Infosys CEO Says Now Is Time to Sacrifice Margins for Growth
(Bloomberg) -- Salil Parekh didn’t get much time to settle in after taking over the helm of Infosys Ltd.
Since becoming chief executive officer in January, the 53-year-old has crisscrossed three continents to meet with customers and employees to get his hands around the challenges facing India’s iconic tech-services giant. He talked with 48 clients in his first three months -- and he’s determined to see every single one face to face in the next two quarters.
He’s already making tough decisions. He says Infosys has to sacrifice profit margins now by investing in advanced technology and skills in order to capture the opportunities of the ahead. That includes pumping more money into technologies such as the Internet of Things, retraining employees, localizing its workforce in the U.S. and building up the sales staff.
“To build the future Infosys, we have to make those investments now,” says Parekh, perched on a couch in the office he clearly hasn’t used much. On his sparse desk are three photos of his family, a laptop and small statue of the elephant-head Ganesha, the god of new beginnings. “If we don’t do that now, the real concern is that we won’t be relevant to our clients in the future.”
It’s a message that may unsettle investors. On Monday, Infosys shares tumbled after the IT services giant said it expected operating margins to be 22 percent to 24 percent, lower than the previous year’s.
On Wednesday, shares declined as much as 1 percent while Indian markets rose. The stock is trading at about the same level it did two years ago.
Parekh contends Infosys has a rare combination of skills and experience that will benefit the company in the years ahead. It’s been working with customers for decades and can use that understanding to help them navigate shifting technology trends, like cloud computing and artificial intelligence.
To read Bloomberg Intelligence’s view on Infosys, click here
Infosys now reaps $2.8 billion in revenue from such digital services. But the potential market is $200 billion.
“We are best positioned to help clients navigate their journey into the future and take them to the next phase,” says Parekh. “Our clients are pushing us because they know we have the capabilities.”
Parekh may also cut some big acquisitions, like he did in his previous job. He has already met with the M&A team and asked them to draw up a short list of possible targets that could help buttress its digital capabilities. He’s also on the lookout for “opportunistic things that we can do that will help accelerate our digital pace.”
In his first interview with international media, Parekh was engaging and a bit disarming. He explained he’s in the process of signing the lease on a house for his wife and youngest son to join him in Bangalore from Mumbai, even as he sends another son off to college in the U.S.
“You miss them, you don’t stop thinking about them,” he says, dressed in a blue shirt and striped tie, while his jacket is thrown over the back of a chair.
Through it all, his focus clearly is on urgent challenges at Infosys. Parekh is trying to get the company back to stable footing after the tumultuous tenure of his predecessor. Vishal Sikka arrived in 2014 as a well-respected executive from SAP SE, but quit in August after a clash with the company’s founders over strategy and compensation.
Parekh was a surprise choice as CEO. He was plucked from Capgemini SE over a field of internal candidates and former executives. He joined Capgemini in 2000 as part of an acquisition and then built its India business to the point it competed with Infosys and rival Tata Consultancy Services Ltd.
Parekh jokes about his management style -- “What are my options? I’ll pick one” -- but he quickly makes clear what he believes in is data.
“That’s the basis of all my decisions,” he says, explaining he spends so much time talking to staff and customers because he doesn’t like “second-hand” information. “I get into the details but I’m not a micro-manager.”
Infosys and TCS are pioneers in providing back-office support for the world’s largest corporations, but they’ve had to evolve to go beyond traditional low-margin, labor-intensive work. The country’s $167 billion IT services industry is investing in cloud computing and AI to jump-start growth, as clients from banking to retail turn to automation.
Spending on advanced technologies puts pressure on margins. Infosys and its peers are seeing hiring costs rise alongside immigration curbs by administration of Donald Trump. It also needs to install and train a vast workforce unaccustomed to digital services.
“Investments in digital capabilities through 2019 will likely delay margin expansion,” said Anurag Rana, an analyst with Bloomberg Intelligence.
Parekh says Infosys has to sharpen its recruiting in the U.S. to better compete for top-notch employees. The company long depended on bringing in Indian staff on work visas, a practice on which the Trump Administration is cracking down.
Infosys has gotten more serious about hiring in the U.S. In the fiscal year that ended in March, the company added 3,900 workers in the country, including 850 college graduates. It’s also building a 50-acre training center in Indiana.
All that investment won’t get growth back to that of the boom years though. On Friday, Infosys forecast a 6 to 8 percent increase in revenue this year, a disappointment to many given the slide in margins.
Parekh says the forecast is simply realistic. He looked at what clients will do, the overall geography and how the business is doing internally -- and can’t promise more.
For a photo shoot after the interview, Parekh is back to his most formal. He grabs his jacket, stops to exchange polite greetings with employees en route, and he walks into the verdant garden outside the C-suite offices.
“Should I smile?,” he says, squinting into the bright sunlight. “Oh, OK, no smile.”
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