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Infosys Needs to Diversify Out of Body-Shopping

Posted on Thursday, Oct 18th 2007

The rupee value may rise making Indian services more expensive, but companies like Infosys adapt. In this piece, we look at what is going on inside the outsourcing giant, and whether their strategy is enough to sustain continued growth.

Infosys (INFY) delivers information technology (IT) enabled outsourced business solutions and provides business process outsourcing (BPO) services. In Q2, Infosys achieved $1 billion dollars in quarterly revenue for the first time, growing 37% versus Q1 (annual revenue was $3.1 billion and net income $850 million ended March 2007). Only 3-4% of this revenue comes from the Indian domestic market (63% comes from the US, Infosys’ largest market, 27% from Europe, UK primarily, and the remainder is generated in Asia).

Revenues have risen 10.1% sequentially by the quarter. Infosys improved operating margins to 27.5%, 2.8% higher than Q1. The company recovered from the Indian rupee appreciation impact in Q1, and analysts pegged Q2 growth at approximately 10% versus guidance of a deceleration Q3 sequential growth of 5% to 6%. As a result Infosys is expected to produce 4-5% sequential growth regardless of the rupee value. Supporting this view, Q1 saw the billing rates going up by 1.1% and in Q2 by 1.9%. Simultaneously, staff utilization has increased from 73% to 78%.

Annual growth guidance for the remaining year has been increased by 5% from 30% to 35%. Management assumes no more large deals for the year and no further price increases from Q2.

Infosys has five segments:

* The Banking/Financial Services/Insurance (BFSI) segment, and largest, grew 11.4%;
* Manufacturing grew 13.2%;
* Retail grew 27.3%, attributed to growth of retail and new clients in Europe as companies seek more efficiency in outsourcing;
* The energy and utility segment grew 19.5%;
* Consulting is now 5%; and package implementation is 18.7% from 18.4% in Q1, creating a 24% share of company revenue ($241m). No slowdown is anticipated.

New clients/contracts are now won at 3-4% higher than company average and contract renegotiations are 2-3% above average. The top 10 customers grew by 2.7% quarter-on-quarter and the non-top 10 grew 13.7% sequentially. Infosys added 48 new Q2 customers with a company total of 520. Infosys plans projects on a basis of 30% onshore and 70% offshore, showing more offshore reliance to control cost compared to a previous 40/60 split. Fixed prices have increased in Q2 as a company strategic direction, the goal being Infosys value accrual. Management increased attention on increasing productivity in the last year with a current fixed price now being higher than the average margin by 3-4%.

The big question for Infosys is where is the new money coming from and where is it going to go. More new business is coming from Europe now than the U.S., with the United Kingdom fueling the strongest inroads. And more than 43 percent of revenue comes from non-application development, i.e. BPO ventures. Further BPO expansions are being tested through Finacle as a service, which is currently going through validating market demand and formalizing offering strategy. Finacle is Infosys’ Banking solution.

Infosys’ acquisition strategy is also focused on filling in BPO gaps. BPO acquisitions need to provide new platforms for Infosys to base business on or open new markets. The company is cautious in selecting target companies, looking not only for strategic fit, but also overlap of ability to retain employees and alignment of values, culture, and ethics. Infosys does not support hostile takeovers. Acquirees are expected to want to be acquired.

Summary of recent acquisitions:

* 2006-07: Infosys purchased 3 shared services centers (India, Poland, and Thailand) from Royal Philips Electronics, giving it a large presence in Eastern Europe, the largest of any Indian company in the region.

* 2003-04: The company acquired Expert Information Systems Pty Limited, a leading Australian IT design, build and integration provider for business solutions.

* 2002-03: Infosys acquired intellectual property rights in Trade IQ, a U.S. trade management product, Autolay – a commercial software for design of high performance structural systems, and I-Link – a signature display system from India for banking products.

Most of these purchases expand Infosys’ geographic presence. However, with a cash and cash equivalent balance of at least $1.4 billion, and a great market cap, it is unfortunate that Infosys is not really getting into strategic “product” acquisitions. Thus, Infosys’ growth remains head-count-bound, and not much creativity beyond basic body-shopping seems to be going on. Nonetheless, in body-shopping, Infosys is one of the world’s absolute best.

The time has come, though, for Infosys to take a good look at the software eco-system in the US, and decide on a strategy that enables them to play in the more leveraged technology / IP driven business models, and change the business mix somewhat. The company currently lacks excitement, but the right signals along these lines would definitely bring them back to popularity. In fact, the rising wage costs and appreciating rupee can easily be mitigated if the company diversifies its business model out of body-shopping.

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I strongly object to your use of the term “body shopping”. There is a lot more to creating complex enterprise software applications than throwing bodies into a room; as your piece implies. Infosys has developed extensive proprietary systems, processes, tools, and domain-specific training programs. One of its growth areas is Strategy Consulting, a field that I believe you are quite familliar with. It is also looking to generate a lot more revenue in the future from SaaS (Software as a Service). Sramana, you seem to have missed the big picture here; so let me spell it out for you. Rapidly aging populations in the United States and Europe combined with a drop in enrollment in computer science and engineering programs will result in a significant shortage of IT workers in the near future. With regard to your comment about product aquisitions, can you name any software services company that has successully transitioned from a services company to a product company? If the company has tremendous growth prospects in services and can sustain its margins then why would you suggest a change of strategy?

Raju Agarwal

Raju Agarwal Thursday, October 18, 2007 at 1:13 PM PT

Hi Raju,

I used the term body-shopping in full consciousness of all the issues you raise above.
Today, Infosys’ business model is based on head-count. To scale, they need more bodies deployed. Yes, it is an over-simplification, but it is, by and large, true.

I am not suggesting a change of strategy. I am suggesting a remixing of the business model, so that its dependence on head-count driven scaling is reduced.

Infosys will not need to transition so to speak from services to products. It needs to acquire products / SaaS companies to make this happen.

Yes, the best example of a company that first got its services strategy together, and then started acquiring software products is IBM. Ofcouse, there is a long history of product DNA in IBM.

But the league in which Infosys is playing in, it should be able to pull it off.


Sramana Mitra Friday, October 19, 2007 at 8:55 AM PT

There was a recent report from ICICI Securities stating that Infosys was leading the SWITCH 6 in terms of SaaS. And that SaaS will be an important driver of growth for Infosys in the future. In a sense, you are merely stating the obvious. But I agree with you in that Infosys should accelerate its efforts in this regard. I also think that Infosys should put its cash to work by creating a PE Fund to take advantage of the growth opportuntities within India.



Raju Agarwal Friday, October 19, 2007 at 10:10 AM PT

When I read the title of the blog , I was tempted to ask the same question as Raju, and then I realized where you are coming from: you use the term “Body-Shopping” to imply “software services” (in a non-derogatory way … just to ensure the blog has a catchy headline 🙂

The example of products company (big blue) morphing into a products-and-services firm is a case study in itself. But there again, there are no cookie-cutter models out there: Services firms (Infosys included) are leveraging innovations that are helping improve productivity that have begun to pay dividends. Examples of such ‘innovations’ include reusing ready-to-use-frameworks, toolkits, software solutions and other tools

Mohan Tuesday, October 23, 2007 at 12:09 PM PT

Hi Mohan,

You are very smart 🙂 Whatever you may conclude from reading my blog, I am sure it doesn’t include that I am particularly naive.

Yes, I used body-shopping as a provocative phrase to imply software services / headcount based businesses versus somethings that are more leveragable. Also, I have been in services businesses myself, and am very familiar with software toolkits, reusable blocks, etc.

However, the software product business model has always produced extremely high gross margin businesses. That’s why, it is important to look into them.

SaaS is a different story. Today, SaaS companies have very low profitability, but huge
predictability and recurring revenue advantages, which is why they get the kinds of multiples they do.

Anyway, I have to go, but more on this stuff later.


Sramana Mitra Wednesday, October 24, 2007 at 9:20 AM PT


Irrespective of the term one uses, it is very true that Infosys business model is based on the head count and one of the key metric used in their business model is “human resource utilization” or “%ge of bench time”. When you talk to some of the Infosys employees who are here on a H1 or a F1, you will realize that they are earning much lower than a comparable person employed by a US company. It is very true that the Infosys business model is based on the lower salaries for equivalent resources. But, we all know that the lower cost advantage is not sustainable over the next 5-10 years – this is already starting to erode.

On the other hand, it is great that Infosys has successfully scaled up the offshoring phenomenon and grown to where they are today. Infosys will certainly continue to migrate to a model where the cost savings will be more from their processes and expertise than just the cost per head count.

However, I always wonder why India or Infosys has not been able to produce software products or web 2.0 products globally acceptable? What will it take to drive younger Indians to move from their comfortable jobs at Infosys or TCS and move to a more entrepreunerial, risk environment.

One thing Infosys should do with the pile of money they have is set up incubation teams within Infosys to develop globally competitive products, fund them and spin them off. OR the incubation centers could be formed as a joint venture for specific verticals between Infosys, Wipro, TCS, etc.

Sudhakar Avula

Sudhakar Avula Saturday, October 27, 2007 at 5:01 PM PT

Hi,Sramana Mitra
I agree with you, if you closely observe throughout industrial revolution the industry leaders will set not only standards but gives industry a direction. Surprisingly many times they end up in telling us what they were doing all through was NOT THE BESTWAY (it’s called own Product/Process Killing).If INFOSYS fails to understand this I am sure that a junior player outwit them sooner than they believe. One such possibility is DOMAIN SPECIFIC LANGUAGE DEVELOPMENT

M.V.subba rao Monday, October 29, 2007 at 5:39 AM PT

This is an argument ( “Infosys should diversify into products” )I heard from the time I worked in Infosys in 94-95, but I think its largely superficial. At the end of the day investment decisions are based on ROI and it is difficult to see how Infosys can generate higher returns on products when it lacks the capability in that space (no customer ecosystem, no proprietary technologies, lack of product development culture etc.). Infosys will be better off finding opportunities for the system integration/ global delivery capabilities it has rather than both developing product development capabilities and developing markets for them. Incubation efforts are unlikely to move the needle at the organization level and would be more of fancy than hold any serious investment returns. Also I don’t get what’s wrong with human resource based model – isn’t that what McKinsey, Accenture, KPMG, EDS etc do?

Bhanu Pullela Monday, October 29, 2007 at 1:41 PM PT

Yes, but Infosys’ competitive angle has been the significantly lower cost structure that India has historically offered.

What happens in 5 years, as that cost-structure advantage erodes?

How is it going to compete against Accenture?

And no, there is nothing inherently wrong with the head count based business model. It’s just that Infosys has the opportunity to move up the value chain, which of course, it may choose not to do, and remain a back-office for its clients.

Profitability will erode over time, as cost of labor goes up. Stock price will go down.

Just a few relatively harmless possibilities that perhaps were not as great threats when India was not yet booming.

Today, the salary escalation alone makes any labor arbitrage based business model somewhat more dangerous.

Sramana Mitra Monday, October 29, 2007 at 4:34 PM PT

[…] don’t think so. I have said that the time has come for Infosys to take a good look at the software eco-system in the… The pure body-shopping business needs to start looking at including SaaS, for […]

Infosys In Light of Recession Fears - Sramana Mitra on Strategy Monday, January 14, 2008 at 2:32 AM PT

[…] Wipro, assuming that they want to preserve their business momentum, will need to diversify their portfolios away from pure body-shopping and process competencies to technology driven advantages. The obvious place for them to go is Software-As-A-Service (SaaS). Their current market caps and […]

Death of Indian Outsourcing - Sramana Mitra on Strategy Tuesday, January 22, 2008 at 12:59 PM PT

[…] Wipro, assuming that they want to preserve their business momentum, will need to diversify their portfolios away from pure body-shopping and process competencies to technology driven advantages. The obvious place for them to go is Software-As-A-Service (SaaS). Their current market caps and […]

The Death of Indian Outsourcing at VentureWoods Friday, January 25, 2008 at 1:59 PM PT


I agree generally with your view. I would like to make a couple of points here:

  1. Infosys’s model is primarily a head-count based model (polite term used for body-shopping) and unlike a manufacturing company, Infy has to add huge numbers to increase their turnover.
  2. Profits at Infy has been largely driven by the very advantageous resource mix – very large percentage of freshers and <2 years experience. This allows cost arbitrage for the customer and good profits for Infy.
  3. Infy, with its “learnability” mantra has the technological and money power to incubate product-development teams as a medium-long term strategy.

Finally how long can Infy add HC at the rate of 20% year-on-year and where will it end ?

Sathya Saturday, March 1, 2008 at 5:28 AM PT

Hi Sramana, it’s a very smart piece and a few words about slightly distant though connected issues. Why don’t you write a series on IT entrepreneurship of last decade across US-India coverage and give the readers part of your great insight earned through strange cross culture dare devil personal experience ?

anubhab sen Friday, April 25, 2008 at 3:43 AM PT

Hi Anubhab,

Not quite sure what you are looking for. I have covered a lot of Indian entrepreneurs operating in Silicon Valley. Are you looking to see case studies of IT outsourcing entrepreneurs?

By the way, “strange cross culture dare devil personal experience” – I like the image. That this is the image my writings evoke for you makes me smile!


Sramana Mitra Friday, April 25, 2008 at 9:05 AM PT

[…] For a more data-centric analysis (with lots of % signs) of the body-shopping phenomena, check out Sramana Mitra’s […]

Software Engineering or Software Bodyshopping? « Kishore’s Weblog Friday, September 19, 2008 at 4:15 AM PT

Hi Sramana,

I am as well catched by that headline which for me meant also as those outsourced IT services worldwide which made Infosys develop better system through the years. With increased service and decreased costs, it can be a better option for most companies nowadays while facing the economic regression to be up and going in the business.

Tyrone Tuesday, March 9, 2010 at 9:35 PM PT

Tough to grow in this economy… but hey, some companies NEED that growth in order to survive..

Massy Monday, April 19, 2010 at 4:24 PM PT