Infosys debates hiving out products business

Narayana Murthy is said to have reopened the debate on whether the company should hive off its products, platforms and solutions (PPS) business into a separate entity.

BANGALORE: Infosys chairman N R Narayana Murthy is said to have reopened the debate on whether the company should hive off its products, platforms and solutions (PPS) business into a separate entity.

The division accounts for about 5.5% of Infosys's over $7 billion revenue. The IT company's vision under its 3.0 strategy has been to raise it to 33%, but three years into this strategy, the PPS needle has barely moved.

Several current and former senior executives of the company said discussions on the subject had been initiated, but it was difficult to predict which way the decision will finally go. None wanted to be named. Infosys declined to comment on the story.

Similar discussions had happened around the time 3.0 was formulated, but the dominant view then was to keep it within the larger services entity. Given the slow progress of the division since then, the arguments for a hive-off may gather strength.

The primary argument for a hive-off is that the culture and compensation structure of a products business has to be vastly different from that of a services entity.

"Selling products is a different skill set than selling services. It requires a team with a different DNA to be successful," said Ray Wang, principal analyst and founder of Constellation Research.

A former Infosys executive said the business needed to be made independent. "You have to create IPs, you have to work like a startup, you have to have a better compensation structure. And you can't have that if you are inside a services company," he said.

Arup Roy, research director in Gartner, said a product-oriented approach required a longer gestation period. "You have to invest upfront and the payback cycle is longer, so there is a different cost dynamics. Operating metrics, resources and R&D focused approach requires a different organizational structure," he said.

Infosys has had great success with the banking product Finacle that it launched in 2000. It has an estimated two-thirds share of commercial banks in India and significant shares in Africa and Asia. It is used by 168 banks across 81 countries, and it forms over 4% of Infosys's total revenue. But this also means that the rest of the PPS division, which now consists of over a dozen products and platforms, accounts for a mere 1.5% of revenue, despite the focus in recent years.

Infosys has said that acquisitions would be important for PPS to make a leap. "But it will be difficult to integrate a product acquisition into a company that is largely a services one. Even for acquisitions, it would be better to have the division as a separate entity," an industry analyst said.

Some believe that having it as a wholly-owned subsidiary of the parent company would also be shortsighted. "In products and IP creation, you need to incentivize employees with stock options, and for that to make any sense, you have to enable a structure that gives the entity its own valuation. Otherwise it will carry the valuation of the parent company. What then will be the incentive for an employee to move from the services side to the product side? So you need to bring a separate investor into the subsidiary," an analyst said.

But most also believe that the products and platforms business will have to continue to work closely with the services side. "I think it's really important for Infosys to have their PPS division. You need products and IP in the new world of services in order to scale growth and not be perceived as just a body shop," Wang said.

"IT services, BPO, and products should each be distinctive, but at the same time feed into each others commonalities, and must be led by consulting," an analyst said.

Division talk

Products, platforms and solutions business accounts for 5.5% of over $7bn revenue

3.0 strategy aims at raising it to 33%, but 3 yrs on there is little progress

One argument for hive-off is products biz culture has to be different from that of services entity

One of successful products of Infosys, Finacle, has two-thirds share of banks in India and significant shares in Africa and Asia
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