The Indian IT outsourcer needs to sell products and not just services, one of its top execs says, and that strategy will require acquisitions.
Infosys needs a new way to make money. The India-based IT outsourcer now employs about 140,000 people, having just hired 15,000 people this past quarter, and it faces a harsh reality: It just can't find enough people to maintain its growth pace. It needs to add another, higher-margin way to make money without hiring so many additional people. "We need to break the linearity between headcount and revenue," says Ashok Vemuri, Infosys head of the Americas.
What Infosys is looking to do is build software products and platforms that it can sell and resell again and again without having to add people each time. But Infosys doesn't yet have a culture or systems tuned to consistently generating and improving products. It's a problem all the top Indian outsourcers face, as they see the limits of their historical advantage in lower labor costs and abundant talent.
Infosys is still growing at a decent clip. This week it it announced that its second-quarter revenue rose 16.7% compared with the year-earlier quarter and 4.5% from the previous quarter, to $1.7 billion. But sustaining that growth meant hiring more than 15,000 people--7,000 of them as replacements for people who left.
So it needs to develop original software companies will buy--or better yet, software platforms like its Finacle, on which banks can buy both a capability such as mobile banking and an ongoing Infosys-provided service such as payment processing. Infosys's goal is to make products and platforms a third of its revenue--up from a mere 7.5% to 8% today. "To take it to 33% is a huge leap," Vemuri acknowledges.
So Infosys is looking for acquisitions that would bring that kind of intellectual property, Vemuri says.
Vemuri and I spoke after Infosys announced its earnings. The company cut its revenue growth forecast for the year--it now expects U.S. dollar growth of 17.1% to 19.1%, rather than 18% to 20%.
Here are a few other areas Vemuri and I discussed:
On H-1B visas and the risk of protectionism:
As the economy has slowed and unemployment has risen in developed markets over the past several years, Infosys "did expect a higher protectionist wall, and we have not found that to be true," Vemuri says. The U.S. Congress didn't reduce the number of H-1B visas available to companies like Infosys, which is one of the biggest users of such short-term work visas.
Infosys is on target to hire about 45,000 people this year--about 33,000 in India and 12,000 in other countries. Of those non-India hires, most will be experienced, lateral hires in customers' markets, with more in the U.S. than any other geographic market, Vemuri says. Those hires tend to be salespeople, consultants, and IT specialists such as architects who deal directly with customers.
On Infosys's capability in mobile application development:
Vemuri sees big growth in doing mobile app development for companies, but the big money isn't in doing one-off front-end interfaces. It's in building mobile apps such as those for banking services that also involve back-end processing that Infosys also delivers.
In terms of pure mobile app development, "we are competing with some very small, niche players who are probably more skilled than we are," Vemuri says. Infosys can't build the level of expertise it needs in-house fast enough in the next six months, he says, so it's looking at acquiring companies with mobile expertise as well as partnering with other vendors.
On the current economy:
2008 was a shock to the system, so the reaction from Infosys customers was to push for rate cuts: 20% to 25% wasn't unheard of. The current environment is different. Now, as companies are struggling with uncertain macroeconomic conditions, they're looking at cost cutting through long-term changes, like improving productivity with better systems, Vemuri says. And "there's a lot more focus on the revenue side," he says, meaning companies doing projects aimed at growth.
More companies are investing in projects like mobile apps aimed at improving the customer experience, and tying that work in with CRM projects that help them better understand their customers.
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