Saturday, March 27, 2010

Infosys : the Start-up Story

How a few youngsters’ dream and determination to prove themselves gave rise to one of the most respected Indian I.T companies.

Timeline: In 1981, IBM in US launches its first PC which uses Microsoft Software MS DOS and the term INTERNET first mentioned and in Pune July1981, on a day between monsoon and winter 7 youngsters came together with just 10,000 rupees to give shape to an idea that in 28 years became one of the most respected I.T companies in world. They were N.R. Narayana Murthy, Nandan Nilekani, N.S. Raghavan, Kris Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora. “Seven of us met in 1981 to start something new in India and we were looking out for the global opportunities. We came together because we were sold on the idea and were passionate about the it” says Kris Gopalakrishnan. This was by no means N.R. Narayana Murthy’s first entrepreneurial venture. The first attempt was a company called Softronics, an IT consulting firm in 1976. The lacks of response by the domestic market lead to its closure, and he joined Patani Computers. When the company was incorporated in July 1981 Murthy did not become employee Number one rather it was N.S. Raghavan, because Murthy was committed to finish two projects for Patani and it was only in March 1982 that he was able to join the company.

India in the early 80’s was by no means a fertile ground for entrepreneurship ventures, sweeping liberalising reforms were a decade away and the company which was registered as a proprietary company at a co-founders house did not even have a computer for 2 years as the red tape needed to acquire a computer at that time was numerous. Archaic import restrictions limited the company’s ability to bring crucial equipment into the country. This new company had not only been through the stock problems faced by a young company but also the additional problems of dealing in an area which is relatively unknown in the country. The journey from struggling start-up to multibillion-dollar multinational offers several lessons for entrepreneurs, Gopalakrishnan says Two essential leadership traits are courage and visions — which keep the entrepreneur and employees focused not just on short-term goals, but also on aspirations. While today we are dazzled by stories of tech firms minting overnight millionaires, Gopalakrishnan said that for Infosys, it was a rocky road at the start. “Definitely, the initial years were quite difficult.”

The Early Trials & Failures

In 1983, for instance, the company could not get venture capital or bank financing to expand, largely because very few investors understood the business or its potential. There were no venture capital firms then to pump investment into the company, and India had many currency restrictions. Eventually, the government provided some funding for growth. Despite some successes, by 1989 the Infosys founders felt they were just spinning their wheels. Their peers outside the business were getting on with their lives, while Gopalakrishnan and his partners had devoted eight years to their vision and seemingly had “nothing to show for it…. We almost gave up.” Through the 1980s, there were few big contracts. The founders kept their salaries low, Nandan Nilekani, the company’s Ex-Chief Executive, who in the early days would share a scooter with co-founder S.D. Shibulal as they drove around Bangalore looking for business.

One of Infosys’ early go-to-market vehicles was a joint venture with KSA, KSA-Infosys. And Kris, who spent much of the 1980s in the US, was Infosys’ face in the joint venture. The joint venture collapsed in 1989.Infosys almost wound up in 1989. “Our peers had cars and houses,” to quote Kris from an older interview referring to one reason for what he calls “a major introspection” that happened in 1989. “And we had nothing.” The JV with KSA collapsed in that year. Arora, too, decided to leave that year. Gopalakrishnan and his colleagues began to think “things will change.” Things did certainly change. The change was heralded by massive policy reform in India, business exploded during the 1990s, not only for Infosys but for the whole of Indian industry and leading up to Infosys’ listing on the NASDAQ. This was a ‘first’ for an Indian company and one of the many firsts for Infosys. In 2002, Business World called Infosys “India’s Most Respected Company.”

One thing the Infosys founders had on their side in 1981 was youth. Kris says ” We were 25 when we started Infosys, when you are young that is the right time to take risk because as you grow old responsibilities burden up and you don’t want to take the risk built, today being a youth you can afford to take risk” At the company’s outset, “there was no expectation; we had nothing to lose.” But, he said, the relative stability and comforts of having a job begin to erode the adventurous spirit required for successful entrepreneurship. Kris is very excited about the entrepreneurship wave in the colleges-“I am quite pleased with the great interest that entrepreneurship is generating in various campus and students I meet. They are ready to try their hand at that.” He was happy about the initiatives taken by Techno Park TBI “Technopark incubator helps you with the challenge and face the situation on your own but having people who can mentor you in various aspects will give you an advantage.”

This was one advantage the founding members of Infosys never had. They did not know what to expect, but Gopalakrishnan and his fellow co-founders set the bar high for themselves as they wanted to build a globally respected corporation. The mission statement was “aspiration” but the effect of committing to such a declaration was that every consideration, decision and action of each employee in the company has been calibrated and compared to world class standards. That explains why the company made its global initial public offering on the United States’ NASDAQ stock exchange in 1999.Infosys complies with the requirements of the stringent Sarbanes-Oxley accounting rules, even though as an Indian company, it doesn’t have to. “To become a global company, we must go up with the best companies in the world.” Moves like the NASDAQ IPO had motives beyond raising capital. They raise the company’s profile and by offering transparency, demonstrate that it is possible to run a business legally and ethically in India. Infosys’ culture is hardly typical of India, a country where businesses long thrived on government protection and tax manipulation and where the corporate world was dominated by a tiny clique of family-owned conglomerates.

The Change from 1989

Most people attribute Infosys’ success to its superior planning process. Well, this started in 1989. It certainly wasn’t anywhere near as sophisticated as what they do now but it started then. The first plan gave the founders who had just come off a gut-wrenching discussion on whether to wind up or not, several immediate objectives. The first was the decision to build a campus. The second was the decision to make an initial public offering. The IPO in the Indian market at that time was not an easy thing to achieve. For this to take place the financial reforms had to happen. Infosys wanted to issue its shares at a premium. Until the early 1990s, issue-pricing was decided by the Controller of Capital Issues. The CCI decided that Infosys could make an issue at a premium of Re 1 (issue price: Rs 11). The company demurred. Then, Manmohan Singh as the then Finance minister abolished the post of CCI in the first wave of economic reforms and Infosys went ahead with an issue (in February 1993) at a premium of Rs 86 (issue price: Rs 96).The market may love Infosys today, but most brokers thought the company was just another fly-by-night operator in the 1990s.Many market player at that time was not sure to true this new company which was entering the market at such an high rate. Infosys’ promoters are rich today because of a decision they took early in the company’s existence. Infosys decided to pay dividends from day one, pay taxes on the dividend they received, and re-invest the entire sum as equity in the business. The Infosys IPO almost devolved. Murthy claims that the issue was subscribed 1.06 times, and it was, but fact is, it almost didn’t go through. Eventually Vallabh Bhansali’s Enam Financial Consultants, the lead manager (along with SBI Capital Markets), had to push it through. Among the people who struck rich include Nilekani’s quiz-club members and IIT batchmates. Nilekani was a quizzer in college and was part of an informal group that would meet and quiz in Bangalore.

An element of Infosys’ operational excellence is its Global Delivery Model, based on doing work where it adds most value – that is, utilizing the best global resources with the lowest associated cost and at the highest possible quality. Reliable telecom infrastructure and India’s skilled manpower allowed most of the work to be conducted offshore. Onsite aspects of the project are limited to those aspects requiring market proximity and customer interaction.

Customer satisfaction is another key to Infosys’ breakneck rate of profitable growth. The company has successfully completed more than 20,000 projects with a 99.998% error-free record during their initial 23 years. This recipe for success would now be considered a radical innovation in the software industry: zero-defect code. Even today, the accepted way to code is to write a software, then debug it. In the company’s early years, Murthy and Dinesh and Shibulal and Kris taught recruits how to write code without errors. As the result of such a radical innovation, Infosys’ projects delivered on time and on budget percentage was almost three times more than the industry average of 30%. Such high customer satisfaction rates have resulted in 95% of clients coming back to Infosys for further projects.

Building on such exceptional customer satisfaction, Infosys proactively seeks to expand the scope of the work it does with existing clients, further fuelling revenue growth. Infosys fully understands that in the business of outsourced services, lower cost alone is not sufficient. Quality, reliability, speed and customer orientation are fully part of the equation.

Infosys’ concern to provide its customers with a competitive advantage led to the creation, in 2001, of the Corporate R&D unit SETLabs (Software Engineering and Technology Laboratories). This unit develops methodologies, frameworks and tools to drive efficiency in project execution and delivery. SETLabs help clients with development projects, addressing specific technology or business problems, while also looking into radical innovations and long-term strategic issues supporting business process innovation for the customers. By mid 2007, SET Labs had grown to 500 consultants and software engineers, filing numerous patent applications.

Concerning staff training, Infosys massively invests in technical and management education. Young staff joining the firm typically follows a four month course. This is carried out in Infosys’ training centre in Mysore, where more than 6 000 employees can be trained simultaneously. This contributes to Infosys having a staff much lower staff turnover than is typical in the industry. In an age where competitors are quick to copy a successful business, it is very necessary to bring about an atmosphere of innovation — no mean feat considering that most people resist change. At Infosys, the solution is a controlled blend of encouragement, incentive and a bit of blunt force. For instance, technical employees benefit from available ongoing training, and they must obtain increasingly higher certifications if they wish to advance in the company. Managers are required to come up with two innovations per year. This puts Kris Gopalakrishnan in a unique position, as one of the few remaining founding employees in the executive suite, to try and build the management bench of a company growing by leaps and bounds with young Indian engineers fresh out of college.

The relationship between the founders is one of friendship and that of respect, through all the ups and downs of building an IT empire, the founders shared a personal bond as tight as that of any family. Nilekani may have been the CEO while Kris was the COO, but the latter was actually senior to the former at one point in time. It was Kris himself who suggested in the 1990s that Nandan could be given a larger role as Nilekani was always considered the big picture man, such a relationship, putting the company before the person is the cornerstone of Infosys’ success. The long journey they had together had many ups and downs yet the unity the whole Infosys family kept is seen in the often quoted fairytale like results: it took 23 years for Infosys to reach $1 billion in revenues, but only 23 months to reach the $2 billion mark!

Kris GopalaKrishnan sums up how it feels to be an entrepreneur as “An entrepreneur is an optimist who has a vision that what he or she thinks will change the world, it is all about the belief in yourself and the vision that you have in your idea.”

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