Infosys – the Indian answer to Accenture is in the news for all the wrong reasons. First the company’s profit in the three months missed analysts’ estimate, notably, 3rd time in four quarters. The company which used to say that it will grow faster than the industry, has forecasted a gloomy picture of less than industry’s average growth. They froze increments and also announced steep cuts (up to 70%) in variable pay of their employees. Attrition rates are going high. Employee dissatisfaction is at its highest.
The bad news doesn’t end there. The company is under scrutiny by the US Department of Homeland Security (DHS) for likely errors in the employer eligibility documents of its staff working in the United States. This is when, it is already facing a probe in the US over alleged misuse of visas. According to an Infosys employee in the US, Jack Palmer, the company has been sending employees on B1 visas in lieu of H1B visas.
No wonder the ramifications have begun to show in the stock market with investors buying TCS and selling Infosys. Cognizant is expected to replace it by next June.
The question everyone’s asking is – When most of the other companies are reporting profits including HCL, why Infosys’s performance is dipping? What exactly is Infosys problem? Let’s try and understand the same.
1. Current Management – The founders were different. Their approach was different. The current think tank doesn’t have that kind of passion, ideas or strategy to pull the company out of its current mess. Wrong policy decision has been a big hidden reason their current sorry figures .Moshe Katri, managing director of Cowen & Co , insisted that Internal changes are needed, if infy wants to come back on track.
JPMorgan says that the company’s inability to walk the pricing versus volume trade-off, and constantly blaming the environment for volatility in its performance have kept investors away from Infosys. The worst things is that, analysts have started disbelieving the Infosys management. Analysts have made it clear – Infosys is going through company specific problem and not the industry specific.
2. Sitting On Cash Pile – Experts says that the company has shown excessive risk-aversion, sitting on a cash pile of $4 billion and hasn’t been able to make any game-changing acquisition. Investors are questioning the purpose of saving this cash reserve, as they are not getting the right returns they expect to receive.
The last two companies acquired by Infosys were – Portland Group and McCamish Systems. Reports were in that it may acquire a stake in firstsource. However, nothing has materialized so far.
Insiders say “ Infosys is at a strategic crossover point where it has to decide whether it needs to abandon over-conservatism in favor of greater dare. It also has to decide whether it will take the high road to high short-term margins or the low road to higher long-term margins by seeking higher topline growth.”
3. Premium Tag – Infosys has always been a big margin player operating in the space of 30% and terms low margins as zero sum game. The company’s premium pricing has been helping its peers eat into the company’s market share. Companies like Cognizant, TCS and Accenture are gaining at the cost of Infosys.
4. High Attrition Rate – Media reports confirm that increasing competition with TCS, and other companies has increased its churn rate. Attrition in the fourth quarter was 17% compared with 13.4% a year ago. Even though, Infosys official statement say -The goal of senior executive empowerment is laudable, but multiple responsibilities for business heads might be causing under-performance in some areas, Insiders DISAGREE. They say the top management is more responsible for the current mess. Many point out that at one point of time, there was a drove of people resigning and no one accepted that there was a problem. Clients were left aghast. Business opportunities were lost because of shortage of skilled people who can propel teams. During all this instruction from the top management was to hire fresher’s and get the job done. Why couldn’t they look into the problem. People even in ranks of delivery managers pleaded helplessness.
5. Client Dissatisfaction – Infosys lost more business due to client dissatisfaction and less due to competition. Insiders insist the “all is well” status was merely on the papers and not at the ground level. Account leaders were always pressurized to show that everything is working fine. You can make a client feedback look good on the paper, (for the sake your own promotion or to protect your own job) but can’t get the client back again to the company fold. A client lost is a client gained by the competitors.
6. Reverse Auctioning – Even though it is being touted as one of the reason why infy is losing on the contracts as being a premium player it doesn’t participate in such auctions, however, the fact is such auction have always been there in the industry and hasn’t dented much of infosys’s own clientele.
7. Heavy Dependence on US – One of the major drawback Infosys has is that the geographical diversity of its clients is missing. US accounts for over 62 per cent of Infosys revenue. Hence, any slowdown in US corporate decision making hurts Infosys more than anyone else.The next year could see an increase in rhetoric against outsourcing in US due to presidential election. This could also be another issue that could bother Infosys more than its peers specially TCS.
One passing comment on a social networking site will sum up the entire story
“The 2 places where Infosys got hit was the Sales/Marketing and employee management. Sales and marketing internal processes are so cumbersome that senior people despite knowing that something will help the company, are unable to take the right decisions for the company. On the other hand, the current clients are managed by the existing employees. The existing employees have for years been frustrated with complex processes and the apathy of management to the their genuine concerns. This gets negatively reflected in the work of the clients too. The no hike news recently just triggered the years of frustration in the employees. Until Infosys does not shed the “I am always right” kind of attitude and be ready to accept a 360 degree feedback on what needs to change, they will have issues continuing to come in. The meetings with stakeholders right now seems to be just window dressing rather than an exercise to take feedback and actionise on the genuine concerns of all stakeholders.”