Infosys Leads Indian Outsourcing Back to Its Roots

TheStreet.com

NEW YORK (TheStreet) -- It's a small world after all, and on the other side of it, N.R. Narayana Murthy is a name to be reckoned with.

Murthy, 67, co-founded Infosys , one of the country's biggest information technology companies, in 1981. It started as a dirt-cheap way to get software written, sort of the way South Korea got into animation.

But it became much more than an outsourcer, and today it has offices around the world, including 18 in the U.S., where it employs more than 3,000 people.

Infosys is still basically a contract developer, but it's one with global reach. It has made multiple acquisitions in the U.S., including a company in Atlanta, as well as companies in Australia and Switzerland. Its headquarters in Bangalore is the height of elegance, and its building in Pune, where it was founded, looks something like an Easter Egg.

Murthy himself is worth an estimated $1.7 billion, and his wife runs a foundation that does good work. As the The Times of India noted in a September profile, Murthy also has a touch of Andrew Carnegie to him.

When Murthy retired at age 65, about 2 1/2 years ago, it was expected he'd devote himself to those good works as Bill Gates of Microsoft has done.

S.D. Shibulal, his successor, who remains CEO, tried to turn Infosys into a platform company, a products company and a consultant, one that could compete head-to-head with American companies such as IBM and Hewlett-Packard .

It didn't work. Sort of like Microsoft, Infosys lost its way. It tried to do new things and lost its niche. Its American depositary receipts, which trade on the New York Stock Exchange, lost nearly half their value, dropping from $75 in early 2011 to $40 in July of 2012, and they were still bouncing around there last June when Murthy decided to return as executive chairman.

Shibulal also tried to make Infosys into a U.S. company without paying full U.S. wages, according to whistle-blower Jay Palmer, who claimed the company illegally brought in workers under B-1 business visas but treated them as HB-1 employees, demoting Americans. Palmer lost his suit, partly because Alabama, where he lives, is an "employ at will" state, but it still resulted in an embarrassing criminal probe and political heat for Infosys.

What Murthy has done since his return is to bring Infosys back to its roots, as the India-based low-cost provider of custom programming, and so far it's working. Revenue grew 15% in dollar terms during the September quarter, just reported, which is no mean feat given that the Indian rupee fell 11% in value during the same period.

Margins are down, but Murthy is making it up on volume, taking advantage of the cheap rupee to undercut Western companies on price.

The problems with Infosys are a mirror of India's economic problems in general. The country has many skilled professionals, but it has made its niche as a low-cost provider, and when it tries to move up it has trouble. Its best and brightest working in the West get recruited by competitors, and it winds up back where it started.

Murthy hasn't solved the problem, yet. So far he has mainly brought in more lower-level programmers and gone back to Infosys' roots. He may have "fighting spirit," but Murthy will have to offer more if Infosys, and the Indian information technology sector, is to get the respect it feels it deserves.

At the time of publication, the author held shares of IBM.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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