Infosys And The Premium Pricing Conundrum

Posted in Finance Articles, Total Reads: 4532 , Published on October 02, 2012

Eleanor Roosevelt once said, “The future belongs to those who believe in the beauty of their dreams.” In 1981, a young, middle-class man from Mysore who had once given up on an opportunity to pursue his graduation in an IIT because he couldn’t afford it, saw a dream. That dream was to build one of the most respected corporations in the world. All he had back then was a paltry sum of Rs. 10,000 ($250), which was invested by his wife and the assistance of 6 bright, enthusiastic men. He started off in a little apartment in Pune, which was also his home.

The man in question is Infosys’s N.R. Narayana Murthy. The initiative that got its wings with $250 is now a $7 billion company with a market capitalization of over $26 billion. The company that started off with seven headstrong individuals now provides direct employment to over 1,50,000 people. The organization that found its feet in a little apartment in the sleepy town of Pune is now present in some of the most prosperous countries in the world and is listed on the Nasdaq. Infosys is proof that the Indian middle class can command the esteem of the world by the sheer potency of its diligence, ethics and intellect. It is not just an initiative, a company or an organization; it is indeed a dream!

After having soared the skies for so long, the Infy dream is on a wobbly path and nothing burns more vigorously than a dream on fire. Competitors have started catching up, market capitalization has gone south and market share has been eroded. To say that the dream has already turned into a nightmare would be a tad too callow but if the right questions are not asked now, an upswing would only be a fanciful possibility.

Infy has always positioned itself as a premium player in the IT services industry and high quality has been its pivotal differentiator. This has allowed it the leeway of maintaining a premium pricing strategy in a fiercely competitive market, which allowed it to enjoy higher profit margins as compared to its peers. This strategy which was once its greatest strength is now a cause for immense skepticism and consternation. While the management has made it clear time and again that compromising on the premium pricing strategy is certainly not an option, many believe it is the main factor behind the woes it finds itself in. That is the big question – Is Infy’s obduracy about premium pricing justified?

In the last 10-year period, the net profit margins of Infosys have been 25-33% while Wipro’s net margins have been around 20%. Cognizant’s net profit margins have been around 15-17%. Only the margins of TCS were in the twenties and are now nearly the same as that of Infy. Is lowering the profit margin a way out of the rut? Here’s a perspective from Ravendra Chittoor, Assistant Professor of Strategy, ISB:

“A BMW will not suddenly get into production of low-quality cheap cars if its sales stutter for a few years. BMW’s strategy is to provide a unique value to its customers, albeit at premium prices. A Southwest Airlines or a Ryanair will not add a business class or start charging premium prices just because their margins shrink for a few years. Their unique advantage is low-cost leadership in the markets they operate in. Companies do come up with short-term plans to weather downturns, but never at the cost of undermining their long-term strategy.”

Premium pricing has always been an innate part of Infy’s long term strategy and going back on it would lead to a difficulty in providing high quality services – its foremost differentiator over the years. However, with competitors scaling up and providing services to match Infy, demanding premium prices from its clients is going to get more difficult with every passing day. Sounds like a classic case of a catch 22 situation! Moreover, getting rid of its ‘premium price, high quality’ tag won’t be the most salubrious thing for its brand equity.

A good way out for Infy would be to move up the value chain; provide something unique which would enable it to command a premium price. A strategic shift is the need of the hour. Providing quality software services has always been its forté but sticking only to this domain with its premium pricing mindset would be a substantial step towards the death knell. In today’s rapidly changing ‘flat world’, stagnation of a business enterprise is often a harbinger of a moribund state. The Global Delivery Model (GDM) which was conceived by Infy and which changed the face of the Indian IT industry has been adopted by its competitors and, at the moment, there is little or no difference between Infy’s offerings and those of its competitors. Some aggressive steps are needed.

The focus has to be on innovation, developing products, systems integration and consultancy services. Infy will have to come out of its conservative mindset and get belligerent. A strategy called Infosys 3.0 is in place and, according to CEO Shibulal, consulting & systems integration are its cornerstones. With a cash reserve of over $3.2 billion, growing the inorganic way to achieve the objectives of Infosys 3.0 is a feasible and warranted option.

The latest acquisition of Lodestone Holding, a Switzerland-based global management consultancy firm for $350 million has warmed the hearts of many a stakeholder, especially after their much publicized bid to acquire UK-based Axon Group was lost to HCL Tech in 2008. Consulting hasn’t been one of Infy’s biggest strengths but this acquisition will strengthen its consulting and systems integration capabilities, by bringing more than 850 employees, including 750 experienced SAP consultants to the company. Lodestone will add more than 200 clients across industries, including manufacturing, automotive and life sciences, to the Infosys pool of over 700 clients.

A big step has been taken and all the right noises are being made by the top management.  Statements like ‘Inorganic route will be a key growth driver going forward.’, ‘Infosys is not done with buys yet.’ and ‘It’s time to stop using conservative and Infosys in the same sentence.’ made by CEO Shibulal have become the talk of the town. There’s a reason to believe that the mojo is back. Suddenly, there is an air of expectancy about Infy. Exciting times lie ahead and every stakeholder in the Infy dream is likely to observe keenly. The dream is alive and kicking and the tipping point might just be round the corner. After all, the future belongs to those who believe in the beauty of their dreams!

This article has been authored by Rohit Haldankar from Welingkar.

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