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Corporate Jun 3, 2013

Murthy’s return signals admission of failure by Infosys; can he do a Steve Jobs?

By R Jagannathan

The return of NR Narayana Murthy as Executive Chairman of Infosys Technologies is a high-risk strategy for the company's board for the simple reason that the company's problems are more structural than merely one of a dipping market image.

It is also a partial admission of failure by the Infosys board. That its current plan needstweaking. That its current leadership need help. No one brings an old hand back from retirement if things are working to plan.

For the last several quarters, while Tata Consultancy Services, Cognizant Technologies and HCL Technologies have been speeding ahead despite the global slowdown, Infosys has been missing its quarterly guidance and dropping behind. And CEO SD Shibulal has been facing all the flak for this.

The question is can Murthy reverse the slide?

It's not that corporate boards have not brought old hands back to steady the ship when it is being buffeted by strong winds. Apple's board brought back Steve Jobs - and there can be no greater comeback story than that. Apple never looked back as long as Jobs remained at the helm, coming up with iconic products starting with iMac, iTunes, iPod, the iPhone and the iPad.

Just last week, Procter & Gamble of the US brought back its old warhorse, retired CEO AG Lafley, to the top job after the previous incumbent, Robert McDonald, had stumbled. After a few quarters of pullback from slow growth, P&G fumbled again in its most recent quarter, and, as the Wall Street Journal reports, "was out of a job."

The difference, though, is this. Steve Jobs was just 41 when he returned to Apple in 1996 - still full of beans, and young enough to reinvest himself and the company he founded.

But Lafley is returning to P&G at age 65, and Murthy will be 67 this August.

Can Murthy do a Steve Jobs at 67?

But it's not just about the age. One can innovative and be decisive at any age, but the challenges Infosys faces right now are not the ones Murthy faced when he started the company in 1981.

Speaking at a press conference soon after the company announced his return, Murthy said he stood by the Infosys 3.0 strategy and that his goal was to "add value" to CEO SD Shibulal's mission and not run the company directly.

He acknowledged that it had been seven years since he had stopped playing an executive role, and agreed that there were "new challenges" now compared to what he faced when he was around.

In 1981, Murthy and his founder colleagues realised that software jobs that were being executed by sending cheap engineers to the US could be done more cheaply by recruiting Indians in India to work in a different timezone and deliver the same results.

Murthy's pluck, and three dollops of luck, helped make Infosys a world-beating software company.

In the 1990s, as India opened up, Murthy's Infy was among the first companies to take advantage of a liberalised capital market and scale up.

Later in that same decade, Murthy saw that foreign investors were keen to invest in Indian companies, but found Indian promoters lacking in corporate governance. Murthy, by making Infosys the most transparent company listed in India, and later on Nasdaq, became the darling of the markets instantly.

The third piece of luck was the generic Y2K opportunity - when computers using software code written earlier were expected to malfunction due to the fact years were represented with just two digits - 99 or 95 for 1999 and 1995 - which would have become 00 in the year 2000. Infosys and other Indian companies minted millions of dollars rewriting old code to save that west from the "millennium bug."

But Infosys's problems today are completely different.

First, the basic business - applications development and maintenance - had been commoditised. Retaining and growing this business needs sharp marketing, including strategic price cuts to keep volumes up. Infosys has been slow to adapt to this shift in the market. Will Murthy now try price discounting - what his colleagues at the helm have been unwilling to try till recently?

At the press conference, Murthy seemed to suggest that the company had to focus on large "application development and maintenance projects" - Infosys' bread-and-butter business, which had taken a backseat under the Infosys 3.0 strategy. The strategy calls for the company to chase more "transformational projects" with higher margins, and to develop platforms, products and solutions for clients to generate more "non-linear" growth.

The shift in emphasis Murthy seemed to suggest was just a hint: he said the "need of the day" was to focus on "large" maintenance and application development projects. Does this mean Infosys will be bidding more aggressively for new business by cutting prices? It is a slippery path - but could generate immediate gains in terms of topline growth.

For Murthy, the big issue is whether he chooses to tweak Infosys 3.0 to make it work better and faster, or whether he will rethink the entire strategy.PTI

For Murthy, the big issue is whether he chooses to tweak Infosys 3.0 to make it work better and faster, or whether he will rethink the entire strategy.PTI

Second, there are some who wonder whether Infosys needs a leader from outside or a return to the old faithful. When IBM was in trouble in the early 1990s, the board brought an outsider - Lou Gerstner, former CEO of RJR Nabisco - to turn the company around. As an outsider, Gerstner saw that the industry had changed and IBM would need to reinvent itself. He sold off the PC business to Chinese company Lenovo, and IBM shifted focus to consulting and prospered.

In an interview to The Economic Times, Pankaj Ghemawat, professor at IESE Business School in Spain, said that when a company needs big change, it may need a break with past leadership. He said: "It may be time to seriously rethink what geographies to compete it in, what verticals to build capabilities in or what margin to aim for. And that may also call for a different management architecture capable of planning and executing those changes in strategy."

Is Murthy in 2013 different from the Murthy of 1980-2000? Is he the right man to reinvent a company he invented 32 years ago in different circumstances?

At the press conference, Murthy said he was out of touch with current developments, and this was one reason why he had asked his son Rohan to join him as executive assistant in the Chairman's office. The idea was to work with people he liked and to keep in touch with cutting edge ideas of the young, but Rohan would have no "leadership role" in Infosys.

Third, everyone acknowledges that Infosys has been slower to adapt than its competitors. Not that it didn't realise the big changes coming in the industry five years ago. As Forbes India wrote in a recent issue, "all major players embarked on new strategies around five years ago. HCL Technologies...decided to put its force behind infrastructure management and re-bids. Cognizant ...added more verticals and geographies like consulting and infrastructure management in Europe. TCS was more global and had a finger in all these. Its efficiency-driven CEO R Chandrasekaran reorganised the company into smaller units of USD 250 million each. In all these cases, the restructuring was done to make the individual parts grow faster. There was no big change in the direction (and when there was one, it fell on a separate business unit, or a set of business units)."

Infosys, however, chose the harder option of changing direction with its 3.0 strategy. Wrote Forbes India: "Infosys 3.0 was much broader in scope. It also encompassed the other parts of the company, including the core operations business (application development and maintenance, infrastructure management, BPO), and the transformational business (consulting and systems integration)."

For Murthy, the big issue is whether he chooses to tweak Infosys 3.0 to make it work better and faster, or whether he will rethink the entire strategy.

The performance of what Forbes.com calls "boomerang CEOs" - those who retire and returned to head the company again - is mixed. While Jobs is the best example or success, Harold Shultz at Starbucks is another positive story.

But there have been failures too. Writing in Forbes.com, Susan Adams points out that Kenneth Lay's return to Enron was a resounding disaster. And Paul Allaire's return to Xerox in 2000 a year after he left failed to stop the stock from plunging 60 percent in his second innings - which lasted barely 15 months.

At Infosys, Murthy's return can be said to have been prompted by market concerns over Infosys - almost similar to investor William Ackman's push for Lafley's return.

The markets will surely cheer Murthy's return in the first instance, but will wait to see how Murthy 2.0 is different from Murthy 1.0.

by R Jagannathan

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