Infosys counting on employee cost reduction for quick gains

Infosys founder NR Narayana Murthy, who returned back from retirement in June to once again lead the IT major, is working on a three-pronged strategy to improve the company's financial performance.

Infosys is now aggressively focusing on large low-margin "bread and butter" IT deals it went slow over the last two to three years. India's second-largest IT company is also working to improve the quality of its sales force. These two strategies could start yielding results after three years, Mr Murthy told analysts of global investment bank Barclays.

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One strategy Mr Murthy is counting on to deliver results much ahead of expectations is cost optimisation through a reduction in employee costs. According to Mr Murthy, the company is looking to decrease the proportion of senior people onsite, by rationalizing its role ratio; reduce the usage of subcontractors by improving internal training; and reduce the number of people in onsite locations in business enabling functions.

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The need for cost optimisation arose because Infosys has been unable to deliver industry-beating margins that made the company a favourite among investors. Infosys' operating margins have declined by 360 basis points between 2010-11 and 2012-13 because of a significant increase in employee costs and the management feels its needs to be corrected.

For the July to September quarter, Infosys delivered an operating margin of 21.9 per cent, the weakest among India's frontline outsourcers.

However, the need to optimise costs will not be at the cost of antagonizing the 1.6 lakh strong work force. Employee morale at Infosys had suffered over the last few quarters as the company slipped in the pecking order, losing to late starters such as New Jersey-based Cognizant.

In the past two to three years, senior management took significant cuts in their own compensation as growth came off. Infosys also downgraded other facilities like hotel and airline entitlements for the top management.

The low revenue growth led to no wage increase in FY13 for all employees and the slow revenue growth also led to lower bonuses even for the high performers.

Mr. Murthy believed that freezing salaries was not fair to most of the rank and file employees and hence

Infosys announced a wage hike for all eligible employees in June.

The senior management of the company is now taking a more proactive role in improving employee morale and leading by example, Mr Murthy said. The company will also pay its top performers better, he added.

Barclays seems convinced that cost optimisation could lead to better margins. The brokerage retained its "overweight" call on Infosys and raised its12-month price target on the stock to Rs 4,150, which is around 25 per cent higher than current market price of Rs 3,300 per share.