With a revamped operating structure and aggressive investments in platform-based IP, Infosys tries to reignite performance and brand value, says Bozhidar Hristov, senior analyst at TBR.
In 3Q16 Infosys continued to execute its renew-new strategy, securing foundational revenue while shaping up its portfolio offerings to become a solutions-led vendor. In the long term, however, Infosys needs to address internal challenges and combat external threats to sustain its performance. Internally, Infosys needs to address executives’ attrition and execution in consulting and BPO service lines.
While Infosys continues to explore M&A opportunities that could help it address weaknesses, such as consulting on operations, recent investments in startup technologies suggests the company continues to innovate its portfolio on the services supply side. Externally, navigating the structurally challenged IT services market — challenged mainly around contracts for commoditized legacy services — puts additional pressure on Infosys’ go-to-market messaging.
Infosys’ revenue increased 8.2 percent year-to-year to $2.59 billion in 3Q16, mainly due to broad-based revenue growth in its Business IT Services units and most of its verticals, showcasing Infosys’ ability to concurrently execute on its legacy prowess while embedding strategic imperatives around design thinking and automation. Regional performances reflected the nuances of macroeconomic trends, such as Brexit. Industries such as insurance and utilities showed an uptick in client demand to optimize back-office supply chain applications while improving end buyers’ interactions through front-end personalized services enabled by analytics-enhanced solutions. Insurance expanded 10.1 percent, while energy and utilities grew 10.5 percent year-to-year in 3Q16.
As Infosys overcomes the growing pains of its portfolio and go-to-market transformation, the company recognizes internal and external challenges will hinder its long-term performance, forcing it to revise its revenue guidance from 10.5 percent to 12 percent down to 8.2 percent to 9.2 percent for FY17. TBR expect the company revenue will land at the upper end of that guidance as Infosys accelerate converting bookings to cash, evidenced by days sales outstanding improving three days sequentially.
Operating margin declined 60 basis points year-to-year to 24.9 percent in 3Q16, as Infosys’ increase in spend in portfolio development and onshore hiring offset the benefits gained from embedding automation in service delivery.
Establishing smaller business units will create autonomy and improve client management, but could hurt Infosys’ brand if not scoped properly
During 3Q16 Infosys continued to revamp its portfolio and go-to-market efforts. The company unveiled plans to break out its operating structure into 12 to 15 business units (BUs), each with its own P&L and revenue in the range of $500 million $700 million. The company has yet to iron out the details around the horizontal and vertical splits of the BUs, but will keep its current four presidents as the leads of the existing vertical groups (BFSI; Manufacturing; Retail and Life Sciences; and Energy, Utilities, Communications and Services); they will also oversee the work of the newly formed BUs. TBR sees the announcement as an effort for Infosys to improve performance through better client mining, resulting in increased wallet share — a critical component for Infosys’ long-term goals, especially as 97.5 percent of company’s business stems from existing clients. TBR also believes the proposed restructuring will extend the company’s Zero Distance initiative, which encourages project managers and delivery teams to discuss new services opportunities with clients, across its entire client base.
While establishing stand-alone BUs could help the company zoom in on opportunities in a particular domain for a given client, it would also require Infosys to assure HR policies, pricing and branding attributes are carefully reviewed and approved before going to market with it. If not properly executed, Infosys is facing brand confusion among clients and possible internal revenue cannibalization when two separate BUs are targeting the same client from different domain angles.
Infosys tries to deliver outcomes and climb up the value chain through platform-based IP rather than expanding industry advisory breadth
Infosys is aggressively pursuing portfolio investments to capture opportunities around connecting customer experience to business outcomes. This is evidenced by the recent launch of mobile-based, modular Skava Commerce platform and making its Finacle Universal Banking Solution Suite available on Huawei’s FusionCloud.
Additionally, jointly with the software vendor Symphony EYC, Infosys will bring to market Symphony Retail Cloud solution targeting CPG clients. Rather than build out industry consulting breadth, as rivals such as Accenture have through vertical-centric consultancy acquisitions, Infosys aims to climb the value chain by developing and customizing industry-specific platform IP.
The technological challenges are similar across industries and client’s buy-in stems from vendors’ ability to speak the vertical jargon. While Infosys is training its workforce on the concepts of Design Thinking and has initiated a two-tier split of its consulting unit between strategic conversations and IT execution, TBR does not believe these moves are sufficient enough to help the company build the industry jargon capabilities and brand necessary to expand wallet share and/or win new logos.
Bozhidar Hristov, senior analyst at TBR