Review the case study of "Infosys Technologies, Ltd.". Read that case study and answer the question(s) at the end of the case study.
Organizing Sales for Global Software Products
Mr. N. R. Narayana Murthy, Chairman of Infosys, has just returned from a trip to the United States. He is known as a capitalist in mind, but a socialist at heart. Looking tired, with dark circles under his eyes, he is thinking about the vision of his company located in the gleaming headquarters, which is nestled in a 52-acre green oasis within Electronics City, on the outskirts of Bangalore, the silicon valley of India. More than an office building, this place looks like a holiday resort, with rolling lush green lawns and landscaped gardens. There's even a golf putting range. Rock music belts out from an open-air food court, where young people sit and chatter. But theirs is not idle chatter— their animated conversations are all focused on abstruse software topics.
Software development has historically been seen as an art, to be performed by those with advanced technical training. As a result of standardization, improvements in communication technologies, and the development of "highlevel" languages, owed application software can now be developed without specific knowledge of the underlying hardware. Moreover, activities in the software development process could be partitioned and performed by people located in different places. In particular, detailed design, coding, and testing could be undertaken anywhere in the world, and therefore a remote software maintenance service was becoming feasible.
Such a phenomenon led to the emergence of companies such as Infosys Technologies Ltd. in India. The company has a rags-to-riches story. In 1981, seven Indians gave up their secure jobs to start this software company with a sum of Rs 10,000 (U.S.$1,000). Their dream was to build a world-class software company.' The company initially started by engaging in the development and maintenance of computer software for their clients in the United States. They were among the pioneers in establishing the offshore concept on a large scale. This means that software development for foreign clients is undertaken in India, by utilizing satellite links instead of sending programmers to the client sites overseas. The early success was based on several factors. First, Infosys had a large English-speaking technical talent. Second, the services provided had an attractive rate structure. Third, the company had a 24-hour productive day. Because of differences in time zones, when the United States went to sleep, India woke up. This made it possible to combine the prime time of the United States with the prime time of India; as a result, it provided compressed time for the company's customers.
Infosys made very significant efforts in wooing foreign business. During a decade of operation, the company grew from a start-up operating out of a garage to a 1,000-person, $12 million organization, with a 125,000-square-foot facility in Bangalore's Electronics City. Starting with typical software maintenance services, porting and patching jobs, the company has moved into high-end, specialized applications for vertical markets such as banking, finance, insurance, transportation, distribution, and retailing. Among its 120 customers are about 30 Fortune 500 companies. Clients include Apple, Boeing, Epson, Intec, JCPenney, Nestlé, Nortel, Reebok, Salomon, and Toshiba. About 90 percent of Infosys revenue is from repeat clients. Almost its entire revenue is from exports.
A project team for a U. S.-based multinational corporation keeps in touch almost constantly with their U.S. colleagues via electronic mail, telephone, and video hookups. Though there is a geographic separation, there is a conscious effort to have the teams work in tandem. All this communication does not come cheap. Each 64K bit! second link has an average annual cost of about $130,000, compared to only $9,000 for domestic leased lines. But U.S. companies still find it less expensive to outsource to overseas firms. In early 1996, Infosys reported that the company provides a cost advantage to their American clients of anywhere from 40 percent to 50 percent.
One of the keys to Infosys's success in software development is its blend of whip-cracking efficiency and fanatic attention to detail. The Carnegie Mellon Software Engineering Institute in Pittsburgh has a rating system for developers that takes into account the ability to produce quality software on time and on budget, called the Capability Maturity Model (CMM). Infosys boasts of having attained the highest grade, CMM Level 5, which means they deliver more than 90 percent of projects on time, compared with the U.S. average of 60 percent to 65 percent.
Infosys had a very interesting account management policy. In 1989 General Electric (GE) became a major customer and, within three years of business, contributed to approximately 40 percent of Infosys's total sales. Attempting to take advantage of its bargaining power as Infosys's largest client, GE began exerting intense pressure on Infosys to reduce its rates. Infosys responded by terminating its relationship with GE. After a one-year transition period, during which all Infosys work at GE was handed over to other companies and in-house IT personnel, Infosys exited the relationship. Apparently Infosys does not want to be dependent on one customer for more than 10 percent of its business. Thus, in financial year 2000, its largest customer accounted for 10 percent, and the five largest customers for 33 percent, of its total sales.
Infosys realizes that its key resource is its employees, and it has created a nurturing environment for them. The company has a strong belief that, in a knowledge industry like software, wealth creation is done by people, and hence they too should be the beneficiaries of that wealth creation. This translates into a generous compensation package, attractive stock options, and a campuslike atmosphere with little hierarchy and flexible hours. The company believes in holistic compensation that has three parts—financial, emotional, and learning. The financial component—salary, loans and stock options—grows and erodes with the industry. The emotional part comes from being part of the Infosys team. And the learning opportunities reward individuals who want to grow in their jobs. Other facilities include a health center and a state-of-the-art gym, a sauna, basketball and volleyball courts, and an excellent child care center. Infosys was also among the first few Indian companies to start an employee stock option plan. Not surprisingly, its employee attrition rate of about 10 percent is about half the industry average. Also, Infosys has been voted the best employer by Hewitt Associates in India.
By the year 2000, Infosys had become a market leader in providing customized software solutions to the world's top companies. It now employed 9,000 people in 30 offices worldwide. Infosys had big plans to maintain high growth. The company wanted to transform itself from a provider of low-cost software fixes for such things as the millennium bug to an InfoTech consulting powerhouse, which would be staffed by programmers and executives to carry projects from design to implementation. It had some success moving up the value chain. Offering cheap solutions to the millennium bug, it built a strong client base that includes top U.S. companies. It then used those relationships to win contracts for more complex and profitable work such as maintaining and reengineering existing software. The company began making a shift from labor-intensive coding to the development of e-commerce software consulting services. Of course, this required closer contact with customers and a stronger physical presence in markets.
Since March 1999, when Infosys made its debut on the NASDAQ stock exchange, the company's stock prices in the United States have risen more than fivefold. The firm has been consistently rated as India's most admired corporation by the leading financial newspaper for the years 1999 to 2001. This has helped to build the Infosys brand name in the United States and attract talented American executives to work closely with the clients. The listing also helps the company attract global talent by offering dollar-denominated stock options. Infosys is one of the biggest magnets in the talent pool and one of the earliest to move into more sophisticated software work. The company services hundreds of global firms, including Goldman Sachs, Visa, and DHL. It has developed switching software for Cisco, a factory management system for Nestlé, and an inventory tracking application for Nordstrom.
Until 1999 Infosys was organized around nine strategic business units (SBUs). Each SBU was run as a self-contained organization, comprisIng functions such as sales, marketing, and delivery services. In addition to allowing each area to focus deeply on developing domain expertise, this structure helped the firm develop the next generation of Infosys leaders by giving SBU managers a free hand in leading their SBUs. To take advantage of potential economies of scale across the different business units, in October 1999 the firm was reorganized into practice units (PUs) organized by geography, with dedicated sales and software delivery organizations,9 although each PU has coordinators for support functions, human resources, finance, and so on.
Future Outlook:
Most analysts agree that for Infosys to further succeed in business, it has to transform from its old model to a new model.'° The old model: (a) write code to spec for big clients, (b) maintain software for long-distance clients, (c) do small portions of large solutions, and (d) compete on price. The new model: (a) offer software solutions for key customer systems, (b) outsource simple code work to cheaper countries, (c) create and market software for Western countries, and (d) compete on quality.
In the fiscal year ending March 31, 2001, Infosys increased sales by 115 percent and gross profit by 114 percent.1' But sales growth rates reduced sharply during the fiscal year ending March 2002; the sales total was U.S. $545 million, showing an increase of only 32 percent, and the gross profit was U.S. $255 million, an increase of 27 percent. The regional sales composition during the year is United States 71 percent, Europe 20 percent, India 2 percent, and 7 percent from the rest of the world. Contribution from offshore business is 51 percent, while the onsite component is 49 percent.'2 The new- customer total for the year was 116, and the company currently has a total of 293 active accounts. Infosys had lost some big-ticket projects to competitors, analysts say. Although it signed up 33 new customers during the last quarter, customers are not expanding initial projects into new work for Infosys. Multinational corporations are not making fast decisions to subcontract or outsource big or new projects, as they decide on a quarter-to-quarter basis."
According to one estimate, there should be a strategy to convert the U.S. slowdown into an opportunity. Last year, 185 of the Fortune 500 companies were outsourcing from India, leaving 315 to do potential business. Infosys believes that even if overall spending by companies goes down, it will continue to garner a greater share of the worldwide IT pie. Since Infosys gets about 70 percent of its revenue from the United States, it is seeking to expand in Europe, Japan, and Asia. A strategy Infosys has is to acquire companies that bring complementary values and new customers. The thinking is that if a company with complementary skills is bought, then it is easier to become a concept-to-execution company. Business analysts expect that in the looming slowdown, large companies with an established client base, good professional management, and deep pockets will survive.
Down a road outside this Indian city jammed with cars, buses, and scooters, inside the industrial park wet now with one of the Bangalore's tropical showers, Mr. Murthy sits down to lunch, as he has probably done a thousand times before. But this time it's not growth miracles the legendary leader of India's bellwether technology company is preparing to discuss. The one-two punch of the U.S. recession and the September 11, 2001, terrorist attacks have smacked India's software industry The strategy Murthy outlines is part vision, part dirty necessity: cut billing rates for volume; lessen dependency on the US. market, which buys 60 percent of the company's exports; sell to Old Economy types such as health care companies and government agencies; and expand to offer a range of technology services. Also, the vision is "to be a truly global company, we should raise capital where it is the cheapest, produce software where it is the most cost effective, and sell our services where it is more profitable."As software sales stall, Infosys is struggling to transform itself from a great code-writer to a one-stop technology services provider.
Required to answer:
Problem 1. How can Infosys increase sales growth in view of the constraints in the U.S. market?
Problem 2. In a declining software industry, what recommendations would you provide to Infosys in strategic sales management?
Problem 3. Do you think that Infosys's holistic compensation system—financial, emotional, and learning—is an effective way to motivate salespeople?
Problem 4. What are the merits and demerits of a product-based sales organization versus a geography-based organization in the context of Infosys? Please refer to SBUs and PUs as described in the case.