Murthy’s return sparks year of change at Infosys; At least 10 executives have quit since founder retook helm

June 2, 2014 9:59 am

Murthy’s return sparks year of change at Infosys

By Avantika Chilkoti in Mumbai

Imagine a ship where the crew jump overboard just as the captain returns to the bridge. At least 10 senior executives have quit Infosys since Narayana Murthy, co-founder and outsourcing pioneer, returned to the Indian software group a year ago to shore up the troubled business.

BG Srinivas, Infosys president, last week became the most recent member of the top brass to resign, adding to the instability that has complicated Mr Murthy’s task. Mr Srinivas did not give a reason for his departure, and has subsequently accepted a job at Hong Kong telecoms group PCCW.

It has also piled pressure on the board’s search for a replacement for S D Shibulal, who is poised to step down as chief executive by January.

“When Mr Murthy came in, people thought they had a reasonable chance of being chief executive and when they realised they didn’t they left,” explains one person close to the company. “In other cases, he issued a wake-up call on performance and accountability, and some people didn’t like that.”

Shares in Infosys have dropped 12 per cent in the past six months to Rs2,939.4 as of Friday in a rising market, falling 8 per cent in a single day following Mr Srinivas’s resignation.

Bangalore-based Infosys is one of the best known names in India’s $118bn-a-year IT outsourcing sector.

However, the sector was hit by the slowdown in US and European markets, and Infosys has suffered in particular, losing market share to rivals such as Tata Consultancy Services.

Part of the problem was a mistimed attempt to move into higher value services such as management consulting and next generation technologies such as cloud computing, under the “Infosys 3.0” strategy, which distracted the group from its core software outsourcing business.

Since taking the reins, Mr Murthy has not only brought the focus back to the group’s core services but he has also focused on slashing costs.

Operating margins have grown to 25.5 per cent in US dollar terms in the quarter ended in March, from 23.5 per cent in the quarter ended in June.

In the past fiscal year, the group posted net profits of Rs106.5bn ($1.8bn), up 13 per cent year-on-year, on revenues of Rs501.3bn, up 24.2 per cent on the same basis.

The churn in senior leadership has, however, added to the company’s woes. In a profit warning earlier this year, Infosys acknowledged that, besides problems with clients in the retail and tech industries, growth was being stifled by some senior managers being placed in unsuitable positions for their skills.

Senior level exits not only spread to the wider staff – so-called Infoscions – but also affect business.

“Some of the clients can become circumspect,” explains Rajiv Mehta, an analyst at brokerage India Infoline. “They may want to watch if the new guys who come in would be as competent.”

The next big change will be the selection of a new chief executive. The board formally began its search for a new leader in April and some analysts have suggested that recent senior departures are a signal that the shortlist is further narrowing.

“Infosys is nearing the end of the restructuring process that started a year ago,” analysts at Prabhudas Lilladher, the Mumbai-based broker, wrote in a note to clients this week.

Infosys is a conservative company, where the top job has always been filled by one of the group’s founders. However, a leadership vacuum may prompt the board to make a surprise choice, bringing in an executive from outside the business.

“The industry has changed a great deal and I think all these companies could use someone from the outside to shake things up,” says a person close to the matter.

Another person familiar with the group suggested that the board should approach Nandan Nilekani, the company’s respected co-founder who stood – unsuccessfully – as a Congress party candidate.

“For someone from the external world to come in and settle down it is going to take a long time,” the person says. “Infosys is all about the team, the team that came together and built that company.”

One challenge for the new chief executive will be sharing power with Mr Murthy, the executive chairman who is renowned in the industry and among the group’s global clients.

“Most of the decisions are made by Mr Murthy,” a person close to the company explains. “I think Mr Murthy should also cede some of his powers and become a non-executive director.”

The consensus is that Infosys needs a dynamic young leader, who can woo clients and stay in the top job for an extended period to improve stability.

Alongside a gradual recovery in developed markets, which is boosting clients’ budgets, the hope is that a decision will soon be made and the turmoil at Infosys will pass.

“I think Mr Murthy’s team has got full faith in his ability,” says Shashi Bhusan, an analyst at Prabhudas Lilladher. “I’m very sure that he knows where he’s taking this ship to and it’s not going to be a deserted island.”