Case: Infosys Technologies

Introduction
In 2004, Infosys Technologies, based in India's "Silicon City" of Bangalore, was by most
accounts, India’s most respected company. Infosys offered a range of customized
software development and consulting services to clients all over the world. The company
had set up several dedicated offshore software development centers to serve many global
companies. Infosys had grown from a small company run from rented premises in
Bangalore, to become one of India’s biggest software exporters within two decades. The
company had earned a reputation for its principled leadership, professionalism, strong
value systems and investor friendliness. The Infosys share had become one of the most
sought after scrips on Indian stock exchanges. In 2004, Infosys recorded sales of $1,062.6
million and a net income of $270.3 million.

Chairman N.R. Narayana Murthy (Murthy), one of the founders, had become a
spokesman for Indian industry. A generous philanthropist, Murthy was undoubtedly the
most admired businessman in the country.

Background Note
Early History
After receiving a master’s degree in electrical engineering from the prestigious Indian
Institute of Technology (Kanpur) in the 1960s, Murthy left for France to develop
software for the air traffic control system at Paris' Charles de Gaulle airport.

During college, Murthy had believed that communism was the answer to his country's
problems of poverty and corruption. This belief became stronger during the time he spent
with leftists in Paris in the 1970s. But while riding the Sophia express across Bulgaria in
1975, Murthy's Marxist sympathies evaporated quickly after he was jailed for allegedly
disclosing state secrets while talking with Austrian tourists on the train.

Murthy set out on a mission to create wealth. In 1981, Murthy convinced six fellow
software engineers to start their own company. Infosys was founded that year with $250
in capital (mostly borrowed from the founders’ wives).

Nandan Nilekani, one of the founders and currently CEO, recalled1 : “In contrast to the
kinds of firms that have dominated Indian business – the too personal, family – owned
and run companies and the too impersonal multinational corporations – we wanted to
build a different kind of firm. We wanted to build a firm that was professionally owned
and professionally managed, with good corporate governance, good employee
management and good ethics.”

From the beginning, Infosys looked for business outside India. But a lack of reputation
and government regulations made business difficult for Infosys during the 1980s. It took

1
Harvard Business School Case 9-801-445 May 23, 2002.
 2

nine months just to get the company's first telephone line, and three years to import new
computers. The power situation was a nightmare. Infosys used tons of back up batteries
to keep its computers running. But these infrastructural bottlenecks made the Infosys
team even more determined.

Infosys opened its first US office in 1987. In its early years, the company was mostly
involved in body-shopping and on-site development of software for US customers. The
promoters became involved hands on and completed their first project in six months to
earn $1,20,000. As exports increased, they needed more manpower to work on various
projects. So they started a software development center in Bangalore, which was rapidly
emerging as India’s software capital. Meanwhile, as the promoters traveled across the
US, they became determined to be as competitive as the best managed American
companies.

The year 1988 proved to be a turning point in the history of Infosys. The company
bagged its first major order from Reebok, France to develop a system that would manage
its customer order entries, inventory, invoicing, etc. In 1989, Infosys won another major
order from the US company, Digital Equipment to develop fleet management systems.
But around this time, Infosys faced a crunch situation, prompting some partners to
suggest selling the company. Murthy held the team together by offering to buy out any
one who wanted to leave. Only one of the partners, Ashok Arora left after selling his
stake for Rs. 25 lakhs.

The 1991 Budget, dramatically changed India’s business environment. Foreign exchange
restrictions were relaxed. Shares could be priced, not on the basis of administrative
details, but according to demand and supply. Equity financing got a boost and stock
options became possible. In 1992, Infosys renamed itself Infosys Technologies Ltd. The
company went public in 1993 and made its Initial Public Offering of 13.7 million shares
at a premium of Rs 85 per share. The Infosys share became one of the most popular
scrips on Indian bourses.

As the Indian economy opened up in the 1990s, the opportunities for software companies
expanded significantly. By 1995, Infosys had become India’s fifth largest software
exporter. Infosys invested Rs 7.5 mn in Jasdic Park, a software technology park, in Japan
to strengthen the company’s presence in that strategically important Asian market.

In 1995, Infosys lost its biggest customer, General Electric, which accounted for more
than 20% of sales. The company decided not to let one client or product drive more than
10% of its business. Infosys responded quickly by striking big deals with Xerox, Levi
Strauss, and Nynex. In 2003, Infosys’ biggest customer accounted for only about 6% of
revenues.

Infosys grew rapidly in the mid-1990s by doing short-term pilot projects that it was able
to leverage into more extensive contracts for managing mainframe upgrades, designing
custom software, and implementing e-commerce systems.
 3

Recent Developments
In 1999, Infosys became the first Indian company to list its shares on the Nasdaq, an
offering that coincided with the surge in demand for technology stocks. Nilekani
recalled2 , “We wanted to be recognized as a global company and it was imperative that
we got listed on the largest and deepest capital markets in the world.” On the day of
listing, Murthy remarked3 , “It is a small step for Nasdaq, but a giant leap for Infosys and
the Indian software industry.” Infosys' market cap ballooned to more than $17 billion in
2000.
Table I
Industry Segment Information
Years ended 2003 and 2004

Source: Annual Report 2003-04.

The year 1999 saw some top management changes in Infosys. Murthy relinquished the
post of managing director in favor of his much younger deputy, Nilekani. Joint Managing
Director, NS Raghavan (aged 55), who was initially offered the post, opted out stating
that the post should be handled by a younger person. Raghavan’s stand reflected the
maturity and commitment of the company's founders. While Murthy, as Chairman and
CEO decided to concentrate on managing the company’s brand equity in global markets
and relations with international investors, Nilekani took charge of the day-to-day
operations. Murthy took the succession plan forward when in 2002 he stepped down from
the daily management of the company. Nilekani took over as CEO while Murthy, who
remained chairman, adopted the new title, Chief Mentor.

A major concern for Infosys as 2004 got under way was the resentment in western
countries especially the US, against the export of white-collar US. jobs. In early June

2
Rajghatta, Chidanand, 'The Horse that Flew: How India’s Silicon Gurus Spread Their Wings,” Harper
Collins India, 2001, pg. 310.
3
ibid.
 4

2003, Congress began considering bills to close loopholes in immigration-laws allowing

foreign workers to service clients in the US. on guest worker visas. State legislatures in
Maryland, Washington, Connecticut, Missouri and New Jersey were considering laws
banning outsourcing of government tech-services contracts to low-wage developing
countries. Senior managers of Indian software companies like iFlex and Polaris had been
arrested in overseas locations. Infosys realized such backlashes would have to be
carefully managed to handle outsourcing deals in the future.
Table: II
Geographic Segment Information

Source: Annual Report 2003-04.

Marketing
Marketing had become a crucial function for Infosys since the late 1990s. As more and
more Indian software companies entered the US, competition had increased. Moreover,
the tech meltdown of 2001 had made customers weary about IT spending. Many
customers were demanding tangible returns for their IT investments.

Infosys realized that differentiation would be possible only through greater value
addition. The company had been making various efforts to go beyond purely technical
functions where margins were less into more lucrative activities like consulting. Here
Infosys faced competition from formidable players like EDS and Accenture.

In 2003, Infosys’ sales and marketing team had two broad objectives - to increase
awareness and gain new business from target clients and to increase ol yalty and generate
repeat business in case of existing clients. Infosys promoted client loyalty through a sales
and marketing program that included media and industry analyst events, targeted industry
conferences (sponsorship and participation), trade shows, community outreach and
investor relations. The company also intended to expand the use of Milan, its annual
multi-client retreat in North America and Europe to gain additional visibility among its
client base. Members of the executive management team were actively involved in
 5

business development and in managing key client relationships through targeted

interaction with clients' senior management. Infosys also worked towards obtaining client
references and endorsements.
Table III
Selling & Marketing Expenses

Source: Annual Report 2003-04.

Infosys typically used a cross-functional, integrated approach in its marketing activities.

Account managers, together with the sales personnel and project managers, analyzed
potential projects and joined hands to sell the company’s expertise to potential clients.
This approach allowed for a smooth transition to execution once the sale was completed.
Infosys believed its major strengths were its: Global Delivery Model, comprehensive
end-to-end solutions, ability to scale up, superior quality and process execution, industry
expertise, experienced management team, talented professionals, track record and
competitive pricing.

Infosys constantly sought to expand the nature and scope of its engagements with
existing clients by increasing the volume of its business and extending the breadth of
services offered. For existing clients, Infosys’ onsite project and account managers
proactively identified client needs and worked with the sales team to structure solutions
to address those needs. In 2003, 91.9% of Infosys’ revenue came from repeat business.

Infosys sold and marketed its services from 30 sales offices located in 17 countries. The
company’s global sales headquarters were located in Fremont, California while the
corporate marketing group was based in Bangalore, India. As on March 31, 2003, Infosys
had 259 sales and marketing employees outside India and 21 in India. Infosys had opened
sales offices at Dublin, Ohio, USA and Beijing, China during 2003. In 2004, additional
sales offices were opened in North America, Europe and Asia to help the company access
new markets and to broaden its client base.

In the early 2000s, Infosys strengthened its marketing efforts recruiting several new
people, many of whom came from consulting organizations. Infosys had recruited a
director of Sapient Corporation, a senior principal from AT Kearney and a senior client
delivery executive from Sun Microsystems. Infosys had also wooed people from
PricewaterhouseCoopers, Accenture, Booz Allen Hamilton, Cap Gemini, Scient, KPMG
 6

and McKinsey. A number of business managers had also been recruited from banks and
financial institutions (a vertical which contributed close to 40% of the company's
revenues) like Citibank and American Express. Many of the recruits, especially those at
senior levels, had salaries ranging from Rs 40 lakh to 75 lakh a year, fairly high by Indian
standards. As a result, the company’s overall salary bill went up by 46.32%. In 2002,
Infosys’ sales and marketing budget doubled from Rs 129 crore to about Rs 267 crore.

Figure I
The Value Reporting (TM Flow)

Source: Annual Report 2003-04.

Over the years, Infosys had established a substantial direct-marketing network around the
world, including North America, Europe and the Asia Pacific regions. These offices were
staffed with sales and marketing specialists, who typically focused on large, international
clients. A global initiative to increase the awareness of the Infosys brand, and of the
company’s products and services had been launched. Several press and public relations
exercises were launched in the US to enhance the company’s visibility. The company
also took part in international exhibitions to promote its products and services.

Human Resources
As on March 31, 2003, Infosys employed about 15,400 employees, including
approximately 14,000 IT professionals. Progeon, Infosys’ BPO subsidiary employed
around 540 employees. During 2003, Infosys recorded approximately 4,600 net hires.

Infosys regarded its employees as its most important assets. The company was committed
to retaining its position as one of the industry’s leading employers. In recognition of its
 7

efforts, for the years 2001 and 2002, Hewitt Associates and Business Today had selected
it as the "Best Employer in India." The Dataquest-lDC India Human Resources Survey
2002 ranked it "IT's Best Employer" in India.

Murthy4 summarized Infosys’ approach towards empowering employees: “Empowerment

isn’t abdication. It is synergising organizational objectives with individual aspirations.
Organizational objectives can’t be negotiated. What we try to do is understand and meet
individual aspirations by constantly giving our people responsibilities that match their
aspirations, reviewing their performance constantly and giving them performance driven
rewards.”

Infosys believed in recruiting the best people, giving them interesting assignments and
rewarding them based on performance. The company continually provided its engineers
with challenging assignments, exposure to new skills, technologies and global
opportunities. Infosys had instituted an appraisal program that incorporated a 360-degree
feedback system which recognized high performers and provided constructive feedback
and coaching to under-performers.

Infosys had taken various steps to meet employee expectations. The HR department
regularly conducted employee surveys. Informal interaction was also used to understand
the problems and needs of employees and take corrective action wherever possible. For
example, on realizing that software engineers did not like signing financial bonds, Infosys
promptly abolished the procedure.

Infosys offered various facilities to take care of both the professional and personal needs
of its employees. They included housing loans, crèche facilities for children of
employees, gymnasium, etc. Infosys also had an Employees Stock Option Plan (ESOP).
The company gave its employees warrants that could be converted into shares of the
company after a lock-in period of five years.

Gopalakrishnan summarized Infosys’ approach to Human Resource Management 5

“Successful growth depends on the ability to continue to attract the best and the brightest
from around the world. We select our employees based on their learnability – the ability
to extract generic inferences from specific instances and to use them in new, unstructured
situations. Having selected people with high learnability, we take them through periodic
generic training programs in technology, management and leadership areas. We have
ensured that meritocracy is held sacred in the company and that high performers are
recognized. We have created several incentives for our people to perform – fast track
promotions, variable compensation, stock options and awards. Low performers are given
extra attention and opportunity to improve.”

Recruitment
Infosys had built its global talent pool by recruiting new students from premier

4
Harvard Business School Case No. 9-801-445 dated May 23, 2002.
5
Case writer’s interview with Gopalakrishnan.
 8

universities, colleges and institutes in India and through lateral recruitment of project
leaders and middle managers. The company typically selected only from the top 20
percent of students in India who had shown consistently high levels of achievement.
Infosys used a rigorous selection process involving a series of aptitude tests and
interviews to identify the best applicants. This selection process was continually assessed
and refined based on performance tracking of past recruits. Infosys’ written test was
significantly tougher compared to tests conducted by other leading Indian software
companies.

The main goal of the recruitment process was to select personnel with high intelligence
levels, leadership qualities and decision-making abilities. The candidates were tested for
their analytical abilities, communication skills and ability to grasp new concepts fast. The
rigorous selection criteria of the company were satisfied by only a small percentage of the
applicants. For example, in 2003, Infosys received approximately 614,700 applications,
interviewed about 22,778 applicants and extended job offers to only 6,200 applicants.

Training and development

Infosys’ training, continuing education and career development programs were designed
to ensure that its IT professionals enhanced their skill sets in line with their respective
roles. Most new student hires completed approximately three months of integrated on-
the-job training before becoming billable to clients.

Infosys employed approximately 80 faculty members in its training division, including

about 60 with doctorate or masters degrees. The faculty conducted integrated training
programs for new employees. Besides, some 160 two-week continuing education courses
in technology and management skills were conducted for all employees.

Leadership development was an integral part of Infosys’ training program. The Infosys
Leadership Institute, a 230-acre campus at Mysore, India, had been set up to enhance
leadership skills that were required to manage the complexities of the rapidly changing
marketplace.

For each employee, the HR department kept a dossier, which maintained a record of
various projects the employee worked on, the contribution made by the employee, the
problems encountered and other information. Whenever manpower allocation had to be
done for a new project, the HR department in consultation with the manpower allocation
committee ascertained the precise role of each engineer in the new team. The dossier
helped in identifying the right individual based on previous experience and track record.

Stock Options
Infosys was well known for its stock option plans that had created several millionaires.
Under the 1998 Plan, options were issued at an exercise price that was not less than 90%
of the fair market value of the underlying equity share on the date of the grant. All
options under the 1998 Plan were exercisable for ADSs representing equity shares. The
options were granted at fair market value.
 9

The 1999 Plan provided for the issue of 66,00,000 equity shares to the employees at an
exercise price that was not less than the fair market value. The compensation committee
administered the 1999 Plan. Fair market value was the closing price of the company’s
shares on the stock exchange, where there was the highest trading volume on a given
date, and if the shares were not traded on that day, the closing price on the next trading
day.
Table: IV
1998 Stock Option Plan

Note: Infosys has issued 95.900 ADS linked stock options to 39 employees during 2003-04under the 1998
plan.

Source: Annual Report 2003-04.

Table: V
1999 Stock Option Plan

Note: Infosys has issued 1,92,800 stock options to 595 employees and one independent director during
2003-04.
Source: Annual Report 2003-04.
 10

Recently, Infosys had suspended its stock option program. Many employees had been
less enthusiastic as options were often out-of-the money. Moreover, there was
considerable confusion about how options had to be expensed in the books of accounts.

Knowledge Management
Infosys’ Knowledge Management (KM) program, initiated in August 2000, had elicited
significant employee participation. Knowledge sharing was a key ingredient of Infosys’
Human Resource Management. Infosys had implemented an internal knowledge market
called K-Shop. Employees could submit research papers, project experiences and other
types of knowledge documents through a web site. Experts reviewed and published these
documents. Both the reviewer and author were compensated via knowledge currency
units (KCUs). Each reader of the document had to pay a certain number of KCUs for use
of the document. KCUs could be redeemed for cash and other gifts. By the end of 2003,
the central knowledge repository had 5,900 knowledge assets. More than 15,000 artifacts
were created by employees as direct deliverables, and over 9,000 system-generated
artifacts were collated from the rich data captured at key checkpoints, during the process
of project execution. On an average, two knowledge assets were downloaded by an
Infoscion every work-minute. Incentive schemes were in place to encourage knowledge
sharing. A dedicated central team of experts, aided by a network of knowledge
champions across various development centers, ensured smooth functioning of the KM
systems. Infosys believed its knowledge-sharing culture was growing stronger. By 2003,
nearly 25% of the knowledge workers had contributed at least one knowledge asset to the
company’s central knowledge store.

The KM program had received widespread recognition amongst customers, practitioners,

benchmarking agencies and academicians. Infosys had been adjudged one of the winners
of the prestigious Most Admired Knowledge Enterprises (MAKE) award (administered
by Teleos, an independent KM research organization) in the Asia region, during 2002.
Infosys was the only Indian company to have won this award.

Challenges ahead
In 2003, some concerns had started emerging on the HR front for Infosys. The company
did not get the top-rank in a study conducted by Business Today and Hewitt of the Best
Employers in India. Employee dissatisfaction and anxiety had also increased. There were
rumours that some employees were unhappy at not getting the kind of assignment they
would like to work on.

In the early 2000s, Infosys had reduced entry-level pay following the downturn, which
began in 2001. The ESOP programme had also been suspended. “Those with 3-4 years in
the company were worried because they realized that linear career progression was a
thing of the past. We started moving to the role-based system two years ago and that
transition was almost complete,” explained Hema Ravichandar, group vice-president
(HRD), Infosys. Every year Infosys anticipated the kind of skills it needed on the basis of
market dynamics and internal requirements. Employees not having the required skills
 11

could not move into those roles. Employees would get trained, but growth depended on
whether the company needed their skills. "If there are 10 candidates and there are only
three roles, the top three will get the jobs," explained Ravichandar6 .… “these are
interventions that we believe every organization has to adopt if it has to succeed. And
when change happens, it is painful.”

The year 2002-03 had been particularly difficult. Incentives had been cut. Employees
also did not receive an increase in the fixed component of their salaries. According to
Ravichander, 7 ''Employees have started seeing the (impact of) company's growth in their
individual pay packets, but there's a gestation period involved. But the Indian mind is
used to a fixed pay scale; so this year, we have brought in a team incentive that is based
on both the team's and the company's performance, and we have ploughed back the
business benefits for about 12,000 employees as a monthly performance allowance-this
varies between 9 per cent and 19 per cent, and is on the average an increase of around 13
per cent.''

Meanwhile, cost cutting seemed to be taking its toll on employee morale. One employee
who had put in about four years in the company stated8 : "About 2-3 years ago when you
joined Infosys, you got to work on projects that involved technical challenges. So you
learnt a lot. But now with maintenance becoming a big part of the revenues, you have to
do time there. It really is not what I want to do, but my manager won't assign me to
another project" The pressure to protect margins and the associated cost cutting had also
affected employee morale, according to some observers.

Infosys also realized that living up to its reputation was a big challenge. There was so
much aura around Murthy's name, that when a young engineer joined Infosys, he thought
he was working for an extraordinary company. Disillusionment set in when he realised it
was not that easy to meet Murthy, who understandably was preoccupied with various
matters. Such problems were likely to increase as the company grew in size.

Despite these difficulties, most Infosys employees seemed content to stay with the
company. Infosys' attrition rate in 2003 remained at around 7 per cent, among the lowest
in the industry. Another positive indicator was that referrals by existing employees
accounted for 20 per cent of the people the company hired, up from 10 per cent in 2001-
02.

Leadership
Infosys’ working style had been strongly influenced by the leadership of Murthy. During
his student days, Murthy had strong leftist leanings. His ideas changed after a short stint
in Paris, where he worked as a systems engineer with Sesa, a French software firm.
During the overseas tenure, Murthy realized that wealth had to be first created, before it
could be distributed. Murthy believed that a company could maximize wealth only by

6
Prasad, Shishir , “No Robots, Thank God,” Businessworld, September 1, 2003.
7
Sukumar R., “The Infosys Effect”, Business Today, 14 September 2003.
8
Jayashankar, Mitu and Prasad, Shishir, “Remaking Infy,” Businessworld, September 22, 2003.
 12

serving effectively the needs of five constituencies - customers, employees, investors,

vendors and the society-at-large.

Infosys had grown by leaps and bounds in the past 10 years. Murthy’s wealth had
increased several thousand times. But despite all the success and wealth he had achieved
over the last two decades, Murthy remained a very modest and unassuming person.
Along with his senior management team, Murthy encouraged Infosys executives to lead a
simple life style. It was common for the directors to put off the lights when they went out
of the room even for a few minutes, drink coffee in steel glasses and have lunch in the
common canteen. Murthy and his wife lived in a modest apartment, without servants.
One writer9 estimated his monthly expenses in 2001 to be around Rs. 5000. Young
software engineers splurged several times that amount every month. Murthy was even
known to borrow money from his driver, as he carried little around!

One area where Murthy had demonstrated that he was a leader par excellence was in
building a top management team. Indeed, Murthy had tremendous pride and faith in his
top management team. One incident that he was fond of referring to, involved Infosys
director Shibulal. In 1980, when Shibulal was working under Murthy at Patni Computer
Systems, he had been instructed not to go home till Murthy got back. Murthy, however,
forgot the whole incident and went home. Four days later, when he came to the office,
late at night on his way to dinner with some friends, he was surprised to see Shibulal
attired in a lungi and still working. When he enquired, Shibulal reminded him of the
instructions he had been given. Murthy would often speak with pride that if he were to
get an opportunity to restart Infosys, he would do so with the same people.

Murthy had demonstrated his commitment to sound corporate governance in various

ways. He believed long-term investments could be attracted only by keeping the
company’s operations and financial dealings as transparent as possible. The Infosys board
was full of independent directors, who were experts in their respective lines. Infosys’
annual reports were among the best in the world when it came to clarity and details.

Murthy believed management had to be transaction based and not personality driven.
Murthy constantly emphasized that emotions must be removed from decision making
which must be driven by data to the extent possible. The Infosys chairman was
determined that a clear distinction needed to be maintained between corporate resources
and personal assets.

To facilitate succession planning, the company had established the Infosys Leadership
Institute (ILI) in October 2001, in Mysore. ILI aimed at developing a cadre of global
leaders with competencies which could be important for the company in the years ahead.
ILI conducted training programs, organized seminars, coordinated various institution-
building activities and provided mentoring and counseling to high-potential employees
across the organization.

9
Rajghatta, Chidanand, 'The Horse that Flew: How India’s Silicon Gurus Spread Their Wings,” Harper
Collins India, 2001.
 13

In 2002, ILI strengthened its role significantly and provided developmental inputs to the
company’s high potential employees. The senior leaders of Infosys, held 24 “Leaders
Teach” workshops covering more than 200 high-potential leaders. In 2003, ILI imparted
training to more than 200 Infosys leaders. The “Leaders Teach” series of work sessions
were conducted by the top management to pass on the skills acquired over the years to
the next generation of leaders. Later, the leadership development model was further
refined to improve its integration with succession planning across various levels of the
company.

Gopalakrishnan explained, 10 “With the objective of leadership development to address

business risk, especially in terms of succession planning, a new ‘3 tier model’ is being
implemented in the company. Tier 1 consists of business leaders including heads of
business units; Tier 2 and Tier 3 consist of hi-potential candidates who may become Tier
1 or Tier 2 leaders in 3-5 years. Each Tier 1 employee is owned by one of the members of
our internal board of directors. In turn, each Tier 2 / Tier 3 employee is mentored by a
Tier1 / Tier 2 employee. These hi-potential employees are trained through external
development programs in India and abroad. The progress and performance of each
member are monitored closely. This forms a pool of ready to deploy leaders who can fill
any new leadership vacancy in the company.”

Risk Management
In the fast changing software industry, business risk was high. Infosys had probably been
the first Indian company to take risk management seriously. The company made detailed
disclosures about its risk management practices in its annual report. The board of
directors and the management council monitored the risk levels and set the guidelines to
manage risk with the help of senior management personnel and line officers. Formal
reporting procedures and control mechanisms had been put in place to ensure timely
information availability and facilitate proactive risk assessment.
Figure II
Risk management Framework

Source: Annual Report 2003-04.

10
Case writer’s interview with Gopalakrishnan.
 14

Gopalakrishnan summarized Infosys’ risk management philosophy:11 ”Taking well

thought out risks is of utmost importance for an entrepreneur. The key step is to
understand the implications of taking a certain risk on the health of the organization….
Any strategic decision made at Infosys follows the PSPD model, i.e. the outcome needs
to be Predictable, benefits need to be Sustainable, the outcome must be commercially
Profitable and in line with our De-risking strategy.”

Infosys’ risk management process was monitored by the Risk Council. Risk parameters
were monitored and the ‘risk metrics report’ was prepared for all departments on a
periodic basis. For instance, Infosys monitored the risk to the company of an increasing
employee attrition rate and also determined the possible impact by examining relevant
data. Based on these reports, the risk mitigation plans were formulated by the risk council
headed by the CEO.

The audit committee of the board provided the overall direction on the risk management
policies. The board of directors was responsible for monitoring risk levels. The
management council ensured implementation of mitigation issues. The risk management
structure was designed to cascade to the line managers so that risks at the transactional
level were identified and steps were taken to mitigate risk in a decentralized manner.

Nilekani explained, 12 “We ensure that we do not become overly dependent on any single
segment of our business. We try to diversify our risk by operating in multiple
technologies and multiple market segments. We make sure that no one customer provides
more than 10% of our business. We ensure that we operate in a variety of vertical
domains. The whole idea is that one should not become overly dependent on any one
segment and that we broad base our operations so as to de-risk the company. Expansion
into under-penetrated markets is part of the de-risking strategy at Infosys. Our aim is to
have multiple development centers across the globe to respond instantly to our
customers’ needs and to take advantage of the talent pools available in cost-competitive
economies. This strategy also reduces the risk to our operations due to changes in geo-
political equations.”

Infosys kept exposure to a particular client, product or service offering within limits.
Infosys had learnt the importance of reducing excessive dependence on a single customer
from bitter experience. In the mid-1990s, Infosys generated almost 20 percent of its
revenues and 8 percent of its profits through contracts with GE. Infosys received a jolt
when rival Satyam bagged the contract after aggressive price undercutting. Since then
Infosys had attempted to expand its client base. During 2003, the company added 92
clients. But Infosys realized large clients and high repeat business led to higher revenue
growth and lower marketing costs. To strike a balance, Infosys had chosen to limit the
revenue from any one client to less than 10% of the total revenue.

11
Interview with Gopalakrishnan.
12
Interview with Nilekani.
 15

Table VI
Client Concentration

Source: Annual Report 2003-04.

Infosys had attempted to avoid excessive dependence on any single service and had
restricted its exposure to any service to less than 25 percent of total revenues. Infosys also
monitored closely the geographical spread of revenues. High concentration of business in
a particular geographical area was accompanied by political risk. In the long run, Infosys
wanted its revenues to be generated evenly across the globe. However, individual markets
had distinct characteristics like growth, IT spending, willingness to outsource, cost of
penetration and cultural issues (language, work culture and ethics). Moreover, the bulk
of the business continued to come from the developed countries. Taking these factors into
consideration, Infosys had not put any upper limits on the volume of business that the
company would generate in a particular geographic region.

Table VII
Liquidity Position in 2004 based on Indian GAAP

Source: Annual Report 2003-04.

Infosys derived its revenues from 29 countries around the world. About 89% of the
company’s revenues in 2003 were dollar-denominated. Contracts entered into in regions
outside the US and the EU were generally in internationally tradable currencies. So
 16

Infosys was not exposed to local currencies that might have significant non-tradability
risks and extreme exchange rate fluctuations.

Infosys had taken full insurance cover for its entire physical infrastructure. In addition,
Infosys had protected itself against fixed costs and loss of profits. The company had
taken insurance cover for other contingencies including risk cover for lives of all
employees in India and abroad, and accident cover for employees.

A significant proportion of Infosys’ expenses were in Indian Rupees but revenues were in
dollars. Operating profits were therefore subject to exchange rate risk. While a
depreciation of the Indian Rupee would have a favorable bottom-line impact, an
appreciation would reduce profits. Infosys attempted to hedge against forex risk by using
forward cover for predictable inward remittances of the US Dollar and the Euro.

Infosys had a clear review and documentation process for contracts. It evaluated the legal
risks associated with a contract after ascertaining the company’s responsibilities under
the applicable law. The management also took adequate insurance cover abroad to deal
with contingencies, which could arise due to the non-performance of contracts.

Table VIII
Foreign Currency Receipts & Payments

Source: Annual Report 2003-04.

Systems & Processes

While pursuing employee friendly policies, Infosys’ top management believed in the
need for robust systems and processes, which could make activities measurable,
repeatable, de-risked and, if possible, automated. Infosys believed that if the processes
were right, the company could avoid nasty surprises. Individual geniuses were not needed
to reach excellence. The process would take care of it. There were reports that Infosys
was even putting in place a formal process to ensure cultural diversity in the
organization!

In the early 90s, even as the software boom began, Infosys had recognized the importance
of cost leadership. It realized that cost data had to be captured in the system in as much
detail as possible. One of the important functions of the information system was to
facilitate sensitivity analysis. For example, if the company allowed executives above a
certain level to travel business class by air, the model could immediately predict how the
company’s total costs would go up every year for the next five years. It took into account
the projected data from the number of executives above those ranks in each of the five
years, calculated the number of trips that each executive made on an average, projected
 17

how airline ticket costs would move in the next five years and then combined all three to
calculate the total cost each year. Finally, it correlated this calculation with sales growth
and realization assumptions to figure out whether the margins would be affected.

An Infosys project typically ran for several months. Even one mistake in the calculation
might have major repercussions on the bottom line. Infosys had systems which helped it
decide whether it should pick up a particular contract if the client was driving a hard
bargain. It was similar to yield management systems used in the airline and hospitality
industries. Infosys used the system when it had people on the ‘bench’ to decide whether a
less-than-optimal contract could be accepted.

Infosys’ employees needed to log in their worksheet every evening. Using the software,
one could easily tell the detailed status of any employee—whether he was on the bench
or on a project, project status, amount of work completed, at what cost or whether it
needed mid-course correction. The database allowed managers to judge how fast a
specific operation could be done and at what cost.

Before the beginning of any project, apart from the budget, the team was decided and a
role assigned to each member. Then, the competencies required by each member were
listed and the gaps highlighted. A full training schedule was then devised for the team.
Similarly, training needs were continuously evaluated for all employees, even those on
the bench. By the beginning of each fiscal year, annual training schedules were frozen,
and became mandatory.

Systems also helped Infosys in other ways. Infosys followed the 40-20-40 policy (40% of
sales amounted to employee costs, 20% selling, general and administrative expenses,
allowing the company to book gross margins of 40%). In 2002, when floor prices of visas
(required for onsite personnel) shot up and contract rates dropped, CFO Mohandas Pai
moved quickly to cut costs in other areas so that the company could maintain its 40%
gross margins.

Systems also helped Infosys to prevent things from going astray. For example, a project
tracking system facilitated the regular review of milestones. The software quality
standards described in detail how a review was to be conducted. If the review was not
completed and documented, the system prevented engineers from moving onto the next
phase. Neither could project managers ask for more people nor could billing be initiated.
The project tracking software also had automatic warning systems for identifying risks
and alerting management. Profitability was tracked by region, by geography, by
horizontals, by verticals and even by projects. If any of them dropped, the system raised
alarm bells. For instance, customer complaints were normally lodged with the project
manager. But if a customer complaint was likely to have a large impact in terms of costs,
it was automatically escalated to the business unit ahead. If a customer complaint was not
addressed within a predetermined time, the CEO was alerted.

In 2003, Infosys employees spread all over the world had real-time access to data. Every
system from project management to ticket processing was online and integrated. If one
 18

piece of data changed somewhere, it got up-dated in the system. Employees did not need
to log into different data sheets and feed the same numbers. They could look up the status
of different projects, the manpower deployed in each of them, and dozens of other
parameters by tapping a few keys. Infosys’ goal was to make all its systems accessible to
users anywhere in the world on any mobile device.

Infosys realized its systems and processes needed to be constantly upgraded. The
company constantly compared itself with the best in the world, in every sphere. Infosys
entered competitions regularly and invited outside auditors to test its systems—and
identify areas for improvement. Top management spent a considerable part of its time
reviewing the company’s systems and processes.

Nilekani looked back at satisfaction, how Infosys had converted the IT slowdown into an
opportunity. 13 "During the boom times, our focus was on scalability, how to ramp up
operations in view of an ever-growing business. Suddenly, we had to change our mental
model. We had to deal with competition, streamline cost structures and look at
efficiencies."

Concluding Notes
As 2004 got under way, Infosys realized that the traditional paradigm in the global
software industry was changing. Competing on price was giving way to competing on
value. As low cost competitors emerged in other parts of the world, Infosys realized that
the need to innovate and move up the value chain had become stronger than ever. Yet,
this would be a major challenge as Infosys was much smaller compared to some of its
global competitors. Meanwhile, its global delivery model which was based on
sophisticated cost arbitrage might well get undermined by cheaper software development
locations such as China. But Infosys’ strong leadership, emphasis on meritocracy,
transparent operations and the ability to attract the best people stood the company in good
stead to face these challenges.

13
"The Man Who Runs Infosys" Outlook, Jan 27, 2003.
 19

Table IX
Financial Highlights

Source: Annual Report 2003-04.

 20

Figure III
Income (Rs. in crores)

Source: Annual Report 2003-04.

Figure IV
Operating Profit (Rs. in crores)

Source: Annual Report 2003-04.

 21

Figure V
Profit after tax from ordinary activities (Rs. in crores)

Source: Annual Report 2003-04.

Figure VI
Market Capitalisation (Rs. in crores)

Source: Annual Report 2003-04.

 22

Figure VII
Basic earnings per share from ordinary activities

Source: Annual Report 2003-04.

Figure VIII
Book Value per Share

Source: Annual Report 2003-04.

 23

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 25

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