More de-Vishalization for Infosys! But… does this benefit its clients?

When Infosys changes direction, it really does change direction! It’s been barely three years since we saw Vishal Sikka take the company down a hybrid “products plus services approach”. Now the new CEO, Salil Parekh, seems to be looking for a Capgemini-esque model of high-value, digital-centric services that is far more technology-agnostic in nature. Consequently, the question arises: what will happen to Infosys’ investments in EdgeVerve and Nia, which do not seem to fit into this new direction.

Infosys clearly wants to clean house and focus on a services-led model

When Vishal Sikka arrived three years ago (see blog post), the company practically reinvented itself in California, hired a plethora of Silicon Valley executives and redeveloped the company strategy around the pillars of software innovation: design thinking, automation and artificial intelligence.  With the new CEO, Salil Parekh, firmly in the driving seat, the new approach focuses on the emerging pillars of services: digital enablement, strong balance of localized/offshore delivery and a technology-agnostic approach to intelligent automation.

Infosys reported its fourth quarter and 2017 yearly earnings announcement last week. As a part of the address, the service provider put Panaya and Skava into what it calls a “disposal group”, laying out plans to sell off the companies by next year. Under former CEO Vishal Sikka, these acquisitions were flag-ship strategic initiatives. Their planned divestitures now pose new questions regarding the company’s future: do these decisions make sense; is there more to the story, and if the board and management are going in a new strategic direction, will it lead them to greater success?

Selling off Panaya and Skava is a distinct shift to a technology-agnostic services approach

Panaya and Skava, acquired for a collective $320M in 2015, were part of Vishal Sikka’s larger plans for Infosys to pivot from traditional IT services into digital solutions. Broadly, his tenure represented:

• Getting closer to customers via a greater US presence, localization in client markets, and using design thinking to focus staff and clients around business outcomes
• Getting smarter with existing services through more focus on intelligent automation technologies
• Growing non-linear revenues in digital by diversifying away from a purely services portfolio.

Sikka, harking back to his SAP days, brought in a strong belief around digital products, pinning Infosys’ future growth on a product-centric services play. Panaya fit into this, with its cloud-based application delivery and test automation solutions, while Skava had a cloud-based platform for online services for retailers. These acquisitions, however, seemed to mark the beginning of the end for Sikka. Panaya seemed to be an especially sore spot in the escalating disagreements between Sikka and Infosys’ founders and management board. It is alleged that Panaya and Skava didn’t deliver as much value to Infosys’ clients as was expected, and that they were unfocused buys that didn’t translate across client use cases and industries. To add to that, the initial criticism of the deals as being overvalued was never cleared. It is thus unsurprising that, less than a year since Sikka’s departure, under the guidance of Chairman Nandan Nilekani and new CEO Salil Parekh, Infosys is planning the sale of Panaya and Skava, to put the matter to rest once and for all and redirect resources to new initiatives.

In addition, Infosys has been one of many examples of services firms seeking to build a software business and struggling with the sales and partnership model.  Major software providers have thousands of clients, and upselling products is relatively simplistic, leveraging a huge reseller and direct sales channel.  Services firms have more one-to-few sales models and are much more focused on client relationships and fixing specific problems as they arise.  With a few exceptions, the successful services firms have steered clear from owning software products and focused themselves on building platform constructs based on methodology and IP, not specific patented software itself. Just look at Wipro (Holmes) and TCS (ignio) as examples of product-agnostic platforms gaining traction, as clients seeks independent, third-party support for complex intelligent automation environments. 

This is the reverse strategy of HCL, with its DRYiCE approach, which is focused on the acquisition of new platforms.

Alignment around NIA will benefit clients

The Infosys leadership team has articulated that its “strategy of software plus services is very valid”.
The executive team has indicated, on more than one occasion, that their focus remains steadfastly on the execution of this strategy. Following this thread, it can be argued that Panaya and Skava did have a place in the new reign at Infosys; that they are being dispensed with for other reasons (as above). This means that the ‘software’ in the leadership’s equation must center on Infosys NIA.

Infosys has expanded client implementations of its analytics and automation frameworks in the last year, so this is a positive. Promising examples of this include the service provider using NIA to introduce machine learning and other AI techniques into enterprise IT and operations environments. This is in line with market demand. Our research finds that client organizations are planning and piloting digital engagements at a far greater pace than traditional IT outsourcing (see Exhibit 1, below).

Exhibit 1: Enterprise clients are planning for digital-driven levers In 2018

Q: Please characterize your organization’s current use of the following value levers to achieve the business outcomes important to your operations transformation journey.

Source: HfS Research, 2018, N = 352 enterprise decision makers

Infosys will need continued investments to drive new IP creation, joint innovation with clients, and growing its libraries of reusable assets around NIA. If the board, the founders, and the new CEO are aligned on doubling down on this as the way forward, we can expect some progress on NIA in the next year. Consequently, we can expect NIA to drive a greater proportion of the 6-8% growth outlined by Infosys for 2018.

What Infosys needs to get right following these divestitures

When Salil Parekh came on board, HfS outlined several short- and medium-term imperatives for the new CEO to tackle. These build on Infosys’ strengths as an execution arm for traditional IT services, a growing services portfolio (and revenues) in all things digital, and some unique IP around products at various stages of maturity. Now, looking specifically at Infosys’ decision to divest two of its most recently acquired digital products firms, we have identified a few more factors that the service provider needs to get right:

• Fix the gap in digital design and consulting: As Phil Fersht, CEO & Chief Analyst at HfS Research outlined, “Infosys has lagged behind Cognizant and Wipro with acquisitions and is miles behind Accenture. We see more recent digital acquisitions like WONGDOODY and Brilliant Basics as the future direction: product design and customer experience additions in both US and UK giving them a digital play that pits them against Wipro, Cognizant and Accenture in digital tech enablement services.”
• Find a way to access new talent: The myth that all existing employees can be “retrained” to work on new digital solutions is being busted across both clients and service providers today. One of the surest ways to access new types of talent is through acquisitions of niche/boutique firms. Infosys has not undertaken many acquisitions in the recent past, compared to competitors like Accenture or Cognizant, and it is now set to undo two of them. It will need to step up its acquisition of new talent with specialized skillsets (e.g. mobile development, machine learning, cybersec), that’s through more acquisitions, crowd-sourcing, partnerships, or curriculum setting and training of new recruits.
• Solve the persisting challenge around product/platform play: Infosys’ EdgeVerve product business predates Sikka, and it has always been a strategic quagmire for the company. Finacle and NIA will need strong investments in IP development, and a sales force that understands how to sell products not as an afterthought, but as the foundation of broader solutions. Infosys will need to consistently develop alignment for these solutions, especially how consultants and sales/solution leads develop opportunities for these new areas in addition to traditional services.
• Build on partnerships as the way forward: Infosys will need to re-establish confidence and set a new pace with its key partners for each identified digital solution area, such as data and analytics. If it is going to be pickier with acquisitions, it will need to develop a deeper level of partnership with a broad set of digital product partners to stay relevant with its services portfolio. Our recent conversations, with senior management at one of Infosys’ strategic product partners for analytics, were encouraging on this front. They mentioned that while there was a pause in momentum following Sikka’s departure, they are starting to see more proactive engagement, joint go-to-market planning, and energy from the team.

The bottom line: The planned divestitures will placate several stakeholders and clear the ground for Infosys to finally work towards a new direction.

Acquisitions like WONGDADDY and Brilliant Basics, along with a continued focus on NIA, do suggest that Infosys is not just playing conservative. It is re-aligning some fundamentals to consolidate its services-led role in the digitally-enabled technology services world. This will benefit clients that are looking to Infosys as a credible partner for global service delivery, digital enablement, and a technology-agnostic approach to intelligent automation. Beyond that, the next two years will show us how well the service provider is executing on its new direction; its ‘make-or-break’ will be its ability to fix: digital design and consulting, new talent development, IP-led growth, and a solid partnership strategy to compete on digital transformation.