I N F O S Y S C O N S U L T I N G I N T H E U . S . ( I N 2 0 1 0 )

W H A T T O D O N O W ?

AUTHOR: LISARY GARCIA

DATE: MAY 10, 2015

EXECUTIVE SUMMARY:

Infosys is an Indian company that specializes in Information Technology (IT) and

engineering services. Over the past few years, the firm has been strategically shifting its

operations into technology consulting and is directly competing with giants like IBM, Accenture,

and Tata Consultancy Services (TCS). The IT consulting industry is highly competitive and

therefore many challenges and threats come along with this distinction. To overcome these

challenges Infosys is developing some strategies. Infosys is going global and is also acquiring

companies abroad to form strategic alliances and horizontal mergers. With this strategy of

expanding globally it has already acquired some companies in the U.S. and Europe, and plans on

acquiring some others in the near future. Infosys also plans on investing in new technologies and

intellectual property, so they can properly face competition.

INTRODUCTION:

With an impeccable financial performance, Infosys is one of the world's leading IT

service firms. Its great performance is mainly attributable to cheap talent available in the country

or brought to the country, and the reliability and high quality services provided by the Indian

firm. However, some challenges and external conditions can threaten this exceptional

performance. This paper aims to analyze Infosys' internal strengths and weaknesses and external

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opportunities and threats to understand how the company overcomes new challenges and

develops pertinent strategies.

BACKGROUND:

Founded in 1981 by N. R. Narayana Murthy and six of his friends, Infosys focused its

energies on the U.S. market from the very beginning. Six years later, Infosys formed a joint

venture with Kurt Salmon Associates and opened its first international office in Boston to secure

its market share in the U.S. When the joint venture collapsed in 1989, the company faced its first

crisis and one of its founders left.

The remaining partners elected to stay and through a lot of efforts, Infosys continued to

grow. Starting from the 90s, the firm was able to grow much more rapidly due to economic

reforms instituted by the Indian government to stimulate the country's development.

In 1993 the company went public on the Indian stock exchange with a market

capitalization of $10 million. Six years later, Infosys became the first Indian company to be

listed on a U.S. stock exchange. By 2000 its market capitalization was more than $17 billion.

Infosys' international operations started to grow shortly after, establishing nine marketing

offices in the U.S. and being present in Canada, Australia, the United Kingdom, Japan, Hong

Kong, Sweden, Belgium, France, and Germany. Firms such as General Electric, Nestle S.A.,

Holiday Inn., and Reebok International integrated its customer base.

Today, Infosys provides all kind of IT services: business and technology consulting,

custom software development, IT infrastructure services, and business-process outsourcing. With

more than 65 offices and 59 development centers in over 30 countries Infosys employs more

than 125,000 people worldwide. As figure below shows most of it revenues come from outside

the country. With more than 65% of sales coming from the U.S. as of 2011, Infosys is highly

dependent on the U.S. market. The second largest market is Europe with 22% of sales coming

from there despite the European sovereign debt crisis. Slightly improving, revenues from the rest

of the world account 11% of sales. Only 2% of sales come from India.

2

2006 2007 2008 2009 2010 20110

18

35

53

70 65 63 62 6366 65

25 26 28 2623 22

9 9 9 9 10 11

2 2 1 1 1 2

Revenue Segmentation by Geography (%)

North America Europe Rest of the worldIndia

Infosys further distinguishes itself from the rest of the competition by maintaining long-

term client relationships and a distinct corporate culture. As described by them, “these values

drive the company's commitment to provide customer delight, exemplary leadership,

transparency, and excellence.”

In the 1990s Infosys pioneered the Global Delivery Model (GDM) which is “based on the

principle of taking work to where it makes the best economic sense - and the least amount of

acceptable risk”, thus employing offshore (low-cost) labor and providing better value to clients

without sacrificing quality.

After being successful at technology implementation, Infosys established Infosys

Consulting in California. However, its consulting model had limited success when its investment

of $45 million in the consulting subsidiary brought a net loss of $18 million.

PROBLEM DEFINITION:

Finding the best strategy for Infosys to overcome external challenges is one of the many

concerns Infosys' CEO has about the future growth of the company. External threats such as: the

increasing global competition, the recent and proposed changes to the U.S. and Indian tax codes,

the global economy demanding higher salaries; along with internal issues on where to get human

resources to support future growth and how to keep costs down are major problems faced by the

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company. Therefore, subsequent management strategies are the means to maintaining its high

profits and sustainability.

DISCUSSION:

SWOT Analysis:

Opportunities Threats

1. Emerging technologies1. Intense global competition

2. Growth in emerging economies

2. Global economy

3. Immigration restrictions

3. Growth in the global outsourcing market

4. Recent changes in the Indian and U.S. tax codes

4. Offshoring in the IT industry

Strengths Strategic Alternatives:

1. Low-cost based competitive advantage1. Continue to acquire firms that can add value to its top line (S3, O3, O4)2. Highly skilled personnel

3. Strong financial position 2. Invest in cloud computing services (S1, S2, S3, O1)

4. Strong relationship with customers 3. Invest in evolving their operating models (W2, T1)

5. Distinct corporate culture 4. Increase business operations globally (S4, S7, O2)

6. Early positioning as high end differentiated player

7. Solid global image

Weaknesses

1. High dependence on clients located in the U.S and Europe

2. High talented personnel turnover

3. Relatively smaller than global competitors

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Based on the SWOT Analysis shown above, Infosys has developed the following

strategic alternatives:

1. By taking advantage of its internal strength of having large amounts of cash in hand and

no debt (S3) and external opportunities due to growth in the global outsourcing market (O3)

and offshoring in the IT industry (O4), Infosys continues to make further strategic

acquisitions that add value to its top line.

2. External opportunities such as emerging technologies (O1) can be combined with the

internal strengths of having highly skilled personnel (S2), low operating costs (S1), and

strong financial position (S3) to invest in cloud services. Infosys has already taken concrete

steps to take advantage of these emerging technologies.

3. By combining an internal weakness due to high talent turnover (W2) with the external

threat of intense global competition (T1), Infosys has invested in evolving its operating model

and has launched its 'Alternative Delivery Model' as part of its Business Process Outsourcing

(BPO) strategy to access a new talent pool and retain highly skilled professionals in India,

thus creating a competitive model to stay ahead of the global competition.

4. Internal strengths such as its strong relationship with customers (S4) and its solid global

image (S7) can be combined with external opportunities due to growth in emerging

economies to increase its business operations globally. Infosys has already extended its

operations to North America, Europe, and some other countries. Future expansion's targets

include China, Australia, Eastern Europe, and Latin America.

Imp

lem

enta

tion

Tim

e F

ram

e

Lon

g- T

erm

4. Increase business operations globally (S4, S7, O2)

Med

ium

-Ter

m 1. Continue to acquire firms that can add value to its top line (S3, O3, O4)

5

Sh

ort-

Ter

m 3. Invest in evolving their operating models (W2, T1)

2. Invest in cloud computing services (S1, S2, S3, O1)

$ $$ $$$

Resource Requirements

Financial Analysis:

Figures 1 and 2 show how Infosys' financial performance has consistently seen steadily

sales growth over the last decade. Thanks to this growth te company has been able to accumulate

a cash reserve of more than $2 billion to fund future growth through strategic acquisitions and

investments in R&D. Additionally, having no debt further encourages future investments.

Figure 1 Tesla Revenue from 1999 to 2010

Increasing revenues and profits year after year provide stability to the company and

further growth opportunities. This impressive performance is in line with the company's

corporate governance that aims to maximize the shareholders' value in a legal and ethical way as

well as on a sustainable basis.

Figure 2 Revenue & Profit (in Rupees Crore)

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2014-15 2013-14 2012-13 2011-12 2010-110

15,000

30,000

45,000

60,00053319

50133

40352

3373427501

14871 13381 11533 10723 8968

Revenue Operating Profit (PBIDT)

The financial highlights for Infosys for the year ending 2014 are impeccable with an

annual revenue growth rate of 20.61% (see Appendix B) and annual net profit growth rate of

12.68% (see Appendix B). However, related to the industry, Infosys underperforms competitors.

Even though Infosys' financial position is extremely strong, when compared to competitors it is

relative smaller in revenue growth terms. This is mainly attributable to rapidly changing market

conditions in the industry. Established companies like Tata Consultancy and Cognizant are able

to adapt to market changes much faster than Infosys. Therefore, they are able to reach a larger

market share much faster than Infosys. Figure 3 shows how the company underperforms

competitors by much.

Figure 3 Infosys underperforms competitors

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RESULTS OF ANALYSIS AND INTERPRETATION OF RESULTS:

The results of analyzing Infosys' internal and external conditions show that Infosys is a

strong player in the IT industry. It is also understood that even though revenues received every

year are extremely large, competitors are able to outperform the firm by far. However, if external

opportunities are combined with internal strengths, Infosys could attain sustainable competitive

advantage. Therefore, appropriate strategies need to be developed.

RECOMMENDATIONS:

The company should continuously scan the environment by monitoring, evaluating and

disseminating knowledge from the internal and external environments so that it will be able to

maintain its high profits and sustainability by avoiding strategic surprises. Infosys should also

continue to acquire firms that add value to its top line. They also need to invest in cloud

computing services and in evolving their operating models. Furthermore, the company should

increase its international business operations even more.

CONCLUSION:

There is no doubt Infosys has created tremendous value in the IT consulting industry by

delivering quality and leveraging its core competencies. However, competitors should not be

underestimated. Since the industry is based on human capital, Infosys needs to take the pertinent

steps in order to stay competitive. Therefore, management strategies are extremely important to

the company’s success.

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APPENDIXES:

Appendix A

P & L Data (in Rs. Crore)

Particulars 2014-15 2013-14 2012-13 2011-12 2010-11

Revenue 53,319 50,133 40,352 33,734 27,501

Operating Profit (PBIDT) 14,871 13,381 11,533 10,723 8,968

Interest - - - - -

Depreciation & Amortization 1,017 1,317 1,099 928 854

Provision for taxation 4,911 4,072 3,370 3367 2,490

PAT from ordinary activities 12,372 10,656 9,429 8,332 6,835

Dividend (inc dividend tax) 6,145 4,233 2,815 3,137 4,013

Appendix B

Growth Ratios

Particulars 2013-14 2012-13 2011-12 2010-11 2009-10

Export revenue (%) 19.85 17.76 23.08 18.78 4.33

Revenue (%) 20.61 17.63 23.12 20.08 4.32

Operating profit before depreciation (%)

13.73 9.48 19.57 14.32 6.57

Net profit before exceptional items, net of taxes (%)

12.68 13.29 23.95 11.95 -1.1

Basic EPS before exceptional item (%)

13.23 13.29 23.88 11.85 -1.26

Appendix C

P & L Ratios - Standalone

Particulars 2013-14 2012-13 2011-12 2010-11 2009-10

Export revenue/ revenue(%) 97.12 97.73 97.63 97.66 98.73

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Software development expenses/ revenue (%)

60.3 58.92 57.06 56.2 54.68

Gross Profit/ revenue (%) 39.7 41.08 42.94 43.8 45.32

Selling and marketing expenses/ revenue (%)

5.39 5.09 4.65 4.8 4.61

General and administration expenses/ revenue (%)

6.06 6.03 6.1 5.85 5.9

Aggregate employee costs/ revenue (%)

54.92 54.21 49.51 49.08 48.96

Operating profit (PBIDTA)/ revenue (%)

28.25 29.96 32.19 33.15 34.82

Depreciation and amortization/ revenue (%)

2.48 2.6 2.54 2.92 3.82

Operating profit after depreciation

25.77 27.36 29.65 30.23 31and amortization and interest/ revenue (%)

Tax/ revenue (%) 8.59 8.82 9.95 9.37 8.12

Profit after tax before exceptional items/ Revenue (%)

22.99 24.61 25.55 25.38 27.22

Return on Capital Employed (ROCE)

35.83 37.3 40.87 37.58 37.25(PBIT before exceptional item, net of taxes / Average Capital Employed) (%)(1)

Return on invested capital before

62.24 64.94 71.29 67.73 68.75exceptional items, net of taxes (%)(1)

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