As Infosys struggles with Sikka’s exit, it faces three levels of risk

The Information Technology industry has over decades, exerted enormous disruptive influence on the world. There has been also plenty of disruption within the industry itself, with waves of innovation leading to new paradigms. The industry leaders of one phase have rarely managed to maintain pole position in the next phase. IBM was the unquestioned leader until the 1980s. Then it was Microsoft and Apple. After that, AOL, Netscape, Amazon, Yahoo and then Google. Apple again. Facebook, Netflix, Twitter.

Multiple Indian companies have carved out a space in the IT Services and IT Enabled Services segments over the last 20 years . But they might have missed the bus when it comes to the current wave. Artificial Intelligence, the Cloud, Digital, Software as a Service are the new drivers in the services space and the Indian majors have been slow to embrace those trends.

The Indian IT services model was founded on labour arbitrage. Indian engineers with reasonable English-speaking skills would work for far lower compensation than equivalently qualified First World people. They wrote code and maintained systems for companies that wanted to outsource such functions. Call centres had a more extreme version of arbitrage. The big IT/ ITES companies just hired more people every year rather than concentrate on improving per capita productivity.

Artificial intelligence takes away many of those jobs, especially the low-level call centre jobs. The Cloud and SOAS has also taken over much of the outsourced services space. Even writing code has changed in that it’s more about cut-and-pasting chunks of relevant code nowadays and code’s much easier to debug. As a result of coming late to the evolving game, Indian IT services firm have seen margins thinning and struggled to generate revenue growth. There have been thousands of layoffs.

Generational battle

The trouble that’s erupted at Infosys is, at least in part, due to its desperate attempts to catch up with the new trends. Vishal Sikka was hired as chief executive officer in 2014 to push Infosys into the AI and digital era. The dissatisfaction over Sikka’s leadership had grown because the old-timers were used to double-digit growth rates and, as labour arbitrageurs , they did not understand what Sikka was attempting.

A flashpoint has been controversy over the acquisition in February 2015 of an Israeli automation technology company called Panaya. This has led to many rumours about impropriety and a whistle-blower asserting that the deal was overvalued. The exit of Chief Financial Officer Rajiv Bansal in October 2015, along with his later demands that he receive his full severance pay has added fuel to the flames.

Infosys co-founder NR Narayana Murthy said that the severance deal with Bansal (who was offered Rs 17 crore as severance pay and went for arbitration when he received only Rs 5 cr) had the appearance of hush money. He also asked a sequence of questions in a letter that has gone public about the Panaya valuation and possible improprieties surrounding that deal.

Sikka resigned earlier in August. The Board has traded back-and-forth accusations with Narayana Murthy in another open letter. The stock has crashed. There are lawyers in the US talking of class-action suits. It’s a sad state of affair for a company that was always as among the most ethical and transparent in the world.

Most amazingly, the company has announced a buyback which would, if fully availed, extinguish 5% of the equity. Buybacks generally occur when a corporate has a cash hoard that it doesn’t know what to do with. Infy has a large cash hoard. But it could acquire other companies or push that money into developing new business segments. Most cogently, a buyback when the CEO is missing, sends a very bad signal. It suggests that the business is in panic mode and trying to shore up the stock price.

The real danger

Theoreticians often speak about three kinds of risk that can affect a business. One is global risk: the business is operating in an environment that is bad for everyone. The second is sector-specific risk: that particular sector is going through a downturn. The third is company-specific risk.

At the moment, Infosys is suffering from the adverse effects of all three risks. Global demand isn’t strong; the rupee is strong and shaving off margins from forex earnings; the Indian IT services model is screwed up. The company is headless and the Board is engaged in a conflict with a founder-investor. There are allegations that affect the firm’s reputation.

There is a real danger, given Infosys’ standing as a market-leader, that its company-specific risks will spill over and affect other IT businesses, which may well find copycat allegations surfacing from disaffected former employees. There are enough of those around in the sector right now, god knows.

We do live in interesting times.