From Trailblazing to Trailing: The Imperative of Reshaping Business Strategy for Infosys
DR. A. SHIVAKANTH SHETTY
Professor Krupanidhi Business School Bangalore, Karnataka, INDIA.
Abstract: Infosys, once considered as the Bellwether of Indian IT industry has hit a rough patch in last two years due to both internal and external factors. The changing landscape of global IT industry had created a situation of uncertain demand, increasing competition, increasing bargaining power of clients, rising attrition amongst the skilled senior employees and lack of employable talent pool in the industry. The old formula of linear model (cost arbitrage) is no more relevant given the changed scenario, which demands complete business solutions from the IT companies than the earlier “piece-meal” approach. Therefore, this paper makes an assumption that the current business model of Infosys in particular and Indian IT companies in general is ill equipped to face the current challenges and turbulence in the industry. Hence, this paper intends to probe the sustainability of the present business model and advocates the adoption of non-linear business model for Infosys. Moreover, Infosys being the Bellwether of Indian IT sector, the findings and suggestions from this paper can be more or less perfectly applicable to the other Indian IT companies.
Key Words: IT industry, liner business model, non-linear business model, competitive advantage, cost arbitrage
Corporate history of the world is full of colour- ful examples where at one point or another, virtually every company succumbs to “competitive myopia”. It happens when companies make the mistake of defin- ing competition too narrowly and being oblivious to the very real and dangerous strategic shifts in their industry. Indian companies are no great exception to this phenomenon where even the mighty and much admired companies like Infosys had also recently fell in the trap of competitive myopia. The disappoint- ing performance of Infosys can be attributed to the changing dynamics of global IT industry which has undergone a tremendous metamorphosis in last two decades. Therefore, it becomes imperative to probe the suitability and veracity of adoption of new busi-
ness model for the Indian IT companies in general and Infosys in particular to be relevant and thriving in the changing external environment. This paper assumes that the earlier time-tested method of cost arbitrage or the linear model is no more relevant to the Indian companies as there is going to be shift in the industry from traditional human capital-intensive model to a software capital intensive model in future.
Based on the research objectives, this paper is divided into five parts. The first part involves the customary introduction part and reveals the objec- tives and research motives of the paper. The second part accounts the journey of the global and Indian IT industry from 1970s to the present. The third part is dedicated to review the past and current literature to ascertain the imperative of reshaping the business strategy during the turbulent times. It also examines the empirical support for the adoption of new business strategy for the Infosys to cope up with the new exter- nal environment. The fourth part of the paper essays the journey of Infosys from trailblazing Bellwether to trailing company under the changed circumstances of external business environment. It also ascertains the necessity of Infosys changing its business model and recommends the adoption of non-linear model to achieve a sustainable competitive advantage in future. The fifth and final part ends with summary, conclusion and suggestions along with the recommendations for the future research.
II. CHANGING DYNAMICS OF GLOBAL AND INDIAN IT LANDSCAPE: THE ROAD AHEAD
The Indian IT Industry has been the poster boy of post-independent and post-reform India, which as growth 100 times in the last 15 years. It has shown the remarkable resilience and agility in countering the various challenges like protectionism, adverse business cycles, recession and competition in its eventful journey of more than two decades. But time and again, the Indian IT industry has evolved more vibrant and stronger in each of these crisis ridden situations. The eventful journey of the Indian IT industry is summarized into five distinct stages and explained in the below given Figure-01 and Table-01.
Figure-01 The Eventful Journey of Indian IT Industry
Table-01 Evolution and Growth of Indian IT Industry – Changing Dynamics
Source : CII-KPMG Report “ Non-Linear Models Driving the Next Phase of Growth for the Indian IT Industry” 2012.
The critical review of the above indicates that the golden run of the Indian IT industry is no more guaranteed under the changing external business environment. At its inflection point, Indian IT indus- try should embrace the non-linear business model to create value for its clients and in turn can gain complete understanding of the client’s business and consulting needs of the industry. It is no surprise that NASSCOM in its Strategic Review opined “While, the industry expanded from a mere USD 8 billion in 2000 to USD 88 billion in 2010-11, contributing significantly to India’s economic progress over the last decade, business leaders now agree that the next decade will be substantially different from the previ- ous one, in which new business models will emerge to deal with a rapidly changing marketplace and customer needs”(NASSCOM, 2012).The adoption of non-linear business model is very much essential in the context of ever-changing geo-political factors, socio, techno & cultural factors, regulatory mechanisms, human resources and market conditions.
Figure -02 Factors changing the dynamics of Indian IT Sector
a) Geo-Political Factors:
The Indian IT companies are increasingly facing the threat of protectionism in U.S. Europe, and other markets, because of slow growth and loss of jobs in global financial crisis of 2008 and sovereign debt crisis
in Europe. This acts of protectionism got manifested in imposition of restrictions on the visa of skilled employees, removal of tax benefits and loans for the outsourcing companies,(US Call Center Worker and Consumer Protection Act)ban on the outsourcing of the government projects etc.On the other hand, the rate of growth of outsourcing and IT sector has not been significant in the domestic and other emerging economies to offset the losses of revenue in the devel- oped world. The Indian IT companies now have the unenviable task of achieving profitability and profit growth amidst the lack of growth in both developed and emerging economies.
b) Market Conditions:
The linear growth model was successful, when Indian companies were reaping the benefits of their cost arbitrage, as there were no worthy competitors in terms of large human resources and cheap labour. But the ‘cost arbitrage’ as a competitive advantage seems to be fading away as there are low cost alternatives in the form of Philippines, Eastern Europe, Latin America and China. The maturing of the IT industry has made the customers demanding more value for their money and customers are seeking complete IT solutions for their enterprises thatare a clear shift from the earlier approach of piece-meal projects. This would definitely results in the better bargaining power of the IT cus- tomers and negatively impacts the profitability of the Indian IT companies.
c) Socio-Techno and Cultural Factors:
The emergence of business verticals like social ana- lytics would definitely help the Indian IT companies to develop their own business tools and enterprise appli- cations, followed by mobility in enterprise, consumer space and communication. The emergence of these relatively new business verticals definitely offer the chances for Indian IT companies to innovate, design, test and master these new services in the domestic market before they launch these services in the global market. The success and popularity of social network websites would definitely have a remarkable impact on the Indian IT sector as the normal customers no more just interacting with the branches or outlets but would like to be connected with the companies from anywhere.
d) Governance and Regulatory Factors:
It is an undeniable fact that the Indian IT sector has received the commendable support from the govern- ment and its bodies in its initial stages of evolution and growth in India. But owing to the maturity of the industry, the government and its related regulatory bodies have been imposing certain policies which may not be favourable for the industry in its toughest market situations. The ambiguity regarding the protection of intellectual property rights, transfer pricing and the imposition of Minimum Alternative Tax on SEZs are certainly harming the industry growth rates when their external environment is very much turbulent.
e) Human Resources Factor:
It is very ironical that the industry which thrives on the quality of its human resources is still suffers from issues of increasing attrition rate, raising wage inflation and decreasing employability of the engineer- ing graduates. The higher rate of attrition and wage inflation has resulted in the escalation of the costs and squeezing the profits of IT firms. The recruiting, train- ing, cross skill development, keeping them motivated definitely leading to the mammoth HR costs especially when their employee base is around 1,00,000. The lack of coordination between the academia and industry is also resulting in producing a huge group of unemploy- able graduates, which further add to the burden of IT companies who trains them for a sufficient period of time to make them really employable.
It is in this context that it is advisable for the Indian IT firms to re-calibrate their strategies and shift their focus from cost competitiveness to providing increased value in terms of domain expertise and efficiencies to customers. This is where the relevance of non-linear business model applies to the Indian IT companies in general and Infosys in particular and the same has been discussed in the next section.
III. THE IMPERATIVE OF RESHAPING THE BUSINESS STRATEGY: REVIEW OF LITERATURE
The dynamic and often volatile business environ- ment is sometimes equated with the living organism like amoeba which changes its shape every moment. The trigger for such a volatility and turbulence may emerge from different factors affecting the industry. Therefore, it is natural that only those organisations which clearly understand the early signals of vital external shifts will be equipped to face the turbulence than the others. However, it is sad that most of the organizations initiate last minute dramatic change only when the company’s performance is on down- ward spiral. It is observed across the world that only a handful of companies proactively initiate the new busi- ness strategy before their performance falter. In this section, important studies advocating the necessity of change in business strategy in response to the changed external business environment have been reviewed to find the empirical support for the assumption of this research paper.
Even though, there is a plenty of literature available on strategy, but strangely, there is still no unanimous or singular definition as different academicians have defined it in different ways. Strategy is the process of achieving the long term goals and objectives that ensures the organizational continuity.(Chandler, 1962). Strategy is careful assessment of firm’s resources and developing a distinctive competency after studying the firms’ strengths, weakness, opportunities and threats. (Andrews, 1980 & Quinn, 1980).Strategy is focusing on product market positioning to achieve competi- tiveness.(Porter, 1980).Strategy is defined as a par- ticular set of decisions which integrates and provides consistence, cohesion and coherence to the firm in facing the external risk.(Galbraith &Schendel, 1983). Strategy is a way of choosing firm’s market, products and services towards the economic and non-economic value creation to its stakeholders. (Schendel& Hofer, 1979). Finally, Mintzberg& Quinn (1996) concluded that there is no one best way to define strategy as it is a complex phenomenon and no single and static defi- nition would be able to cover all its nature and scope.
Considering the dynamism and turbulence in the external business environment there were many studies which advocated the flexibility in strategy to be able to cope with the external environment. (Lawrence & Lorsch,1986). Strategy is to be flexible and adaptable to external environmental changes in the business environment (Pascale, 1984). While reiterating the importance of adjusting strategy with the changing business environment, Pettigrew (1985) remarked that strategy is nothing but making a match between the organization and its dynamic environment and organizational change is always context dependent. In contrary, there were opinions from the management thinkers that strategy is not a constant narrow thing but it is incremental, emergent and dynamic and a continued process of adaptation through learning and experience.(Mintzberg, 1987).
Hannan& Freeman (1987) were of the opinion that strategy is a competitive process of natural selection triggered by the changes in the external market or business environment. Dess& Davis (1984) opined that strategy is a tool to cope up and mediate organisation’s relationship with their changing business environment and if organization is able to implement a new strategy according to the dynamic business environment, they should be able to perform relatively well. (Dess& Davis, 1984) March (1981) reveals that organiza- tions do respond to the dynamic business environment but in a steady and continuous way as they think that neither success nor change requires dramatic action. Miller (1982) argued that strategic change is difficult and costly which will force the organizations to adopt them over a period of time. Meyer, Brooks and Goes (1990) in their seminal work on how firms react to their changing business environment based on their both explicit and implicit assumptions have presented for basic types of organizational change based on whether they follow the continuous v/s discontinuous mode in coping up with the changing business environment.
The review of the studies on strategy and busi- ness environment reveals that initially firms will be often resistant to reshaping their business strategy as it may turn out to be risky, costly and time consuming. In contrary, the other body of reviewed literature men- tions that the firms irrespective of their convenience or inconvenience need to counter or mediate their relationship with their changing environments. It also infers that the incremental change in business strategy may be applicable when the changes in the external environment are not radical, but when the changes in the environment are more radical; the firms have to engage more radical forms of change in their business strategy.
Therefore, considering the Meyer, Brooks, and Goes (1990) model of change within organisations and industry, it can be said that the entire global IT industry in general and Indian IT industry in particular is embracing the revolutionary changes (Second Order Change) in the technology and business environment. This metamorphosis will definitely have a series of repercussions on the Indian IT firms forcing them to undergo the transformation to survive and thrive in the changed circumstances. Hence, considering Infosys as the critical case study for the entire IT industry, the present study makes an attempt to bridge the gap in the available literature by advocating and promoting the non-linear growth model for Infosys to reclaim its past glory in the dynamic and more often turbulent business environment.
Figure -03 Models of Change within Organisations and Industries
Source: Meyer, Brooks, and Goes (1990)
IV. TRAILBLAZING TO TRAILING STORY OF INFOSYS: THE IMPERATIVE OF NON-LINEARMODEL:
The global financial crisis of 2008 has forced a metamorphosis on the global IT industry resulting in customers searching for the companies who can partner them in finding the comprehensive business solutions than just being an IT vendor enjoying the cost arbitrage by operating in the low cost develop- ing economies. It is very sad that this new shift in the business dynamics was least expected by most of the Indian IT companies including Infosys who were too busy and content in in plucking the low hanging fruits in the form of conventional projects like ADM, GDM, BPOs, BFSI etc. The need of the hour for the companies like Infosys is to transform themselves from project led company (piece-meal approach) to the enterprise solutions (comprehensive IT business solutions) company. This transformation would enable them to ride the new wave of business in cloud comput- ing, mobility, social analytics, business analytics and consulting which are considered to be high value, high margin and highly specialized business. It is strange and ironic that the factors which led Infosys on the path of ‘golden run’ are proving to be the obstacles for Infosys to ride the new wave of market opportuni- ties. The conservative leadership, limited skill sets of new campus recruits, increasing attrition amongst the senior employees, controversial HR policies and timid approach towards the Merger and Acquisitions makes the task more daunting for the Infosys to outperform its rivals in the industry with the present linear model of business strategy.
Figure-03 Non-Linearity Growth Models for the Infosys
Source: CII-KPMG Report on Non-Linear Models Driving the Next Phase of Growth for the Indian IT Industry. 2012.
It is the high time Infosys, should phase out its irrelevant business model and embrace a non-linear business model (a riskier but a new business model based on innovation, new technology and products) to be relevant and thriving in the ever-changing 850 billion dollars global IT industry. The reshaping of business strategy by phasing out linearity (delivering cost advantage to clients) and adoption of non-linearity (delivering value to the customers),will definitely rede- fine the strategic competitiveness of Infosys. The fol- lowing are the seven strategic models of non-linearity (Intellectual Property, Cloud Computing, Platform BPOs, Pricing Models, Delivery Accelerators, Brand-ing and Mergers and Acquisitions) recommended for Infosys, which can steer the company into the path of success in future. The seven strategic models of non-linearity recommended for Infosys are described as under,
A) Intellectual Property:
It is no doubt that Infosys has witnessed the ‘golden run’ since its inception even amidst occasional hiccups like the dotcom bubble of 1990s and the global financial crisis of 2008. But the new normal i.e., cur- rent volatile economic environment has bestowed the unenviable tag of ‘underperformer’ to once iconic company. The transition of industry from project based to solution based demands Infosys to invest and grow their product portfolio to match its global peers in the form of Accenture, IBM, Google, Appleetc. to provide an impetus to their non-linear strategy. The setting up of incubation centers, creation of new separate prod- uct line and the encouragement for the promotion of intrapreneurship amongst its employees could be the stepping stones in its long journey of intellectual prop- erty creation. The clever acquisitions of companies with strong IP portfolio in the coveted new business areas of business analytics, social analytics, mobility etc can create the synergy and deliver strong impetus to Infosys to be able to stand on par with its global peers.
B) Cloud Computing:
The research findings emerging from the different industry bodies indicate that cloud computing is not just going to be another technology fad but is proving to be a long secular trend and is expected to grow at a double digit for next few years. For a company like Infosys it provides the ‘strategic window’ for the In- dian IT companies to be on par with their global peers in cloud computing. Therefore, the key imperative for the companies like Infosys is to explore and invest in areas of SaaS (Software as a Service) and eventually venturing into the PaaS (Platform as a Service) and IaaS (Infrastructure as a Service). Meanwhile, it is understandable that it may take long time for Infosys to emulate the success of its cloud computing peers, but strategic and smart acquisitions of companies in the domain of cloud computing would give them an advantage in taking a giant leap in the emerging field of cloud computing.
C) Platform BPOs:
After the commoditization of the basic IT services and BPO, it is necessary that Infosys needs to trans- form its BPO business by moving into the platform
BPO solutions which demands it to dump its labour dependent delivery model to largely transaction and process-centric delivery model. By resorting to build platform BPOs, Infosys could attract the new clients by showcasing the benefit from cost savings with short deployment time and clients need not to make CAPEX investments. It also makes sense for the Infosys to use cloud for platform delivery across multiple clients. The much discussed war chest of Infosys amounting more than 4 billion dollars could be utilised for the building of platform BPOs in verticals of Finance and Accounting, HR Outsourcing, Analytics and Procure- ment Outsourcing.
D) Non-Linear Pricing Models:
Having adopted the policy of “Quality as Differen- tiator”, Infosys has always been proud of its margin (25 to 30%) which is more than their industry peers like TCS and WIPRO. Because of its obsession with higher margins, Infosys has lost many projects to its lesser known competitors. Still unfazed, Infosys defends premium pricing as a reward for its value creation for its clients. Given the tough market situation, where the mainstream and conventional IT services and products were commoditized, Infosys needs to adopt a different pricing paradigm. In line with its non-linearity as its business strategy, it needs to adopt non-linear pricing models where the clients link their expenses to their business outcomes or usage. This win-win approach by both IT vendors and clients would definitely result in higher revenue productivity per employee and im- proved margins for companies.(CII-KPMG Report 2012)
E) Delivery Accelerators:
It is no secret that most of the top tier Indian IT companies were looking to build their own technology lab or Centre of Excellence (COEs) to build software solutions framework and create the intellectual prop- erty. It also benefits the Infosys if it opts for building the delivery accelerators as it reduces the cost, derisks business by increasing predictability of outcome, re- sults in higher efficiency, reduces the time to market and results in the standardisation of the products and services. Though, Infosys offers the ‘Manufacturing Collaboration Accelerators’ for the manufacturing seg- ment and Test Automation Accelerator (ITAA) as well as ‘Cloud Strategy and Consulting Accelerator’s for the other sectors, it needs widen its services portfolio by covering different industry verticals especially amongst the sunshine sectors. For that, Infosys needs to employ or poach the requisite talents from both India and abroad to build technology labs, knowl-
(COEs) which could propel Infosys into the league of global peers in high value consulting and other busi- ness solutions.
When compared to other indian IT peers, Infosys had always been shrewed and lucky enough to enjoy a better brand equity than the others thanks to its careful- ly managed brand involving ‘quality as differentiator’ philosophy in its DNA. Though, its carefully governed brand image ably aided by its excellent corporate governance has helped the infosys to charge premium pricing to its customers, but increasing instances of visa violations in USA, the ultra conservative top leadership, strong hold of promoters over the company may damage the brand equity of Infosys. The brand perceptions of the customers towards their IT vendors are assuming more importance in the turbulent times, as they look for more value for their money in their IT projects. Hence, it pays for the infosys to build a strong brand empahsizing on its technology/domain expertise, strategic and symbiotic partnership propo- sition, USPs of its own against its competitors and finally delivering high quality products and services justifying its brand promise.
G) Mergers & Acquisitions:
It is a common practice that most of the growth seeking companies will resort to Mergers and Acquisi- tions in a rapidly growing market, but Infosys so far, had surprisingly adopted a conservative and cautious approach towards the M&As. The failure to acquire the AXON (later acqauired by competitotor HCL) can be a good learing for the ultra conservative top leadership of Infosys as Axon has contributed a more than quarter of total revenue to its acquirer i.e, HCL. Hence, when its traditional markets like US and Europe are in crisis it makes a lots of sense for the Infosysa to acquire some potential companies in non-linearity sphere to achieve scale, domain expertise, IP creation and finally entry into the new markets. The controversial war chest of 4 billion dollors can be utilised for acquiring pocoten- tial companies in social analytics, business analytics, mobility and cloud computing spheres.
Finally, it is the high time that Infosys should rede- sign its business strategy on non-linearity model to be able to compete with its global peers in the constantly changing business environment. But the radical shift from linearity to non-linearity cannot happen instantly as it needs the total participation and cooperation of other key stakeholders in the IT landscape like industry bodies, academia, government, clients and consultants. Infosys as an bellwether of the Indian IT industry needs to engage all these diverse stakeholders to bring the strategic shift in the IT landscape. Apart from conver- sion to the non-linearity of business model Infosys also needs to focus more on innovation, products, sales & marketing, domain specialist businesses and needs to diversify its portfolio into recession proof business sectors to counter the shifts in business cycles. Finally, there is no doubt that Infosys has one of the most formidable management talent, wonderful customer base, enviable brand equity and not to forget one of the finest corporate governance, but it has to come out of its dilemma and realise that it is time to go up the value chain be the harbinger of change for the entire IT industry. After all, it was widely reported that the only piece of advice Mr. Narayan Murthy gave to the current CEO Shibulal that “Take the decisions Shibu. Even if you make mistake, take the decision”. This is the high time that the CEO Shibulal should take the critical decision to take Infosys in its next phase of journey into the unknown future.
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