What will Infy Do After they are Gone?

Chandra Shekar Kakal may not be known widely to the outside world, but at Infosys Technologies, he is the leader of 12,000 people bringing in business worth over $1 billion. But there is a more important reason why this vice president of enterprise solutions must be watched. He is among the handful of future leaders who will shape the new Infosys in the next decade or so. He is one of the faces the world must get used to once the company’s iconic founders bow out in deference to age and change. But Kakal should do just fine. His mentor? Narayana Murthy himself!

 

Subhash Dhar, Ashok Vemuri, V. Balakrishnan and B.G. Srinivas, all Kakal’s peers, are now coming under the same limelight. These five are among a band of leaders being groomed to take over from the founding team of Murthy, Nandan Nilekani and S. “Kris” Gopalakrishnan.

Imagine being asked to lead the Roman Empire after Augustus. Infosys is no ordinary company; its reputation is globally enviable. Its leaders enjoy an iconic status. Inside the company, they virtually have a demi-god status. “They are brands and personalities of their own. It will be extremely difficult for anyone to replace them,” says Sudin Apte, country head of research firm Forrester.

As if that wasn’t tough enough, the new leaders would be required to develop their own script for running Infosys. If that means overturning the precepts under which Infosys has been run until now, so be it. This new band of boys is already tweaking the so-called Murthy Doctrine — a financial model that has invariably helped the software giant beat market forecasts over and over again.
It will be one of the most keenly watched corporate transitions in recent times — and one that is fraught with huge risk. Not without reason. No other promoter group perhaps has caught the public imagination in Indian corporate history in quite the same way as Infy has. The story of how seven middle class engineers created Infosys in Pune in 1981 with a modest seed capital of Rs. 10,000 is now part of business folklore. Yet, in five to seven years, practically all the promoters will no longer be involved in the day-to-day running of the company. That’s something Murthy had scripted back in 1998. He ordained that all founders would step down from operational roles when they turn 60 and leave the board at the age of 65.

Starting August 20, 2011, when Murthy will retire, the old guard will start putting more and more of Infosys in the hands of the new leadership. Within the next decade the remaining founders, who are now in their mid-50s, will start retiring too. The bench of leaders is already deep. Infosys Leadership Institute (ILI) has helped the company’s board to identify 50 senior executives. The founders as well as Infosys veterans Mohandas Pai and Srinath Batni each will groom a few of them. Kakal is one of the eight people being mentored by Murthy. “The key that we look at is consistent performance, because that gives a good indication of his ability to run a long-term marathon. The second, is he building something which is of long-term value?” says Girish Vaidya, who heads ILI.

Co-chairman Nilekani and current CEO and MD Gopalakrishnan have about a decade left on the Infy board. It’s not sure whether Nilekani will continue to give full-time attention to Infosys. Some believe that he could be setting himself up for an alternative career in public policy. Whether he eventually takes the plunge is not clear. The founders have a tacit agreement that they would not stay on as CEO for more than five years. So, Gopalakrishnan could step down by 2012 and it could be COO and director S.D. Shibulal’s turn to take over then. In the next five years, if a non-founder assumes a key operational role — as CEO or COO — it could mark an important turning point for the company.

Infosys without its founders at the helm is a difficult animal to define — a bit like Apple without Steve Jobs or Microsoft minus Bill Gates. No one quite knows how the transition will pan out. There’s a chance that it may not be as orderly as most things inside Infosys tend to be.
“I have been associated with founder-managed companies. The succession issue is a very difficult one, loaded with emotions and personal factors. It doesn’t go like a Swiss clock watch,” says Claude Smadja, independent director on the Infosys Board and president of Smadja & Associates Strategic Advisory.

For over three decades, all the key operational roles have been looked after by one of the founders. Murthy ran a very tight ship which had little space for anyone beyond the circle of founders. In three decades, only three professionals — Phaneesh Murthy, Batni and Pai — could get a seat on the Board.
Of course, this could change with the relatively new Executive Council (EC), the highest decision making body in the firm, just below the board. In December, 2007, Gopalakrishnan drafted five newbies — Kakal, Dhar, Vemuri, Balakrishnan and Srinivas — into the EC. They could eventually get a chance to join the board. One of them could even take over as CEO.

Before the EC was formed, Infosys had a more informal way of working. If there were any decisions to be taken, three or four executive board members — mostly the founders — would arrive at one. Now all those decisions are put to the council which meets every 15 days. Responsibilities are fixed, timelines are allotted and progress is monitored closely.
The EC has also made the decision making process more inclusive by taking it one level below the Board. It is an important part of grooming the next level of leaders. By assisting Gopalakrishnan and Shibulal, these leaders learn what it takes to run a large corporation. “It is a big step forward, because people who were only looking at their unit and thinking it was the world… now they have to look at the whole organisation and try to execute it,” says Srinivas, who is the senior vice president for the manufacturing segment. The new leaders are exposed to the Infosys Board and also have to handle analyst calls and media interviews, says Marti Subrahmanyam, independent director on Infosys board and New York University professor.

But here’s the moot point: Can a bunch of young leaders step out of the shadow of an iconic team of founders to bring in the discontinuity that Infosys now needs?

New Response
Some indications of the emerging, new Infosys are already coming in. Ask Dhar. His elevation to the EC came just a year before the worst downturn in living history hit the world. It has been baptism by fire. And the decisions he has been taking have been unlike any at Infosys of the past.
Dhar found himself in a rather awkward spot with one of Infosys’ oldest customers — a telecom giant in midland Europe. The client was under serious pressure to reduce costs and the Infosys contract was in peril. Dhar knew he had to act fast. He was aware that a host of rivals had already offered to cut their price by 25-30 percent. If Dhar did not respond on time, Infosys would be edged out of other juicy contracts that were on the table.

He then did what would have been once unthinkable inside Infosys. Rather than reduce his per hour billing rate (which would have hit revenues and profits), Dhar decided to change the way the client was billed.

For a third of the value of the contract, he promised the client an upfront cost saving. Infosys would now charge the client on the number of technical problems it would solve instead of charging for the number of hours it worked in doing that. In sum, he was proposing an outcome-based model.

Now, the risks were considerable. To ensure that they still earned a profit from the account, Dhar had to bet on far fewer engineers than usual to use their native intelligence to pull off the job. But there was no guarantee that they would be able to accurately predict the rhythm of the job. In fact, in the first six months, the company might even lose some money working this way. But in the long run, Dhar believed it was the best thing for both the client and his company. “It’s always been at the back of our mind to move to this model, but we never had the incentive to do it. This downturn has given us the reason,” says Dhar.

Infosys is hardly the first company in the industry to try out non-linear models. If anything, it’s coming to the party very late. But now, the EC has given Dhar the mandate to push up the contribution of such outcome-based contracts from 3-4 percent of revenues to 20 percent in three years, translating into a $1 billion target. By all accounts, it’s a huge bet.

Handling Discontinuity
The man in the corner office, Gopalakrishnan, is fully aware that Infosys needs a new way of working. The slowdown has exposed the chinks in Infy’s armoury. While it has preserved its profits; it had to sacrifice revenue growth. Its rivals Wipro and Cognizant are growing faster.

For the first time in three decades, Infosys said its revenues will shrink by 3-7 percent this year, rather than the 30 percent growth the business saw two years ago. “These are signs that in future profitability and revenue growth may not go hand in hand,” says Forrester’s Apte.
Business is much harder to acquire and clients are no longer willing to pay like they used to. The seemingly infallible Infosys had to learn to put some more skin in the game — something that its ultra-conservative culture wouldn’t easily allow.

Gopalakrishnan has put together a five point plan for getting Infosys ready for the next stage. This includes increasing the share of higher value services like consulting, delinking revenue growth from staff addition, pursuing large deals of above $500 million, improving efficiency and finding new locations for talent.
He is banking on his trusted ally and friend, COO S.D. Shibulal to lead the new strategic initiatives. “Whatever made us successful in the past may not work in the future,” says Shibulal. Each of the senior VPs in the executive council leads one such initiative and reports to the COO.
Infosys’ operating profit margins have been steady over the past five years, though analysts reckon they could have slipped but for its superb financial management.
Clearly, faced with discontinuous change, Infosys now needs to dance to a new tune. But can it effect the transformation with straying too far from Narayana Murthy’s Holy Grail?

The Murthy Doctrine
Under Murthy’s 21-year-long reign as CEO, Infosys built a unique DNA. To this day, the founders share his belief: They would always put the interests of Infosys above their own, the company would be profitable from day one, and they would accommodate each other. So if one of them became the CEO, the others would allow him to bask in the glory but continue to contribute to Infosys and support him from outside. Murthy also plumped for transparency and respect. He ensured Infosys ran a clean and open balance sheet.

Murthy understood how to manage shareholder and investor expectations. Since Dalal Street values predictable and sustainable growth, he evolved a complex model by which Infosys would be able to set an annual and quarterly guidance. It was clearly communicated to the external world and then in classic Infosys style, it would always surpass expectations.
Yet for all its success, Infosys remained a curious blend of American-style capitalism and South Indian conservatism. Murthy was extremely modern when it came to investing in brand building — creating an American-style campus, going in for Nasdaq listing, building a GE-style leadership institute. Yet he remained extremely conservative about bringing in outsiders into the company or spending money. So while its peers went in for global acquisitions, Infosys chose to sit on its $2 billion cash hoard, much to the chagrin of stock market analysts. Today, while the downturn may have acted as a trigger for the new-look to push through a raft of changes, there are some things that will always prove harder to change.

Every successful company has its own version of the Holy Grail. For Infosys, it is its home-grown Predictability-Sustainability-Profitability-Derisking (PSPD) model. The founders believe this has been the secret sauce that makes it the darling of the markets. It chooses to stay wedded to it and every new leader is expected to cut his teeth on it. They evaluate every business deal and proposal using these four criteria. Mastering this model is a key part of the leadership development process at Infosys. It is the PSPD model that allows the company to set its revenue and profit guidance every year and meet its targets quarter on quarter.

Pai says discussions about guidance setting have always been extremely heated at Infosys. “Even senior leaders get butterflies in their stomach while setting the guideline,” he says. The February meeting this year, when the EC met to decide the guidance and ended up cutting revenue targets, was a particularly difficult one, say some who attended it. As a bellwether stock, Infosys could simply bring down the market, if it misses its guidance.
While Dalal Street loves the model, some complain that it makes Infosys too mechanical. “It is an engineer’s company and is too process driven, there should be some emotion too once in a while,” says a senior member of the leadership team, on condition of anonymity. But jettisoning this maddening obsession with processes won’t come easy. It’ll be even harder to recreate the same chemistry in the top team that helped build the country’s best known start-up.

Together, We Stand
Under Murthy, even though the founders shared common beliefs they had their individual styles of leadership and personalities. Murthy says they had complementary skills for which he chose each of them. While he was good with strategy and finance, Raghavan (a co-founder who left early) was good at human resources, Nilekani had great networking skills and was good with handling customers. Gopalakrishnan and Shibulal had strong operational skills and were good with technology while K. Dinesh was well-versed with quality. Ashok Arora, another founder who left early, had the strongest programming skills in the group. There were intense debates and discussions around all key issues. Murthy calls “Infosys the world’s biggest debating society”.

Even though Murthy handed the baton to Nilekani and then Gopalakrishnan, he has remained more than an active participant in Infosys affairs. As Infosys CEO for 21 years, he had laid a strong foundation for the company and continued to be an extremely hands-on CEO. Such was his conviction in the team and Infosys that in 1990, when all the other founders wanted to sell out to an external investor for $1 million, Murthy offered to buy them out even though he didn’t have the money in his hand.

It is obvious that Murthy has a profound influence on the company. Even today, senior leaders say that when a decision cannot be reached the team approaches Murthy. “Whatever he says, gets done, it doesn’t matter,” says Balakrishnan.

Everyone who knows him well knows that Murthy doesn’t take no for an answer. “He never takes an emotional decision, you have to back every thing you say with data,” says Balakrishnan.
Murthy is also a task master. Once, he demanded that Infosys had to prepare the full annual report within a full day of closing. “‘I don’t care how you do it’ he said. We stayed in the office whole night. And he was there in office too till 3 am with us,” adds Balakrishnan.

It is this intensity which makes people question how the company will cope when he leaves. One theory is that it will be Nilekani who could provide continuity and still make room for diversity.
But while the next generation leaders have the huge task of filling in the shoes of the iconic founders, they must also not become their clones. “We want to deeply embed the DNA of the company in the successive leaders, at the same time we don’t want to put in too many checks and balances as it will end up creating a huge bureaucracy,” says Nilekani.

It will be a tight rope walk and much of it will also depend on how hard the new leaders push for change. Given how large the personalities of the founders have become, it won’t be easy. “I’ll say they are making progress, from the first meeting of the EC to now, I think they are 60 percent there. But they need to be more hard hitting,” says Pai. “They are still very polite to us when they have to interject or make a point. The older lot is used to more vociferous debates because we have grown up together.”

KEY PLAYERS IN INFOSYS' CHANGE INITIATIVE

Ashok Vemuri, 40
Sr. VP, banking and capital markets
In charge of the global sourcing strategic initiative.
Board Member – Infosys Technologies (China) Company Ltd., Infosys Consulting Inc.

B.G. Srinivas, 47
Sr. VP, manufacturing; in charge of Europe
Drives the initiative to be a trusted transformation
partner.
Board Member – Infosys BPO, Infosys Consulting, Infosys Technologies (Sweden) AB

Subhash B. Dhar, 42
Senior VP – communications, media and entertainment
In charge of sales and marketing, driving the non-linear pricing models.
Board Member – Infosys Technologies (Australia)

Chandra Sekhar Kakal, 48
Senior VP- Enterprise Solutions
In charge of execution excellence. Kakal’s target is to improve underlying work productivity.
Board Member – Infosys Consulting

V. Balakrishnan CFO, 44
One of the youngest leaders of the finance team, handled two $1 bn ADR offerings and was also the man-in-charge of the Australia acquisition done by Infosys in December 2003.

Next page: Interview with Narayana Murthy and Nandan Nilekani

“WE MUST PUT COMPANY BEFORE SELF"
The founders want to preserve the company’s DNA even as they prepare to pass the baton to the next generation. Nandan Nilekani and Narayana Murthy share transition plans

Is there a number of years that leaders need to serve before the business outgrows them?
Murthy: We had to make an implicit decision — it is not written anywhere — that after five years you step back and give the other person a chance. Because the founders made lots of money, in one dimension they have arrived, they don’t have to prove anything to anyone. So it’s easy for [them] after five years to say, ‘OK, I am done’. We have yet to see whether that model will work later. I was CEO for 21 years and I am the wrong person to advice. But at this point, in the Board itself there are five more people… all of whom are competent — we don’t [know] which one will become CEO. That is a decision for the external Board.

By what time do you think the founders will cease to be in operational roles?
Murthy: After August 20, 2011, I have no role. At 60 we have to leave, unless we become non-executive directors. My colleagues were kind to me and wanted me to continue but it will not be the case with everyone.

Nilekani: We are going to enforce that [retirement age of 60] very strictly. So in the next decade there will be a complete transition of leadership in this company. We have to make sure that the culture that we create of putting the company before ourselves, of having team spirit, should continue.

Are you looking at bringing in external candidates?
Murthy: [We at] Infosys have a certain view and sometimes it may not be shared by the external directors. So far they have been in agreement with us but in future they may not be… There is so much of institutional memory and culture here and it is very important.

Very few founder-led companies have made a successful transition to the next generation…
Murthy: The problem could be if we select somebody who is new to the culture of Infosys. The person [should have] the attribute such a large company [needs].

Where are you with respect to this transition?
Nilekani: The process is happening… with the forming of EC [Executive Council]. They are taking on corporate roles. Then the overall leadership development that is going on through ILI [Infosys Leadership Institute] and the mentoring process. How do we create a deep bench of leaders and how do we transition the founders out over the next decade? How do we retain the culture and DNA of this corporation?

What was the trigger?
Nilekani: The leadership change with Kris [S. Gopalakrishnan] coming in [as CEO] was one trigger. Second as we looked down the next 10 years we started projecting these issues. We realised that more empowerment and more decentralisation was critical to long-term growth.

The founders have an emotional connect to the company. How do you ensure younger leaders retain that?
Nilekani: You have to create a culture where [everyone] appreciates the value of that.
If I am in London, B.G. [Srinivas] and I will visit clients together, we have lunch or dinner. That acts as a huge osmosis of how I think. Last time I went to New Jersey I went to Ashok’s [Vemuri] house and met his wife and kids. All that is part of passing on what we believe in.

When will the board start looking at them as the next leaders?
Nilekani: The Board is fully exposed to the next level of leaders. It is important to convey that there is a depth of management, it is not only one or two people. The company has the leadership bench to carry out in any eventuality.

In some ways that was the biggest strength as well as weakness. That all we saw were the founders running the company.
Nilekani: That argument has become muffled now [with] the formation of the EC and they are seeing the new leaders. Today… I don’t appear on TV during quarterly results, it is these leaders.

(Additional reporting by Neelima Mahajan-Bansal)