What's Behind The Mass Exodus Of Executives From Indian Software Giant Infosys Ltd. (NYSE: INFY)?

 @Gooch700
on March 28 2014 12:41 PM

Infosys Ltd. (NYSE: INFY), one of India’s most well-known companies and the country's second largest software exporter, had a mass exodus of some of its top talent over the past nine months. At least 50 executives who held the rank of associate vice-president (AVP) or higher left the firm after the return from retirement of co-founder N. R. Narayana Murthy as executive chairman last summer. Murthy came back after two years of retirement to lead the global firm he co-founded in 1981 after it repeatedly missed earnings targets; had sharp declines in revenue growth and margins; and lost market share to competitors like Tata Consultancy Services (TCS) and HCL Technologies.

Murthy set himself on a five-year plan to restore Infosys' dominance in India's IT/outsourcing sector, mostly by cutting costs and increasing sales. But the rash of departures have raised concerns from some analysts about the company’s growth momentum. The Bangalore-based company has been struggling to transform itself into one that focuses on higher-value software and consulting services rather than labor-intensive outsourcing services.

The latest high-profile executive to bail from the company earlier this week was Chandrashekhar Kakal, the India business unit head, making him the ninth top-level corporate figure to quit since Narayana's return. He followed exiting heavy-hitters like Ashok Vemuri, the head of global manufacturing and the Americas; Basab Pradhan, the head of global sales; and V. Balakrishnan, a board member. Incidentally, Balakrishnan, who was once pegged to become Infosys' chief executive officer, defected to enter politics, and he is now a member of the anti-corruption Aam Aadmi Party (AAP), which fancies itself a fresh alternative to the entrenched Congress and Bharatiya Janata Party (BJP), ahead of next month's national elections. He is running for a seat in the lower house of parliament representing Bangalore. "The [AAP] have revolutionized politics in this country, I'm fascinated with it," Balakrishnan told Press Trust of India.

The Hindustan Times reported that when members of Infosys' senior management resigned, they each took a number of their underlings in middle-management with them, in part explaining the mushrooming number of people packing their bags. 

“If a top executive leaves, seven [or] eight people close to him [and] at one or two levels below him will start looking for opportunities outside the company,” a source told the Hindustan Times. 

In addition to the return of co-founder Narayana Murthy last summer, Indian media speculated that his son Rohan’s recent shift into a powerful decision-making role in the company may also have triggered some high-level exits. (Rohan's official title is executive assistant to the chairman). The Times noted that another factor in the departure of executives may be related to the company's new policy of cost management, that is, reducing the prices of its software services not only to win bigger contracts, but to slim down margins.

In February, Narayana Murthy shrugged off the number of executives leaving the company, and he even predicted a larger exodus. “Barring a few exceptions, most people who left us were not adding critical value to the company. Over [the] next few months, you will see some more [departures],” he said at an investor conference. Murthy further suggested that the loss of high-salaried employees (some of whom made as much as $1 million per year) who were not pulling their weight will actually benefit the company in the long term.

With respect to the departed Kakal, Indian media speculated that his position became redundant after Murthy reorganized top management by recently naming two presidents: B.G. Srinivas (who is widely believed to become the next CEO once S.D. Shibulal retires next year); and U.B. Pravin Rao, whose new duties largely overlapped with those of Kakal's. Kakal may also have seen the writing on the wall when the "executive council" (a former decision-making body that he belonged to) was disbanded by Murthy earlier this year.

Despite Narayana Murthy's apparent indifference to losing top talent, some analysts who follow Infosys are concerned by the rather large number of departures. "The resignation of Chandrashekar Kakal... raises concerns over one of Infosys' key initiatives -- to bring delivery excellence. Furthermore, this departure may... further dampen employee morale," said Ankur Rudra of Ambit Capital in a note. "Infosys faces the twin challenges of growth ... and margins. We reiterate our 'sell' stance," Rudra said. Viju K George, technology, software & IT services analyst at JP Morgan in India, wrote in a recent client note that the “elevated [rate of] attrition at the middle management [level] is a bigger worry for Infosys.” George added: “We think that the senior management departures from Infosys that made the headlines have likely hurt them a bit." ZDnet reported that the loss of mid-level account and project managers harm the company because these employees made sure that existing projects and contracts ran smoothly and in a timely manner. Thus, uncertainties with product deliveries -- and a decline in client satisfaction -- may hurt growth. Gaurav Mehta, VP of Institutional Equities, Ambit Capital, told Economic Times: “We do not see any concrete signs of a turnaround as yet.”

Other Infosys analysts, including those as Macquarie and Nomura, also view the flurry of executive exits negatively. Indeed, in mid-March, Infosys warned that its fiscal fourth quarter revenues could be weaker-than-expected following some project cancelations. "Some of our clients have seen a slowdown in their business. These are across various verticals leading to unanticipated project ramp downs and cancelations in [the fourth quarter]," Shibulal told Indian media.

While Murthy may brush off the hemorrhaging of senior staff, he apparently wants to hold on to some of the employees he still has. On Tuesday, the company announced annual pay hikes ranging from 4 percent to 10 percent for employees between job levels “2” and “6,” effective April 1. The swath of workers to get higher salaries range from junior employees, including non-engineering graduates and customer support executives (“level 2”), to project managers and senior project managers (“level 6”). Most salary increases had been postponed for the past two years due to the company's mediocre performance, Economic Times reported.

However, despite the wave of apparently unhappy employees deserting the firm, Infosys' shareholders seem to have significant confidence in Narayana Murthy -- since his return as company boss last June 1, shares have climbed about 25 percent, taking into account a brief correction in March. Moreover, several analysts has praised Murthy and declared that the executive departures fit in with the chairman's overall cost-cutting and restructuring program. Sanjeev Hota, a researcher at Sharekhan, the Indian brokerage, told broadcaster NDTV: "Nobody knows the DNA of Infosys better than Mr. Murthy and there are hopes that he will revive the company over the next two years.” Another Infosys analyst, Bharat Shah, the executive director of investment advisor ASK Group gushed: "In Narayana Murthy, you have as good a leader as you can hope to ever get."

A report from Kotak Institutional Equities, an Indian institutional broker, praised and criticized Murthy simultaneously -- conceding that executive departures are an inevitability of restructuring, but cautioned that the rate of senior-level exits has been “disappointing” and could hurt revenue growth momentum. Kotak expects volatility in Infosys' stock price over the next few quarters as the company tries to find its footing. "Organizational stability can help boost employee morale and serve Infosys' cause [of improving] delivery effectiveness as well.”

Vivek Wadhwa, an expert on India's high tech sector and Director of Research at the Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering, Duke University, said in an interview that when there are CEO-level changes, executive attrition is not that unusual. "That's because people who were comfortable with their jobs now have to prove themselves again and because the new managers want to make changes,” he said. “Murthy is an old hand but had been out of the company for a long time. Let's see if Infosys can reinvent itself -- it certainly needs to.”

Finally, as for Rohan Murthy, Narayana's son, Indian media has speculated about his future at Infosys. Rohan has already received a strong vote of confidence from his father, but the senior Murthy hedged on whether his son is ultimately slated for the CEO position. “What [Rohan] wants to do is a decision that should be left to him,” Narayana told NDTV. “What designation Rohan will hold in Infosys is not for me to decide. He is on leave from Harvard. He would like to go back to Harvard at an opportune time but who knows he may change his mind.”

Share this article