Transcript of “An Interview With N.R. Narayana Murthy”

The following is a transcript of Nayan Chanda’s interview with Infosys founder, N.R. Narayana Murthy, conducted on April 28, 2006. Murthy analyzes factors required for success in the global market. He founded Infosys in 1981 with six software professionals, and now serves as the chairman and chief mentor for the firm. Since 1981, the firm has become one of the most innovative in the world, providing advice to companies in all sectors. – YaleGlobal

Transcript of “An Interview With N.R. Narayana Murthy”

Monday, June 5, 2006

Nayan Chanda: We have with us in the studio Mr. Narayana Murthy. He is the founder and mentor-in-chief of Infosys, India’s second largest software company. Infosys was founded in 1981 with capital of $250, and today market capitalization is about $22 billion. Mr. Murthy, welcome.

N.R. Narayan Murthy: Thank you very much.

Chanda: It is a great pleasure to have you on our campus and to answer some questions about the developments in India. First of all, Infosys has become an iconic institution in India. In the course of a very short time, it has risen to the top. How do you account for this meteoric rise of Infosys in the context of India?

Murthy: Well, you’re right. We celebrate our 25th year this year. On 2 July of 2006, we will have completed 25 years. First of all, I must say that God has been very kind to us because, as Louis Pasteur once said, that when God decides to announce his presence, he comes in the form of chance. Having accepted that, let me say this, right from day one, when we founded the company, when we sat for four hours to discuss what we should seek in this journey, we were all unanimous that we would seek respect. We would seek respect from customers, from our employees, from our investors, from our lender departments, from the government and from the society. And we said, if we seek respect from each of these stakeholders, we will do the right thing for them. And if we do the right thing for them, then everything will fall into place. So I’m happy that the company has not swerved from that part of taking respect right from day one to now. And that is perhaps the reason we have had what little success we have had so far.

Chanda: But in 1981, India was not at all friendly to enterprise, from the type of place you set up. From what I recall, you had difficulty getting your first computer, getting your first telephone line. And how do you work on those obstacles?

Murthy: Well, you know that entrepreneurship is all about courage, it’s all about thinking about a powerful idea and then converting it into wealth. When we founded the company in 1981, we had tremendous friction to business. But there were two important paradigm changes taking place at that time. First, of course, there was the PC revolution. Microsoft had started in 1976. Many computers and super min-computers had come into existence. Borland was about to announce the first 100,000 software –

In other words, we realized that the power of software would be unleashed in the years to come, and number two, that software would become more and more demanded because the cost was going down and people were realizing the power of software. That was the first paradigm. The second is the paradigm of globalization. I define globalization as sourcing capital from where it cheapest, sourcing talent from where it is best available, producing where it is most cost effective and selling where the markets are without being constrained by national boundaries.

Now, this we realized was a unique opportunity for countries like India, to release the power of the availability of English-speaking technical talent to produce powerful software for the global market. And thanks to these two paradigms, I think, Infosys took off, though the first ten years we had tremendous friction to business. And thanks to the economic reforms of 1991, Infosys took off from 1992. Just to give you a data point, between 1981 to 1992, we grew our revenues from $130,000 in 1981-1982 to about $1.6 million in 1992, but from between 1992 and 2006 we went from $1.6 million to $2.15 billion. In other words, we grew by a factor of approximately 1300 times in the second half, that is the last twelve, thirteen years, as against 10 times in the first ten years.

Chanda: In fact, you mentioned the 1991 reform. The 1991 crisis in March 1991, India was left with a total foreign reserve of $1.2 billion, which is worth two weeks of imports, and that’s exactly the amount you’re worth today, yourself, according to Forbes magazine. And so it shows the kind of journey that you have made in these 25 years. And the question is, apart from the availability of Indian technical talent, apart from the existence of markets, you needed something to link the markets to the Indian technical talent. And from what I recall, you initially took your engineers to the client site as well as what is called body shopping. And that kind of model changed with the availability of satellites and then fiber optics, am I right?

Murthy: You’re right, because in the beginning, we had no access to data communication lines. It took us a year for us to get a telephone line. It would take us two years, to get a license from Delhi to import a computer worth $50,000. In other words, everything was stacked against us. So we realized that if we want to have a growing business, then it was best if the talented teams of Infosys went to customers’ offices, to give the software to them, install it in support of them, rather than doing it from India.

But you know, I must say all of that changed in a dramatic manner with the economic reforms of 1991, because Dr. Manmohan Singh, at that time the finance minister and now the prime minister, he did a few things that were remarkable: One, he removed licensing, which meant that we did not have to go to Delhi and wait in the corridors to import anything. Today, government is not a bottleneck. It’s just we have to finalize what we want to buy and we buy quickly. Second, we introduced current accounts convertibility. Until 1991, we couldn’t set up offices abroad, we couldn’t travel easily, we could not hire consultants and quality brand equity from abroad, etc. All of that got changed when he introduced current accounts convertibility. Third, he abolished the office of the comptroller of capital issue. This was an officer who determined at what price we would have our IT loan. And this officer had no idea of capital markets. And he would rarely allow you to list your stock at anything better than your par value, which meant there was very little incentive for entrepreneurs to list because then you would use so much of equity and raise so little funds. On the other hand, Dr. Manmohan Singh said, “Look you can decide the price at which you want to have your IT loan in consolidation with your investment banker, then officers realized we would get the fair price from the market – the market’s world was going to be the determinant – and that was another important thing he did to encourage entrepreneurship.

And finally, he allowed 100 percent equity for multinationals. IBM and Coca-Cola had walked out of India in 1977, and when he allowed these companies to have 100 percent equity, then what happened was, we had tremendous competition in India, not so much for market, because the market hardly existed, but for talent, and because there was tremendous competition for talent in India and these multinationals had great names, prestige, a lot of money, etc, we had to fight for talent in competition against these great multinationals, and that’s exactly what made India’s companies stronger because that’s when we realized that we had to create a good infrastructure, we had to give good salaries, we had to give a good work environment, if we want to attract good people. So I would say that these are the four things that India did.

Chanda: Since India has now become the leader of outsourcing in the world, what are the challenges you see for Infosys in maintaining its tradition?

Murthy: Well, there are many, many challenges. First, we have to move up the value chain, which means you have to enhance per capita productivity. I always say that just as the per capita GDP is a good index of the development of a nation, per capita productivity is a good index of the growth of a corporation. So we had to enhance per capita productivity. To do that we had to become more and more relevant to our customers’ businesses and we had to have greater and greater impact on that – which means we have to learn to provide more and more end-to-end business solutions, innovative technology. In other words, we have to do more consulting, we have to do more business assistance integration, etc. Second, we have to handle scalability, scalability in terms of the number of customers, scalability in terms of the number of employees, scalability in terms of physical infrastructure, technological infrastructure, etc, etc. For example, today, we have about 52,000 employees. We have about 55,000 known networks. We have to train about 20,000 people in a year. You know, we have recruited 300 students, people from the colleges in the US.

Now we are taking them for a nine-month long training program. It’s the first time in the history of India that a set of 300 employees who will work in the US are going to India for a training of nine months. So scalability is another challenge. Third, I think the ability to work in multicultural teams is another important challenge. Fourth, we need to create better infrastructure in the cities, because that’s where all our operations are. Fifth, I’d say we have to enhance our brand equity, we because we have to get to more and more get hundreds-of millions-dollar projects, maybe a billion dollars or more for outsourcing projects, etc.

Chanda: Because so far, India – Infosys is somewhat apart – but a lot of other IT companies are using basically cheap labor – educated cheap labor – to leverage India. Is that sustainable?

Murthy: No, I have a slightly different view on that. At that end of the day, business is all about bringing better value to money. As economists say, price is what you pay and value is what you get. So if for a dollar, we can give our customers better value for money. One way of looking at it is better value for money and another way of looking at is it is cheaper. So be it. As long as we are able to satisfy our customers’ needs better and better and better, it doesn’t matter. So, I don’t look at it as providing things cheap, I look at as providing better value for money.

Chanda: No, what I meant was that, that cheap labor, other countries could offer as well.

Murthy: No, I think India has some unique advantages. We are a nation of a billion people. We produce anywhere from 3.5 to 4 million graduates every year. We produce 450,000 engineers. We produce about 300,000 master’s IT and applications graduates. And all of that is getting enhanced year after year after year. And at the end of the day, let’s remember, if we have to solve the problem of poverty in India, the only way we can do that is by creating more and more jobs. And if you want to create more and more jobs with good disposable income, then you need to expand in sectors like this.

Chanda: But there again the population of India, especially in the villages, and the education is still very poor, still 40 percent illiterate. So what do you see looking down from your own IT domain, for India as a whole, what do you think should be India’s strategy?

Murthy: Well, you know, I believe we have to do more of many things. We have to expand the software industry because there is considerable opportunity in the global market. Second, we have to focus on low-tech manufacturing because that’s how we can create a large number of jobs for the masses of Indians who are semi-literate or in some cases illiterate. So, we have to focus on low-tech manufacturing and create anywhere from 10 to 15 million jobs per year for the next 10 years. And that cannot be done by the software industry alone, it has to be done, reinforced by focusing on low-tech manufacturing.

Chanda: Your company has moved to China. What is happening with China, what are you doing there?

Murthy: Well, you know, if you want to be a high-aspiration corporation today, if you want to be in the top five in any sector of the economy – for example in the software services, we are in the top five in the world, you have to have a presence in China for multiple reasons. One, China is a fast growing market. It is growing at 10 percent or so. There are lots of things happening out there. So, we have to have presence there. Second, like India, China too has a large population. There is good technical talent out there. And as we keep growing in revenue, we have to leverage the talent in China. Third, there is a large Chinese diaspora in East Asia and Southeast Asia etc. And Japan is very near. So you can service Japanese clients from the northern part of China. So looking at all these things, I think China is an important piece in the jigsaw puzzle.

Chanda: The rapid growth of outsourcing is very good news for a country like India or China. But one sees an increasing concern in Europe and the US about white-collar jobs leaving the country and going outside. Do you see that this could be a drag on your business?

Murthy: You know my view is that people in glass houses should not throw stones at others. After all, what we are doing is what we were preached to do by the rest of the nations. My European friends, my American friends, told me umpteen times in the 1980s how India should become more and more open, how India should open up its borders, how India should reduce its tariffs, how India should allow competition from multinationals, etc. I agreed with all of them. All we’ve been doing is implementing the ideas that they have been propounding. So, at this point in time, just because the shoe pinches a little bit, I don’t think we should go back on those principles.

So my view is, at the end of that day is that we’re making corporations in the US, in Europe, in Japan, in other countries, more competitive, not just for selling in their own countries, but in other countries. So just as we accepted liberalization, just as we opened up our borders, I believe that western nations, too, would gain from such open access.

Chanda: Globalization has become a very contested word. A lot of people are turning anti-globalization. To me, India seems to be one of the more pro-globalization countries, is that right?

Murthy: I would think so. Because, remember that we have a coalition government, which is supported by communists. Now in spite of that, our government has made many, many moves forward. We increased foreign holding in the banking sector to 74 percent. We introduced foreign participation in the weakest sector. We have liberalized in the civil aviation sector. So in many areas we have brought in liberalization. So when you do it in the context of the coalition government, supported by the communists, I think it’s not a bad record.

Chanda: And finally, the outsourcing which started as essentially software services or back-office work sent outside of western Europe and America, is now becoming a global model. I just read an article in “Foreign Affairs” by the former CEO of IBM, he talks about MNCs being replaced by new model which he calls globally integrated enterprises. And is this a trend that you see from your perspective going to touch other sectors of industry?

Murthy: Absolutely, absolutely. For example, I think since Excel, we have a program called M3 +, Infosys phase two. And what they’re trying to do is bring the power of globalization, that globally integrated model into areas outside just software – accounting, systems integration, equity research, customer service. In all these areas, we are bringing the power of globalization. We are liberating the strength of talent in India. Now, for example, a friend of mine is starting an enterprise to maintain aircraft. He thinks that India will be the right place to maintain aircraft, where people can get the best value for money. And aircraft from all over, Asia, perhaps from some parts of Europe and the US, too, could be maintained from India or from some other part of the world too – but focused from the talent available from India.

Chanda: And that’s one of the things that I think Infosys has done, not just write codes, but for business purposes, but many other industrial operations, they are coming to you for solutions to their problems.

Murthy: Sure.

Chanda: So your employees include not just code writers, but experts from other fields.

Murthy: Oh yes. Because if we want to become more and more relevant to customers’ businesses, if we want to have greater and greater impact in the areas of business relevance, then we have to be the main expert. We have to understand the business of the customer. So our focus has been to enhance the market readiness of our people in the domain knowledge. In fact, we have several initiatives in this area. We encourage our people to get certified by industry associations at different levels. For example, we have retail 101, retail 201, retail 301, banking 101, etc, etc. We do it so our people, over a period of time, have become more and more business domain knowledge-ready.

Chanda: You have become more and more of a consulting company –

Murthy: Absolutely.

Chanda: – than just a software provider. Well, Mr. Murthy, thank you so much for your time.

Murthy: Thank you, thank you.

© 2006 Yale Center for the Study of Globalization