“We can never say that Infosys has made it….” - Views on News from Equitymaster

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  • Aug 24, 2001 - “We can never say that Infosys has made it….”

“We can never say that Infosys has made it….”

Aug 24, 2001

Mr. Nandan M. Nilekani received a B.Tech. in electrical engineering from the Indian Institute of Technology (IIT), Bombay in 1978. And in 1981, along with a group of first generation entrepreneurs founded Infosys. Since then he has served as a Director in the organisation. Over the years he has played a seminal role in the transition of Infosys from a fledgling software company to a multimillion-dollar global corporation. Presently, he is the Managing Director, President and Chief Operating Officer of Infosys. He is involved, along with the board, in defining the strategies of the company.

In an interview with Equitymaster.com Mr. Nilekani talks about the future of the software industry and Infosys’s past and the exciting times ahead.

EQTM : How do you see the software sector taking shape in the future?

Mr. Nandan: What is happening is that technology is becoming more and more central to business strategy. Earlier people used to have a business strategy and then used to look around for a technology to implement the strategy. However, thanks to the Internet, products and services are being delivered over multiple channels. This has resulted into supply chain management itself leading to a competitive edge. Technology has become central to the business strategy and therefore, we are in such a situation where you cannot conceptualise or implement a strategy without first looking at the available technology, both today as well as in the future. Organisations have to make sure whatever technology options are available are fully leveraged so that the business value is obtained. This kind of business technology integration is something that has happened over a last couple of years. And I see this trend intensifying in the future.

What this means for software and IT services companies like ours is that, we cannot really propose a technology solution without fully understanding the business needs. And hence, the whole drive is towards making sure that we have sufficient business skills so that our technology people are able to seamlessly combine technology and business. Thus, we are able to offer business-consulting services, an area towards which the markets are moving due to this business technology integration.

EQTM :What kind of technologies do you see dominating?

Mr. Nandan: If you look at the past there have been four or five trends in the last decade. In early nineties we saw the shift from main frames to the client-server computing model, thanks to the development of the local area networks. This resulted into the two-tier and three tier client server architecture. The second major trend that happened towards the early to mid nineties was to move towards integrated ERP (enterprise resource planning) solutions. This period saw the rise of ERP majors like SAP and others companies, as there was a big rush for their products. The third thing that happened was in 1996; The Govt. in the US passed the Telecommunications Act, which essentially liberalised telecommunications sector in the US. Thus, allowing multiple local, long distance and Internet service providers. This led to huge investments into building a network for the future for example fiber optic networks and complicated local area exchanges. There was a huge amount of investment into Telecom sector. Then in 1998 – 1999 there was the Y2K boom that started with companies racing to get Y2K complaint. Then of course there was the Internet boom. Firstly, Internet itself was a big investment. The other part of the Internet boom was the high amount of investments made by Venture Captialist’s into ‘dot-coms’. This led to large number of ‘dot-coms’ coming up in the late nineties. This in turn led to large corporates getting concerned about the potential impact these ‘dot-coms’ would have on their business and therefore, they also had to come up with a competitive strategy to counter the competition from ‘dot-coms’. These events over a period of last seven to eight years essentially acted an incentive for IT spending.

Right now most of these trends have subsided, in the sense that it’s not a boom situation any more. Looking to the future, technology has become indispensable. However, companies will be looking very hard into their investments in technology and making sure that for any project they take up there is clear return on investment. The companies would like to see that there is a payback that is measurable in a quantitative way either in terms of defect reduction or cost reduction or cycle time reduction or productivity or better customer acquisition or better customer satisfaction or whatever. People are now saying that every project needs to be justified on a very tangible matrix and I think this kind of thinking is going to dominate the attitude toward tech spending in the coming years.

EQTM :There is this shift towards maintenance in the past two quarters what kind of a market are we looking at?

Mr. Nandan: I would say the work in this area is that which the companies cannot do without because their entire business is supported by these software. Maintenance is just one example of that kind of a business. Integration with suppliers and customers are also needs which the companies cannot do without. Let us define application and maintenance as the work companies have to have to keep their business going.

The second area that attracts a lot of IT spend, is where the return on investment is very quick and tangible. For example a company is currently making payments using cheques. The payments cost you somewhere between a dollar or two per cheque. The company now decides to make 90% of its payment electronically. These payments cost only a few cents compared to a dollar for payments by paper. This is just an example. Thus, companies are asking themselves what is it in a business cycle by implementing technology we are able to get a quick payback. Both these areas are driving IT spend now.

EQTM :The Indian software sector to a certain extent has been a low cost story. How do you see it positioning in the future?

Mr. Nandan: I think positioning has to be value for money. It is not necessarily about cost, it is about getting maximum value for the money paid by the customer. And I think the impact of the slowdown has been much greater on the US IT services companies. These companies are going through sequential negative growth, from profits to losses, lay-offs and in some cases even bankruptcy, whereas relatively the Indian software companies have performed much better. When the economy in the US turns around (which is inevitable), companies like Infosys will be on a strong wicket.

EQTM :Would you like to comment as to when do you see the economy in the US turning around?

Mr. Nandan: It will take some more time. But we still cannot say anything for sure.

EQTM :In a recent interview Mark Faber said the most of the programming and development of software shifting to Indian and China? Do you agree with his views?

Mr. Nandan: I think the trend is towards moving to a global delivery model. And certainly India and China are strong contenders.

EQTM :Israel and Ireland are also known to be quite dominant in the software industry. How are these companies positioned against the Indian software companies?

Mr. Nandan: They have different competencies. I think Israel has a very strong technology base and some excellent companies have come out of Israel like the ICQ for instant messaging, which AOL bought, basically very high tech, very security encryption oriented companies. These have come out of the defence activities of these countries. The Americans have worked with the Irish to gain a window into Europe. But in terms of large scale IT service market that Indian software companies address I don’t think these two countries would be the competition. If you take a five-year view China is a far likelier competition.

EQTM :Talking a bit about Infy’s history, did any one of the core group that started Infosys have a business background? What was the motivation?

Mr. Nandan: All the people who founded Infosys were first generation entrepreneurs, all of them were professionals and none of them had a business degree or a business background. Our motivation was to create a world-class software company that was owned and managed by professionals. We believed that there was a great opportunity, we understood the pulse of the people and therefore we wanted to create a professional organisation with a global mindset.

EQTM :How did the vision evolve as Infosys grew and what is your vision for Infosys five years down the line?

Mr. Nandan: Well, up till 1991 we were a relatively small company. In that year when the markets opened there were a huge set of opportunities facing us, we took this up as a chance to build that truly global firm. We expanded our vision and grew from Rs 9 Cr to Rs 900 Cr in a span of 7 to 8 years.

I think our vision is considering the fact that IT services is getting a very complex and exciting area. We believe that there is no single player in the market who really has the entire pieces of the puzzle. Also, there is no company that is a truly global brand and global company from India. We intend to be the company.

EQTM :Tell us something about the times between 1981 to 1991, what did Infosys do? What kind of projects? Whom did Infosys work with?

Mr. Nandan: That was the era when we did not have liberlisation, there was no telecommunications infrastructure for us to work on and we had to really do more of onsite work. We used to work with Data-Basic corporation a US based software company. They had many clients in the garment industry. In the mid eighties we had clients like Revok, France. We also had a joint venture with a American firm called Kurt Solomon Associates. We had that joint venture for a few years and then we dissolved the joint venture. Sometime in the early nineties while working with clients like GE we decided to invest in our own sales and marketing outfit. We first opened an office at Boston, then in San Francisco and slowly opened other offices.

We largely used to work in the minicomputer space; we did some work for the data general, AS 400, VAX and IBM mainframes platforms too.

EQTM :What was the most difficult time in Infosys’s history?

Mr. Nandan: Our biggest challenge was in the late eighties when we looked at the market. And looked at how things were shaping up and we had genuine concerns about our abilities to flourish in the new liberalised environment. So we had a lot of introspection as to what we should do in the future. But we finally decided to go ahead and create a world-class company rather than packing it in. This thing happened in the late eighties when one of our founders had left the organisation.

EQTM :When did you feel that Infosys had finally made it?

Mr. Nandan: We can never say that. We believe that in every dimension of our business we have to show continued growth, continued improvement and continuous productivity. There is never a point where you say that it’s done. No way.

EQTM :Infosys is getting into new areas like business process outsourcing (BPO) could you kindly elaborate on this?

Mr. Nandan: What is happening today is that due to the capabilities of the telecom infrastructure organisations can take a process like claims processing or settlements in a investment bank or cheque processing in bank and can actually outsource this to somebody else who can do the whole activity on a per transaction basis. We can think of remote facilities for clients worldwide.

EQTM :Who are the three people that have influenced you the most?

Mr. Nandan: At a macro level in term people who have demonstrated global leadership two people would be Jack Welch and Nelson Mandela. At a more personal level, obviously, Narayana Murthy.

EQTM :What is your favourite book?

Mr. Nandan: My favourite book is Competitive Strategy by Michael Porter.

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