978-1259913747 Infosys Consulting In The US Case

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Structure of the Case

use to bring skilled foreign technical workers to the United States. These changes would constitute a

significant blow to Infosys’s business model, which relies on the ability to source technology work from

wherever high-quality talent is available at a cost-competitive rate.

Infosys was founded in Pune, India, by N. R. Murthy and six friends in July 1981 (it later relocated to

Bangalore). Because India lacked an established software development industry, the company focused

listed (on NASDAQ) in the United States. Today, Infosys is one of the world’s leading IT service firms

with annual revenues nearing $5 billion and a presence in more than 30 countries; its North American

operations account for 68 percent of overall sales.

The rise of outsourcing and offshoring in the IT industry can be traced to the global delivery model

(GDM) pioneered by Infosys in the 1990s. GDM involves sourcing work where it makes the best eco-

offering a wider range of services. While the overall company has been a top performer in the offshore-

outsourcing market, the consulting arm has yet to break even on its initial $45 million investment.

The consulting industry grew rapidly through the 1980s and 1990s, but is now considered to be in a

mature stage of development; future growth prospects are limited. Technology consulting comprises

Professor Marne L. Arthaud-Day, Research Associates Leena Makhija (GT MBA ’10) and Sukonya Gogoi (GT MBA’10), and Professor Frank T.

Infosys Consulting in the U.S.—What to Do Now?

TEACHING NOTE

MHE-FTR-012

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Rev: JANUARy 6, 2012

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

roughly 46 percent of the $330 billion global consulting industry. Because IT consulting requires mini-

mal contact with clients, the industry tends to be globalized and is well suited for outsourcing to low-

cost, high-skill destinations such as India. Major competitors include management consulting firms

(Accenture, Deloitte Consulting, McKinsey) with IT divisions, broad technology consulting firms (HP

Enterprise Services, IBM IT Services, and Indian-based Tata Consultancy Services and WiproIT Business),

and smaller boutique firms with a more focused area of expertise.

Infosys Consulting faces several challenges in its international political-legal environment. With the

invest in India. Meanwhile, all technology firms conducting business in the United States are caught

in the middle of a heated H-1B visa debate. Corporations are lobbying for increased opportunities to

bring foreign technology workers to the United States, while opponents argue that there are plenty of

American-born technologists to fill these jobs and that the H-1B visa program is marred by fraud. To

date, the debate has generated more rhetoric than legislation, but H-1B visa reform of some kind seems

Suggested Answers

AnAlySIS: FoCuS on InTErnAl AnD ExTErnAl EnvIronMEnT

1. Perform a PESTEL analysis of the IT consulting industry.

The case discusses macrolevel environmental trends in all of the PeSTeL segments except for envi-

ronmental. Ask students to describe these trends, and then engage them in a debate regarding which

three or four are likely to have the largest impact on the IT consulting industry in the next few years.

• Political – Senators Durbin and Grassley continue to push for H-1B visa reform, even though previ-

ous attempts at legislation have not proven successful. They would like to see the number of H-1B

visa holders limited to less than 50 percent of a company’s work force. In contrast, technology firms

are advocating an expansion of the H1-B visa program, arguing that foreign workers bring vital

economic benefits to the United States.

• Legal – The IT consulting industry is directly affected by changes in Indian and U.S. tax codes. Tax

protection under India’s Software Technology Parks program expired in March 2011, and the exemp-

tions afforded by relocating to special economic zones phase out gradually over a 10-year period.

Meanwhile, India’s new Direct Tax Code goes into effect in 2012. While many of the changes appear

to be positive (reduction of corporate taxes, a simplified tax regime resulting in lower administrative

expenses), both Indian and foreign firms will likely experience significant uncertainty as they adjust

to the new regulations. One particular concern is that the taxation of offshore deals is likely to increase

the cost of acquisitions and therefore have a negative effect on foreign direct investment in India.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

While the United States has yet to pass any new tax laws related to offshoring, President Obama

has stated his desire to start taxing all income earned outside of the United States. If such a law is

implemented, the tax burden on U.S. companies would increase significantly (currently income is

only taxed once it is repatriated to the United States).

2. Analyze the structure of the industry utilizing the SCP model. How does the IT consulting

industry structure influence Infosys’s potential profitability?

According to Plunkett Research estimates, global revenues from the consulting industry were close

to $330 billion in 2008. After growing rapidly (20 percent annually) throughout the 1980s and 1990s,

consulting is now considered a mature industry that is experiencing low growth or decline (–3.5 per–

vide onsite management of the client’s computer systems and data processing facilities.3

Although there are several large firms that dominate the industry, collectively they account for only

around 25 percent of revenues. Along with the fact that there are over 300,000 enterprise firms, this

suggests that the IT industry is best considered as monopolistically competitive. There are many firms

ForMulATIon: FoCuS on BuSInESS, CorPorATE or GloBAl

STrATEGy

3. Create a strategic group map for the IT consulting industry, identifying any mobility barriers that

restrict movement between strategic groups.

A strategic group map for the IT consulting industry might look something like the graph in exhibit

TN-1. We selected geographic distribution as the horizontal axis to highlight the vast exposure of major

global firms like Accenture, McKinsey, and Deloitte versus international and then regional or local bou-

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

services. Deloitte is placed closest to HP enterprise solutions, because the two firms compete head-to-

head for many government contracts. There is a second cluster of firms that are clearly major interna-

tional players, but which have focused more specifically in the technology services area. These include

HP enterprise Services, IBM, and the three major Indian companies (Tata, Wipro IT, and Infosys).

Among these, IBM is the largest, whereas HP enterprise Services has one of the broadest IT service

portfolios in the industry. Wipro, Tata, and Infosys are somewhat less diversified and have less of a

global reach. Infosys in particular has been heavily focused in North America. The blue dots in the bot-

tom left-hand corner represent the over 300,000 boutique or enterprise-level firms in the IT consulting

industry. They offer a more limited set of services over a much narrower geographic area, but success-

fully meet the needs of many small-to-medium-sized firms.

The dashed green lines indicate that there are significant mobility barriers (economies of scale) pre-

venting boutique firms from becoming global IT service providers. Another set of mobility barriers

(economies of scale, access to clients) makes it difficult for the global IT service providers to enter other

consulting areas.

4. How might culture play a role in Infosys’s ability to formulate and implement a successful

strategy for its U.S. consulting arm?

Hofstede’s cultural dimensions may be considered microfoundations that influence how strate-

gic leaders formulate and implement strategic plans. Being aware of cultural differences is especially

important when engaging in international business, as it helps managers understand the national insti-

Comparing the two countries across the five dimensions reveals that the United States and India

have similar scores with respect to uncertainty avoidance and masculinity/femininity. This indicates

that people from both countries have moderate tolerance for ambiguity and fairly similar preferences

The United States, however, scores significantly higher than India on the individualism/collectiv-

ism dimension. In fact, the United States ranks highest in individualism amongst all the countries

studied by Hofstede. This means that U.S. managers typically prioritize task over relationships, and

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

an accepted part of Indian society, and shape the way members of different castes associate with one

another. Organizationally, India’s higher power distance score translates into more centralized decision

structures, concentration of authority, higher levels of supervisory personnel, and a reliance on formal

rules.

Finally, India tends to have a longer time orientation than the United States. Where U.S. managers

want quick results, Indians place a stronger emphasis on persistence, perseverance, and thrift (with

an eye toward the future). This can result in significant differences in expectations as well as plan-

ning horizons when negotiating contracts. In light of these differences, Infosys should provide cultural

training for any Indian workers it brings to the United States, to help them adapt to the Americans’

fast-paced, results-driven, individualistic and egalitarian work environment.

IMPlEMEnTATIon: FoCuS on rECoMMEnDATIonS AnD HoW To

ExECuTE THEM

5. What makes IT consulting a suitable industry for offshore outsourcing? Is India’s competitive

advantage as an attractive offshore destination sustainable?

The global outsourcing market reached over $1.4 trillion by the end of 2009, and is growing at a

compound annual growth rate of 15 percent. Outsourcing activity is most highly concentrated in the

banking and financial services, technology, and health care industries. What these industries have in

common is a significant subset of business activities that require low levels of integration with home

India’s competitive advantage as an attractive offshore destination in technology services is depen-

dent on several factors, which are listed next. Their relative importance is depicted graphically in

exhibit TN-4 (Case exhibit 6).

Unfortunately for India, the sustainability of these factors is becoming increasingly uncertain in light

of major changes in the political and legal environment. With respect to the availability of low-cost labor,

global competition for India’s highly trained labor pool is increasing, resulting in higher wages and

greater employee mobility. High job turnover translates into higher costs for companies as they seek to

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

Press Trust of India. Narayana Murthy laments falling standards of IITians. October 3, 2011. http://

www.thehindubusinessline.com/industry-and-economy/economy/article2509778.ece.

Financially, India has been an attractive outsourcing destination not just for labor costs but also

for its business infrastructure and regulatory environment. This advantage is likewise decreasing due to

changes in India’s tax laws. Companies like Infosys once received significant tax breaks by locating

their domestic operations in software technology parks and special economic zones. As an example,

Politicians in the United States have also threatened to change the u.S. tax code to require corpora-

tions to repatriate taxes on profit earned outside the home country. If passed, this could negatively

impact the profitability of outsourcing and decrease demand for the services provided by Indian com-

More threatening are proposed changes to the u.S. immigration and visa policy, which aim to discour-

age outsourcing by making it more difficult for Indian companies to bring low-cost workers to the

United States. Senators Durbin and Grassley would like to limit H-1B visa holders to no more than

The “Recent Updates” section provides additional information on Infosys’s apparent abuse of the

U.S. visa system (publicized after the original case was finalized). At least three Infosys employees

have alleged that the company knowingly engaged in “creative” uses of short-term visitor (B-1) visas

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

Recent Updates

Murthy steps down as chairman. Founder Narayan Murthy stepped down as Infosys’s chairman,

effective August 2011, after seeing the company through 30 years of operations. See Murthy’s final

Visa fraud investigation (see accompanying videos under Additional Resources). In February 2011,

Infosys employee Jack Palmer filed a lawsuit accusing the company of misusing short-term business

visitor (B-1) visas. He stated that he had been summoned to a meeting in Bangalore where company

leaders discussed ways to “creatively” circumvent H-1B visa restrictions by using B-1 visas to bring

low-cost Indian employees to work in the United States. After he refused to write letters inviting Indian

sessions, as well as for the installation of specialized equipment. H-1B visas, which are more difficult to

obtain, are required for contract work and for employees to receive salaries in the United States.

Infosys denied all accusations and asked for the case to be dismissed to arbitration. The company

stated it had undergone a complete internal review of its visa practices and found that it was in compli-

ance with all U.S. requirements. A State Department official in India explained that Infosys and other

companies in India.

The case has drawn increased attention to the issue of labor outsourcing from India in the U.S. senate

and elsewhere. In May, Infosys received a separate subpoena from a federal grand jury in Texas seeking

information regarding its use of B-1 documents. In August, the U.S. government increased its fees for

both H-1B and L1 visas, which is likely to cost Indian software firms as much as $200 million annually.

eT Bureau. (2011), “No arbitration for Infosys in visa fraud case: U. S. fed judge,” November 11.

http://articles.economictimes.indiatimes.com/2011-11-11/news/30386927_1_jack-palmer-visa

-fraud-infosys-employee.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

Press Trust of India (2010), “Innovate and beat U.S. visa fee hike: Infosys mentor Narayana Murthy,”

August 22.

http://www.ndtv.com/article/india/innovate-beat-us-visa-fee-hike-infosys-mentor-narayana-

able consulting firm in seven years ever in the history of consulting.” Infosys earned $40,000 profit

per employee, compared to less than $10,000 for most major global consulting firms. Pratt attributed

Infosys’s advantage to its efficient delivery system, which affords the company much higher margins.

Nevertheless, demand for separate consulting services has slowed as a result of the recent recession.

Infosys Consulting’s second quarter 2011 revenues increased by just $3 million over 2010, while net

(currently) to 33 percent of Infosys’s revenues, and will have three sets of offerings:

• Consultingandsystemintegration(competingagainstglobalfirmslikeAccenture)

• ITservices(competingagainstotherIndianoutsourcingfirms)

• Productsandplatforms(anemergingarea)

Previously in 2011, Infosys had collapsed six business units into four industry “verticals,” each of

tion (that is, incubate, co-ordinate, then integrate). Consulting remains an important part of Infosys’s

overall offerings because consulting engagements generally bring in revenues five times higher than

traditional software services.

Press release announcing the reorganization: http://www.infosys.com/newsroom/press-releases/

Documents/2011/organization-change-vision-bte.pdf.

times.com/2011-08-04/news/29850740_1_infosys-consulting-consulting-subsidiary-stephen-pratt.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

Additional Resources

1. Infosys company web page: http://www.infosys.com/pages/index.aspx.

2. http://www.youtube.com/watch?v=dl4DJK1ACpe (4:11). A promotional video introducing the

Infosys Consulting team and product innovation practice. September 20, 2010.

3. http://www.youtube.com/watch?v=H4eMxdyRN9o (46:36). Stephen Pratt, CeO and managing

4. The Big Think has a series of speakers on the general issue of immigration reform, including:

http://bigthink.com/ideas/16211 (9:11). The promise and peril of immigration reform. An editorial

5. http://www.in.com/videos/watchvideo-h1b-visas-will-bring-jobs-to-america-infosys-7068415.

html (6:28). H1B visas will bring jobs to America: Infosys. This is a 2010 NDTv interview with a

6. Two CNBC-Tv18 reports on the Jack Palmer lawsuit against Infosys are available:

http://www.youtube.com/watch?v=kDvekPKyL8M (2:22). Infosys visa manipulation case. May 18,

2011.

7. Two NDTv reports on the Infosys visa controversy are available:

http://www.ndtv.com/video/player/news/narayana-murthy-saddened-by-infosys-visa-contro–

203261?sp (2:25). Infosys in the dock again for visa troubles. June 22, 2011. A follow-up report to the pre-

vious video, prompted by the revelation of two additional internal reports of B-1 visa abuse.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

ExhIbIt tN-1 Strategic Group Map

ExhIbIt tN-2 Hofstede’s Five Cultural Dimensions

Source: Hofstede, G. (2001), Cultures Consequences: Comparing values, Behaviors, Institutions, and organizations Across nations,

2nd ed. (Thousand Oaks, CA: Sage Publications).

United States India

Index Rank Index Rank

Power distance 40 38 77 10–11

Uncertainty avoidance 46 43 40 45

Individualism/collectivism 91 1 48 21

Masculinity/femininity 62 15 56 20–21

Long/short-term orientation 29 27 61 7

Local Geographic Distribution Global

High

Low

Diversification

More than 300,000 boutique or enterprise firms

Infosys

Tata

Wipro

IBM IT

Services

HP Enterprise Services

Deloitte

Accenture

McKinsey

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

Make Global Operations

More Effective

Gain Access to New Skill

Gain Access to New Technology

Transfrom/Reengineer Process

Reduce Operation Costs

0% 20% 40% 60% 80% 100%

Mid-market Companies

Enterprise Companies

ExhIbIt tN-3 What Drives Outsourcing?

Source: Adapted from Josh Hyatt, “The new calculus of offshoring,” CFo Magazine, October 1, 2009, www.cfo.com/article.

cfm/14443115/1/c_14443798.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

of McGraw-Hill Education.

Business Environment

People Skills and Availability

Financial Attractiveness

0 0.5 1 1.5 2 2.5 3 3.5

U.S. India

Note: A higher number indicates more attractiveness.

Teaching Note —Infosys Consulting in the U.S.—What to Do Now?

Endnotes

1. Abhinav C., A. Courtney, B. edwards, M. Gutierrez, M. Janovec, and K. Winkler (2010), “Infosys consulting

paper,” April 2010.

2. IBIS World website, www.ibisworld.com/industry/default.aspx?

3. “IT consulting U.S. industry report,” October 15, 2009, www.ibisworld.com/industry/retail.

aspx?indid=1415&chid=1.

4. “STPI withdrawal may hit Infosys, Wipro net profit,” The Economic Times, May 26, 2009, http://eco-

5. “Infosys annual report,” Infosys Technologies Ltd., 2009.