Infosys Girds for Battle

The IT services company completes its executive reshuffle, with an aim to take on rival Accenture.
Author:
Publish date:

Infosys

(INFY) - Get Report

formally completed its planned chief executive transition Friday, with the company's president and chief operating office taking the helm.

S. Gopalakrishnan, who helped found the company in 1981, replaced CEO Nandan Nilekani, who oversaw Infosys' rise to become the largest India-based tech services company, having a market value of nearly $30 billion.

Prior to taking the top spot, Gopalakrishnan, known as Kris, was responsible for customer services, investments and acquisitions, and also served as chairman of the company's fledgling North American consulting subsidiary.

Infosys first announced plans for the transition

during its fourth-quarter conference call in April.

"Nandan Nilekani has voluntarily decided ... to pass on the baton to a worthy successor chosen by the board," said Narayana Murthy, chairman of the board, before delving into the company's financial results.

Nilekani will become co-chairman of the board alongside of Murthy.

Kris' selection as chief executive underscores Infosys' focus on expanding its range of services beyond application development and IT services into higher-end consulting projects. This evolution of the company's business model pits Infosys against established rivals such as

Accenture

(ACN) - Get Report

,

Computer Sciences

(CSC)

and

Affiliated Computer Services

(ACS)

.

The company has a tradition of replacing executives in their early- to mid-50s. Murthy stepped down as CEO in 2002 at the age of 56. Both Kris and Nilekani are 52.

Infosys, in late afternoon trading, was off 69 cents, or 1.3%, to $51.10, just above the midpoint of its 52-week range.

The process of selecting a new CEO took roughly seven months. At first, the board's nominating committee made preliminary judgments about succession and the oversight roles outgoing CEO Nilekani and Chairman Murthy would continue to play.

As the decision grew nearer, all directors were included in the process. The board also held several meetings with Kris to discuss his "vision" for Infosys' future.

"We are tying to demonstrate collective leadership," said Nilekani when describing the board's actions. He added that the deliberative process demonstrates that Infosys is "building an institution that goes beyond individuals" and "gives opportunities to very talented people."

The change in leadership comes as Infosys is grappling with a mix of challenges. Torrid growth of India's economy has boosted the value of the rupee, India's currency, threatening revenue growth as dollars translate into fewer rupees.

At the same time, demand for outsourced IT services has created wage inflation of 10% to 15% annually. This has stirred fears that labor arbitrage would not be able to continue sustaining Infosys' gross margins and pricing advantage over U.S. rivals.

Citigroup analysts Surendra Goyal and Hitesh Shah estimate that investors have already factored currency effects into the stock price. Citigroup has done investment banking work for Infosys within the past 12 months.

Kris' predecessor, Nilekani, offset rising wages by changing the mix of senior personnel to junior personnel, performing more work in India than in the developed market where wages are higher and raising fees.

Infosys is also developing its employee base in China where the local pool of cheap labor will help keep personnel expenses under control.

The effect of developing a team in China isn't likely to help Infosys in the near-term, however, as clients balk at sending confidential material to a country bearing a stigma for rampant intellectual property theft.

But Moshe Katri of Cowen & Co., which makes a market in Infosys' stock, says the fears of wage inflation are overblown in Infosys' case because wages only account for 13% to 15% of the cost of sales. This can be offset with only a 2% increase in prices, given a rise in wages of up to 15%.