Infosys Future Comes in a Choice of Three Flavors
(Bloomberg Gadfly) -- Infosys Ltd.'s incoming CEO Salil Parekh faces three choices: He can create a more valuable company, return cash to shareholders, or kick the can to a new set of owners.
Unlike his predecessor, who got into a messy skirmish with the firm's still-powerful cofounders, Parekh will have some latitude to choose his strategy. For one thing, he has the right experience, having spent 25 years at Ernst & Young LLP, then at Capgemini SE, where he oversaw the integration of IGate Corp.
IGate's 100,000 people in India gave the French consulting firm the low-cost execution capability it needed to venture beyond Europe. North America is now Capgemini's largest market, where Parekh leads the fight against International Business Machines Corp., Hewlett Packard Enterprise Co. and Accenture Plc, as well as the Indian players. That gives the 53-year-old intimate knowledge of the traditional offshoring industry and the existential threat it faces from so-called SMAC -- social, mobile, analytics and cloud computing.
At the same time, being an outsider puts Parekh above the founders-versus-board fracas that culminated in the abrupt departure of Vishal Sikka, the company's first non-homegrown chief executive. The senior talent that had followed Sikka from SAP SE has mostly left, giving Parekh a clean slate to script his five-year term.
So what should he focus on? If he decides to be a wealth creator, a one-word answer is: margin.
The five-percentage-point decline in Infosys's operating margin over the past five years can be regained, but it will take some work.
Some time back, the folks at Elara Securities estimated that as much as 75 percent of the outsourcing firm's revenue could be made more profitable with automation. The maintenance and support workflow in providing global corporations with large-scale enterprise software from SAP or Oracle Corp. is very labor-intensive. Take people out of the equation and replace them with artificial intelligence. Similarly, in managing clients' IT infrastructure, use machine learning to dismantle help and technical-support desks. Pass on some of the savings to customers, retain the rest.
Such a margin boost is easier to achieve on paper than in practice. Infosys would need to use some of its $5.4 billion cash hoard to acquire companies with specialized skills. The results would show over time, but first would come job losses. Given India's less-than-cheerful employment situation, there could be political ramifications. Those would come on top of pressure to use fewer guest-worker visas in the U.S. and hire more Americans.
Providing shareholders with instant gratification is the safer option. Already, they can look forward to receiving 70 percent of free cash flows, compared with 30 percent of net profit prior to fiscal 2014. If Infosys can't return to growing faster than Accenture, Parekh can simply preside over a gentle decline. Alternatively, the new CEO could work with the cofounders, who own 13 percent of the stock, and prepare Infosys for a sale. Private equity might be the most likely suitor.
For now, the Indian media sees a good omen in Parekh's decision to endure the bad traffic of Bangalore. Sikka's choice of a Palo Alto base, when the majority of the company's 200,000 employees are in India, didn't endear him to N.R. Narayana Murthy, one of Infosys's billionaire cofounders. Murthy's campaign against Sikka led to a revamp of the board, with Nandan Nilekani, another of the cofounders, returning as chairman.
Allegations of a kickback and hush money in the $200 million 2015 acquisition of Panaya Ltd., an Israeli automation-tech specialist, were investigated by a law firm. But with Sikka gone, and even the new board declining to make the full findings of that probe public, Murthy's fight for more disclosure from Infosys is over.
That's one headache less for the incoming CEO, but the board saga has a clear message for him: Parekh can have Infosys in any flavor he wants, just as long as the cofounders like it too.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
©2017 Bloomberg L.P.