Is employee attrition the biggest challenge for Infosys?

There is more to the troubles of Infosys than highlighted at the Barclays investor conference where the management said that they would meet the lower end of its guidance.

Most of the analysts in the market have appreciated the changes taking place at Infosys after the entry of N R Narayana Murthy. However, the investor conferences held by Barclays and other brokers recently underscore the bigger issue.

Over the last three weeks, Infosys management has attended three investor conferences. Infosys management gave a picture of normalcy in their meets on February 16, 2014 and February 26, 2014.

Yet within a fortnight of the last conference, they realised that the best the company could do was meet the lower end of the guidance.

Even if we give the management benefit of doubt that they needed two full months of numbers to give a clear picture, the reasons cited by it for not meeting analyst expectation shows that the problem was more structural and they would have known about it from the beginning of the quarter.

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Let's first list down the main reasons for non-performance cited by the management. First of all, the management admitted that the issues are Infosys specific and not spread across the board.

Nasscom, the face of the industry has said that the sector is expected to grow at 13-15 per cent, Infosys on the other hand is barely expected to touch the double digit mark, while TCS and HCL Tech are expected to see higher than industry growth.

Infosys said that on the external front there were client-specific issues which led to unexpected ramp downs and cancellations. Broader level clients have seen slowdown in their business across verticals like manufacturing (especially Hi-tech) and retail.

On the internal front they had a problem of skill mismatch which led to slower ramp-ups.

If none of the other players are witnessing a slowdown in order flows then even the external factors cited by Infosys is due to the unwillingness of their clients to ramp-up their business with the company.

The only plausible reason can be that exit of senior level personnel of the company has started affecting the company's performance.

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Ankur Rudra and Nitin Jain of Ambit in their report believe that the company is living in denial when they assert that the loss of senior management officials and overall attrition is not hurting the company.

Murthy's public criticism of departing employees is only going to hurt existing employees morale further, Ambit's report says.

Infosys saying that they have a skill mismatch despite having one of the lowest efficiency levels suggest higher attrition in the company and its inability of retaining talent as the employees who quit were actively working on important projects.

Software business is more of a relationship business rather than only skill sets, especially the generic work done by most of the Indian companies.

IT programmers have been a commodity since Y2K. The main differentiator more than rates and deliveries is the comfort the client has in working with the company.

For the client the face of the company is the person they are interacting with over the years. Companies in their result presentation stress on repeat business to drive home the point of their trust with the customer.

In the case of Infosys, the company seems to be losing the trust battle if the reports are to be believed.

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The human resources problem is now clearly reflected in Infosys' financial performance, but the worst is yet to come.

Ambit says that the company is facing higher attrition both at the senior management levels and rank and file level. This will result in the company facing account mining challenges and will have to give higher than industry wage hikes to retain talent.

The initiatives taken by N R Narayana Murthy has not yet reflected in the company's performance. The company is increasingly becoming a sweatshop, relying more on commodity business and increasing its focus on offsite rather than higher margin onsite business.

Coupled with its human resources issues, the company is on a path of reducing margins. Yet only 10 per cent of the analysts covering the company have a sell call on the company.

Clearly the trust of analysts in N R Narayana Murthy is very high based on his credentials and vision that helped Infosys become a world class IT company.