Case Study – Infosys 3.0 Non Linear Revenues priority for future growth

With a focus to improve operating margins and an aim to delink revenue growth from headcount growth, Indian IT Services vendors have been investing in non linear revenue models and despite their focus on improving their non linear revenues for the past few years non linear revenues comprise less than 10% of total revenues. With employee headcounts for major Indian IT Service Vendors expected to reach 2 Lakhs in near future, there is a worry in the Industry that raising headcounts will be difficult to manage and the vendors will have difficulty in training, hiring and retaining employees and delivering quality output to the clients. All the vendors have realized the need to decouple revenue growth from employee headcounts and non linear revenue models help them to increase revenue per employee, employee productivity and also operating margins as non linear models have scope for charging higher prices for services. Top Indian IT Vendors have adopted following models Intellectual Property/Products, Cloud Computing, Platform BPOs, Non Linear Pricing Models, Delivery Accelerators, Branding of products and services/solutions and Merger & Acquisitions to increase the non linear revenues.

Infosys had been investing millions of dollars in R&D and have exclusively set up Infosys Lab that focuses on applied research in software engineering and other areas of Enterprise IT. Infosys is the largest spender on R&D among the Top Indian IT Service vendors and recently announced plans to invest about $50 million to develop and create Intellectual Property (IP) in the mobile commerce platform, following a deal from India’s Leading Telecommunication player Bharti Airtel. Infosys also announced doubling its Product Research and Development Center in India to 1000 engineers in next two years and is expected to develop Products and Platforms leveraging technologies in the areas of cloud computing, mobility, analytics, and social media. This Research and Development Center in Bangalore has played a crucial role in development of various products, platforms and solutions in Infosys. Most of the products revenue comes from Finacle, which is the core banking offering and also has five other products that contribute fewer revenues. Infosys is increasing its R&D spend on its Finacle line to develop new cloud, mobility and analytics solutions for the banking product to counter competitors.  Infosys has so far commercialized about 12 platforms and there are other platform offerings that are under development.

Infosys launched cloud based business platforms and applications for functions like HR, procurement, social commerce, digital marketing. Cloud based offerings include a mobile app store platform Flypp, iEngage for social media, mConnect, Infosys HIMI, and TalentEdge, a cloud platform for enterprises to streamline HR function. Platforms are a major non-linear strategy for Infosys and it has more than 20 clients on platforms. Infosys’ biggest BPO platform play is its FY10 acquisition, McCamish Systems (a platform-based insurance processing solution provider). Smaller platforms such as Newspaper-in-a-box, HR outsourcing (Hire-to retire), Shopping Trip 360 (retail analytic solution) generate very limited revenues. Infosys BPO is significantly gaining revenues through platform BPOs and in FY 2011 added $75 million in incremental revenues while adding only about 300 employees and gets 15-20% of its revenue from platforms. Infosys had embedded a Products Platforms and Solutions unit in each of its four businesses—banking, financial services and insurance; manufacturing; retail and life sciences; and energy and utilities during a recent reorganization.

Infosys has seen good growth in its cloud computing offerings in past couple of years and cloud business contributes about 2% of its total revenue which it has identified it as a major growth driver. Company also tied up with Microsoft to co-create and architect cloud environments for large companies in seven geographies US, UK, Australia, France, Germany, Middle East and India. It has also partnered with over 30 cloud providers and is looking to work with clients as an end-to-end cloud ecosystem integrator, provide professional services and business platforms in the cloud. Infosys have data centers in Europe, the US, India and in Australia and presently offering private cloud from their own data centers or working with other clients. Infosys has more than 2000 resources working on the cloud computing and it also started offering Indian cooperative banks a cloud version of its core banking product Finacle, tapping into a Rs 2,000 crore market. Infosys is also offering its Infosys Edge cloud based platform offerings and other platforms on the outcome based pricing model and plans to get over 30% of its total revenue from such higher-end services.

Infosys has invested millions in branding products, platforms and solutions and Finacle is the core product offering and lot of banding activity is centered on it. Infosys is also branding all its products and is looking to create a unique awareness and proposition. Branding helps in creating a relationship with clients and also increases their understanding of the product functionalities, uniqueness, differentiation and its positioning. Infosys had launched 'InfosysEdge', a family of platforms that enable customers to buy software on a pay-as-you-go model and it presently has 12 platforms and couple with its Building Tomorrow’s Enterprise branding strategy intends to create awareness for clients and position its platform and products accordingly. In 2011 the brand positioning statement has been changed from 'Win in the flat world' to 'Building tomorrow's enterprise' as part of the new Infosys 3.0 strategy. Infosys is branding its products, platforms and solutions as part of its non linear revenue growth strategy and it is looking to charge clients higher prices based on usage or license as these are intellectual property based offerings.

Infosys had been criticized for not being active in M&A game and as a matter of fact in 2011 it had acquired two companies. First in June, it acquired Gen-i the software solutions division of Wellington- headquartered Telecom Corporation of New Zealand (TCNZ) to strengthen its outsourcing services foray in Australia and New Zealand. In December, it has acquired Australia-based sourcing and category management services firm Portland Group which enhances service offerings and takes sourcing and procurement functions to a higher level as Portland Group has over 100 procurement specialists with domain expertise. In 2009, it acquired the US-based McCamish Systems to expand its presence in the insurance and financial services sector and it is known for platform based offering where standardized offerings for multiple clients. In 2007, company signed a $250-million deal with Royal Philips Electronics of the Netherlands and acquired three shared service centers located in India, Poland and Thailand. All these acquisitions helped Infosys to increase its capability, entry into new geographies, enhance its service offerings and acquire new clients. Infosys is looking at acquisitions for the non linear revenue growth and its sits on billions of dollars of cash and looking to acquire particularly in Europe to reduce dependency on the North America Market.

Infosys is aiming for 33% of its revenues to come from non-linear business by 2020 and it has invested significant amount of resources both monetary and human for increasing its non linear revenues. To further increase its non linear revenues Infosys adopted a strategy of developing of products platforms and solutions involving internal research and development teams; co-creation with clients; partnering with a start-ups or a large software vendor such as SAP AG or Oracle Corp. Infosys has set up a separate unit for non linear initiatives and embedded units for this purpose in its key vertical businesses like BFSI, Manufacturing, Retail, etc. Infosys is also looking to recruit more domain specialists that help in creating the products, platforms and solutions based on the clients needs. The company is also looking to delink the revenue growth from employee headcounts and this effort has been successful in the Infosys BPO. There has been volatile economic environment in North America and Europe which are the major markets for Infosys and clients are demanding innovative offerings that will improve the return on their investments. With this scenario Infosys is forced to look at non linear revenue growth models for sustaining revenue growth and profitability.

Discussion Points:

•  How to increase the non linear revenues for Infosys?
•  How will mobility, cloud computing, digitalization, big data, etc effect the future business environment?
• Will the non linear revenue strategy adopted by Infosys deliver in the changing future business environment?
• Will the products, platforms and solutions strategy lead to innovation of new products and service offerings based on clients needs?