September 7, 2017 10:00 am JST

Inside the fight for the soul of Infosys

The boardroom drama reflects the disruption facing India's IT service industry

KEN KOYANAGI, Editor-at-large, Nikkei Asian Review

Before the storm: Vishal Sikka, left, and Infosys co-founder Narayana Murthy at a June 2014 press conference in Bangalore announcing Sikka’s new position as CEO © AP

BANGALORE The symbolism was impossible to miss. A year into his tenure as the chief executive of Infosys, Vishal Sikka leaned down and touched the feet of Narayana Murthy, one of the company's co-founders and a driving force behind India's emergence in the global technology industry. As everyone in the Bangalore auditorium that day immediately understood, Sikka, 49 at the time, was using a traditional Indian gesture to seek the blessing of his elder, the 69-year-old Murthy. "What a pleasure," Murthy said. "What a pleasure."

Ever since Sikka had been named the first outsider to run Infosys on June 12, 2014, it seemed clear that a changing of the guard was underway. Murthy had built Infosys into a multibillion-dollar business by deploying armies of Indian software engineers to do back-office work for global companies like Accenture, Bank of America and Deutsche Bank. But that model was running out of steam. Sikka, a Stanford graduate who earned a reputation as an innovator at German software company SAP, was going to push Infosys hard into big data, cloud computing and artificial intelligence.

Sikka embraced his status as an outsider. He moved the chief executive's office from Bangalore to Palo Alto, California, in the heart of Silicon Valley, to be closer to clients -- and to the cutting-edge technology being developed there. He made many investment decisions from Palo Alto, including acquisitions of cloud- and AI-related companies. Sikka even looked the part of a Silicon Valley mogul, wearing a black T-shirt under a sports coat.

But the relationship between Sikka and Murthy has collapsed spectacularly since last year, culminating in a bitter -- and highly public -- exchange of accusations between the two men that has captivated corporate India. Murthy criticized Sikka's pay and his use of private jets, and claimed that corporate governance standards had eroded during his tenure. Saying he could no longer run the company amid such criticism from a company founder, Sikka resigned as chief executive on Aug. 18 and left the board six days later. Three other directors followed him out the door, including the former chairman, R. Seshasayee.

Murthy's criticisms haven't let up since Sikka's resignation. Speaking to shareholders on Aug. 29, he detailed his "concerns as a shareholder" over how the company's board members approved a severance package worth roughly 170 million rupees ($2.65 million) for former Chief Financial Officer Rajiv Bansal, who left the company in October 2015.

Then he quoted a "whistle blower" who sent an open letter to the chairman of the Securities and Exchange Board of India in February. The letter alleged the existence of a doubtful matter surrounding Infosys' $200 million acquisition of Israeli cloud-based IT service provider Panaya in 2015, and suggested the generous payout may have been meant to silence the ex-CFO.

It was a harsh indictment by the founder of a public corporation against its board, but Murthy took one more swipe at the departed board members. "Now we can all sleep better," he said, referring to the interim appointment of another Infosys co-founder and former CEO, Nandan Nilekani, as chairman.

Many old Infoscions, as the company's employees call themselves, back Murthy's argument. V. Balakrishnan, a former Infosys chief financial officer who now runs a venture capital firm, said all the remaining board members should be replaced. "It was fine to have a technologically strong CEO. The problem was that the board failed to uphold the core values of the company," Balakrishnan said.

Investors appear unconvinced, however. Infosys' share price fell sharply after Sikka announced his resignation as CEO, then recovered after Nilekani was appointed as new chairman. But the stock has yet to return to the level before Sikka's departure, implying market support for his leadership.

The boardroom drama and management uncertainty -- the company has yet to name a permanent replacement for Sikka -- comes as Infosys and the rest of the Indian IT services sector face daunting technological and political shifts. Sikka came into the CEO job warning that the "low cost, mundane" software services that were the core business for Infosys and its rivals -- including market leader Tata Consultancy Services and Wipro -- are being challenged by disruptive technologies such as AI and cloud computing. Those forces are accelerating, as are protectionist sentiments in the U.S. and elsewhere that pose a threat to offshore technology services companies like Infosys and Tata.

FROM DISRUPTOR TO DISRUPTED Infosys, founded in 1981, was a disruptor once, too, challenging dominant companies like IBM and Unisys in the late 20th century by deploying abundant -- and inexpensive -- software engineers around the world. The industry successfully weathered several major technology paradigm shifts, including the arrival of servers and personal computers, the spread of the World Wide Web, and a shift from tailor-made proprietary systems to off-the-shelf software packages.

Starting in the 1990s, the IT services companies developed lucrative partnerships with software developers including SAP and Oracle. A big chunk of revenue for Infosys and its Indian peers still comes from customizing these software packages for large corporations and maintaining them. They also rake in profits by maintaining accounting and transaction systems for giant financial institutions and other multinationals. These jobs have required huge amounts of manual programming by humans -- which has been ably provided by Bangalore's IT services sector.

But the evolution of cloud computing is leading corporate IT systems to migrate from maintaining their own computer servers to platforms provided by such U.S. technology titans as Amazon.com, Microsoft and Google. These cloud platforms are typically equipped with basic software and some maintenance functions, reducing the need for manual programming and servicing.

At the same time, newer technologies such as AI, machine learning, natural-language processing and big-data analytics are forcing IT outsourcers to change their business models. Labor-intensive software system development is becoming obsolete day by day.

Rajesh Gupta, head of Indian operations at U.S. consultancy Information Services Group, said his company's clients want more automation to be built into their business processes, such as online sales transactions and customer support. "What used to be hype a year ago is turning into real demand," Gupta said.

In Bangalore, the capital of India's IT sector -- and a name synonymous with outsourcing -- software engineers are beginning to feel these changes.

Suhail, a 30-year-old software engineer with six years of experience at Tech Mahindra's Bangalore campus, was certain that he was among the top performers at his company. He had won a few awards for his work in recent years, and a senior manager had given him high marks for his performance.

But in April, an HR manager called with bad news. Suhail was told that he had to leave the company within five working days; if he took longer, it would no longer be considered a "resignation." Being "terminated" would be a blot against him when he went looking for other jobs.

He resigned and is now updating his skills by learning big-data crunching technologies. This, he is confident, will make him more marketable.

"I am not worried about myself," he said. Instead, he is worried about engineers designing automation programs. "After automation is done, they will have no job."

One of the country's best-recognized IT workers' rights advocate groups, Forum for IT Employees, or FITE, set up a regional chapter in Bangalore in late 2014 but few signed up in the beginning. Since April, however, the chapter has been receiving 10-20 calls a day, compared with just a few during the same season last year, says its coordinator, Rajesh Natarajan. Although it still has only 250 members in Bangalore, the FITE is aiming at registering the chapter as a state-government-recognized trade union by the end of 2017.

Job cuts in Bangalore's tech sector have become a hot-button issue in India. Mint, a leading business publication in India, shocked the nation with a survey in May that revealed seven major IT service companies, including Infosys, Wipro, Tech Mahindra and HCL Technologies, are planning to lay off a total of 56,000 Indian engineers this year alone. Mint cited an HR head at one of those companies saying "traditional business is slowing" and emphasizing the need to align their talent pool to future needs.

The survey does not count job addition plans at those seven companies, so the scale of job losses is yet to be seen. But according to a calculation by the Business Standard, the top 15 Indian IT companies actually reduced their total head count by about 3,000 during the April-June quarter. The paper called it the first sequential net job reduction by those companies since the global financial crisis of 2008-2009.

Kris Lakshmikanth, founder and managing director of a Bangalore executive search company called The Head Hunters (India), said his IT-sector client executives are complaining that a majority of engineers need to upgrade their skills -- and the majority of them are incapable of doing so.

George Mundassery, global head of automation at Tech Mahindra, told the Nikkei Asian Review that intelligent automation techniques are "reshaping" the demands on the IT services industry and the company is committed to training its engineers. The company trained 21,000 engineers in 2016 and 12,000 so far this year, Mundassery said, in such new fields as automation, robotics and AI. Tech Mahindra had roughly 117,000 employees globally at the end of 2016, though a considerable part of them are not engineers.

The skill shortage is a problem for India. The country's IT services industry generates revenue representing 8-9% of India's gross domestic product and roughly 60% of the global sector. The country cannot afford to let the industry weaken, and there seems to be a growing sense of urgency. The National Association of Software and Services Companies, or Nasscom, comprising all major IT services companies, estimates that 1.5 million of the country's existing 4 million IT engineers will need "re-skilling" to prevent becoming unemployable in the sector by 2025, said Vice President K.S. Viswanathan.

Nasscom, in collaboration with the central and state governments, has defined six high-priority technology fields including the internet of things, AI and cloud computing, and it is launching training centers around the country in public-private partnership schemes. It is accelerating startup incubation by providing co-working spaces and involving government investment funds. The hope is that these startups will play major roles in creating advanced-technology jobs.

"New technologies eliminate some legacy jobs but they also create completely new jobs," said Viswanathan. Those new jobs could be clustered in anywhere in the world, and India, whose working-age population is set to keep rising for decades, badly needs to be among those locations.

HEALING THE WOUNDS Like its peers, Infosys faces the challenge of managing its maturing core business while pushing into cutting-edge services. Yet in the near term it also has to move past the Sikka-Murthy split -- and prevent a drawn-out battle like the one that followed the ousting of Cyrus Mistry at Tata Sons.

The job of soothing those bad feelings has fallen to co-founder Nilekani. He commands respect, having led Infosys through a period of robust growth while he was chief executive, with revenue rising sixfold between 2002 and 2007. Later, he steered India through major technological transitions, including the rollout of a national biometric identification system.

He will need to find a permanent CEO -- the job is being held by Pravin Rao, former chief operating officer, until a replacement is named. Nilekani has also promised to outline a new direction for the company in October.

"I have a very open mind," he said.

So far, Sikka and Murthy have not made his job any easier, with both using the media to trade barbs in interviews after they had left the company. Sikka suggested to the Financial Times that Murthy was stuck in an old "value system" and had "undermined" him, charges that the co-founder rejected.

In his Aug. 29 conference call, Murthy emphasized that "business transformation and corporate governance have to coexist and are not at odds with each other."

Fair enough. But for the incoming CEO, it may not be so easy to connect Silicon Valley dynamism with a firmly guarded Bangalore corporate culture.

With additional reporting by contributing writer Gangadhar Patil in Bangalore and Nikkei staff writer Rosemary Marandi in Mumbai

Asia300

Infosys Ltd.

India

Market(Ticker): BOM(500209)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 34,791.64M
Shares: 2,296.99M
Asia300

Wipro Ltd.

India

Market(Ticker): BOM(507685)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 22,193.93M
Shares: 4,866.69M
Asia300

Tata Consultancy Services Ltd.

India

Market(Ticker): BOM(532540)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 80,555.89M
Shares: 1,914.28M
Asia300

HCL Technologies Ltd.

India

Market(Ticker): BOM(532281)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 18,148.09M
Shares: 1,392.05M
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