The iconic firm is in dire need of ‘intellectual renewal’, and Sikka is the right man for the job
Shubhendu Parth | July 7, 2014
For a man that Nagavara Ramarao Narayana Murthy stood out to be all through his life – one of India’s greatest entrepreneurs – the murmur was soon becoming too big and loud to bear. While Infosys’s decision last year to bring him back as the executive chairman two years after retirement was then hailed by all, exactly one year down the line not much seemed to have progressed. The only exception is that the challenge of leading India’s #2 software company whose revenue growth was being constantly going southwards, has been passed on to a rank outsider. It was also the first time that the 32-year-old company was being handed over to a non-founder!
For 47-year-old Vishal Sikka, history repeated itself. He found himself in a similar challenging situation when, after a car accident in Costa Rica in 2008, he called Hasso Plattner, SAP’s chairman and co-founder, to inform that he wanted to move on. Sikka was then the chief technology officer (CTO) at SAP and was not quite happy with the direction that the world’s third largest software company was headed in. Instead, he wanted to work on newer technological areas to improve data computation speed.
Also read: The Infosys lesson for India Inc
The rest, as the legend goes, is history. According to media reports, during a dinner meeting at a hotel in Aspen, Colorado, Plattner banged his fist on the table, challenging Sikka to “intellectually renew” the company, and also promised to give him all the freedom and authority to drive it. But what did that mean?
Through discussions and deliberations with colleagues and fellow executives, he was clear that it had to be something that would invigorate the $15-billion German giant and help renew employee and customer confidence. He also realised that the “renewal” had to be that of the spirit of innovation, the lack of which had been stifling him and suffocating others too. Soon HANA or the high-performance analytic appliance was on its way to development (see box: What is HANA?).
In 2009 Sikka and his team started working on the “in-memory” approach for better management of large volume data. The product was launched in November 2010 and it became generally available in 2011. It has since then been able to single-handedly drive renewal of SAP’s fortune. By December 2012, HANA had become the fastest growing product in the company’s history with more than 1,000 customer implementations. The platform has also been a major growth engine for the company in 2013 that now boasts of over 3,000 HANA customers.
According to SAP’s January 2014 release, HANA software revenues increased 69 percent at constant currencies to EUR 664 million (61 percent at actual currencies to EUR 633 million) during the year 2013.
The Infosys story
Set up by the famous seven – Narayana Murthy, Nandan M Nilekani, NS Raghavan, Senapathy Gopalakrishnan, SD Shibulal, K Dinesh and Ashok Arora – in 1981 with a seed capital of '10,000 borrowed from their spouses, Infosys soon became the poster-boy of India’s fledgling IT industry. It crossed the $100-million mark in 1999 and became the first Indian company to list on Nasdaq, raising the profile of the country’s outsourcing industry globally.
Under NRN’s leadership as the CEO till 2002, before Nilekani took over from him, the company almost doubled its revenues – to $200 million in 2000 and $400 million in 2001. Between 2002 and 2007 when Nandan led it, Infosys outpaced the industry sales growth and market capitalisation at a steady pace. While Infosys sales grew at 38.3 percent during the five years compared to 34 percent clocked by rival Wipro and TCS, its market cap increased 345 percent. The company launched its consulting business in 2004 while the revenues crossed the psychological $1 billion mark ( '4,853 crore). 2006 was a watershed year for Infosys. As the company celebrated its 25th anniversary, and Murthy retired on turning 60, Infosys doubled its revenues to $2 billion ( '9,028 crore) in 23 months; it took the company 23 years to reach its first billion.
However, the market dynamics were changing fast and it was during Nadan’s tenure itself that Infosys started to feel the pressure on its bread-and-butter contracts. Its operating margins during the period had shrunk from 33.7 percent in 2001 to 27.5 in 2007. He was succeeded by Gopalakrishnan (‘Kris’) who improved Infosys presence in the US and expanded operations in Latin America. Under him, the company’s revenue crossed the $6-billion mark even though the demand for technology outsourcing services was slowing down due to global financial crisis.
Ironically enough, Shibulal who is credited with building the operational core that helped Infosys achieve its success had to face a barrage of challenges; with the global slowdown demand for software services was slowing down and client spending was going weak by the day. Interestingly, despite the slowing revenue growth, the company did not elevate anyone as the chief operating officer, the post that had become vacant after Shibulal took over as the CEO in 2011.
It was during these tough times that Shibulal conceptualised the Infosys 3.0 strategy aimed at “intellectually renewing” the company’s performance and share of revenue from intellectual property and emerging technologies. However, Infosys continued to lose shine and the company’s revenue growth dropped from 25.7 percent in 2010-11 to 15.8 percent in 2011-12 and 5.8 percent in 2012-13.
This is when the worried board of Infosys, led by its independent director and veteran banker KV Kamath, decided to recall NRN to act as executive chairman for five years and resurrect the company. It was also decided that Gopalakrishnan would be re-designated as executive vice chairman and would primarily focus on key client relationships and broader industry issues while Shibulal would continue to be the managing director and CEO.
After NRN joined back in June last year, the company continued to work on its 3.0 strategy. Infosys also introduced a number of initiatives during the fiscal to spur overall growth and productivity. Murthy also decided to focus on revenue-accretive traditional business IT, the bread-and-butter for most large Indian IT services players. However, Narayana Murthy also seemed to be taking forward Shibulal’s strategy of being open and flexible when bidding for commoditised contracts. This was a departure from earlier belief that Infosys could earn a premium, a culture that Murthy and Nilekani had strongly inculcated.
Infosys also strengthened its focus on the core competence area of business IT services (BITS) and continued to explore and invest in the products and platforms space. Given the very different R&D environment demanded by products and platforms, and the objective of delinking revenues from person-month effort, Infosys also decided to transfer its existing products, platforms and solutions business (excluding Finacle) to a wholly-owned subsidiary Edgeverve Systems (for Infosys’ product offerings see box, Product Parade). Interestingly, despite a slew of software products, the company’s revenue share from the category remained a meager 4 percent for the last two fiscals.
Attrition continued to remain another key concern: while over nine senior-level executives had moved out since Narayana Murthy re-joined, Infosys was also struggling to retain talent at mid and junior levels, with 1,823 people quitting in the October-December 2013 quarter alone. In fact, its attrition rate of 18.7 percent, up from 13.4 percent in 2009-10, was much above the 11 percent attrition rate reported by TCS.
Sikka, a compulsion
While Infosys improved its performance in 2013-14 and posted 11.5 percent revenue growth, nearly double the pace in the previous year, experts believe that the company was still not on track. Worse, the company shared a forecast of 7-9 percent revenue growth in 2014-15, much lower than the 13-15 percent growth for the period as projected by Nasscom.
Narayana Murthy and his team had clearly failed to estimate the magnitude of the problem and despite their efforts it was clear that to create the “desirable Infosys within 36 months” as promised by Narayana Murthy would be a tall order. The situation was worsened by the presence of Narayana Murthy’s son, Rohan, who had joined the company with him as his executive assistant. This was a clear departure from the corporate governance rule set up by Narayana Murthy himself: that children of Infosys founders would never take up jobs at Infosys. Observers continued to raise questions on Rohan’s role and authority. The decision also triggered the rumour that he was being groomed to take over the mantle. This further accelerated the process of senior executives’ exit. With Shibulal expressing his desire to retire much before his superannuation on January 9, 2015, the company had only two options left: request Nilekani to don the CEO cap again or look externally.
Though clamour for bringing Nilekani back started rising, both internally and externally, the former UIDAI chairman refused to get drawn into the game. With not much option in hand, NRN decided to look outwards. A senior Infosys executive, speaking on condition of anonymity, disclosed that what switched the decision in favour of Sikka was his proven track record of spearheading HANA and the change at SAP – reviving it from the slumber to a new revitalized, software giant that was as nimble footed and customer-centric as a start-up.
In November 2013, Gartner analyst Susan Tan, in her report, ‘Market Insight: Integrated Platform Solutions are the Next Frontier for IT Services Providers’, stated, “Infosys is perhaps the most aggressive of IT services providers in going after the integrated platform solution market.” With seven Edge products and platforms and six other product-based solutions and nearly 90 clients, Infosys had developed a key portfolio of strategic investments in products and platforms that boasted of a good mix of horizontal and vertical offerings. However, it had so far failed to market and capitalise it with software products contributing just 4 percent to the overall revenue.
Comparing Infosys, TCS and Wipro, Charles Green of Forrester Research in his report on software product development services (PDS) had in March 2014 pointed out that though all three of these vendors had significant scale in software PDS, the lack of a dedicated PDS group and sales force hindered their ability to meet the needs of the emerging software-is-the-brand segment.
This is exactly the core strength that Sikka brings on to the table. It is interesting to note that while Oracle founder Larry Ellison had called the concept of HANA and the in-memory approach “wacko” when Sikka and his team were working on the technology, his company was forced to adopt and announce the launch of a new in-memory database add-on for its enterprise customers. Oracle’s upgrade that will be available from July is not just a validation of the success of the platform that Sikka conceptualised and rolled out, it also highlights the core strength of Infosys’ CEO-designate.
IT industry analysts also point out that the changing technology paradigm has also made it essential for Infosys to ensure it remains relevant to global customers who are actively exploring options of streamlining their operations and reducing cost by moving computing tasks to “cloud” programs from companies like Microsoft, Amazon.com and Salesforce.com.
Commenting on the role that has been cut out for Sikka, Greyhound Research chief analyst and CEO Sanchit Vir Gogia says, “While IT services and SI activities will remain the core, one of the key jobs that he has is to significantly add to the existing SAP HANA practice at Infosys.”
This appointment will also bring attention and muscle to developing internal IP at Infosys and add to the non-linear growth story. Infosys peers are also closely watching this change and Sikka’s appointment has the potential to spark a similar change across other players as well, he stresses.
Infosys insiders and analysts list out the challenges that Sikka will have to deal with: slipping margins and revenue growth; internal dynamics and attrition – especially top level exodus; creating new intellectual properties and software products while driving strategies to market the existing set of products; and last but not the least, build a strong second line of executives who understand (and respond) to the rapidly changing IT service landscape.
“While Sikka will help set a new vision and path for the company to follow, the second-tier management and other key executives will be the guys who will ultimately help him make the new vision a living reality,” Gogia says.
Whether Narayana Murthy’s words describing him as “big money” (since Vishal means big and Sikka is coin in Hindi) proves prophetic or not, is something that only time will tell.
What is HANA?
The High-Performance Analytic Appliance or HANA as the world knows it is an in-memory database that uses the server’s main memory instead of the hard drive to store information.
The in-memory approach adopted by SAP radically changed the way big data was managed and processed. The in-memory computing does away with the need for disk storage in the hardware system, as data is stored in the memory. Besides, HANA stores data in columns in the database, rather than in rows, which was the traditional way. The new approach allowed big data to be crunched and analysed much faster, in real time.
According to SAP, the platform is deployable as an on-premise appliance, or in the cloud and combines database, data processing, and application platform capabilities. It provides libraries for predictive, planning, text processing, spatial, and business analytics. By providing advanced capabilities, such as predictive text analytics, spatial processing, data virtualisation, on the same architecture, it further simplifies application development and processing across big data sources and structures.
Since the HANA database resides entirely in-memory all the time, additional complex calculations, functions and data-intensive operations can happen on the data directly in the database, without requiring time-consuming and costly movements of data between the database and applications.
(This story appeared in the July 1-15, 2014 issue of the print issue)
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