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Wednesday, October 16, 2013

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Infosys independent board member talks about game-changing innovation, diluting hiring standards and a worrying culture across the industry

Ravi Venkatesan, an independent board member of India’s second largest software services provider Infosys Ltd, says the country’s biggest information technology (IT) companies have become complacent after years of rapid growth and high-profit margins, and continue to avoid taking big, risky bets.
“Fantastic growth and fat margins have made many companies quite complacent so there has been very little game-changing innovation after the global delivery model,” Venkatesan, a former chairman of Microsoft Corp.’s India operations, said in an interview last week. “There has been innovation in hiring, in training and in new service lines, but a lot of this innovation is incremental and overall the IT services business is quite commoditized as a result.”
“More importantly, to feed the machine, a lot of companies are continuously diluting their hiring standards. As a result, the talent pool and the culture across a lot of the industry is pretty worrying. So overall, it’s a rather dire situation, whether people realize it or not,” Venkatesan said.
He declined to offer specific comments on Infosys, which is in a silent period ahead of its earnings announcement later this month.
In the 2013-14 fiscal year, industry lobby Nasscom expects Indian software export revenue to grow by 12-14% in dollar terms, the slowest pace since the 2008 global recession.
One of the biggest challenges facing Indian software firms is to move away from existing people-based, low-cost software services business, which is increasingly getting commoditized and even threatens to be replaced by software robots. “As that happens, then an industry that is built on talent availability and cost arbitrage stands a big risk of being disrupted,” Venkatesan said.
On the one hand, the century old International Business Machines Corp. (IBM) is pushing its solutions such as Watson to replace manual efforts needed to offer healthcare services; on the other, top outsourcing customers including General Electric Co. are increasingly offering software bundled with their traditional industrial products.
“A few companies like IBM are driving this type of disruptive innovation but a lot of our Indian services firms are at risk. This is pretty ironic because the global delivery model was such a disruption, such a tectonic shift and now the game has come full circle,” said Venkatesan. Edited excerpts from the interview:
Some firms say they are too big to suddenly make this shift. But IBM keeps shifting gears every decade so well despite its enormous size. How?
First of all, when it comes to enterprise IT, the gold standard is IBM. No company has the same breadth of businesses, depth of capabilities and certainly no technology company in the world has successfully navigated so many waves of change and disruption. So although I worked for a competitor for many years (Microsoft), I have a lot of admiration for IBM.
What have they done well? Well, they’ve really invested through tough times and good times in R&D (research and development) and innovation and they have not compromised on hiring some of the best and brightest people in the world in their labs and giving them the space to do this stuff. I think more than anything else that is one thing they’ve done.
Another one is a relentless obsession with their customers and the customer relationships. I remember when I was at Cummins, they kept calling on me. I kept saying, ‘listen boss, we’re not a big IT user and we’ve actually frozen our IT budget.’ They said, ‘ we simply want to build a relationship and point out opportunities.”
It was impossible to keep the IBM account manager away. They didn’t say, “this company is not going to spend very much this year, so let’s focus somewhere else.” They have such a long-term view that they’re able to do this. At least they used to. They’re also incredibly global, they’re in every major economy in the world. In these economies they are highly local. Their HR policies are local, their management is local, their decision making is pretty local.
Take Japan, where IBM may be the only foreign (IT) firm to have a major presence. The key is that they are very Japanese in Japan, very Indian in India and so on. Most of our companies are still very Indian—they have still to really globalize.
So I think the reason that they have been able to stay successful is because every decade or so they re-invent themselves substantially around this core—of a few extraordinary people, of customer relationships, of innovation and of core values—and have the courage to exit commoditized businesses where they don’t think they can create any sustainable differentiation or competitive advantage. They exited the PC business saying we can’t see a path to the margins we want. They’re selling off some other low-margin services businesses saying machines are going to do this work, why do we need this? So before the value of the business becomes zero, let’s sell it off.
Reinventing yourself dramatically like this—it’s easy to describe and admire and incredibly hard to do.
Indian software firms are looking at proportion of local work force as a metric for how global they are becoming but they are still seen as Indian firms. What will it take to become truly global?
It’s not just about proportion; it’s about the feel of company, the leadership and culture. If most of the senior people in America are Indians, if most important decisions are taken in Mumbai or Bangalore, if the HR policies are the same everywhere, then face it, it’s an Indian company.
Paradoxically, being global means being more local. So for instance at Microsoft, I was a corporate VP, the head of China was a corporate VP, the head of Japan was a corporate VP and so was the head of the US; we were all local nationals and we all had a voice at the main table. A heck of a lot of decisions—hiring, pricing, compensation, sales strategy—are decided locally. You operate with very few expats.
So you should look at whether major countries like America are run as strong, accountable profit centers, are they agile and able to make most operating decisions locally, do people there have a real voice in the decision making process of the company, can they aspire to the top jobs or are they only do-ers. That’s what we’re talking about.
A lot of these companies look at their multi-billion dollar cash piles as a show of strength. Could they have deployed cash better?
A huge cash pile can often mean that the company has a wonderful legacy cash cow but is failing to create and invest in new engines for tomorrow’s growth. It often means that management isn’t pursuing future opportunities with imagination, vigour and courage.
Of course, cautious shareholders might prefer that companies simply return the cash to them but when you have such extraordinary growth opportunities, I think a lot of our firms could be investing in the future far more imaginatively and aggressively. Whether it’s the Internet of things, whether it is analytics, whether it is automation, each of these opportunities has the potential of being much larger than the current business of even very large firms like TCS (Tata Consultancy Services Ltd) or Infosys. Leading firms that seize a couple of the next big things could be $100 billion rather than $10 billion. It’s a very exciting time.
There are so many professionals quitting their jobs at Infosys, Wipro to start new firms. In some ways isn’t this an opportunity lost for large firms?
You said it—it’s an opportunity. A lot of your 20-30-40-year-old employees today, particularly if you have hired the right ones, are bitten by the entrepreneurial bug. You need to create multiple ways to fulfil that desire or you will simply lose them. This can take different forms. You could try to promote more risky experiments within the firm. You could strategically invest in either start-ups or relatively early stage companies and send some of your best and brightest to go work on the future. You could back some of your own people who are willing to go out and take entrepreneurial risks. The whole point is to create a culture and mindset that ignites the imagination of bright people, enables them to take some risks and rewards those who pull it off.
I believe this may be the only realistic way for large companies to be innovative and entrepreneurial. Large companies have to be ambidextrous; they have to continue to incrementally grow today’s business yet be willing to get into very different new businesses even if it means disrupting themselves. These are two different games—It’s like saying, ‘Oh you were good at hockey, now you start playing cricket and be good at that.’ It’s hard. Unless the CEO is personally driving the agenda, nothing will happen. The “babus” in the middle of every large company will kill it. If the CEO has to drive then, then somebody has to deliver the quarter. The CEO can’t do both. That’s why you need a CEO-COO type structure. You have to have this kind of separation of roles. In academic literature, this is called the ambidextrous organization.
Companies like ours have to learn to become ambidextrous. There is this legacy business which still has life in it, but it’s going to be a difficult business and one leader has to run that. And then you need to create a new core around the new opportunities and the CEO needs to run that; the left hand and right hand need to communicate.
What’s really happening with the Indian IT industry? Innovations such as IBM’s Watson on one the hand and an aggressive internal push by large customers like General Electric to create their own software solutions are raising questions about whether Indian tech firms are innovating enough?
If you are talking about Indian IT services companies, then I’d say that many of them have done an excellent job riding the great outsourcing wave for the past fifteen years or so. However fantastic growth and fat margins have made many companies quite complacent so there has been very little game changing innovation after the global delivery model.
There has been innovation in hiring, in training and in new service lines but a lot of this innovation is incremental and overall the IT services business is quite commoditized as a result. Companies are competing in highly contested “red oceans” where differentiation has evaporated and margins are withering. There is still a fair amount of growth left especially with the US economy recovering but the game is getting tougher.
More importantly, to feed the machine, a lot of companies are continuously diluting their hiring standards and as a result the talent pool and the culture across a lot of the industry is pretty worrying. If this weren’t enough, there are some other tough headwinds. There are regulatory challenges in several countries. Every government is worried about jobs.
Protectionist sentiment will not be restricted to the US alone. Concerns over data security and privacy are huge, particularly after the Snowden affair. Governments and people are now even more paranoid and we shouldn’t be surprised to see new regulations that say “our data must reside in our own country.” Then are disruptive innovations.
The biggest disruption is automation where computing is getting sophisticated to the point that software can already do more than half the work that software engineers and BPOs do and at a fraction of the cost. As that happens, then an industry that is built on talent availability and cost arbitrage stands a big risk of being disrupted. A few companies like IBM are driving this type of disruptive innovation but a lot of our Indian services firms are at risk. This is pretty ironic because the Global Delivery model was such a disruption, such a tectonic shift and now the game has come full circle. So overall, it’s a rather dire situation whether people realize it or not.
Certainly the US recovery buys everyone some time and of course some companies are executing the traditional model much better than others. But I am not sure if even they are playing a profoundly different game. The need of the hour is more innovation, more entrepreneurship, more risk taking.
So it’s not just how much money you can throw on innovation, but also whether you have right kind of people who can think different. Are there such people inside these large IT firms?
Large companies, even extremely well managed and successful ones, are generally quite hopeless at innovation. As you get large, to manage scale and complexity, you need hierarchy, you need controls, you need bureaucracy. The culture can then become rigid, hierarchical, political and rule bound and this discourages risk taking and innovation. One of my professors at business schools said it well: the difficulty of innovation is proportional to Age X Size X Success. So established and successful firms have a particularly hard time being innovative.
You can’t have a culture that is rule based and expect innovation and entrepreneurship. Growing and extending the current business versus pursuing fundamentally new opportunities—these are two very different games. If you want to simply grow today’s business—who do you hire? You hire people who are grateful to have this job. You don’t hire mavericks. Few IITians or few IIM grads join any of our big IT companies, anymore. It was very different in my time. It was aspirational.
Today, forget the IITs, even tier two college students tell me, “I’d rather try something else.” So I don’t think we are getting enough of the right talent, more importantly we don’t have the right culture and the right governance to get into these new opportunities because what you need is people who are technology entrepreneurs, who will smell this opportunity and just like a startup go after it and build it. Now this is very difficult for a large company to do. It’s very hard for a Microsoft to do, it’s very hard for anIntel to do and it’s very hard for an Infosys or TCS to do. It’s no condemnation of the company—it’s hard to be both.
When you have 100,000 people, there are some people who are pretty amazing…who are dying to build the new businesses of the future. They are there, you must identify them, give them a chance and bet on them. I am confident at many of our companies, there are such people. The seeds for our renewal are very much still there. The trick is to identify them and then unleash them.
What will it take to create this work culture, can CEOs lead operations and still focus on future at the same time?
This needn’t take a lot of money but it does take a disciplined approach driven personally by the CEO. One company in Europe that I work with is doing this very imaginatively. They have created an internal venture capital team reporting to the CEO. This team has a combination of seasoned venture capitalists and insanely bright engineers who can prototype anything. They know the new areas the company needs to break into. They spot early and growth-stage companies in this space and make strategic investments in these firms. They use lean-start-up principles and prototypes to show how they can change the game and then when the time is right, really use the assets of a big company—financial resources, brand, customer relationships, distribution—to bring these make these companies really big.
Inventing the future—this is the CEO’s primary job. Not simply delivering the quarter. You have to learn to be ambidextrous. You have to learn to be open and work with the ecosystem, rather than believing that all the good ideas are going to come from within my organization. The world is too complicated right now and you have to have open innovation, which means your boundaries for ideas must be porous. This is as big a shift as I can imagine which is why most of our companies are still playing yesterday’s game. This is the worrying thing.
What opportunities do you see for Indian IT?
I must say that I am optimist and see lots of opportunities everywhere. For instance, geographically I think that Japan and the US are huge opportunities and I’m not convinced that many of our companies are adequately focused on either.
Let me explain. The US right now is a giant opportunity. Its not just the economic recovery; it’s the gradual re-industrialization of America—the revival of manufacturing in the US and Mexico. This re-industrialization is driven by energy costs, new technologies and the declining competitiveness of China. This is, therefore, a once-in-a generation opportunity.
All our IT companies are present in the US but they’re not thinking ambitiously enough about the wave. If you had to ride this wave, what would you do? The most important thing you would do is invest ahead of the business. That means you make sure that you have a very senior and trusted leader leading the Americas. You would treat the US as it’s own P&L and the ability to make most decisions locally and fast. You might hire 100 more sales people and put them on small accounts today, knowing tomorrow they are going to be medium accounts and that a few will be big accounts. This is quite different from how a lot of firms operate currently with a reticence to invest proactively in account coverage.
The other extraordinary opportunity for us from a geography perspective is Japan because they have this huge problems of demographics of an ageing population. China was well-positioned to take advantage of this but the trust issues between the two countries are substantial. Only one other country can fill Japan’s needs and that is us. But Japan is a very difficult market for foreign companies. Its culturally and linguistically different and they have a very peculiar structure with tier-1 outsourcers like NEC, Fujitsu etcetra who own the customer relationships. So its very hard to crack the market—IBM may be the only foreign company to have done this super well.
But, however, hard it may be, the prize over time is so huge, that if I were a CEO today, I would do whatever it takes to build a substantial presence in Japan over the next few years. Again this means being incredibly local, incredibly Japanese and having a very long term perspective.
Beyond geography, there are also very substantial opportunities in areas like engineering services, in business process management, infrastructure management and so on where despite the amount of outsourcing, we are still only at early stages of the game. In today’s environment with the economic challenges all over the world, the single most effective way of getting a CEO’s attention is say, “I’ll show you how to save money.” You will at least get an attentive meeting. If you go to Siemens today, where the CFO has just become the CEO. You say, “I have got a proposition for you. You need to lay off 15,000 people, you have announced it. I’ll take your people and I’ll take your processes with them.” Could this be an opportunity? Possibly. European companies in particularly have not yet done a lot of outsourcing, but their cost pressures are enormous. I think there’s a substantial opportunity yet to get them to let you manage their processes.
And then as you look out further , there even bigger, trillion dollar opportunities like the so called “Internet of things”. The possibilities are mind-boggling. Take a look at what is happening in computing. First of all you’ve got this whole multi-core architecture. What that does is give you profoundly more computational horsepower. What are you going to do with this? Are you just going to run your word processor faster? You don’t need to run it faster, it’s already way more capable than what you need, even a professional journalist like you. So, what are you going to do with this? What you will do is start interacting differently with your computer, whether it’s a PC or a tablet or phone or whatever. For 30-40 years, the computer has been a tool. You tell it what to do, it does it. It has been a tool.
Increasingly because of the exponential increase in computing horsepower and the power of software, computers are becoming a personal assistant. You can talk to it like you talk to a secretary or junior in your office. You can do that with Siri on an iPhone. So you can start interacting with it almost like a person. You can interact in human like ways, through voice, gesture, touch, and all these kind of UIs are a big shift that enables completely different scenarios. Your service center agents, your bank tellers, gone. Voice BPO—gone. The nurse in primary health care-gone. It’s a huge disruption. What are Indian companies doing to take advantage of this? The fact that you now have intelligence that is pervasively embedded everywhere in your in your refrigerator, car, phone, air-conditioning- everything. And all these devices are generating data and this data can be aggregated and then you can use software to make sense of it. It is absolutely profound. Now which companies are making the biggest bet on analytics? IBM. Microsoft. OracleGoogle. GE. But what are the cumulative investments that our Indian services companies are making—not just in money but in throwing the best minds at these opportunities?
So really, whether you are looking at the short, medium or long term, there are extraordinary opportunities for Indian IT firms. But will we seize these to propel ourselves to the top echelon of industry? I don’t know.