Infosys Ltd’s embrace of automation and artificial intelligence technologies to boost employee productivity is taking longer than expected.
India’s second-largest software services exporter now expects the related productivity boost to reflect in a meaningful way only from April 2017.
Chief executive officer Vishal Sikka had told Mint last October that he expected any “meaningful” impact to start reflecting by the end of March 2016.
The development underlines the daunting task faced by Sikka, who is trying to put Infosys back on the global software services map and help the firm retain the bellwether tag in India’s $146 billion outsourcing sector.
Understandably, the theme of large-scale adoption of automation at the employer of more than 194,000 people was central to the US-based Sikka’s five review meetings (including one with company’s human resources head Kris Shankar) on his day-long trip to Bengaluru last Saturday.
Since ushering in Sikka’s “renew and new” strategy at the start of last year, Infosys has managed to move 3,900 employees to work on higher, value-added projects by replacing their current jobs with automation tools.
This translates to about 3.5% of the firm’s entire delivery (or software writing/maintenance) workforce of 110,000 engineers.
Last month, Infosys chief operating officer U.B. Pravin Rao told analysts at an annual sales conference in San Francisco that productivity improvement tied to the new tools may start in the second half of the current financial year, and become more evident only in the next one.
“We asked COO Pravin Rao when Infosys expects its investments in automation and AI will begin to have an impact on productivity. Apparently, this may start in H2 FY17, and become more evident in FY18, as Infosys makes progress against its targeted $80k revenue per capita by 2020,” Rachael Stormonth, executive vice-president of research at NelsonHall, a research firm, wrote in a note dated 9 May.
Infosys did not respond to an email seeking comment.
The inability of some of the automation tools to do basic manual work and the debate within the company about how much work it can actually automate are the two reasons behind the slow embrace of automation.
Under the current human-hour billing model, Indian information technology firms stand to earn more money when they deploy more engineers on a project. Using any automation tool means IT vendors have to sacrifice some revenue.
However, this will change.
Beginning October-December of this year, Infosys expects to move at least 5,000 engineers every quarter to work on high-value projects, according to an executive familiar with the development.
This will, in effect, open new revenue streams and ensure automation tools take care of existing work such as infrastructure maintenance.
Automation and AI-linked productivity improvement is a “requirement” and not a “proxy” in Infosys’s turnaround, according to Ray Wang, founder and chief executive of technology advisory firm Constellation Research.
More importantly, these technologies can change the way Indian technology vendors have traditionally done business.
“The ascent of the intelligent automation, although still nascent yet moving towards exponential growth, is the most disruptive shifts the industry has seen,” said Thomas Reuner, managing director of IT outsourcing research at HfS Research. “The impact will go far beyond productivity per employee or similar metrics.”
“There will be a transformation in the way we work, with fundamental changes in terms of education and hiring,” he added.
While companies realize the importance of intelligent automation, they are very coy about discussing the implications in public as they are yet to fully understood the impact it will have on their revenue models, he said.
To Sikka’s credit, Infosys has already managed to revive revenue growth. In the year ended March 2016, Infosys posted 9.1% revenue growth in dollar terms (13.3% in constant currency terms), which was higher than industry lobby Nasscom’s estimate of 12.8% for the software services industry.
The company also knows the importance of quickly embracing these automation tools. For instance, a 4.7% drop in realization last year hit its profitability: Infosys’s operating margin dropped to 25% at the end of March 2016 versus 25.9% in the year-ago period.
According to the management, every 1% decline in realization shaves off 40 basis points from its operating margins. One basis point is one-hundredth of a percentage point.
“Has it (automation) become measurable? Yes. It is not large enough, but right now it is measurable but not meaningful. I believe before the end of fiscal year (March 2016), it will become meaningful and start having a significant impact,” Sikka told Mint on 12 October last year.
However, Sikka then conceded that “the tower of existing work” was so big that it was taking time.
Some analysts say automation-linked productivity measures are taking time because of the sheer size of the company.
“Infosys is a big ship. So, it does take some time to make course corrections,” said Wang of Constellation Research. “The question is how long and I think that will depend on how fast both the client base moves as well as the mix of projects.”
The faster it moves, the better.
Rivals Tata Consultancy Services Ltd (TCS) and Wipro Ltd are fast deploying automation platforms to retain profitability and making their existing workforce learn new technologies. TCS and Wipro launched smart technology platforms, Ignio and Holmes, respectively, last year.
One of the big gains of large-scale adoption of automation tools is incremental growth in business from engineers working in newer projects. This helps in the latter half of the calendar year when decision-making on traditional outsourcing contracts gets pushed back due to the holidays.
Last year, the top three IT firms saw a decline in revenue per employee with Infosys reporting a marginal slip of 0.9% to $48,963.
Infosys has started evaluating productivity by measuring revenue per FTE (full-time equivalent) or revenue generated by employees working on a project, unlike the traditional method that tracks revenue per employee by including all of them, including those on bench or in training.
Infosys’s revenue per FTE declined to $50,700 at the end of March 2016, against $52,300 at the end of March 2015, even though Sikka has outlined a target of $80,000 FTE by March 2021, by when Infosys expects to become a $20 billion firm.