How Infosys’s $20 billion revenue target by 2020-21 is hurting the firm

Bengaluru: Infosys Ltd, despite a relatively good performance over the past two years, is battling perceptions of under-performance because of its inability to keep pace with its ambitious target of more than doubling its revenue to $20 billion by March 2021.

This target appears to have done more harm than good: analysts continue to rate the company using it as a metric; and people in the know attribute the departure of at least a few senior executives over the past few years to it. Now, an analyst at a foreign brokerage has suggested that the company is better off without the target.

“Management continues to maintain ‘aspirational’ revenue and margin targets that are increasingly becoming unlikely to be achieved, in our opinion. Given Infy (Infosys) is now guiding to lower levels of both revenue growth and margins in FY18 (2017-18), we think management would be well-served to either amend or drop its aspirational targets,” Keith Bachman, an analyst with BMO Capital Markets, wrote in a note dated 16 April.

Based on its guidance for 2017-18, issued last week, Infosys expects to end the year with revenue of between $10.8 billion and $11.3 billion.

Infosys maintains this target is an ambition and the management has no plans to dump it.

In April 2015, Infosys first outlined its ambitious target: India’s second largest software firm wanted to become a $20 billion firm with 30% operating margin and to generate $80,000 in revenue from every employee working on a project.

In 2016, it tweaked the deadline to 2020-21.

Infosys ended financial year 2015 with $8.7 billion in revenue, 25.9% in operating margin and generated $52,300 per employee.

Two years later, Infosys managed a compound annual growth rate of 8.25% to increase its revenue to $10.21 billion but operating margin declined by 120 basis points to 24.7% and revenue per employee slipped to $51,400, making many question CEO Vishal Sikka’s strategy.

One basis point is one-hundredth of a percentage point.

Not that Sikka hasn’t delivered.

Since outlining this target, Sikka steered Infosys to dollar revenue growth of 9.1% in 2015-16 and 7.4% in 2016-17; for the second consecutive year, Infosys will grow faster than its larger rival Tata Consultancy Services Ltd (TCS) and cross-town peer Wipro Ltd (Wipro).

Still, Infosys continues to be evaluated on the progress it makes in becoming a $20 billion company.

Worryingly for the management, a bigger fallout of the targets has been the pressure on senior leaders, making a few of them leave.

Since April 2015, half-a-dozen executive vice-presidents (EVPs) and a dozen senior vice-presidents (SVPs) have quit. Not all departures are on account of the targets but two former executives admit that they left Infosys as they could not keep up with the “impossible targets.”

“The industry is going through a structural change, and to make it worse, you set yourself impossible targets,” said a former EVP, who quit last year. “A large component of a senior executive’s salary is tied to company’s annual growth, which itself is linked to the long-term target.”

Infosys says it outlined a target to make its employees work towards a goal and eventually help script a turnaround.

“We gave this target because we believed this would help motivate employees, and help the CEO make them work towards a goal,” one board member, who was part of the goal-setting exercise, said on condition of anonymity. “Looking back, I’m still not sure if it was a wrong step. I’m still on the fence, thinking how and what we could have done better to make sure hopes did not run high and employees did not come under pressure.”

One of the things Infosys could have avoided was linking Sikka’s salary to the target, said the second executive who quit, a former SVP. This seemed to suggest that this was much more than an aspirational target, as the CEO himself has repeatedly said.

A weak performance in this year hurt Sikka, who earned $6.8 million in 2016-17, less than the $7.3 million he earned in 2015-16. Sikka got $3.8 million of the promised $8 million performance-related pay, despite a clause in his employment contract that guaranteed him at least 90% of his $11 million salary (including bonuses).

It is a general practice for companies to have long-term goals. Wipro, under Abidali Neemuchwala, has outlined an ambition to become $15 billion firm with a 23% margin by March 2020. India’s fifth largest software firm, Tech Mahindra Ltd, too has set a goal of more than doubling revenue to $10 billion by March 2020.