Kris Gopalakrishnan: No Need to Give Up Margins

The next big disruption will be cloud computing — hardware and software companies are already impacted and are making changes to their business model. What will be the impact on the business model of services companies?
I believe that it is a very important trend that any company in the technology sector will have to understand and figure out how they are going to play this. Infosys has a set of services to migrate clients to the cloud, move the client from one environment to the other.  

Second, we have several applications now — some Infosys owned and some by others — which we license and bundle our services and provide solutions to our clients. For example the HR solution, where we take over the HR department of the client. We license the Peoplesoft application from Oracle and host it with a partner. We sit at the top of the stack; we handle the relationship with the client and deliver the entire business process, application, infrastructure, everything in a bundled, integrated manner. We have multiple such solutions.

Internally, we are migrating our entire IS suite of applications to an internal private cloud, which is run by our internal communications division.

The first part that you talked about has the same existing delivery model, which means that you are billing the client in the same way. Do you have clients for the second part where your model itself will be different?
We have three clients for HR solutions, two clients for social commerce platform (iEngage) and so on. In revenue it is not big at the moment, but it goes up as the usage increases. The difference is that we spend the capital required, the R&D required, we create the relationship and deliver it as a revenue expense to the client. Clients like this model because their capital is preserved.

How much of your capital have you invested?
It is small because we have decided to go with partners. We know that we are not in a position to create highly robust, distributed data centres around the world. Couple of clients for this service are in Australia, few of them are in US. In Australia we have a relationship with somebody who does the hosting; in the US we have a partner who will provide the infrastructure for us. Software is licensed from Oracle so we have a back-to-back arrangement with Oracle. We also have an arrangement with Microsoft. So this model is that we have bundled it but our investment at this point is limited.

The investment model is still aligned to the old model...
But that is something that people don’t understand. We can’t compete with Google or Microsoft in creating multi-billion dollar data centres. There is no point in us doing that — whatever we create will be too small.

So are you on track from what you expect to come from this new model?
In India we are doing some of that work too. The Income Tax project that we are doing is actually not a cloud service but the infrastructure is hosted by Infosys. We have invested the money required. The most important part of strategy is that you leverage your strengths — you don’t leverage your weakness.  

It is not right to say that you have to find a lot more investment dollars to succeed in the new environment?
Absolutely not. There is no need to do it. This is like electricity on tap. Why would Infosys create a power generation plant today? Today processing is on tap, provided by telecom companies and by large computing farms from Google and Microsoft. There is no way we can provide that at a lower cost.

I am not talking about that, I am asking you about building those solutions and platforms. What about investing in those?
There are many standard platforms available too. When it comes to HR, Peoplesoft is an existing platform. If we create that it will take us 10 years, so our role is to make sure that we sell services on top of that. Our value addition comes from knowing the client and in being able to customise that product for that particular client. In US we have a retail client and are handling 25,000 employees for them. In Australia, our client is a bank and we handle 15,000 of their employees.  

The question here is that till last year the investment in R&D was only 1 percent of revenue?
Where there is a gap we will fill that. On social commerce space we have built something on JIve, so we have taken software and built additional features on top of that. It is a thin layer above that so that our services are differentiated. That is what we believe is important.

So you are saying that the 1 percent R&D investment model does not need to change? Because one of the points being made is that in the new environment that needs to change. You have to invest a higher number in R&D.

Look at Fincale. 2,500 people work on Finalce. That is $60 million of India cost in R&D, equivalent US cost would be $370 million. That is a huge amount of R&D investment in US value. But we spend much lower because it is in India.

So are you saying that the model is not changing?
The model is changing, it will continue to change, but it doesn’t mean that you have to spend a huge amount of money. It is how smartly you invest that money that matters. We have changed. You have to understand that 10 years ago we were just ADM. Today we are a full services company. 55 percent of our revenue comes from new services introduced in the last ten years. The company is constantly changing. Already 10 percent of our revenue comes from new models based on IP.

The argument here is that cloud will bring a disruption in your existing model.
If they think we are not changing, they don’t understand Infosys. It is not me talking just go and see our numbers. Infrastructure management is a $300 million business, more than many companies. BPO is a $300 million business. We are a diamond partner for Oracle: Only us and Accenture; no one else in the world. All built in the last 10 years.

Have there been discussions inside the company, what will happen when the model changes. You have held on to your margins for the last 5 years. Is that a concern internally?
Ha...see this is the problem. People believe that you have to sacrifice margins to be successful in this business. We have proven in the last ten years that we don’t have to sacrifice margins to change the business.

Here the point is that non-linearity and cloud is not an incremental thing. It is a disruption, so the model will have to change and holding on to a 30 percent operating margin will not be possible?
I disagree with that. Margins have nothing to do with model it is about how a company is run. In any industry there are best companies and worst companies. Best companies make the maximum margin, worst companies lose money. All of them are doing the same business. You have a Wal-Mart and you have Sears, all retailers but their margins may be different. Margins are about how you run the business.

What about sales and marketing investment? With the new solutions and clearly articulating that, don’t you need to increase that?
S&M is dependant on clients. We are selling to our enterprise class clients. Our focus is Global 2000 clients, our model is marketing driven. We know exactly who the buyers are. We have relationships with them. Sales and marketing doesn’t have to change. We have to educate our sales and marketing on how to sell cloud services, which is happening slowly. The reason we have clients now is that we are starting to figure that out now. I don’t believe we have completely figured it out, but we understand it. We have contracts already signed. We will make mistakes and learn from them and go forward.

One of the other views is that the whole PSPD model the way it works — strict quarterly guidance and maintaining margins at a certain rate comes in the way of something like this. It is a disruption that needs to be looked at differently.

I have my views. Others have their views. Two years back everyone said this industry will never come to double digit growth. We have double digit growth in one quarter this year. I may be wrong, I may be completely wrong, I understand that. You may be right.

How does the Infosys 3.0 tie in to the cloud computing view?
Infosys 3.0 is about business solutions, becoming a strategic partner, understanding clients business much better. Understanding what drives investment in client’s business. Consultative sales — that is what Infosys 3.0 is all about. Cloud is the technology piece.

People say — internally and externally, that your investment model is still aligned to the old model. And now you need a new model.

When the number of people required to grow the business changes, the investment will also be redirected. It is all tied to the current and the future and we are investing for the future. But it will be a gradual shift. Our model always has been that you don’t sacrifice the current for a future that is unpredictable and unknown. There are no guarantees in the world. So you don’t sacrifice today’s margins for some unknown tomorrow. We are taking risks. We are changing our business. We have our own way of doing it. That’s it.

There must be voices that question this thinking?
Sure... there will be some voices. But that’s not going to change anything.

When will cloud computing become mainstream?
Our goal is to get to one-third of revenue. We call something mainstream when it crosses $100 million in revenue. Our non-linearity is a mish-mash of many things including Finacle. Cloud alone is at $50 million-60 million revenue for us now. When it crosses $100 million it will be significant for us.