yes. I think that the need is more new technologies, more local. People that you want sitting in the room, you want them to be from the local context. So, we started in Indiana, we will go to other areas within the US, where our clients are, where the universities are, so that there can be a much more local element to the innovation which is complemented by the force in India, by the global talent.
Q: You were talking about new areas of opportunities and one of the way of trying to get into those new areas of opportunities has been by way of acquisitions. Is there because of the kind of criticism that the company has had to face on account of the acquisitions done Panaya specifically and Skava as well, is there now a go slow as far as acquisitions is concerned? Has Skava also not worked out the way that you would have liked it to?
A: Both Panaya and Skava have worked out extremely well for us. In the world of packaged applications for SAP, Oracle, we now don’t go without Panaya in any engagement because it has become an integral part of what we do. Skava has been a resounding success. It is something that we are incredibly proud of. We have now brought Skava into industries beyond retail, into insurance, into telecommunications, into utilities and we are really proud of that.
Q: But there was contingent payment basis some milestones that Skava had to achieve which you haven’t paid. So, one would imagine that it hasn’t worked out as per expectations?
A: If you look at our fillings and if you look at our business performance, it has worked out extremely well. Milestones and all these things, I don’t know why people read so much into that. There was a saying in Silicon Valley that no plan meets the test of reality.
Q: Has that what is happened to the 2020 plan as well because it doesn’t find mention in your annual report? Has that plan also been laid to rest?
A: On the flightover I was thinking about three years ago. On June 12 it is going to be three years and I was remembering that time and what it was like and it is the nature of the human brain that we forget these things. However if you go back and see what it was like, at that time there was a deep sense of anxiety in the company, there was very high attrition, growth was a fraction of the growth of the industry and in this climate after studying what was happening for two or three months, in the October board meeting that year I presented this ambition, this aspiration that let us go after USD 20 billion, 30 percent margin, USD 80000 by 2020.
Q: Are you no longer holding that target?
A: Over the last year it somehow got linked because of my compensation and so forth. There are two parts to that, 20 billion, 30 percent margin, USD 80000, this is a very concise way to capture what needs to be done with the company, with the strategy.
Q: So, you are sticking with it?
A: We are sticking with it but 2020 is almost impossible. So, how the board decides what to do with the compensation trajectories and all of that, this is up to them. To the investors, to the financial community we have never said that this is a goal. This was always an aspiration to sort of rally the company around something aspirational and so on. If you look underneath that, I talk about the new and the renew, software and the services, the automation and the innovation, ultimately the way to capture all of that is rapid growth, USD 20 billion, we have the ability to get there largely organically. 30 percent margin which means that we will not sacrifice margins to get there. In fact we believe that we can improve the margins to get there by bringing in an element of non-linearity and software and so on. USD 80000 which means that we want to augment people with software so that we amplify their abilities and improve the revenue per FTE. If you look at our revenue per FTE it is going up whereas the rest of the industry is going down because of what is happening. So, sticking with the numbers, 2020 almost certainly is not going to happen.
Q: Pravin spoke and he spoke about how the run side of the business is seeing extreme amount of pressure and this is not a new phenomenon, it has been going on for a while now. Taking out of costs from the run side of the business, he said pricing pressure at this point in time is as was, nothing has changed dramatically on that front. What kind of risks are you seeing now as the run side of the business becomes even more commoditised?
A: This is something that I have been talking about for the last three years. The entire industry is seeing this, there is nothing new in what Pravin has said. I don’t know why again it got over blown in such a big way. This is just the reality of our industry. In fact it is the reality of any commoditising industry that there comes a pricing pressure. If you look at our world of managing enterprise software landscapes, the parts where you maintain, operate, run systems and applications and processes, this part is under commoditisation pressure. There is a lot of automation that can already be done there and this is already known to all of us. Then there is the new part which is the transformational part, the build part and that is where there is tremendous opportunity because the world is being rewritten with software and when you build this new software that is a high value, high margin area. Roughly speaking we have 65 percent of our workforce working on 55 percent of our revenue and this is the part that is still growing but it is growing slower and the margins are lower than the rest of the company. Whereas 35 percent of our workforce produce 45 percent of our revenue at a much higher revenue per employee and much higher margins.
Within that area we have the 25 new services that we have started in the last 2.5 years which are seeing incredible growth and similarly in the software. Our software has grown significantly, it has grown way faster than the company and the revenue per employee there is much faster than the company. We will start to reveal these numbers in detail starting first quarter of this year.
Q: Give me a sense on the back of visibility that you currently have, FY18 operating margin guidance between 23-25 percent, growth guidance at 6.5-8.5 percent. Are you seeing traction enough that you will be able to get to the higher end, the upper end of the margin guidance?
A: It is too early to tell because we are just two months into the year. As we see better, we will obviously share that with the markets. So, far we are sticking to the numbers. We feel very comfortable with 6.5-8.5 percent range given the circumstances. We were at 24-25 percent earlier and we have taken that lower end to 23-25 percent now and that is because of several factors like the currency. The currency itself has a big impact on that, the US hiring, all of these things altogether are factor in there.
We believe in consistent profitable growth. We believe in ensuring a very tight discipline on the margins. I believe that, that is the right way for us to operate the company. The trade-off that if we were to go lower on margins that we could somehow do better, I don’t believe in that. So, we are all about ensuring that we will have consistent profitable growth at high margins. For now we see 23-25 percent but our endeavour is to ensure through disproportionate growth in the new areas and disproportionate growth in software to beat that trend.
Q: So, no go slow on acquisitions or continue to go slow on acquisitions given the kind of environment that you are in?
A: Be very purposeful about acquisitions. Acquisitions don’t come naturally to us, they don’t come naturally to the industry. I am a very strict principal of ensuring that we don’t buy yesterday’s companies and technologies, we don’t buy market share or revenue growth but we buy things of tomorrow, ideas of tomorrow and where there is a very deep spiritual alignment and alignment of purpose in what we are doing compared to what the future needs. This why we did Panaya. Those companies are not cheap, they are rare. So, therefore it takes time but you will see us do acquisitions.
We bought this little company Skytree, it is a great example in the last couple of months and we will do more.
Q: Do you believe that the purpose that you set out for yourself at Infosys when you joined three years ago, is that purpose still intact, do you believe that you have been able to reinforce it? Are you veering away from what you thought your purpose was?
A: Transformations are very difficult especially if you look at the traditional sort of script for transformation. You have a cash cow legacy business that is high margin, that you squeeze for savings and then use that to fund the new business which is low margin. In our case it is the other way around, the new businesses are high margin, high value businesses. The traditional business is the one that is under margin pressure. So, the normal script doesn’t apply. There is only one way out of this that is we have to bring automation to the work of yesterday and we have to bring innovation to the work of tomorrow. There is no other way and this is my message here as well. We have to create a culture of innovation, we have to create a culture of grassroots innovation.
Q: Do you still have appetite given everything that has happened over the past three years or specifically over the last few months, do you still have appetite for this big transformation because it requires a lot of effort, time, blood, sweat and tears?
A: It requires effort. It is the other way around. It is the only thing that keeps me going. On the flightover I have a list of around 400 odd really extraordinary project managers and I was looking at what projects do we have where the largest number of these extraordinary project mangers work. I found one working for a large company in the north east in United States, an insurance company and I was looking at their work and it was amazing. They solved a really unique problem, the amount of pharmacy data that comes into their CRAMS processing system had lots of errors and they figured out a way to completely eliminate these errors outside of the process. So, it was totally non-disruptive. It was beautiful the work that they did. I was wondering, I have 6 people on this particular one who are the stars and what have they done and they did something so amazing. I haven’t had a chance to even talk to them. This kind of a thing really makes it all worthwhile. I absolutely love that.
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