Sikka to move Infy away from time & materials model

As Vishal Sikka, CEO of Infosys, prepares to articulate a “detailed strategy” in April that steers the company back to industry leading growth in 18-24 months, one of the things he plans to tackle head on is to move the company away from time and materials (T&M) projects to fixed price projects (FPP) and outcome-based projects that offer better margins.

“Currently, 56-58 per cent of the projects that we do are T&M projects and the rest are FPP and outcome-based projects where margins are higher. While more than 40 per cent of our projects are fixed price, outcome-based projects constitute less than 1 per cent of the 22,000 projects that we have today. I want to grow the contribution of outcome-based projects significantly, which will get us a revenue share from the customer,” said Sikka, who believes the future lies in moving away from the T&M “hell” the industry and Infosys has been wallowing in for decades.

Indian IT service firms are trying to move away from the T&M ‘cost arbitrage’ business model to a ‘risk and reward’ outcome-based model where the pricing of the project is based on a pre-defined business outcome that the IT services provider has to deliver in order to be paid.

Analysts say that margins can go up to 60/70 per cent in FPP and the sky is the limit for outcome-based projects. While Sikka’s near term objective is to achieve margins of 25 per cent plus or minus 1 per cent for FY 2015, in the long term he is looking to maintain margins between 25-28 per cent.

Asked about the optimum offshore/onsite revenue model mix for Infosys where the bulk of the billing happens for offshore work, while in many cases clients are demanding more onsite presence, Sikka said: “Onsite and offshore will become less relevant as you will see much more distributed, real time collaborative teams working out of multiple locations, using the power of technology. While there is obviously no substitute for onsite work by our teams in customer locations, the key is to amplify the onsite teams with teams sitting elsewhere.”

Since taking over as CEO last August, Sikka has been busy with the revamp of Infosys’ operational structure by separating delivery from sales; unleashing a slew of employee-friendly initiatives/incentives to stem attrition; driving innovation from the grassroots; introducing Infoscions to design thinking and proactive approach to solving customer problems; and inducting his ex-colleagues from SAP where he worked before joining Infosys.

Revenue per employee growth, which is the revenue divided by the number of employees in the company, has steadily been inching up from a little below $52,000 per employee to $52,300 in Q2 and to $52,700.