Infosys in China - Managing Service Supply Relationships - Report Example

Cover page Executive Report Managing Service Supply Relationships “Infosys in China” Management February, TABLE OF CONTENTS 1. Executive summary 3 II. Introduction 4 III. Issue Statement 4 IV. Analysis 4 a. Overview of Infosys 4 b. Factors that influenced Infosys to shift location to China 5 c. Global Delivery Method 6 d. Skeptics on the selection 7 d. Comments on the selection 8 V. Alternative Analysis and selection criteria 9 VI. Recommendation 9 VII. Action and Implementation plan 9 VIII.. References 10 I. Executive Summary Infosys Technologies, Ltd. is a company that has been operating in India for 30 years. It is contemplating on branching out to China as a strategic move to gain competitive advantage and to avoid increasing cost of salaries of professional workers in India and the impending dearth of employees and as effect of economic downturn. Most of its multinational clients are going to China and in line with Infosys Global Delivery Model, they will take their service to the location where there are enough talents and operation is profitable. But this decision is criticized by analysts. A review of reasons that compelled Infosys to go to China, the problems they have encountered in their decisions and doubters will be presented here for better understanding why multinationals go into globalization. INFOSYS IN CHINA II . Introduction Infosys Technolologies Ltd, is a leading service and outsourcing company. It has been in the industry for 30 years and has been successfully operating in India and in many parts of the globe. However, the economic slowdown in Europe and in the United States, coupled by the rising operational problems in India propelled a decision to branch out to China. The recent changes in its corporate leadership and growth slowdown have made Infosys to make a strategic move of global expansion through acquisitions and partnerships. The decision to go to China as a strategic move has been criticized by the industry. III. Issue Statement: This study is a review on the factors that influenced Infosys to choose China, perceptions of the industry analysts and its problems. IV. Analysis a. Overview of Infosys. Infosys is a global consulting company headquartered in Bangladore, India. It was founded by Nayarana Murthi and six other people in 1981 with a small capitalization of US$750. It went public in India in 1993 and got listed in United States of America in NASDACQ in 1999. Murthi became its CEO until he retired in 2003 upon reaching age 65.From a humble beginning Murthi steered Infosys into a billion dollar company with a reported revenue today of USD $8.095 billion and a market capitalization of approximately US$33 billion. His leadership together with his co-founders led an industry that stands for a modern entrepreneurial system in India employing more than 153,000 employees converged on a SiliconValley style campus. (Infosys.com) Infosys deals with the Software and Information Technology Services and Consulting industry that provides IT expertise, software design, development and maintenance services as well as on-site management and other IT functions to its customers. (Infosys.com) Its products and services consist of software development, business technology consulting, IT services, maintenance and independent validation services to companies in finance, banking, insurance, manufacturing, and others. It offers its services to major industries such as Aerospace & Defense, Airlines, Automotive, Communication services, Energy, Financial services, Healthcare, High-tech, Hospitality and leisure, Insurance, Life sciences, Logistics and distribution, Manufacturing, Media & entertainment, Public sector, Retail and Utilities Industry.Infosys has branched out from India and has moved towards globalization. Today, the company has development centers in 77 cities and has established its presence in 32 countries from America, Asia Pacific, Europe, Middle East, and Africa. Revenues of the company as of 2013 is USD $ 403.5 an increase from previous year’s 2012 USD$337.34B, providing a net income of USD$ 94.29b MarketWatch) http://www.marketwatch.com/investing/stock/infy/financials b. Factors that influenced Infosys in moving to China One of the reasons of Infosys for seeking expansion elsewhere is the soaring salaries of IT professionals in India due to an increasing global demand for them. The needs for skilled professionals by the existing competitors of Infosys is large enough so that supply of manpower will not be enough to fill the demand and a shortage of 250,000 workers is likely to be felt in the near future(Jadhav, S.,2013). This situation may in due course raise the wage levels thus making it difficult to attract and retain employees, aside from the fact that software companies offer “joining bonus”, Jadhav fears. Acquisition and partnerships have been the strategic moves of Infosys in strengthening its company position globally. Company has looked at opportunities elsewhere but came to a decision to invest heavily in China. It has proposed to establish a campus style setting in Shanghai, China with an investment of $125-130 million that can accommodate 8,000 employees, a sales office in Hongkong, and a global education center in Jiaxing. The Business Processing Office of Infosys will also establish a center with 500 employee capacity in Dailan, China.. Infosys believe they can easily get employees in Dailan who are good in managing Japanese and Korean processes aside from English and Chinese. Infosys choose China as a destination for expansion because a big number of their clients have operations in China, and it will be a strategic location in serving clients.(Mishru, B. 2011), Infosys reasons out China has a competitive advantage of lower costs and language. They believe that China has the same competitive manpower skills that match India. Other choice is Philippines but this country’s services are focused only in voice-based BPO and high-value back office woks like Finance and Accounting. Another reason is that when multi-nationals enter China, they look for established companies who understand their procedures and systems, so Infosys does not want to miss this opportunity. Infosys believe that while U.S. and Europe are good markets, their economic uncertainties today continue to worry the company, so they decided to diversify markets for a long-run strategy. (Reuters. Sept. 11, 2011) Reuters also cited other reasons that justified Infosys choice of China are volatility in the rupee, rising wages, severe competition, rising high staff turn-over and management shake-ups that slows down growth of the software services sector. c. The Global Delivery Model Global delivery model is pioneered by Infosys whereby it takes advantage of the company’s global presence in delivering value to clients. GDM system of Infosys is based on the principle of taking work to the location where there is enough talent, with a minimum amount of acceptable risk, and makes economic sense. It is defined as “the optimum combination of processes, end-to-end methodologies and quality procedures, with high-quality skills and resources available internally or externally, in requisite quantities, on a global basis, that enables organizations to maximize the quality of their solutions while minimizing the overall cost and delivery time of their IT services.” (IT Glossary,n .d.). GDM allows Infosys to support global operations of multinational clients. Modern technology now facilitates communication anywhere, so with GDM, location in China does not make a big difference. It becomes beneficial because being in China, Infosys has a leverage on talents and lower costs and the ability to work around the clock to ensure business continuity because BDO never sleeps, it operates on a 24/7 basis. Its relevance to Infosys operation is the strategy of cost optimization, productivity and quality, increased of sales effectiveness. It is expected that the Global Delivery Model will reduce senior people assigned to client’s onsite location as well as costs. It will reduce the number of sub-contractors to site locations. Global Delivery Model allows workers to work on night shifts to make up for the working hours difference of customers. d. Skeptics on selecting China When Infosys announced the idea of China expansion, several analysts doubted the decision. Goutom Das (July 22, 2012) He said large companies have operated in India but had only moderate success and could hardly be called as an alternate culture. The decision of Infosys to enter China has been brought by the idea that if they do not follow their multinational clients to China, they will be losing them to the local players.(Infosys.com) Executives of the company was against the idea of expansion in China because of bureaucratic hurdles due to conflicting ideas of both parties . China being a communist country, has different business attitude than the Laissez-Faire of India (Jadhav, 2013). The Chinese government is looking at cost reduction while Infosys aims at profit maximization. Given this situation, a lot of foreign investors worry a lot and complain about the political barriers of the Chinese government that seems to drive away investors, and that the bureaucratic system is designed to favor local businesses.(Jang, Chencheng, Sept 09, 2010). e. Comment on the problems Infosys will be facing in China Entry to China is one of the problems of Infosys due to government policy of ownership structure, sharing agreements, etc. since Infosys considers intellectual factor and confidentiality of information vital in operation. One suggestion that fits is to establish a wholly owned subsidiary. A wholly owned subsidiary is an arrangement wherein all stocks are owned by the Parent company and has no minority shareholders. This arrangement is most common among Hi-Tech companies who want to retain control of operations (Investopedia). Another problem that beset entry to China is the fear they will lose clients if they do not follow them to India. The situation now calls for the spread of multinationals to China because they see the important developments of this country. Infosys competition is lodging its business in China, and if they do not take advantage of this market opportunity, they will be on the losing side. Their problem of availability of talents, scaling up of wages will be answered in China, as it was found out that wages in China is 40% lower than in India. Availability of professional workers is not a problem as China has 10 times the U.S. engineering graduates. In 2008 alone, China has awarded 300,000 bachelors degree in natural sciences and 700,000 engineering graduates. IV. Alternative analysis and selection Criteria There are only 2 options available to Infosys India in the light of its predicament. One is to stay in India where it had successfully operated for many years and has been established as As leader in the industry. If it stayed, it will face the consequences of salary hike, shortage of manpower and loss of clients. Salaries in India according to information are jumping by 25% or more annually. So India’s cost advantage is something that could not be endured by Infosys business. Infosys realized that the situation is different so unlike its operations in American and European countries wherein they can operate without a local presence. Catering to their clients who have relocated to China needs their local presence because of the need to understand the complicated Chinese language and regulations. The Chinese programmers are better trained to analyze materials written in Chinese language. Second, is to expand its operations to China to take advantage of availability of talents and low costs. However going to China has external problems like ownership structures and legality. V. Recommendations. The advantages of expansion to China weigh heavily as against India. As Infosys is doing global operations, China is a fine option as it is timely action when multinationals are all eyeing this country because of its economic importance. The decision of Infosys to locate is China is a long-term strategic solution to its problems. My recommendation is to go ahead with its plan for expansion in China. China could be its hub in servicing countries in Asia like Japan and Kores. VI. Action and implementation plan It is customary in business that decisions should be translated into actions. Action plan should come from the higher ups in the company that consists of negotiations with the Chinese government, financial backup and other internal necessities. References Awhad, Shweta Jadhav ( December 22, 2013) . Capstone Project –Infosys Project China – Strategic Analysis. Information Technology & Project Management Blog. Retrieved 20 February 2014 < http://project-management-sj.blogspot.com/2013/12/capstone-project-infosys-china.html> Das, Goutam (July 22, 2012). Infy the Cotrarian. Business Today Retrieved 20 February 2014 Infosys in China. http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Infosys%20in%20China.htm IT Glossary .(n .d.) Global Delivery Model. http://www.gartner.com/it-glossary/global-delivery-model ITIF. The Information Technology and Innovation Foundation. (n.d.) “Innovation Fact of the Week. Retrieved 20 February 2014 .Jang, Chencheng, (Sept 09, 201l). Why Foreign Businesses in China are Getting Mad. Time World. Retrieved 20 February, 2014 >http://content.time.com/time/world/article/0,8599,2017024,00.html Mishru, B. (Dec. 28, 2011), Infosys BPO to expand in China. Business Standard. http://www.business-standard.com/article/companies/infosys-bpo-to-expand-in-china-111122800101_1.html Investopedia. Wholly Owned subsidiary. Definition www.investopedia.com/terms/w/whollyownedsubsidiary.asp‎ Reuters. (Sept. 11, 2011).“Infosys concerned by US, Europe, plans China Expansion.. LiveMint Wall Street Journal. http://www.livemint.com/Companies/xhvPEvbfwR1SbDHelWSaoO/Infosys-concerned-by-US-Europe-plans-China-expansion.html Read More