Infosys Needs to Diversify Out of Body-Shopping

The rupee value may rise making Indian services more expensive, but companies like Infosys adapt. In this piece, we look at what is going on inside the outsourcing giant, and whether their strategy is enough to sustain continued growth.

Infosys (INFY) delivers information technology (IT) enabled outsourced business solutions and provides business process outsourcing (BPO) services. In Q2, Infosys achieved $1 billion dollars in quarterly revenue for the first time, growing 37% versus Q1 (annual revenue was $3.1 billion and net income $850 million ended March 2007). Only 3-4% of this revenue comes from the Indian domestic market (63% comes from the US, Infosys’ largest market, 27% from Europe, UK primarily, and the remainder is generated in Asia).

Revenues have risen 10.1% sequentially by the quarter. Infosys improved operating margins to 27.5%, 2.8% higher than Q1. The company recovered from the Indian rupee appreciation impact in Q1, and analysts pegged Q2 growth at approximately 10% versus guidance of a deceleration Q3 sequential growth of 5% to 6%. As a result Infosys is expected to produce 4-5% sequential growth regardless of the rupee value. Supporting this view, Q1 saw the billing rates going up by 1.1% and in Q2 by 1.9%. Simultaneously, staff utilization has increased from 73% to 78%.

Annual growth guidance for the remaining year has been increased by 5% from 30% to 35%. Management assumes no more large deals for the year and no further price increases from Q2.

Infosys has five segments:

• The Banking/Financial Services/Insurance (BFSI) segment, and largest, grew 11.4%;
• Manufacturing grew 13.2%;
• Retail grew 27.3%, attributed to growth of retail and new clients in Europe as companies seek more efficiency in outsourcing;
• The energy and utility segment grew 19.5%;
• Consulting is now 5%; and package implementation is 18.7% from 18.4% in Q1, creating a 24% share of company revenue ($241m). No slowdown is anticipated.

New clients/contracts are now won at 3-4% higher than company average and contract renegotiations are 2-3% above average. The top 10 customers grew by 2.7% quarter-on-quarter and the non-top 10 grew 13.7% sequentially. Infosys added 48 new Q2 customers with a company total of 520. Infosys plans projects on a basis of 30% onshore and 70% offshore, showing more offshore reliance to control cost compared to a previous 40/60 split. Fixed prices have increased in Q2 as a company strategic direction, the goal being Infosys value accrual. Management increased attention on increasing productivity in the last year with a current fixed price now being higher than the average margin by 3-4%.

The big question for Infosys is where is the new money coming from and where is it going to go. More new business is coming from Europe now than the U.S., with the United Kingdom fueling the strongest inroads. And more than 43 percent of revenue comes from non-application development, i.e. BPO ventures. Further BPO expansions are being tested through Finacle as a service, which is currently going through validating market demand and formalizing offering strategy. Finacle is Infosys’ Banking solution.

Infosys’ acquisition strategy is also focused on filling in BPO gaps. BPO acquisitions need to provide new platforms for Infosys to base business on or open new markets. The company is cautious in selecting target companies, looking not only for strategic fit, but also overlap of ability to retain employees and alignment of values, culture, and ethics. Infosys does not support hostile takeovers. Acquirees are expected to want to be acquired.

Summary of recent acquisitions:

• 2006-07: Infosys purchased 3 shared services centers (India, Poland, and Thailand) from Royal Philips Electronics, giving it a large presence in Eastern Europe, the largest of any Indian company in the region.

• 2003-04: The company acquired Expert Information Systems Pty Limited, a leading Australian IT design, build and integration provider for business solutions.

• 2002-03: Infosys acquired intellectual property rights in Trade IQ, a U.S. trade management product, Autolay – a commercial software for design of high performance structural systems, and I-Link – a signature display system from India for banking products.

Most of these purchases expand Infosys’ geographic presence. However, with a cash and cash equivalent balance of at least $1.4 billion, and a great market cap, it is unfortunate that Infosys is not really getting into strategic “product” acquisitions. Thus, Infosys’ growth remains head-count-bound, and not much creativity beyond basic body-shopping seems to be going on. Nonetheless, in body-shopping, Infosys is one of the world’s absolute best.

The time has come, though, for Infosys to take a good look at the software eco-system in the US, and decide on a strategy that enables them to play in the more leveraged technology / IP driven business models, and change the business mix somewhat. The company currently lacks excitement, but the right signals along these lines would definitely bring them back to popularity. In fact, the rising wage costs and appreciating rupee can easily be mitigated if the company diversifies its business model out of body-shopping.

Disclosure: no position

Comments

[SanityCheck]

I don't know which rock Sramana called out from, but to call Infy a 'body-shopper' proves her utter ignorance beyond doubt. No. 1 problem for Infy today is the Dollar plunge and their over reliance on US market. There are no easy solutions for the problem, growing market share in Europe and Asia will take time

[RinAns]

Author is right in saying that INFY is a body-shopper. Their income from product line is negligible; mostly, income is from parking people at clients place for projects.

[boni]

I agree with the author's reasoning. With the strength, brand and financial muscle that Infosys has it can potentialy become the products power house from India. Some how it has not yet happened.

The title is missleading. May be a cheap but succesful attempt to get readers :-). Staff augmentation (body shopping) is not an area infosys is working on. It usually works on fixed bid packaged services delivery. There might be a sizable chunk that is billed at time and material. Clients are fast moving out of this model.

[ThomasVictor]

I'm a programmer in a US company and have worked with Infosys and I agree strongly with SanityCheck that INFY is no way a body shopper!

But agree with Sramana that they should move higher up the food chain. They ARE trying hard to be Managemant Consultants similar to McKinsey, Accenture etc. - but besides Finacle, which they've had for ages, why aren't they trying to develop other software products?

Body shopping is a fairly specialised term. A company needs X programmers who say, know Java,for a one year project. There are many company's in India who can supply these programmers. But those companies are not involved with coming up any of the following:

1) Deciding that the company needed the project in the first place
2) High Level IT Design and lower level detailed specifications

The US company itself has done items 1 and 2 finds it needs 15 programmers for this project but only has 12 employees free so it contracts for 3 more 'bodies' from India. Say $25/hour for someone in India, more if they want the programmers to be here in the US.

Infosys pretty much takes on only projects where it does item 2 completely or does item 2 in collaboration with the US company. And it is trying to get to do item 1 also via their ManagementConsulting whih right now is running ata loss.

Usually there are 2 phases for which they might be paid separately, one to come up with Design and Detailed Specs, then to actually program test and go-live.

The only situation where INFY would do body shopping is to get a foothold in the US Company - i.e. the 3 programmers they sent do so well that they can then persuade the Company to let INFY do 100% of the next IT project.

My US Health Care company is spending a HUGE amount of money on a 'do it all' health care package - provides the doctors with everything they need for medical care - patient chart, schedule display, prescription ordering etc etc. PLUS handles the business side such as billing.

From what I've seen, if INFY made an initial investment to study Health Care requirements they could do MUCH better than the software company we have now - come up with a better system, one that is designed to 'scale up', does what the doctors need, does billing etc.- and to maintain and enhance the system.

For the amount of money we're paying we would be happy to go with a better package and better support but there is no alternative on the horizon!

[Generic]

Author is right. I am also someone working for one of the top 5 Indian consulting company. Any consulting company does just that - they either provide consultants(bodies) who consults and works in the clients place or provide a team of consultants including mid level managers to manage a complete project from start to end. But consultants are not innovators. Inventing something requires a different mind frame. You cannot innovate if you are constantly under time to market pressures or if you have hundreds of other problems to take care of (like it is in India). No , I dont think any innovation can come from India. When India invented "zero" it was a different time and place - if you give that environment back then again it may be possible - otherwise not.

[Generic]

Author is right. I am also someone working for one of the top 5 Indian consulting company. Any consulting company does just that - they either provide consultants(bodies) who consults and works in the clients place or provide a team of consultants including mid level managers to manage a complete project from start to end. But consultants are not innovators. Inventing something requires a different mind frame. You cannot innovate if you are constantly under time to market pressures or if you have hundreds of other problems to take care of (like it is in India). No , I dont think any innovation can come from India. When India invented "zero" it was a different time and place - if you give that environment back then again it may be possible - otherwise not.

[Dayanand]

IT outsourcing has in itself become a "CENTER OF EXCELLENCE" and calling it bodyshopping shows the ignorance towards this new business model. Achieving success in this business is as tough as achieving success is any other kind of IT business like Hardware or software development.

I feel Infosys is in the right track and have created their own circle of competance. Any further advancement should be linked with their present competence.

The latest contract from Phillips is worth $250mn . I am sure any guy who works in IT would agree the degree of complexness involved in winning such contracts.

Everyone always talks about how INFY can adapt the model of Accenture and grow further, but I would say before attempting that they should first become India's#1 IT consulting company by exceeding TCS's revenues....