Infosys underestimated cultural challenge of transforming itself: Co-chairman Ravi Venkatesan

Infosys, like much of the Indian IT services sector, has been hit by a variety of external head winds – slowing demand for its traditional services, protectionist moves in its biggest market, the US, and disruptive technology changes that it needs to cater to. But this iconic company is also having to deal with an internal row with its promoters, led by N R Narayana Murthy, who have questioned the value systems and effectiveness of the current board and management.
TOI reported recently that the promoters might even consider selling their stakes in the company.In a nearly hour-long interaction with TOI, co-chairman Ravi Venkatesan says the company underestimated some of the cultural challenges of transformation, and is now trying to deal with them.
Infosys is going through trying times. The share price is not much higher than when Vishal Sikka took over as CEO. The promoters are still unhappy with some of the actions of the company.
When we look at the prospects of the IT industry and Infosys specifically, they are all going through choppy times. I’m very much an optimist. I often use Charles Dickens’ quote “It was the best of times and the worst of times.” Clearly, we are experiencing significant challenges of every sort in terms of shift of business models, regulatory headwinds, and each company has its specific issues. But overall, I think, we are at the cusp of the largest ever what’s called the fourth industrial revolution, and it throws up opportunities that make even the internet modest in comparison. People say the best times are over for the industry. I really think they are quite wrong and I believe Chandra (Tata Sons chairman N Chandrasekaran) has said similar things, Bill Gates has said similar things.
The issue is how our companies are going to navigate from the existing models towards the new opportunities. And it’s a classic case of what Clayton Christensen (Harvard Business School professor) called the innovator’s dilemma 15 years ago. The company has the choice of either doubling down on execution, doing better with its core business model, squeezing out costs, or it can try and also figure out how to build the new capabilities required in the new areas, like now AI (artificial intelligence), natural language interfaces and so on. When you do that, there is a big challenge – to build new capabilities, make investments, and the investments have to be funded by the existing business, so you’re not optimising for profitability.
To build new capabilities, you may have to hire talent from outside, and then there is the challenge of integrating the new people with the old people. These are big issues. This is acutely painted well by Christensen and others. I never thought we would be living through a text book case of this kind of a transition. Some investors and employees will say you need to go back to the past, double down on the existing model and execute that better. Others will say you need to press the accelerator to the floor and power your way to the future. The worst thing in the world is to be caught in the middle, and not do either well.And the biggest challenge here is the cultural challenge. Very frankly , all of us have underestimated the cultural challenge during this whole transformation.
You mentioned cultural challenges several times. Is that where you’re placing the constant pullback in some sense by the promoters?
Mr Murthy absolutely understands the need for transformation and in fact he is the one who hired Vishal Sikka. I don’t think the issue is around strategy; I think the biggest challenges we are facing are thinking through a whole host of cultural implications of the transformation.For instance, part of what you have to do is to build new capabilities and you have to selectively acquire specialist skills from the outside. Now, these people come with market based compensation. That may or may not fit with the existing compensation system. That can be a source of friction. Now, when you bring in people from outside the industry, the mindset and orientation tends to be quite different from those who’ve grown up in IT services. I think we have completely underestimated the magnitude of these challenges and Peter Drucker 50 years ago said “culture trumps strategy” and nowadays they say culture eats strategy for lunch. That’s where significant issues have cropped up and we are dealing with it.
Can you tell us specifically how you are dealing with the issues of salary and severance pay? The promoters have a different philosophy.
Let’s talk about compensation squarely . More than a decade ago, Mr Murthy used to say our only asset is talent. So we live in an ecosystem where we have to attract and keep talent. So one of the things you have to do is benchmark yourself to the market and make sure you’re competitive. We have embraced a compensation policy at the more senior levels where more of your pay will be variable -at the senior level 60% is variable, 40% is fixed. We have also adopted a policy where half the variable compensation will be in stock. So in general, at senior levels, 60%-70% of the pay is at risk. In fact, cash compensation has remained the same or has come down in most cases.
The biggest issue is, we have made these changes at a time when the industry is not doing well and the company is not doing brilliantly , and therefore there is a lot of anxiety. Timing is a big issue. Had we made these changes when the industry was booming and the company was booming, I don’t think anybody would have cared as much. Part of the issue is that we are hiring people in the US at market salaries. But the point is, if you look at what Microsoft and Google are doing to acquire engineers in new areas -driverless cars, machine learning, analytics – these are skill areas where the market is red hot. You end up paying pretty hefty salaries. I think the trick here is to explain this much better and take employees, investors and the public along.
Is the management still holding on to the 2020 target of $20 billion in revenue? Sikka’s employment contract says that’s the target on which his variable pay and stock grants are going to be based.
I think it is fair to say the 2020 targets do not appear to be realistic to achieve anymore. Now, how do we recalibrate the expectations of markets, employees and all stakeholders? This is where the committee of directors is working very closely with the management to come up with a road map with specific milestones. We hope to finalise that soon. We need to do something similar. The CEO’s compensation has to be revised to be linked to new milestones and we will do that. The CEO’s compensation should not look like a salesperson’s compensation. It is currently linked to the achievement of three metrics – revenue, margins and revenue per employee. And it does so on an annual basis. That’s fine for an annual payout, but the CEO’s job is also to be more long-term oriented and therefore part of the CEO’s remuneration should be driven by achievements of longterm targets.
How do you rate Vishal Sikka’s performance?
Like anything, he has done some things well and there are other things where he needs to focus and do better. If you look at what he has done really well, he has energised the company , with a deeper, exciting vision, sense of purpose, has communicated this to the employees.Some of his initiatives are absolutely outstanding, particularly the ideas of retraining everybody on design thinking, on trying to get every project team to think about innovation.
The company’s financial performance is solid, not great. Last year we grew 8.3%, which was the second best in the industry. We have done a better job of holding on to margins than most others. We have probably done the best in free cash flows. More importantly, the seeds of renewal are beginning to sprout, and we can see lots of reasons for optimism. Vishal has said 35% of our employees are now focused on new service lines that are generating 45% of our revenues. And these new service lines are growing at very high double digits and at very high margins, and the revenue per employee in some of these services is as high as $70,000. So we now clearly see where the opportunities lie, it’s no longer speculative.
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