The Hindu Business Line : ‘We have the flexibility to manage margins’

Our market share is small. At present we are working with only about 550 clients. There are a lot of companies that we don’t work with, many markets we don’t work in. All those are opportunities. - S. GOPALAKRISHNAN, CEO, INFOSYS TECHNOLOGIES

S. Gopalakrishnan, CEO, Infosys Technologies

K. Venkatasubramanian

The challenges before top-tier software companies are many. Managing the US credit crisis and global economic slowdown, which may trim IT budgets, is tough enough. Challenges such as vendor rationalisation are also making the deal environment difficult. Internally, there are the challenges of keeping up growth and de-linking it from headcount increase, maintaining margins and climbing the value chain to compete with the Accentures and IBMs of the world. What’s happening to the deal landscape? Are billing rates under pressure? The CEO of Infosys Technologies, Mr S. Gopalakrishnan, shares insights on these and many other issues impacting the company.

Excerpts from the interview:

From global IT players winning billion-dollar deals, to vendor rationalisation leading to slicing of deals, to an increase in large deals won by Indian IT players, what is your reading of the deal landscape?

Definitely, the number of large deals now are fewer. Companies are breaking up these large deals into smaller deals, especially between applications and infrastructure.

Within applications sometimes, they are creating bundles which are logical or functional and are bringing in multiple service-providers to bid for it. So the deal sizes are typically smaller.

The second change is that all the deals are now sourced globally.

The third point to note is that because these deal sizes are smaller, Indian companies also qualify and are able to bid for many of them and win some of them.

So it is not as if large deals will drift away to global players and we will see only the odd large deal being won by Indian players?

Definitely. But some of these large deals actually involve taking over captives. That you have to separate out from outsourcing deals. But you will see Indian companies also winning large deals.

Is there any decline in terms of the discretionary services budget that you are seeing from clients? Will we see only more of application development and maintenance work coming through in the current environment?

No. We are seeing opportunities across the entire set of services. The reason is that our market share is small. At present we are working with only about 550 clients. So there are a lot of companies that we don’t work with, many markets we don’t work in.

Those are all opportunities. It will take time. I believe that the industry will continue to grow for the next several years.

IT majors have all indicated a flat to declining pricing environment for the year ahead. Your view on this.

In this environment of economic slowdown, companies are looking to reduce expenses. We believe that holding the price is the best thing to do. So we are projecting flat pricing.

How well are Indian IT companies, and specifically Infosys, positioned to deliver business process consulting, apart from pure IT consulting?

The percentage of revenues from those services is lower. But it is growing and the credibility is increasing. Infosys has been working across various industry clients for the past 27 years and hence we do develop significant levels of knowledge about those industries. We are able to invest in research.

In looking at business and technology trends, we can proactively come up with recommendations and solutions. It is not a challenge from an intellectual perspective or a capability perspective.

It is more a challenge from the amount of money we can invest in these things.

As the companies become larger and larger, or niche companies focussed on providing solutions come from India, you will find more and more solutions companies coming from India.

How is Infosys trying to achieve growth that isn’t linked directly to headcount?

By investing in intellectual property, investing in solutions and licensing these solutions. Finacle is an example of something we have been doing for over 20 years. You will now see more and more of such solutions coming from us. The second aspect is how we engage with clients.

For example the ‘shoppingtrip360’ platform enables managed service: The customers pay for the information they use, the reports they use, etc. They don’t pay us for the IP or for services delivered. It is a ‘pay for use model’ and utility computing model. That will change the profile of that part of the revenue.

The model is different, because we have to invest upfront in research, in creating the IP and things like that. We also host and run the application and then the services are delivered.

Please elaborate on the ‘ticket’-based pricing that you have introduced.

In this model, the risk is higher. For a particular type of ticket, the charge is fixed. It is not effort-based. If for that ticket, we take more time and more effort, we will incur more expenses.

The customers, of course, get the benefit that their expenses are going to be fixed. They can actually estimate their expenses much better. They will have historical data on the number of tickets that occur and based on that can fix their budgets much better.

For Infosys, the opportunity is that we can increase efficiency and reduce the time taken to fix the tickets. Now, if we make a mistake and are not able to fix the ticket on time or are not able to fix it properly, we incur penalty or higher expenses. So it is a sharing of risk and reward.

How does Infosys view opportunities in the India market? Do you see 3G as an opportunity in India?

We are expanding our presence in India. We have been in India through the Finacle product. We are looking at offering a broad range of services in India, and telecom is a part of that.

How would you look at tweaking operating levers to enhance margins?

There are 10-12 levers. At any point, all of them are not optimised. Depending on what the situation is, we would look at these levers. The key to remember is as long as all of them are not optimised simultaneously, we have the flexibility to manage margins.

In the last 15 years (since we went public), we have managed through high-growth, low-growth, different exchange rates, different size of the business and different scenarios. Under reasonable assumptions of change, Infosys has the capability to manage margins.

What are the parameters that are important: Exchange rate, inflation, compensation increase, growth etc. we have modelled these things. Our goal is to have margins move in a very narrow band of 50-100 basis points. The margins will change significantly if there is a structural change. The next structural change will be the sunset of the STPI scheme.

Similarly, if the inflation rate continues at this level of 12 per cent, it will affect us because the compensation increase has to be commensurate. For the past 7-8 years, we have seen compensation increases of 13-15 per cent annually in India, but inflation was then 5-6 per cent.

The US geography has seen an increase in contribution in the June quarter…

The decline in the telecom client, based in Europe, is the cause. This is just a one-off event. One need not read too much into it. But opportunity in Europe is very significant.

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