Kris Gopalakrishnan, boss of Infosys, thought he had the British IT firm Axon in the bag — then an Indian rival outbid him. Is the East now carving up the West?
And so it goes. Offstage from last week’s main financial dramas, a fight breaks out between two Indian IT giants, both bidding to buy the British tech consultancy Axon. It looks like a sign of things to come.
“One of our strategies is to reduce our dependence on America,” explains Infosys boss Kris Gopalakrishnan, in Indian-inflected English, “and to increase our revenues from Europe and the rest of the world. We also want to do more value-added services, and we want to leverage the customer base. So this acquisition has to meet multiple strategic objectives.”
He might add that western companies are ripe for the picking, as a new breed of heavyweight emerges from the East. Deep in pocket, with cheaper pay scales and market-leading, technological know-how.
But Gopalakrishnan, one of Infosys’s founders, just stirs his tea and smiles. His approach to business, like the Infosys approach to software, is designed with a certain polite logic. Given that his business is now in India’s top 10 by market value and employs 95,000 people, you can believe that logic regularly pays off.
Then, just occasionally, the unexpected happens. Nine days ago Indian rival HCL trumped Infosys’s £407m bid for Axon by offering £441m. On Friday Axon said it was backing HCL. Shares in Infosys, which are listed in Mumbai and New York, slumped.
This weekend Gopalakrishnan and his board will ponder making a higher bid. Their response should be known by Friday, when Infosys announces its half-yearly results. But one way or another, the Indians are coming.
Holding court in an upstairs reception room at London’s Covent Garden Hotel, Gopalakrishnan, 53, seems untroubled by the fuss. Tucking into tea and biscuits, flanked by his banker and a coterie of PR women, he sits a little detached.
He was one of the original seven software engineers who founded Infosys in 1981, and is the third to head it, appointed chief executive last year. Short, affable, grey-haired and moustached, he has the distant air of one who is happier dealing with algorithms than people.
His company, alongside Wipro and Tata Consultancy, is one of India’s big-three tech-support giants. It has built a base sorting out western firms’ software problems, providing the internal links that mesh multinationals together. The growth of this outsourcing work — from call centres to software and systems contracts, taking tasks to where the cheapest solution can be found — underpins globalisation, and is one of the bedrocks of India’s economic success. But so far it has also been dependent on deals with western multinationals.
For Infosys, that is now a problem. Around 97% of its likely $5 billion (£2.8 billion) revenues this year will come from outside India, much of it from America. With an economic slump there inevitable, that needs some adjustment.
Hence Infosys’s desire to own more in Europe. “We’re now consciously growing Europe,” nods Gopalakrishnan. “Today our revenues are 60% America, 30% Europe, 10% rest of the world. We want to take it to 40-40-20.”
British firms like Axon make a good start. Axon specialises in servicing software developed by the German firm SAP and advising clients such as Vodafone and Barclays on implementation.
Such work is important — Infosys, like its Indian rivals, is keen to move up the value chain to higher-end consulting, and get more business here. Then it can really take on western rivals such as IBM and Accenture.
All of which explains why Infosys and HCL, India’s fifth-largest tech-support group, are scrapping for the firm, prepared to pay more than twice Axon’s annual revenues of £204m to get it.
Infosys has made only one overseas acquisition before — in Australia five years ago — and prefers growing organically. Its main experience of employing Europeans is an outsourcing deal with Philips that saw it take on 700 employees in Poland.
But tougher times need a shift in strategy. Infosys is not just heavily dependent on America, but also on the banking, insurance and financial-services sector — it provides over a third of its revenues. That must be taking a hit.
Was Lehman Brothers a client? Gopalakrishnan shakes his head.
“That’s confidential. All I can say is that if there is a slowdown and your clients reduce their spending, it has an impact. Last year Infosys grew at 35%. This year we are giving guidance of 19%-21%.”
Such figures still look good, given the trouble in the West. It has even been suggested that Indian firms could now buy up ailing banks’ back-office functions.
Gopalakrishnan smiles and dodges the question. “If you’re asking me if we are going to buy a bank, no.” But, he adds, we will see more functions sold off by big business. “As industries mature, you have to bring in efficiencies.”
As for the prediction of layoffs in Indian firms as western clients drop away, he is bullish.
“These companies are not going to stop spending money on technology, they still have to run data centres, maintain applications, make changes, go after new business opportunities. And if you think about where they will invest for the future and growth, it will be in Asia and emerging markets … You lose some, but you win some too, as new companies come up and offer new opportunities.”
Gopalakrishnan has a lot riding on his handling of this shift in world power. Modest and softly spoken, he is less charismatic than his predecessor at Infosys, Nandan Nilekani, but still broadly experienced. He spent part of the 1990s in America, working with Infosys clients. Colleagues says his character fits Infosys’s consensual management style.
“Kris is a techie, but he’s approachable and people find it easy to talk to him,” says Infosys vice-president BG Srinivas. “He also connects very well with customers.”
And customers, as Gopalakrishnan acknowledges, are the key. They keep pushing Infosys to do more. But where does it stop?
“If you do a good job, you get asked to do more,” says Gopalakrishnan, “and you have to stretch yourself to meet expectations because their expectations keep going up. Otherwise, what happens is they offer you more, and someone else walks away with it.”
That is the way Infosys has grown. Established by colleagues who met at India’s Patni Computer Systems, the firm was set up from an apartment in Pune, near Mumbai, with just $250 in capital. Five of the founders are still involved in the business.
And from the start, it targeted work from abroad, not India.
Gopalakrishnan, the son of a small businessman, says that shared values have moulded a particular leadership approach.
“We were all educated, middle class, from similar backgrounds and we’ve always believed the best idea should win, not just because a boss says so. If you want a world-class organisation, it’s got to be built on the best ideas, and we always wanted to be world standard.”
That’s now reflected in the company’s lushly landscaped, 300-acre campus outside Bangalore in southern India, and in the management training and overseas travel that a job at Infosys now offers.
“They used to say in America, ‘Join the Navy and see the world’. Now they say that about us in India,” beams Gopalakrishnan.
This week’s half-yearly results may show whether that expansion can continue unchecked. Infosys is a bellwether stock for Indian business — fiscally conservative, and priding itself on its transparency. That conservatism is one reason why some think it may baulk at paying more for Axon.
But Gopalakrishnan is confident that India’s grip on IT services will tighten. “From a demographic perspective we have the youngest population in the world; soon we’ll have 600m people under 35, that’s a huge pool.
“But our customers are around the world, and we’re also going to have a growing presence in all locations. We’re recruiting straight from college in Britain, we’ve been doing it in America for years, this year we’ve started in Germany …”
And Indian politics, which have been volatile, won’t get in the way? The Indian IT giants have benefited from tax concessions which end next year — then it could get tougher.
No, says Gopalakrishnan. “If India has to progress and create jobs for its people, it has to support its industry. Sometimes there may be temporary reversals, but the general direction is progress.”
And if Infosys doesn’t buy Axon, who will it target next? Last year there were rumours of a much bigger bid for the British software firm Sage.
“I’ve not heard that,” says Gopalakrishnan carefully, before adding: “There are many speculations.”