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.

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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.

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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.

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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 loyalty 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

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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

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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

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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 Management5 “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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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

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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

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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

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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.

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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.

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