The Infosys business model in an evolving economic climate
by Matthew Mower, sourcingfocus.com
Following Infosys’ disappointing revenue guidance, shares slipped by around 2% today as investors continued to sell stock. Infosys announced growth predictions at 8%-10%, despite the industry association NASSCOM predicting growth of 11%-14%.
This has led to growing concerns amongst the analyst community. Many think that Infosys’ guidance can be taken as a bench mark for the whole of the Indian IT industry due to their sheer size. So why is the industry, and Infosys in particular, struggling?
V. Balakrishnan, Chief Financial Officer of Infosys, has blamed an unstable economic environment for the poor predictions: “You should understand, the economic volatility is too high and most of our revenue comes from US and Europe. In the March quarter, we have seen confluence of three or four things.” He continued: “Today, the challenge is not about budgets because most of the clients have finalised the budgets and budgets are either flat of slightly down but the ability to focus on the spending has come down.”
While the European crisis still lingers, it appears that the US is on its way to recovery, however, Infosys are yet to see the benefits of this. In the upcoming US election, outsourcing has become something of a dirty word, and politicians may become obliged to crack down on immigration issues. V. Balakrishnan says: “It is going to be volatile because if you look at all the recent macroeconomic data emerging from US, there are concerns about growth. The employment creation has not been up to the expectation”. Infosys themselves are under investigation for allegedly flouting immigration laws to get Indian employees in to the US.
This desire to keep work on shore also suggests that the trend for outsourcing solely for cost cuttings sake is ending. Previously, 90% of Infosys sales were made up of basic “application development and maintenance work”. As modern businesses look to also keep quality of service and innovation at the heart of any outsourcing venture, cost cutting becomes a secondary benefit. This means that businesses who would previously offshore to India, now want IT services performed locally.
However, while the outlook may appear gloomy for Infosys, they are well positioned to recover from this minor crisis.
Infosys have built a strong onshore US presence, with 15,000 employees based there. If new US laws, such as the ‘House Bill (HB) 3596’, which is currently being tabled, do not hurt the firm too badly, they have in place a great infrastructure for recovery, despite the added competition of huge firms such as IBM.
For Infosys, geographical expansion seems to be a key goal, as echoed in the recent news that they are keen to expand their European presence. According to recent reports, the firm are willing to spend as much as $500 million on an individual European acquisition, as they look to purchase business that own intellectual property and niche consulting firms to boost business on the continent.
While this may mean that Infosys may have to sacrifice the benefits of low cost labour, they have adjusted accordingly to maintain their reputation as an attractive outsourcing supplier. Sales of lesser skilled work has now fallen to 40%, and Infosys have moved their focus to complex consultancy work, with adjusting business models to adapt to new mobile technology and smartphones one of the services on offer. In a recent survey of 267 bankers, 40% of respondents said that they would like the facilities for mobile corporate banking, and Infosys are responding to provide these in demand services.
The fate of Infosys is yet to be determined. So, while on the surface, a sharp drop in share price may suggest a bleak outlook for Infosys, the infrastructure and strategy they have in place should see them bounce back stronger than ever.