India’s software industry is on a roll. Revenues have exploded from $10 million a decade ago to $4 billion in 1999 and are projected to reach $50 billion or more during the next decade. The drive behind this growth has come from companies like Bangalore-based
India’s software industry is on a roll. Revenues have exploded from $10 million a decade ago to $4 billion in 1999 and are projected to reach $50 billion or more during the next decade. The drive behind this growth has come from companies like Bangalore-basedInfosys Technologies, which provides software services to global clients such as Northern Telecom. Headed by N.R. Narayana Murthy, a soft-spoken, 53-year-old engineer who is its chairman and CEO, Infosys in 1999 had revenues of $121 million. Last March it became the first Indian company to list on a U.S. stock exchange. Its American Depository Shares have thrived on the Nasdaq during the past year; on February 11 the stock closed at more than $670, giving the company a market capitalization of more than $44 billion. Jitendra Singh, vice dean of international academic affairs at Wharton, recently spoke to Murthy about the factors underlying Infosys’s growth and the company’s strategy for the future, at a time when the Internet is re-writing the old rules of the software industry.
Singh: Infosys started trading its American Depository Shares in New York in March 1999. The stock has performed spectacularly in India as well as the U.S. Infosys is now the second- or third-most valuable company in India. What is your response to this turn of events?
Murthy: Frankly, I don’t understand the stock market. I have never invested in the stock market. I thought I knew the stock market, but after talking to various people I have realized that my knowledge is only theoretical. The market works in a different way.
However, the stock markets in India and the U.S. have rewarded Infosys very handsomely for a few reasons. First, Infosys has been a trendsetter in the Indian stock market in terms of its corporate governance principles, bringing innovation to the marketplace in the areas of quality, human resources, offshore software development and so on. In all these cases, Infosys has been a first mover, and the market seems to value that.
Second, we have created trust among our shareholders. For example, in 1990, when we lost GE’s business, we were upfront with our shareholders. We held an analysts’ meeting and told them that a customer that contributed between 25% and 27% of our total revenues was no more with us, but we had a plan to overcome that problem. Because we went proactively to the analysts, they had tremendous confidence in us. They knew that they would hear bad news first from us rather than the rumor mill.
As for the U.S. stock market, it has understood that our company has run the marathon successfully since it was founded in 1981. Ever since we went public in India in February 1993, quarter after quarter our top line and bottom line performance has steadily improved. We have increased our margins and added several new customers. That is why Infosys has been valued the way it has in the U.S.
Singh: What were the aspirations of Infosys’s founders, and your own aspirations as the leader of that group? To what extent have these aspirations been achieved or exceeded in the 1980s and 1990s? And what stretch goals do you see for Infosys and your team going forward?
Murthy: When we started Infosys in 1981, our desire was to create India’s first professional-owned software company. We wanted a company of the professional, for the professional and by the professional. We also hoped to be able to make a difference by creating high-quality jobs for qualified people. We wanted the satisfaction of creating wealth for these people.
Let me give an example. When we had an opportunity to start our company in Bombay (Mumbai) with much better short-term opportunities, we deliberately chose to move to Bangalore even though it was less attractive. We did this for one simple reason. In the Bombay of 1981, perhaps someone like me could have bought a reasonable apartment in a suburb relatively close to the city, but the younger people in the company couldn’t have afforded apartments in these areas. They would have had to go to distant suburbs, places that in my opinion were not at all convenient for highly educated professionals who had gone to the Indian Institutes of Technology (IIT’s) or the Indian Institutes of Management (IIM’s). I felt that it was unfair to subject these youngsters to such a lifestyle. That is why we moved the company to Bangalore. The quality of life of our younger employees was an important consideration.
Being middle-class people, respect was always very important to us. My father was a schoolteacher, and all my colleagues were middle class. One’s father was a lighthouse keeper; another’s father was an officer in a textile factory; yet another was the son of a schoolteacher. We wanted society to respect us because we ran our business honestly, we did not violate any laws of the land, and we identified with society at large rather than an affluent elite. I would say these were the initial objectives.
Have we achieved these goals? Certainly we have much left to do, but we are going in the right direction. Today we have created 219 dollar millionaires and about 2,000 people with stock options who are rupee millionaires. The fact that my driver is probably worth Rs. 10 million gives me reasonable satisfaction.
Singh: One reason for Infosys’s high valuation in India and the U.S. is that it is identified primarily as a growth stock. The multiples and P/E ratios on growth stocks typically are much higher. Of course, to justify these high valuations, investors also look for solid rates of growth. Even as Infosys has grown at a rapid rate in recent years, have you revised your growth strategy? Where will the company’s growth come from? Do you see any obstacles to growth over the next three to five years?
Murthy: We have been growing fairly rapidly. As for our growth drivers, we are a software services company. Even Microsoft’s Steve Ballmer has said that five years from now, Microsoft will be more of a services company than a products company. Thanks to the Internet, Microsoft will have to transform itself into a services company. We are in the business of developing new software. We reengineer software from one technology to another, or from one level of functionality to another. And finally, we do software maintenance. Having defined our business in this way, as long as technology changes, demand for our services will exist.
Similarly, as long as business models and rules keep changing, we will have opportunities because corporations will have to implement information systems that will enable the new business rules.
Our primary growth in revenues will come from our traditional business, which are the development, re-engineering and maintenance of software. In addition, there may be new and emerging opportunities. For example, today we work with dot-com companies in helping them develop projects for deployment on the Internet. We work with Amazon.com, CBS Sportsline, EC Cubed and many such companies. These corporations are trying to compress cycle times of development, and we are their partners in this activity. We also have other opportunities in customer relations management and in the implementation of enterprise-wide software packages such as SAP. But at the end of the day, our success will depend on how quickly we can learn, adapt to new situations and focus on customer service.
Singh: I find it interesting that the way in which you define Infosys’s capabilities and future directions is quite abstract and general. You almost seem to be taking an evolutionary approach, saying, ‘We will go where the opportunities are,’ rather than saying, ‘We are an XYZ company, and these are the things we do.’ Would you care to comment on that?
Murthy: I agree with you. We are focusing on software development, reengineering and maintenance. Our strengths are quick learning, adaptability, and so on. I don’t want to commit myself to a given technology, service or business model. These things have been changing rapidly, and they will continue to change. I would rather emphasize attributes that appear to be time- and context-invariant.
Singh: You mentioned the Internet. In your most recent earnings announcement in January, I noted that your bottom line net income for the nine months ending December 1999 went up 112% compared to the same period in 1998 (and net income for the quarter ending December 1999 was up by 61%). In addition, 15% to 16% of your revenues now come from Internet-related activities. Have you and your colleagues thought about an Internet strategy? And even as you pursue opportunities with dot-com companies, how much has that started to transform Infosys’s strategy overall?
Murthy: I look upon strategy as doing what makes us unique in the marketplace. We have been pursuing several opportunities in the Internet space. First, we have had 19 years of experience in designing and implementing industrial-strength and robust online transaction processing systems. This helps us quickly learn the skills needed to make the Internet the front-end delivery channel for such transactions. In fact, in this context we have more experience than most new wave Internet services companies. At the end of the day, e-commerce requires robust and secure middleware, plus an industrial-strength, high-performance and secure online transaction-processing (OLTP) engine. This is because you may accept orders over the Internet, but they are processed by the OLTP engine. That is one of our major strengths.
Second, we are working with several leading-edge dot-com companies. We believe we have to be up-to-date in our knowledge of technology, and this will be possible only if we work with dot-com companies. These firms are really pushing the technology envelope, and working with them will help Infosys enhance its knowledge base.
Working with dot-com companies is important for one more reason. We have found that the customer profile of dot-com companies is completely different than that of traditional corporations. The dot-com companies are very entrepreneurial. They are run by very high-quality people. That is why working with them is transforming certain parts of Infosys. It will, hopefully by osmosis, transform the entire company.
The Internet is helping change Infosys in yet another important way. In the past, if we designed an information system, deployed it on a mainframe computer, and it developed certain problems, the only people who saw the problems were in the Management Information Systems (MIS) department. Because this department itself had a vested interest, it was usually sympathetic to us; it understood the issues. But now, when we deploy our applications over the Internet, the number of people who use them are not just in the company’s MIS department; they are all over the world. If a problem occurs, our client loses face and we are automatically exposed. As a result, the pressure on our people to improve their quality, productivity and performance is much higher. I am happy, because this helps Infosys become more efficient.
Singh: I am intrigued that participation in the Internet is leading you to develop new and higher levels of capabilities. This reminds me of Intel, whose chips were inside PCs all over the world, but whose brand name was not well known, until the company launched its Intel Inside ad campaign. Similarly, in the Internet world, the potential number of clients who might use Infosys’s software engines might be very large compared with the past. How will you build Infosys’s brand name so that there is greater public awareness of how Infosys is creating that value?
Murthy: A few people in Infosys have entrepreneurial capabilities. They came to us with certain ideas, and told us that if Infosys was not interested, they would like to leave to work on them. We thought about it and said, ‘Why don’t we pilot the idea with these guys? We’ll give them full support and let’s see how this model works.’ That way the Infosys brand-name will hopefully get some visibility, since we will be on the front screen of the application. Right now we are conducting pilot trials, and we have moved these people to Silicon Valley because we want them to breathe in that environment.
We are also looking at a paradigm where we will take a certain stake, up to 20%, in a venture capital firm. We have told the VC firm that we want them to invest our part of the money in ventures where there is an opportunity for our people to leverage the strength of Infosys in compressing cycle time, improving productivity, and so on.
In a business like ours, where growth is extremely important, I cannot sacrifice P&L growth. I must have revenue growth and bottom line growth. That is why we have told these people that those companies in which our funds are invested should look at Infosys, of course subject to our competence, and other things being equal. This strategy also provides considerable upside in terms of capital appreciation in case these companies go public.
Singh: In that sense, it is like the role of a venture capitalist.
Murthy: It is like venture capital, but it is more than that, because we also participate in development.
Singh: One thing that inevitably has been happening to Infosysand your participation in the Internet will only increase thisis that most of your revenue opportunities are outside India. This raises a question: Is Infosys an Indian company that does most of its business outside India, or is it a global company that happens to be located in India? If it is the latter, how will the company face the challenge of developing a global and diverse face rather than an Indian face? What are some of Infosys’s strategic intentions in this domain?
Murthy: I define globalization as producing where it is most cost-effective and selling where it is most profitable without worrying about national boundaries. Our endeavor as we move forward is to make sure that our salespeople and the people at the front endarchitects, analysts, consultantsare local. For back-end tasks, such as technical design and programming, we can use employees in countries like India and China.
Toward that end, we have opened a proximity development center in San Francisco. We have also started others in Boston and Toronto. In addition, we have started going to various universities in the U.S. to recruit students, although we have not yet begun doing this at top-tier schools. We must first learn to do this at the second-tier schools for a couple of years before we take a shot at Ivy League schools. We intend to have 40 to 50 people located in the U.S. joining us in the summer. We want to strengthen our presence in the U.S. Today, when we go to campuses and tell students that our company is listed on the Nasdaq, and our market capitalization is more than $20 billion, we are not dismissed right away. In the past, it would have been difficult for us to do this. But today, fortunately, we have overcome a little bit of resistance. Once we recruit the first batch, these people will become our ambassadors. Then we will be able to work faster toward the target of becoming a multi-cultural organization.
Singh: Let us return to the question of Infosys’s growth strategy. A fortunate consequence of a strong stock price is that acquisitions for stock become a viable option. What is your strategic thinking in this direction, and what kind of firms do you believe would best complement Infosys’s set of capabilities and service offerings while blending with the company’s culture?
Murthy: We want to look at companies that will bring complemantary strengths to Infosys. This includes companies with high-quality consultants and those who do front-end work such as requirements analysis, interviewing customers, and so on. Such companies may have a back-end group too, but we believe that we would be in a position to leverage the much larger force that we have in India. For example, there may be a company with 200 consultants and 400 back-end people. We could use the back-end people for services like installation and our large software center in India to do the actual programming. So I see complementarity of strengths there.
Today, because the back-end work is done by high-cost people, the bottom line of these target companies may not be as strong as that of Infosys. But by moving the back-end work to India, the margins and profitability of these companies could improve. Also, if these companies have good processes and methodologies, our education research group could learn from them and produce a large number of professionals using efficient tools and techniques.
Singh: The Indian government is doing its best to be supportive of the Indian IT sector. What is your sense of the prospects and problems that might arise from setting up a Ministry for Information Technology in India?
Murthy: There is a clear role for an Information Technology ministry. The reason is that the country is moving toward e-commerce and e-government. There are people who want to use the power of the Internet to bring power to the citizens. We need a ministry that will clearly come out with a legal framework for that. This is something that industry cannot do.
Second, we have several industry-level issues that require a champion within the government. For example, we are trying to push the limit for acquisitions from $100 million to 40% of market capitalization of the company. This requires support from within the government. Third, we believe that if the Indian government wants high-quality talent to remain in the country, it must create hard-currency wealth for them. For example, when I go out of India, I am bound by certain laws laid down by the Reserve Bank of India. Although I am supposed to have a lot of wealth in India, when I travel abroad I cannot take a group of customers to a $1,000 dinner. For those who aren’t familiar with India, this is very difficult to understand.
The Indian government should allow the promoters, directors and employees of companies that are listed outside India to convert 50% of their holdings into ADRs on a non-fungible basis. And when they sell these ADRs, they should be free to use the money for any purpose other than anti-national activities. But the finance ministry finds it difficult to appreciate this. That is why we need champions within the government.
Singh: Infosys was the first Indian software company to list on the Nasdaq. But the Indian software story is now well established. The Indian government, to its credit, has seized upon the importance of this sector, and there is a great deal of talk of building software exports up to $50 billion or even $100 billion. Are these realistic targets? And what obstacles exist to achieving them, in addition to the ones you have already mentioned?
Murthy: If the Indian software industry has to grow to that level, we will need 1.5 million more software professionals, as I said in a recent talk at a conference of Nasscom, India’s national association of software and service companies. We will need another 1.5 million cars. Today India has 1 million cars in all cities together. Also, assuming that these professionals will travel at least four times a year to other countries, we will need 6 million more seats on the airplanes. This means at least 100 flights going out of India’s international airports every day, compared with eight or 10 flights today. We will need reasonable housing for these people, and good schools for their children. We will have to do open systems planning. It’s not just a question of saying, "We will increase our software exports." It is a more complex problem.
Singh: In conclusion, I would like to ask some questions about you as a person. You and your team have achieved tremendous results even by global standards. But there must have been times when you hit the lowest of lows. Can you share any experiences about those times?
Murthy: We have been through difficult times. There was a time when it took us anywhere from 18 months to 24 months to get a license to import a computer. I had to make 15 to 20 visits to New Delhi to negotiate even small changes, such as changing the model number of a disk drive, with government officials. It was very frustrating. Also, when we first moved to Bangalore, it took us one year to get a telephone line. In 1984 retired government officers who wanted a telephone ranked higher in terms of priority than a software company that needed one. When we were small, we also faced a severe cash-flow squeeze when customers did not pay us on time. My wife once had to pawn her jewelry and the family silver so that our company could make payroll. At the end of 1989, we faced such severe problems that all my colleagues suggested selling the company. We discussed this for some six hours, and finally I told my colleagues, "If you want to sell the company, let me buy you out." Within minutes, everyone had decided against the sale. We decided not to be pessimistic, although we had thousands of reasons to be. The only reason to be optimistic was that we wanted to be optimistic. The ultimate lesson I have learned in India is that if you want to make a difference in your own little way, you have to run a very lonely marathon. Unless you are determined to complete the race, it is easy to drop out.
Singh: What would you consider you have achieved? At this stage of your life, what are your personal motivations?
Murthy: My motivation comes from several sources. First, I know that when investors see that Infosys’s stock stands at X dollars, they have placed tremendous trust in us. We have to continue to work hard to live up to that trust. Confidence and trust matter much more in life than money. Second, we are fortunate to be pursuing our goals in post-independence India, where we have several opportunities. As people of the modern era, it is important for us to play our role. Finally, I am an unabashed creator of wealth because the power of money is the power to give. Everyone must work extremely hard to make more and more money. While you may use some of it for your personal benefit, having money also gives you tremendous power to make a difference in a society like India.