case study

Say no to Bangalore, yes to Buffalo. l

--PRESIDENT BARACK OBAMA

Marne L. Arthaud-Day Kansas State University

Sukenya Gogei The North Highland Company

Leena Makhija Ernst &Young

Frank T. Rethaermel Georgia Institute of Technology

BOARD DELTA FLIGHT 184 from Mumbai, India, to Atlanta, Georgia, Adrian Patel found herself engulfed by a swarm of worries. She was returning from STRAP, Infosys's Annual Strategy Retreat,2 at company

headquarters in Bangaiore, India. Each year, Infosys leaders from across the globe gathered to discuss strategy formulation and action-planning. The STRAP

meetings help the company adapt to the rapid pace of change in the information technology (IT) industry and to coordinate activities across its widely dispersed operations.This year, the Chief Operating Officer (CO0) of Infosys, S. D. Shibulal, had given Adrian the daunting

responsibility of developing strategic scenarios to help the U.S. Division of Infosys Consulting gain and sus- tain a competitive advantage that would lead to tangi- ble bottom-line results. She had just four short weeks

before she had to return to India with a proposal in hand.

This promised to be a tough assignment, given the current backlash in the United States against outsourc- ing. For Infosys's global delivery model, outsourcing

was a key component: The company sourced technol- ogy work from wherever high-quality talent was avail- able at a cost-competitive rate. Infosys had watched the 2008 U.S. presidential election with great concern, because President Obama had made outsourcing one

of the key issues of his campaign platform, promis- ing to leave no stone unturned in the effort to cre- ate and keep jobs "at home." His mantra, "Say no to

Bangalore, yes to Buffalo;'3 was expected to end many years of tax incentives to U.S. companies that create jobs overseas in places like Bangalore, shifting them

instead to companies willing to hire people in cities like Buffalo, New York. Meanwhile, officials in Washington were engaged in heated debate about how to reform

the H-1B visa program, which many companies use.to bring skilled foreign technical workers to the United States.The results of that debate could have vast impli-

cations for Infosys's ability to bring Indian employees over to work on projects for its U.S. clients. Despite a promising start for Infosys's U.S. consulting subsidiary, the future was starting to look uncertain.

Having climbed the ranks to managing partner at Infosys Consulting, Adrian was used to facing challenges. She was a proud recipient of the "Electrocomponents Silver Salver" award for the best strategic consulting

project during her MBA program at the Safd Business School, Oxford University. Since then, she had spent 15 years in the IT-consulting industry, scaling the cor- porate ladder. Yet the task ahead of her was of a much

larger scale and greater complexity than she had ever tackled--spanning at least two continents and sub-

ject to the whims of the U.S. and Indian governments. Thankfully, she had another 17 hours to figure out how she would present the issues to her colleagues in the Atlanta office, who were eagerly awaiting news from STRAP She dreaded even thinking about the meeting four weeks later when she would have to present a final report to the members of the board back in India. She

opened a can of Diet Coke and booted up her laptop. It was time to get to work. She wished that the 100,000

engineers at the lnfosys campus in Bangalore could just come up with a magic algorithm to solve the problem for her.

Professor Marne L. Arthaud-Day, Research Associates Leena Maktfija (GT MBA '10) and Sukonya Gogoi (GT MBA' 10), and Professor Frank T. Rothaermel prepared this case from public sources. This case is developed for the purpose of class discussion. It not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient manage- ment. © Arthand-Day, Gogoi, Makhija, and Rothaermel, 2013.

C303

0304 CASE 21 [ InfosysConsultmglntne u.b.--vvnaÿo uo iÿow¢

Infosys: Origins and Growth Infosys is one of the world's leading IT service firms,

with annual revenues approaching $5 billion. The com-

pany was founded in July 1981 by N. R. Narayana Murthy and six of his friends in Pune, the eighth-largest metropolis in India. According to his wife, the entrepre- neurial Mutthy was "always broke," so she provided the

starmp capital of 10,000 INR (approximately $US 250).4 Starting a business in India was challenging in the

1980s due to extensive governmental red tape. It took the

company nine months to get a phone line and three years to obtain permission to import computers. Because India did not yet have an established software development

market, Infosys focused its energies on the United States from the very beginning. It secured its first U.S. client, Data Basics Corporation, in 1983, and relocated its head- quarters to Bangalore that same year. (Bangalore is known as the "Silicon Valley" of India due to the high number of IT companies located there.)5 In 1987, Infosys opened its first international office in Boston, Massachusetts, and formed a joint venture with Kurt Salmon Associates (KSA)6 to market its U.S., operations. KSA solicited

projects while Infosys proviÿted the personnel and pro- gramming expertise. The company faced its first major crisis when the joint venture collapsed in 1989, and one of Infossÿ.s's founders, Ashok Arora, left, discouraged about the company's future prospects] Another founder, Senapathy ("Kris") Gopalakrishnan, later recalled, "We

had nothing after eight years of trying to bring up a com- pany. Those who studied with us had cars aÿd houses.''8

Murthy challenged the remaining partners, saying, "If you all want to leave, you can. But I am going to stick [with it] and make it.''9 All five elected to stay,

and through their efforts, Infosys continued to grow slowlyl0, 11 Then in the early 1990s, the Indian govern-

ment instituted economic reforms and lifted many of the regulations that had stagnated the country's devel-

opment, enabling Infosys to grow much more rapidly.J2 The firm went public on the Indian stock exchange in 1993 with a market capitalization of $10 million.13 Morgan Stanley salvaged the undersubscribed IPO and later reaped millions in windfall profits.14 In 1999, Infosys joined the NASDAQ, becoming the first Indian company to be listed on a U.S. stock exchange.

After just one full year as a listed company, Infosys's market capitalization reached more than $17 billion in 2000. Meanwhile, the company's international opera- tions grew to nine marketing offices in the United States as well as a presence in Canada, Australia, the United

Kingdom, Japan, Hong Kong, Sweden, Belgium, France, and Germany. Some of its major clients included such well-known firms as General Electric, Reebok International, Nestld S.A., and Holiday Inn.iS

Today, Infosys is engaged in every aspect of IT ser- vices, ranging from business and technology consulting to application services, custom software development, IT infrastructure services, and business-process out- sourcing.16 It has 65 offices and 59 development cen-

ters spanning more than 30 countries; the firm employs more than 125,000 people worldwide (see Exhibits 1 and 2). Infosys's North American operations account

EXHIBIT 1 Infosys's Human Capital Source: Adapted from Infosys, "lnfosys annual report," 2009, Infesys Technologies Ltd., wwwÿinfÿsys`cÿm/investÿrsÿrepÿrts-fiÿings/annuaÿ-repÿrÿ/annuaÿ/ÿnfÿsys-ARÿ6ÿdfÿ

Functional Classification of Employees Employees by Gender Employees by Age

92.90%: 93.20%

6.80%

Year 2008

Software Professionals

[] Sales and Support

, 7.10%

Year 2009

66.6o%

Year2009 Year 2008

I Male [] Female I

o=o oo

20-25 26-30 31-40 41-50 51-60 60and above

I , Year 2009 [] Year 2008I

JX '5

CASE 21 ! Infosys Consulting in the U.S--What to Do Now? C305

EXHIBIT 2 Intangible Assets: Human Capital

2009 2008

i

I

Growth/Renewal

Total employees added during the year: 104,850 91,187

Gross 28,231 33,177

Net 13,663 18,946 Laterals added 5,796 8,523

Staff education index 272,664 251,970 Number of nationalities 76 70

Gender classification (%)

Male 66.6 67.5

Female 33.4 32.5

Number of non-Indian national employees 4,698 3,678

Stability

Average age of employees 26 26

Attrition--excluding subsidiaries (%) 11.1 13.4

Attrition--exc4uding involuntary separation (%) 9.1 t2.1

Source: Adapted from ]nfosys, "lnfosys anÿua? report," 2009, Infosys Technologies Ltd,, wwwÿinfosÿsÿcÿrn/investÿrs/repÿrts-fiÿings/annuaÿ`repÿrtjaÿnuaÿ/ÿnfÿsys-ARÿ6.pdf`

EXHIBIT 3 4

Revenue Growth and Repeat Business Source: Adapted from Intangible Assets score sheet (External structure: our clients), Infosys Annual Report 2008-2009,

120%

100%

8O%

6O%

4O%

2O%

O%

Revenue Growth '-

Total Added during the year

Exports / total revenue (%)

97.7O%

97.60%

97.50%

97.4O%

97.30%

97.20%

97.10%

97.00%

96.90%

96.80%

96.70%

, Year2009 ÿ Year2008]

Repeat Business

iÿ iÿr . [

Year 2009 Year 2008

Repeat Business (%)]

for 68 percent of sales, with another 22 percent from Europe, and 10 percent from the rest of the world]7 Future expansion is targeted for Australia, China, Eastern Europe, and Latin America.

Concurrent with geographic growth, Infosys seeks both to increase business from existing customers

and to add and retain new clients. As evidence of its emphasis on long-term client relationships, the

company proudly points out that over 97 percent of its 2010 revenues came from its existing client base (Exhibit 3)]a Infosys's ability to understand and meet the needs of its clients is an important reason it

C306 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

EXHIBIT 4 tnfosys Financial Performance Data (Currency in Rupees Crore)

Financial Performance

Income

Operating profit (PBIDTA)

Depreciation

Provision for taxation

Profit after tax

Dividend One time / special dividend

Margins (%)

Operating profit margin

Net profit margin Return on average net worth

Return on average capital employed

Per share data (Rs,)

Basic EPS

Dividend

One time / special dividend

Book value

Financial position

Share capital

Reserves and surplus

Net we rth

Debt Gross block

Capital expenditure Cash and cash equivalents

Investment in liquid mutual funds and CDs

Net current assets

Total assets

Shareholding related

Number of shareholders

Market capitalization (period-end)

Public shareholding (%)

Credit rating

Standard & Pear's

Dun & Bradstreet

Corporate governance rating

CRISIL- (GVC) ICRA

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 882 1,901 2,604 3,623 4,761 6,860 9,028 13,149 15,648 20,26ÿ-

347 765 1,038 1,272 !,584 2,325 2,989 4,225 4,963 6,906

53 113 40 73

286 623 30 66

161 189 231 268 409 469 546 694

135 201 227 325 303 352 630 895 808 958 1,242 1,859 2,421 3,777 4,470 5,819

132 179 196 310 4t2 649 758 1,345 668 830 1,144

39.3 40.2 39.9 35.1 33,3 33.9 33.1 32.1 31.7 34.1

32.4 32.8 31.0 26.4 26.1 27.1 26.8 28.7 28,6 28.7

40.6 56.1 46.6 38.8 40.7 43.8 39.9 41.9 36.3 37,2

46.3 62.6 54.4 . 46.9 48.1 51.4 44.9 45.7 41.1 42.9

5.41 11.78 15.27 18.09 23.43 34.63 44.34 67.82 78.24 101.65

0.056 1.25 2.5 3.38 3.69 5.75 7.5 11.5 13.25 23.5

12.5 15 20

15.75 26.26 39.29 53.98 61.03 96.87 125.15 195.41 235.84 310.9

33 33 33 33 33 135 138 286 286 286 800 1,357 2,047 2,828 3,220 5,107 6,759 10,876 13,204 17,523

833 1,390 2,080 2,861 3,253 5,242 6,987 11,162 13,490 17,809

284 631 961 1,273 1,570 2,183 2,837 3,889 "4,508 5,986

160 463 323 219 430 794 1,048 1,443 1,370 1,177

508 578 1,027 1,639 1,819 1,683 3,779 5,610 7,689 10,289 930 1,168 684

612 798 1,293 2,018 1,220 2,i84 3,832 7,137 8,496 12,288

833 1,390 2,080 2,861 3,253 5,242 6,897 11,!62 13,490 17,846

46,314 89,643 88,650 77,0t0 66,945 158,725 195,956 488,869 555,562496,907

59,338 26,926 24,654 26,847 32,909 61,073 82,154 115,307 82,362 75,837

67.55 67.69 68.08 68.32 65.56 702 66.55 64.35 64.31 64.38

BBB BBB BBB BBB+ BBB+

5A1 5A1 5A1 5A1 5A1

Level I Level 1 Level 1 Level 1 Level1

CCR1 CGR1 CGR1 CGR1 CCR1

Source: Adapted from Infosys, "lnfasys annual report," 2009, Infosys Technologies Ltd., vwvw.infosys.corn/investois/reports-filings/annual-report/a nnual/Infosys-AR06.pdf.

CASE 21 I lnfosysConsultmginthe U.S --What to Do Now? C307

6,906

694

895

5,819

1,345

34.1

28.7

37.2

42.9

101.65

23.5

310.9

286

17,523

17,809

5,986

1,177

10,289

12,288

t7,846

BBB+ 5A1

Level 1

CGR 1

,s-AR06.pdf.

496,907 75,837

64.38

is ranked among WIRED magazine's top 40 compa-

nies. Similarly, Bloomberg Businessweek lists Infosys among its IT 100 and 50 Most Innovative companies, and Forbes cites it as one of the five best-performing companies in the software and services sector in the world.19 A FinanceAsia poll lists Infosys as the best managed company in India.z°

Infosys further distinguishes itself from its com- petitors by maintaining a distinct corporate culture. The company believes that "the softest pillow is a clear conscience" and aims "to achieve our objectives

in an environment of fairness, honesty, and courtesy towards our clients, employees, vendors and society at large.''21 These values drive the firm's commit-

ment to provide customer delight, exemplary leader-

ship, integrity and transparency, fairness, and pursuit of excellence,z2 In keeping with its values, Infosys

adheres to numerous international governance gnide- lines, including the UN Global Compact.23 Its efforts have won recognition for ,best practices in corporate governance by Asiamoney and best company in cor-

porate governance, investor relations, and corporate social responsibility by FinanceAsia.24' 25

Infosys believes that its employees are its "vital and mostÿvaluable assets,''z6 and also stands out for its

human resource practices. For example, it was the first

company to initiate an employee stock option plan in India. Currently, all new hires undergo an integrated on-the-job training program of 20 tO 29 weeks before

they are assigned to a business unit, and all employees participate in continuing education through Infosys's Education & Research unit and Leadership Institute. The Education & Research unit employs over 600 full- time faculty members, a third of whom hold at least a master's degree. These investments have enabled

Infosys to attract the best talent in the industry and to keep attrition rates lower than competitors (13.4 percent in 2009-2010).27, 28 The company also

has executive-level talent with a high macro-economic

literacy; almost all of its top executives have been invited to speak at the Davos World Economic Forum.

Infosys's financial performance has improved steadily over the last decade (Exhibit 4) and repre- sents another important strength as the company faces changing market conditions. Infosys has a $2 billion cash reserve that it can use to fund future growth, through both increased investment in R&D and the acquisition of promising new technology ventures,z9

Nevertheless, the company was hit badly by the global economic crisis.3° Between December 2008 and April

2009, Infosys laid off over 2,100 employees for poor performance and asked 50 people from executive

management to work with nonprofit organizations for a year at half their salary.3 t On April 15, 2009, Infosys reported its first drop in revenues in a decade.32

This revenue decline prompted the company to develop a new method of pricing software mainte- nance projects, called transaction- or ticket-based pricing.33 Transaction-based pricing means that cus-

tomers are charged based on the units of function- ality consumed.34 For example, an Infosys client is

charged a prespecified price for every bug that is fixed in the software code instead of being charged a fixed amount for a few months for maintenance of the software. "Customers are increasingly look-

ing at adopting the transaction model as cost-cutting becomes imperative," said Gautam Thakkar, Vice-

President and head of Finance and Accounting, Infosys's Business Process Operations (BPO). The

company claims to have gained traction with its new pricing model as customers look to economize on operational expenditures while recovering from an economic downturn.35

The Birth of Infosys Consulting Outsourcing is subcontracting a process, such as prod- uct design or manufacturing, to a third-party company. The outsourcing partner can be domestic or foreign. If the third party is located outside the home country (assuming a U.S. firm), say in China or India, this process is called offshore outsourcing. The global out- sourcing market reached over $1.4 trillion by the end

of 2009, and is growing at a compound annual growth rate of 15 percent. Firms in the banking and financial services, technology, and health care industries spend the most on outsourcing.36

The rise of outsourcing and offshoring in the IT industry can be traced to the global delivery model (GDM) (Exhibit 5) pioneered by Infosys in the 1990s. GDM is based on the principle of taking work to the location where it makes the best economic sense given the available talent and the least amount of acceptable

risk. In practice, this means that Infosys maintains a flexible offshore-onsite ratio--the ratio of billable

project employees at offshore locations (low-cost labor) to billable project employees at the client loca- tion (cost-intensive)--for all of its service contractsS

By employing cheaper, offshore labor, as well as pro- viding an onsite presence, Infosys can provide better

C308 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

EXHIBIT 5 Global Delivery Model Source: Adapted from Prof Saby Mitra, "Conceptual overview of the global delivery model," The Global Delivery Model at Infosys, February 2007, Georgia Institute of Technology.

Global Delivery Model

value to its clients without sacrificing quality. The industry benchmark is 80:20 (80 percent of resources offshore and 20 percent onsite), but Infosys's pro- portions vary from 70:30 to 90:10 depending on the type of project and resources available. Infosys Technologies has been a consistent top performer in the offshore-outsourcing market, with growth of more

than 40 percent annually. Infosys first applied GDM to its existing software

development activities. Clients would define the proj- ect and requirement specifications, and then contact

Infosys with specific programming requests. The com- pany quickly realized, however, that its revenue growth

was directly proportional to employee growth, and started to look for ways to expand its employee base.3s

Around the same time, Stephan Pratt and Raj Joshi of

Deloitte Touchd Tohmatsu began developing a proposal to increase the offshore component in the traditional management consulting model. When Deloitte's lead- ership proved to be less than enthusiastic about altering

their operational strategy, Pratt and Joshi approached Infosys.39

Having been successful at technology implemen-

tation, Infosys established Infosys Consulting, a wholly owned subsidiary, headquartered in Fremont, California, in 2004. Stephan Pratt and Raj Joshi left De!oitte to head the new division. By expanding the services it provided to existing clients, Infosys hoped to avoid the typically high entry barriers (brand equity and client base) to the IT consulting industry. Strategically, the firm believed that consult-

ing capabilities would help Infosys deepen its client

r

?.

f CASE 21 I InfosysConsultlngintheU.S.--Whatto Do Now? C309

t

i i

relationships at the boardroom level and to start con-

versations with business heads instead of IT manag-

ers. As a result, Infosys would have the opportunity to implement broader operational changes and have a greater impact on client profitability.4° By using GDM, Infosys Consulting would be able to provide a blended offering of high-quality business consulting onsite with high-quality technology implementation offsite, distinguishing the firm from its competi- tors. Just as GDM disrupted the IT services industry, Infosys Consulting believed GDM had the potential to "reinvent and redefine" the IT consulting industry

by seamlessly integrating IT strategy and technology implementation, while simultaneously taking advan- tage of opportunities for globalization.41

To date, Infosys's proposed consulting model has had limited success. As of March 31, 2009, Infosys had invested $45 million in the consulting subsidiary with a net loss of $18 million.42 The breakeven point has been

deferred at least two times since the company's launch 43in 2004. Whereas competitors such as Accenture gen-

erated almost $10 billion from IT consulting in 2007, Infosys Consulting generated a little more than $47 million. In contrast to its major competitors, Infosys failed to make the Washington Technology newspapers' list of the Top 100 Federal Contractors in 2006. Ilffosys's inability to garner greater market share has impeded the development of a steady flow of revenue,ÿpuNng the company at even further competitive disadvantage.

The Information Technology (IT) Consulting Industry According to Plunkett Research estimates, global revenues from the consulting industry were close to

$330 billion in 2008. Geographically, more than 97 percent of all consulting revenues come from North America, Europe, the Middle East, Africa, and Asia, areas where Infosys Consulting has a strong presence. The percent of total revenues by sector is as follows:

technology consulting (46 percent), business advisory services (26 percent), operations management consult-

ing (15 percent), strategy consulting (8.4 percent) and human resources consulting (4.5 percent). Hoovers similarly estimates that '°computer consulting services

is nearly twice that of management and scientific con- suiting" in terms of annual revenues.44

During the 1980s and 1990s, the overall consult- ing industry grew at a rate of 20 percent per yea2r and

witnessed the entry of many small to medium-sized firms. However, since 2001, the industry has experi- enced either low growth or decline; industrywide rev- enue growth was -3.5 percent in 2009.45 Today, the

consulting industry is generally considered to be in the maturity stage of its life cycle. Although there are over 300,000 "enterprise firms," the market is dominated

by a few key players46 who compete for large client accounts. Jointly, Accenture, Bain, Boston Consulting Group, Booz, IBM Global Services, McKinsey, and Monitor account for around 25 percent of all industry revenues.

IT consulting falls broadly under technology con- sulting. Activities include the design and delivery of computer systems, producing design specifications, computer programming, and developing complex software solutions such as enterprise resource plan-

ning, customer relationship management, and sales force automation. Some IT consultants also provide onsite management of the client's computer systems and data processing facilities.47 Because IT con-

sulting requires minimal contact with clients, the industry tends to be globalized and is well suited for outsourcing to low-cost, high-skill destinations. India has been a particularly attractive location for IT out- sourcing due to its financial attractiveness (compen-

sation, infrastructure, and tax/regulatory costs), the availability of people and skills (labor experience, education, language, attrition), and its business envi- ronment (see Exhibits 6 and 7).

Major Competitors Infosys Consulting's competitors include both man- agement consulting firms with an IT division48 and boutique firms that focus exclusively on information

technology. Accenture is the world's largest consulting firm,

providing management consulting, information tech- nology services, and business process outsourcing services to customers in more than 120 countries. It is a privately held firm, recently reincorporated in Ireland, with annual revenues of $21.6 billion in 2010. Across all of its divisions, Accenture has 215,000 employees and maintains physical offices and opera- tions in 53 countries.49 Future areas of geographic

expansion include India, Brazil, China, Japan, and the Philippines.5° In July 2005, Accenture launched its Information Management Services unit, which now comprises a network of more than 16,000 IT

6310 CASE 21 ! Infosys Consulting in the U.S.--What to Do Now?

EXHIBIT 6 The 2009 A. T. Kearney Global Services Location Index

Note: A higher number indicates more attractiveness. Source: Adapted from "The shifting geography of outsourcing, the 2009 A. T. Kearney's Global Services Location Index (GSLI)," 2009, www.atkearney.com.rnx/res/

horne/gsli2g09.pdf.

Business Environment

Financial Attractiveness ÿ!

0 0.5

tI F

I I I f 1 1.5 2 2.5

[[] U.S. India

3 3.5

EXHIBIT 7 What Drives 0utseurcing? Source: Adapted from Josh Hyatt, "The new calculus of offshoring," CFO Magazine, October 1, 2009, www.cfo.corn/ardcle.cfrn/14443115/1/c_14443798.

"e''aO rat°ns =i : ore .ctve

Transfrom/Reengineer Process !

Gain Access to New Technology

Gain Access to New Skill

Reduce Operation Costs

1 I 0% 20% 40% 60% 80% 100%

[] id-market Companies

Enterprise Companies

professionals and 50 delivery centers worldwide. Accenture leverages its Delivery Suite, consisting of

proprietary assets, toolkits, and capabilities, to help its clients with their IT needs. It also has an Innovation Center for Information Management located in

People Skills and Availability

Mumbai, India, where potential customers can talk to

service representatives, observe project delivery activ- ities, and preview the latest technologies.51 Recent

growth has primarily been through acquisitions, such as the purchase of a Tokyo-based consulting firm and

r

CASE 21 l InfosysConsultlnginthe U.S,--What to Do Now? C311

i

a freight-order management software company based in California.52

As the pioneer of IT outsourcing in the United States, HP Enterprise Services (formerly EDS), origi- nated many of the industry's central practices such as

systems management, systems integration, centralized transaction processing, and private digital networks. Purchased by Hewlett-Packard (HP) in May 2008 for $13.9 billion, Enterprise Services continues to boast

one of the broadest service portfolios in the industry, spanning infrastructure technology, applications and business process outsourcing.53 The acquisition of EDS bolstered HP's stance against IBM and expanded its global presence to nearly 50 countries. While the com-

pany continues to maintain a strong emphasis on gov- ernment contracts, Enterprise Services has branched out further in the commercial sector under HP's leadership.

Examples of recent transactions include a $1 billion deal with UK-based insurance firm Aviva in 2009. HP also owns a controlling stake in MphasiS, a Bangalore- based business process outsourcing seÿices provider.54

An affiliate of global accounting powerhouse Deloitte Touchg Tohmatsu, Deloitte Consulting's

expertise lies in technology, human capital, and strat- egy and operationg.55 It likewise has a broad offer-

ing of technology products and services, including analytics, technology strategy, technology-enabled process transformation, systems integration, applica- tion management services, service delivery transfor- mation, and enterprise sustainability (green IT).56 To differentiate itself, Deloitte develops dedicated project teams around each industry (for example, automotive, insurance, life sciences, and so on) it serves, taking advantage of the specialized knowledge of recognized industry leaders.57 At the same time, Deloitte main-

tains nearly 25 strategic alliances with other IT provid- ers to deepen its expertise in key areas. For example, Deloitte has been designated a Platinum Partner by Oracle for more than 10 years.5s In May 2009, Deloitte acquired BearingPoint's North American Public Services practice after BearingPoint declared bank-

ruptcy. This move significantly enhanced Deloitte's presence with federal government agencies,59 placing it more directly in competition with HR

IBM IT Services is the IT consulting arm of IBM and provides both IT and outsourcing services. IT Services include cloud computing, end-user sup- port, IT strategy and architecture, maintenance and

technical support, security, servers, and storage and data services, while Outsourcing is comprised of

applications-on-demand, global process services, and IT outsourcing and hosting,s° Application innovation and management services fall under IBM's Global

Business Services division, which also houses ana- lytics and business consulting. In 2008, technology services provided 67 percent of sales compared to 33 percent for business services,sl IBM claims to

provide clients with access to the best service pro- fessionais in the field while delivering results more quickly and less expensively compared to its competi- tors.s2 The company has about 20 focal industries and

maintains strategic alliances with Lenovo, Motorola,

NetApp, Research in Motion, Wyse, Zebra, Oracle, and SARs3 In recent years, IBM has shifted positions from the United States to India and other emerging economies, in an effort to cut costs as well as increase its presence in these important markets. Laid-off U.S.

employees were given the option to apply for the newly created positions, which were compensated at local rates. Many of IBM's foreign workers volun- tarily chose to return to their native countries.64

McKinsey is a privately held consulting company with more than 15,000 employees distributed across 99 global offices in 50 countries,s5 Its eight functional areas of emphasis are strategy, business technology, corporate finance, marketing and sales, operations, organization, risk management, and sustainability

practices. The company has also developed exper- tise in 18 focal industries. McKinsey positions itself based on its depth of functional and industry exper- tise, as well as geographical reach, and cultivates

these strengths by investing deeply in employee development. In light of its human resource practices, McKinsey has repeatedly been recognized as one of the 100 Best Companies for working mothers. The company is also one of Fortune's top 10 World's Best

Companies for Leaders, while partner Eric Braverman is one of Fortune's 40 Under 40 "movers and shak- ers" in the business world,as Overall revenues in 2007

were estimated at $5.3 billion,67 roughly 5 percent of which came from strategy consulting, with a signifi-

cantly larger portion from its technology consulting activities.

The 650 members of McKinsey's business technol-

ogy group utilize the company's proprietary tools to help clients with their needs in application manage- ment, enterprise architecture, IT infrastructure, IT strategy and organization, lean IT, outsourcing and offshoring, tech-enabled marketing and sales, tech- enabled operations, and value assurance.6s Examples

C312 CASE 21 ! Infosys Consulting in the U.S.--What to Do Now? 'I

include the Benchmarking and Performance Center, which helps clients diagnose operational and techno-

logical gaps in performance, and P360°, a comprehen- sive "benchmarking-to-implementation" approach to

improving service centers.69 Tara Consultancy Services (TCS) is an IT services,

business solutions, and outsourcing company that pro- vides services, infrastructure, enterprise solutions, and consulting as part of its technology-based offerings. A subsidiary of the Tara group, one of India's largest

conglomerates, TCS employs more than 174,000 IT specialists in 42 countries. The company's revenues exceeded $6.3 billion in fiscal year 2010.7° Through its Global Network Delivery Model, Tara combines the advantages of having a global work force, inte-

grated processes in quality, security, and project man- agement, and an interconnected network of more than 50 global development centers to manage risks and provide "follow-the-sun" coverage to its clients.71

TCS credits this model ,with its ability to achieve an 87 percent customer saÿsfaction rating for on-time delivery and 89 percent for meeting quality expecta-

tions, with an average project budget variation of 3 percent (figures that exceed industry standards).72

Like other major competitors, TCS is a preferred alliance partner for other IT products and platforms (e.g., Oracle and SAP) and has won several industry awards, such as the 2009 SAP Pinnacle 'award.73 It has

also engaged in several recent acquisitions, including the 2008 purchase of Financial Network Services in Australia and TKS Teknosoft in Switzerland, followed by Citigroup Global Services in 2009.74

Yet another India-based competitor is Wipro IT Business (a division of Wipro Ltd.), which specializes in IT services such as enterprise technology integra- tion, enterprise applications, infrastructure manage- ment, and business technology services. Wipro also provides consulting, business process outsourcing, and product engineering services.75 Wipro employs more than 100,000 people and has more than 70 global delivery centers in over 55 countries. In 2009-2010, the company generated revenues of U.S. $6 billion;76 90 percent of this came from technol- ogy services.77 Wipro seeks to distinguish itself based on its commitment to quality and innovation. It was

the first IT services company to adopt Six Sigma, the world's first PCMM Level 5 software company, and the first IT services company to achieve SEI CMM/ CMMI Level 5 distinction. Its emphasis on innova-

tion is evident through its ownership of 135 patents

and related disclosures. As the world's largest inde-

pendent R&D services provider, Wipro benefits from 95 percent repeat business.78 It is currently looking

to countries in Asia, Europe, and the Middle East for

continued growth.

The Changing Political-Legal Environment

Infosys is feeling the effects of recent changes in the Indian tax code. Also looming on the horizon are pos- sible changes in the U.S. tax system that could affect

firms doing business in India.

CHANGES IN THE INDIAN TAX CODE. Infosys and other Indian-based IT companies have benefitted

immensely from a tax holiday provided under the Software Technology Parks of India (STPI) plan set forth in 1991. Under the STPI scheme, firms engaged in software development for export were exempt from

paying corporate income tax for up to 10 years, result- ing in an overall tax break of 10 to 20 percent.79 The

scheme initially expired in 2009, but was extended twice for one year each, pushing the sunset date to March 31,2011. Despite appeals from Indian IT firms, the Finance Ministry announced in September 2010 that it would not consider any further extensions.8°

In advance of the deadline, many of the larger firms moved to special economic zones (SEZs), which offer a similar tax 'break for five years and then a

50 percent tax rebate for another five years. Most small-to-medium-sized companies do not meet the 7,000 square foot size requirement for the SEZs, how- ever, and face a doubling of their overall tax rate from 15 percent to 30 percent (on average).81 In the mean- time, the Indian government has started to bill soft-

ware companies for work that does not qualify under the export tax exemption (for example, purely onsite services, software work with an onsite component of more than 70 percent, and so on). Infosys was the first company to receive such an unexpected invoice.82 As

services constitute about 56 percent of India's GDP and are expected to grow further,83 the specter of higher business costs in India raises serious questions about the long-term sustainability of the current off-

shore/outsourcing-based business model.84 As an example, Infosys received STP-related

tax discounts of $282 and $325 million for fiscal 2008 and 2009, respectively.85 For the fiscal year

CASE 21 I Infosys Consulting in the U.S,--What to Do Now? C313

2008-2009, 82 percent of Infosys's revenue came

from STP operations, while 11 percent came from SEZs. As a result, only 7 percent of Infosys's 2009 revenues of over $4 billion were subject to full tax rates in India.86 For details on Infosys's financials,

see Exhibits 8, 9, 10, and 11.

Another major change on the horizon is the imple- mentation of India's new direct tax code (DTC) sched-

uled for April 2012. The DTC is a comprehensive tax code designed to replace the 1961 Income Tax Act and a patchwork of other tax laws, which both Indian and foreign businesses find confusing and costly to comply

EXHIBIT 8 Infosys Revenue Segmentation

Source: Adapted from Infosys, "Infosys annual report," 2009, lnfosys Technologies Ltd., www.infosys.com/investors/reports-filings/annual- report/annual/Infosys-AR06.pdf.

Revenue Segmentation by Geography

7O

60

50

40

30

.ÿ 20

0 2005 2006 2007 2008

North America ÿ Europe

India Rest of the world

2009

Revenue Segmentation by Industry

35] 30

25

20

15

10

5

0

I

2005 2006 2007 2008 2009

.ÿ Telecom Retail Energy and Utilities

(continued)

'--.ÿ Manufacturing

Banking and Financial Services Insurance

C314 CASE 21 I InfosysConsultlnginthe U.S --What to Do Now?

.f EXHIBIT 8 (continued) Revenue Segmentation by Services

35

30

25

20

15

10

5

0 2005 2006 2007 2008 2009

li Application Development ÿ Consulting Services and

Application Maintenance Package Implementation Business Process Infrastructure Management Management Product Engineering Services

EXHIBIT 9 Infosys Selected Financial Performance

Source: Adapted from Infesys, "lnfosys annual report," 2009, Infosys Technologies Ltd., www.infosys.corn/investors/reports-filings/annual-reportjannual/ Infosys-AR06.pdf.

45 ......................................................................................................................................................................................................

30 ................................................................................................................................................................ ÿ ............................

25

20 ...............................................................................................................................................................................................

15 ..........................................................................................................................................................................................

..................................................................................................................................................................................... iiiiiiiii

5 ............................

Income ÿ Operating Profit Margin ÿ Net Profit Margin I

CASE 21 I Infosys Consulting in the U.S.--What to Do Now? C315

EXHIBIT 10 Infosys Employee and Income 6rowth Source: Adapted from Infoays, "lafosys annual report," 2009, Infosys Technologies Ltd., www.infosys.com/investors/reports-filings/anoual-reportjannuat/ Infosys-ARO6.pdf.

140 ......................................................................................................................................................................................................

120

100

80

60

2O

0

Employee 6rowth ÿ Income 6rowth ÿ Net Growth afterTaxes}

EXHIBIT 11 0ffshoring Market Source: Adapted from Kanakamedala, K., J. M. Kaplan, an&6. L. Moo (2006), "Moving IT infrastructure labor offshore," McKinsey, May.

14 ......................................................................................................................................................................................................

12

10

8

6

4

2

Application ÿBP0 m Infrastructure Development and Maintenance

C316 CASE 21 I Infosys Consulting in the U,S.--Whatto Do Now?

with. Many of the changes look positive for corpora- tions on the surface: a lowering of corporate taxes from 40 percent to 30 percent for foreign firms and from 33.2 percent to 30 percent for domestic firms, a variety of changes intended to tax domestic and for-

eign firms more equivalently, and a simpler tax regime resulting in lower administrative expenses. Still, crit- ics warn that the DTC is likely to create significant uncertainty and may not have the intended effects on promoting economic growth. Changes in the definition of residency status place additional burdens on for- eign-owned businesses to document where decisions are made and key functions are performed. The code also introduces several "general anti-avoidance rules"

(GAAR) that are aimed at ending tax evasion and extending India's legislative reach over foreign firms.

Furthermore, the taxation of offshore deals is expected to increase the cost of acquisitions and therefore have a negative effect on foreign direct investment, at least

in the short term.87

Wipro, further warned that if passed, the new law would just cause America to suffer, by excluding it from the only growth markets left--Asia, Africa, and China.9°

A back-of-the-envelope calculation shows that

even if the tax proposals have the maximum impact on U.S. companies, it still makes sense for them to continue with their Indian operations. According to

analysts, a service that costs around $48 per seat per hour in the United States is available for about $12 in India. This is for basic-level work; the difference is

even higher for more sophisticated services.

The U.S. H-1B Visa Debate

REFORMING THE U.S. TAX CODE? In a recent speech, President Barack Obama pointed out that one problem with the U.S. tax code is that it offers

incentives for outsourcing. Reiterating his campaign rhetoric, the U.S. President stated: "The way we make our businesses competitive is not to reward American

companies operating overseas with a roughly 2 percent tax rate on foreign profits; a rate that costs taxpayers tens of billions of dollars a year.''aS He wants the U.S.

Congress to pass several measures designed to save the American taxpayers $210 billion over the next 10 years.

Ganesh Natarajan, vice-chairman and CEO of Zensar Technologies and former chairman of Nasscom, explained: "The primary intent is to address the tax rate differentials that exist across the world. If imple- mented, this would impact American-headquartered companies that have overseas operations. The cur-

rent outsourcing tax law states that any income that is earned outside the United States is not taxed until such time as it is brought back into the United States. The Obama proposal aims to alter that to raise the revenues

of the U.S government." Infosys's co-founder, N. R. Narayana Murthy,

believes that Obama's tax proposal will not impact

Indian firms because they already pay taxes in the United States. Rather, American firms operating in India would have to repatriate taxes on profit earned outside their home country.89 Azim Premji, CEO of

In the tech world, stories of H-1B visa dilemmas abound. (Although both the H-1B and L-1 visas apply to non-immigrants, the H-1B visa is more valu- able, as it is valid for a duration of three years. L-1 visas are for a much shorter duration and are used by

employees who are transferred to the U.S. offices of a company.) One such story is that of Google's Sanjay Mavinkurve.91 An Indian immigrant and Harvard

graduate who helped lay the foundation of Facebook, Sanjay is a key engineer on many of Google's proj- ects. But he works as a lone engineer in Google's sales office in Toronto. He has believed in the American dream since he was a child. He excelled in college,

and finally got his work visa. Then he married another Indian and since his wife does not have a work visa, they decided to migrate to Canada where she could find employment.

Similarly, Microsoft has built a cutting-edge re- search center just 130 miles north of its Redmond,

Washington, headquarters to overcome its current H-1B limitations. Only a two-hour car drive on I-5 from Redmond, the new facility is located in the Vancouver suburb of Richmond, British Columbia. Since it is located in Canada, U.S. immigration rules do not apply. Emphasizing this point, Microsoft stated: "The Vancouver area is a global gateway with a diverse population, is close to Microsoft's offices in Redmond, and allows the company to recruit and retain highly skilled people affected by immigration issues in the U.S.''92 Many of the big technology companies like

Google and Microsoft spend millions on their immi- gration efforts, and maintain a full-time legal staff just to deal with immigration issues.93

Bill Gates, Microsoft's co-founder and chairman,

is a vocal advocate of the economic benefits of foreign

CASE 21 I Infosys Consulting in the U.S.--What to Do Now? C317

"r 72;

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, >

=,4,

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workers, and has testified before Congress to this effect (see Exhibit 12 for the full text of his March 12, 2008 speech). Citing a survey by Duke University and the University of California, Berkeley, he pointed out that "one-quarter of all start-up U.S. engineer-

ing and technology firms established between 1995 and 2005 had at least one foreign-born founder. By

2005, these companies produced $52 billion in sales and employed 450,000 workers." For example, Sergei Brin, Google's co-founder, is an immigrant from

Russia. Proponents also argue that foreign workers bring their knowledge networks with them, linking the United States back to the best ideas across the globe. These knowledge networks allow the easy exchange of information, reduce the cost of business, leverage any innovation in the immigrant's home

country, and make America's global presence stron- ger.94 For instance, about 35 percent of Microsoft's

patent applications in 2008 came from new inventions by visa and green card holders. In addition, there is evidence to indicate that technology companies cre- ate an average of four new U.S. jobs for every H-1B visa holder they hire.95

On the other side of the debate, Kim Berry, an

engineer who operates a nonprofit advocacy group for American-born technologists, argues that, "There are plenty of Americans to do these jobs.''96

As of January 2009, there were 241,000 unem- ployed U.S. citizens in IT occupations whereas the number of H-1B IT workers far exceeded this num- ber.97 However, companies that use the H-1B visas

argue that the market (rather than Congress) should

EXHIBIT 12 Text of Bill Gates's Testimony Before the Committee on Science and Technology, U.S. House of Representatives, March 12, 2008

We face a critical shortfall of skilled scientists and engineers who can develop new breakthrough technologies. Today, knowledge and expertise are tile essential raw materials that companies and countries need in order to be competitive. We live in an economy that depends on the ability of innovative companies to attract and retain the very best talent, regardless of nationality or citizenship. Unfortunately, the U.S. immigration system makes attracting and retaining high-skilled immigrants exceptionally challenging for U.S.

firms.

Congress's failure to pass high-skilled immigratidn reform has exacerbated an already grave situation. For example, the current base cap of 65,000 H-1B visas is arbitrarily set and bears no relation to the U.S. economy's demand for skilled professionals. For fiscal year 2007, the supply ran out more than four months before that fiscal year even began. For fiscal year 2008, the supply of H-1B visas ran out on April 2, 2007, the first day that petitions could be filed and six months before the visas would even be issued. Nearly half of these

who soughta visa on that day did not receive one.

This situation has caused a serious disruption in the flow of talented science, technology, engineering, and math (STEM) graduates to U.S. companies. Because an H-1B petition generally can be filed only for a person who holds a degree, when May/June 2007 graduates received their degrees, the visa cap for fiscal year 2008 had already been reached. Accordingly, U.S. firms will be unable to hire those graduates on an H-1B visa until the beginning of fiscal year 2009, or October 2008.

As a result, many U.S. firms, including Microsoft, have been forced to locate staff in countries that welcome skilled foreign workers to do work that could otherwise have been done in the United States, if it were not for our counterproductive immigration policies. Last year, for example, Microsoft was unable to obtain H-1B visas for one-third of the highly qualified foreign-born job candidates that we

wanted to hire.

If we increase the number of H-1B visas that are available to U.S. companies, employment of U.S. nationals would likely grow as well. For instance, Microsoft has found that for every H-1B hire we make, we add on average four additional employees to support them in various capacities. Our experience is not unique. A recent study of technology companies in the S&P 500 found that, for every H-1B visa requested, these leading U.S. technology companies increased their overall employment by five workers.

Moreover, the simple fact is that highly skilled foreign-born workers make enormous contributions to our economy. A recent survey by Duke University and the University of California, Berkeley, found that one-quarter of all startup U.S. engineering and technology firms established between 1995 and 2005 had at least one foreign-born founder. By 2005, these companies produced $52 billion in sales and

employed 450,000 workers.

The United States will find it far mere difficult to maintain its competitive edge over the next 50 years if it excludes those who are able and willing to help us compete. Other nations are benefiting from our misguided policies. They are revising their immigration policies to attract highly talented students and professionals who would otherwise study, live, and work in the United States for at least part of

their careers•

C318 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

dictate the visa cap. During the recession, it has taken 99.5 percent more time for the H-1B limit to be reached. Companies like Microsoft view this as evi-

dence that the market can effectively temper demand for visas, and that the H-1B program can help fill gaps to grow the market when needed.

"BUFFALO, NOT BANGALORE." President Obama's proposal to provide tax incentives to companies cre- ating jobs inside the United States has further fueled the immigration debate.98 However, according to Ravi Aron, a senior fellow at the Mack Center for

Technological Innovation at Wharton, the impact of the president's proposed tax incentives is likely to be minimal (despite their political appeal). He explains that service delivery centers in India:

According to Duke University's Vivek Wadhwa, "60

of the 65 foreign engineers among the 120 he helped train this year to be business executives are leaving for India, China, and Turkey.''I°I Despite the global

recession, most of the students of the class of 2010 at the Indian Institute of Management got placement offers one year before graduation from firms such

as McKinsey & Co., Boston Consulting Group, and Bain & Co.1°2 Even the big U.S. companies which

have implemented hiring freezes at home are still offering jobs in India. The job profiles and opportu- nities are comparable and the pay is quite attractive by Indian standards.

In fact, experts feel that the legislation may actu-

ally help Indian firms as they try to become more competitive, whereas the U.S.-based companies that do business in India may be negatively affected.99 It

is during times of crisis that companies come up with some of their most innovative ideas. For example, when Toyota faced Voluntary Export Restrictions under the Reagan administration, it forged an alliance with GM to create the NUMMI plant. Toyota gained a legal means of entering the U.S. market, while GM learned Toyota's lean manufacturing techniques.I°°

Not only are protectionist measures likely to be chal-

lenged by the World Trade Organization (WTO), but they are also likely to motivate Indian companies to seek simi!ar deals.

What the heated rhetoric on both sides has done is to create significantly more uncertainty for foreign-born innovators, who are increasingly return- ing to their home countries to start new companies.

THE H-1B AND k-1 VISA REFORM ACT 0F 2009. In September 2008, the U.S. Citizenship and Immigration Services (CIS) issued a report indicating that the H-1B visa program was marred by fraud.l°3 Surprise investi-

gations into a random sample of 246 cases out of nearly

100,000 visa holders revealed a 20 percent violation rate, with problems ranging from forged documents, fake degrees, and fake companies at phony locations. A long-time advocate of visa reform, Senator Chuck Grassley (R-Iowa) seized this opportunity as a call for action and fired off a letter to the acting CIS director demanding to know what actions the agency was tak- ing to end the "rampant fraud and abuse taking place in the program.''1°4

When Microsoft announced plans to lay off 5,000 employees a few months later in January 2009, Grassley sent another pointed letter, this time to Microsoft CEO Steve Balmer (Exhibit 13), in which he asked for veri- fication that American workers would have priority over any foreign visa workers. Microsoft's General Counsel Bradford Smith countered in a letter explain- ing that the company was legally bound to avoid dis- cfimination based on nationality, and that Microsoft did not qualify as "H-1B dependent" because less than

15 percent of Microsoft's U.S. force were H-1B hold-

ers (see Exhibit 14). Though Microsoft steadfastly stood its ground, other companies were considerably more alarmed by Senator Grassley's inquiries. Bank of America actually withdrew its 2009 job offers made to MBA students graduating from U.S. business schools who were not U.S. citizens.l°5

Building on this momentum, Grassley, along with assistant Senate majority leader Dick Durbin (D-Illinois), introduced a bill to amend the H-1B and L-1 visa programs on April 24, 2009 (a prior version of the bill had been introduced in 2007 but

are fully owned by U.S. firms, and their employ- ees work for U.S. corporations. Under the proposed

scheme, there may be some marginal impact on

these centers to the extent that the tax rate differ-

ences between India andÿthe U.S. are quite low-

unlike, say, in Ireland, where the corporate tax rate

is as low as 12.5 percent. So even if the captive

centers of these firms attract a slightly higher tax rate than they face in their Indian operations, given the very significant wage disparity, the incremen- tal tax will, at best, have a marginal impact..It will be a small fraction of the wage difference between Asia and the U.S. IBM did not hire its nearly 90,000 workers in India and Accenture its 50,000 or so workers for lower taxes.

1

i

CASE 21 I Infosys Consulting in the U.S.--What to Do Now? C319

EXHIBIT 13 Senator Grassley's Open Letter to Steve Ballmer, CEO Microsoft

January 22, 2009 Mr. Steve Ballmer Microsoft Cgrporation One Microsoft Way Redmond, WA 98052-6399

Dear Mr. Ballmer:

I am writing to inquire about press reports that Microsoft will be cutting approximately 5,000 jobs ever the next 18 months. I understand that the layoffs will affect workers in research and development, marketing, sales, finance, legal and corporate affairs, human resources, and information technology.

1 am concerned that Microsoft will be retaining foreign guest workers rather than similarly qualified American employees when it imple- ments its layoff plan. As you knew, I wan{to make sure employers recruit qualified American workers first before hiring foreign guest work- ers. For example, I cosponsored legislation to overhaul the H-1B and L-1 visa programs to give priority to American workers and to crack down on unscrupulous employers who deprive qualified Americans of high-skilled jobs. Fraud and abuse is rampant in these programs, and we need more transparency to protect the integrity of our immigration system. I also support legislation that would strengthen educational opportunities for American students and workers so that Americans can compete successfully in this global economy.

Last year, Microsoft was here on Capitol Hill advocating for more H-1 B visas. The purpose of the H-1B visa program is to assist companies in their employment needs where there is not a sufficient American workforce to meet their technology expertise requirements. However, H-18 and other work visa programs were never intended to replace qualified American workers. Certainly, these work visa programs were never intended to allow a companyto retain foreign guest workers rather than similarly qualified American workers, when that company cuts jobs during an ecooemic downturn.

It is imperative that in implementing its layoff plan, Microsoft ensures that American workers have priority in keeping their jobs over foreign workers on visa programs. To that effect, I would like you to respond to the following questions:

)) What is the breakdown in the jobs that are being eliminated? What kind of jobs are they? How many employees in each area will be cut?

)) Are any of these jobs being cut held by H-1B or other work visa program employees? If so, how many?

)) Hew many of the jobs being eliminated are filled by Americans? Of those positions, is Microsoft retaining similar ones filled by foreign guest workers? If so, hew many?

)) How many H-1B or other work visa program workers will Microsoft be retaining when the planned layoff is completed?

My point is that during a layoff, companies should net he retaining H-I B or other work visa program employees over qualified American workers. 0u r immigration policy is not intended to harm the American workforce. I encourage Microsoft to ensure that Americans are given priority in job retention. Microsoft has a moral obligation to protectthese American workers by putting them first during these difficult eco- nomic times.

Sincerely, Charles E. Grassley United States Senator

Source: "Grassley works to ensure American workers are priority," January 23, 2009, http://grassley.senate.gov/news/Ar[icle.cfrn?custornel dataPageID_1502=18922.

C320 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

EXHIBIT 14 Microsoft's Response to Senator Grassley's Open Letter

March 3, 2009 The Honorable Charles E. Grassley United States Senator 135 Hart Senate Office Building Washington, D.C. 20510-1501

Dear Senator Grassley,

Thank you for your letter of January 22, 2009. Steve Ballmer asked me to respond on the company's behalf.

Your letter expressed concern about Microsoft's recently announced lay-offs and asked uste provide you with information about them. I have included that information below, but first I'd like to provide a bit of context.

Since the company's founding in 1975, Microsoft's consistent growth has enabled us to increase employment every year. In the last three fiscal years, for example, our employment in the United States increased by 40 percent. Today we have more than 90,000 employees world- wide and over half of them a re in the United States. The vast majority of these U.S. jobs are filled by American citizens.

Because of our partner-based business model, our impact on employment is even larger than these numbers indicate. For every dollar that Microsoft earns in the United States, our business partners earn $6. This creates many additional jobs. One recent study found that 4.2 million people in the United States are working in jobs that are the result of Microsoft's business model ....

This year, in response to the economic crisis, Microsoft is reducing its employment level for the first time .... We announced in January that the company would eliminate u p to 5,000 jobs over 18 months. It's important to note that we also expect to create 2,000 to 3,00Q new jobs during this same timefralne, as we continue to invest in innovation. As a result, the total net impact on our employment will be a

decline of about 2,000 to 3,000ÿjobs, not 5,000.

You asked aboutthe kinds of jobsthat will be eliminated and how many employees will be affected in each area.

Because the job reduction decisions will be made over 18 months, we do not yet know all of the specific jobs that will be eliminated. We do knew, however, thatthe 5,000 positions that will be eliminated will include jobs in marketing, sales, finance, Legal and Corporate Affairs, HR, R&D, and IT. In addition to the 5,000 figure, our workforce in support, consulting, operations, billing, and manufacturing will continue to

change in direct response to customer needs.

We also know thatthe 5,000 figure likely will include positions in a large number of countries. Given the distribution of our jobs, however, it is likely that the Puget Sound region in Washington State will see the largest number of job eliminations ....

As we add new positions to support key investments, we will prioritize R&D investments that promote long-term innovation. That is why we plan to invest over $9 billion in research and development this year, one of the highest such figures in the world. Over two-thirds of this

total will be spent in the United States.

You also asked in your letter how we decide which jobs to eliminate, whether employees with H-1B or other work visas are affected, and

how many of the jobs being eliminated are held by Americans.

Beca use these decisions will be made over 18 months, it's too early to know the precise answers. We do know, however, that the job reductions will impact non-Americans who hold jobs outside the United States, as well as both visa holders and U.S. workers inside the United States .... Workers on H-1B visas and other temporary work visas make up only a small percentage of our overall wurkforce, but they were also among the employees impacted by the reductions announced in January. Employees outside the United States were also

impacted ....

Finally., you asked about Microsoft's plans for retaining H-1B or other work visa program workers after the job eliminations.

H1-B employees have always accounted for less than 15 percent of Microseft's U.S. Wordorce, the level that is used in immigration law to determine whether a company is "H-1B dependent." Nonetheless, the ability to tap into the world's best minds has long been essential. to our success. Although they are a small percentage of our workferce, H-1B workers have long made crucial contributions te Microsoft's innovation successes and to our ability to help create jobs in this country. We are confident this will continue to be true in the future.

We focus our recruiting for core technology jobs at U.S. universities, which continue to be among the best in the world for computer sci- ence and engineering graduates. However, as one recent study found, in 2005 temporary residents earned more than 40 percent of the . engineering and computer science degrees at U.S. higher education institutions. For doctoral degrees, that number was even higher, as temporary residents accounted for 59 percent of the degrees awarded in these fields that year.

The substantial majority of H-1B petitions filed by Microsoft are for core technology positions, and technology and engineering positions account for about 90 percent of Microsoft's H-1B workforce. Many of these H-1B employees have been seeking permanent resident status for many years and would no longer he dependent on their H-1B visas but for multi-year delays in the green card process.

With these factors taken together, we do not expect to see a significant change in the proportion of 14-1B employees in our worldorce fol-

lowing the job reductions.

CASE 21 I Infosys Consulting in the U•S.--What to Do Now? C321

EXHIBIT 14 (Continued)

/

I want to underscore that we are rigorous in our compliance with the requirements of the H-1B program• We are familiar with published repoCcs about abuse by some employers in the H-1B visa category. We believe that the H-1B fraud issue is important and needs to be addressed. We recognize that every H-1B employer has an obligation to ensure that the program's rules are followed. We support H-1B reform efforts to ensure that users ofthe program follow both the spirit and the letter of the law.

Finally, I want to convey our commitmentto help broaden opportunities for all Americans• The country's long-term competitiveness requires that the United States produce more university graduates in science, technology, engineering, and math .... At Microsoft, we have a number of education-focused public initiatives ....

Ultimately, as a company and as a country we need to combine short-term adjustments to the economic crisis with long-term efforts to strengthen our economic competitiveness. We recognize the impact that our decisions have on employees who are affected• We strive to make thoughtful employment decisions and then assist the individuals who are impacted by them. We also strive to take a long-term approach that will enable Microsoft to remain a leader in technology innovation and an important contributor to the country's competitive- ness now and in the future.

We hope that this information is helpful to you. We leek forward to working with you and your staff if we can be of assistance in addressing these important issues•

Sincerely, Bradford L. Smith General Counsel

Source: www.businessinsider, com/mic rosoft-to-grassley-wereÿstill-using-H-1 Bs-no-moraFimperative-to-hire-america ns-2009-3.

EXHIBIT 15 Details of U.S. H-1B Visas

Rank Company No. of Visas Percentage of Top 50

1 Infosys Technologies Limited 4,559 21.11%

2 Wipro Limited 2,678 12.40% 3 Satyam Computer Services Limited 1,917 8.88%

4 Tata Consultancy Services Limited 1,539 7.13%

5 Microsoft Corp 1,037 4.80%

6 Accenture LLP 731 3.39% 7 CegnizantTech Solutions US Corp 467 2.16%

8 Cisco Systems Inc 422 1.95% 9 Larsen & Toubro Infotech Limited 403 1.87%

10 IBM (NYSE: IBM)India Private Limited 381 1.76%

11 Intel Corp 351 1.63% 12 Ernst &Young LLP 321 1.49% 13 Patni Americas Inc 296 1.37%

14 Terra Infotech Inc 281 1.30%

15 Qualcomm Incorporated 255 1.18%

16 Mphasis Corporation 251 1.16% 17 KPMG LLP 245 1.13%

18 Prince 6eorges County Public Schools 239 !.11%

19 Baltimore City Public School System 229 1.06%

20 Deloitte Consulting LLP 218 1.01% 21 6oldman Sachs&Co 211 0.98%

22 VerinonTechnology Solutions LTD 208 0.96% (continued)

Filed (2008, Top 50 Companies) i

C322 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

EXHIBIT 15 (Continued) Details of U.S. H-1B Visas Filed (2008, Top 50 Companies)

23 Everest Business Solutions Inc

24 Google Inc 26 Deloitte &Touche LLP 27 University of Maryland 28 University of Pennsylvania

29 University of Michigan 30 Marlabs tnc

31 Oracle USAInc 32 University of Illinois at Chicago 33 Allied Solutions Group Inc 34 Rite Aid Corporation 35 V-Soft Consulting Group Inc

36 Cummins ]nc

37 The Johns Hopkins Med Institutes 0IS 38 Vedicsoft Solutions Inc

39 University of Wisconsin, Madison

40 JPÿorgan Chase&Co/ 41 I-FrexSolutions Inc

42 Clerysystnc 43 Yale University 44 State University of NY at Stony Brook 45 Harvard University 46 DIS National Institutes Of Health 47 Yahoo Inc ,ÿ

48 Stanford University 49 CDC Global Services Inc 50 Global Consultants Inc

Sum of Top 50

208 0.96% 2O7 O.96% 195 0.90% 191 0.88% 186 0.86% 183 0,85% 177 0.82% 168 0.78% 168 0.78% 166 0.77% 161 0.75% 161 0.75% 159 0.74% 157 0.73% 156 O.72% 151 0.70% 150 0.69% 148 0.69% 147 0.68% 145 0.67% 143 0.66% 143 0.66% 141 0.65% 139 0.64% 138 0.64% !35 0.63% 131 0.61%

21,593

not passed)J°6 The proposed legislation did not aim to reduce the number of H-1B visas (Exhibit 15)-- 85,000 per yearl°V--but rather contained provisions to

increase oversight and enforcement while discourag- ing outsourcing. Anti-outsourcing sentiment was at an all-time high due to large-scale job cuts and double

digit unemployment in the United States. The bill pro- posed the following changes:

[] Before an employer submits an H-1B application,

the employer must first advertise the job opening for 30 days on a U.S. Department of Labor (DOL) website.

[] Companies were prohibited from hiring H-1B holders if they employed more than 50 people and more than 50 percent of their employees were H-1B visa holders.

[] Any company that had received government fund- ing and sought to hire new H-1B workers would be considered an "H-1B dependent employer." All

H-1B dependent employers must make additional attestations to the U.S. Department of Labor (DOL) when filing the Labor Condition Application.

[] The U.S. Department of Homeland Security (DHS) agreed to share with DOL any potential fraud cases.

[] Employers were to pay employees the prevail- ing wages to prevent undercutting American workers by paying substandard wages to foreign workers. 108

Despite all the public attention generated by the Durbin-Grassley bill, the legislation never made it out of committee and was removed from the books when the ll2th Congress came into session.I°9 However,

4

i

I CASE 21 ] Infosys Consulting in the U.S.--What to Do Now? C323

Senators Sanders (I-Vermont) and Grassley did man- age to incorporate a watered-down version of the bill as an amendment to the economic stimulus pack-

age approved in February 2009. Under the so-caUed "Employ American Workers Act," any company that

received Troubled Asset Relief Program (TARP) funds who applied for H- 1B workers had to comply with H- 1B dependent rules. The rules stipulated that the company must make a good-faith effort to recruit American workers and that it could not replace American work- ers with H-1B visa holders.11° One expert interviewed

by Bloomberg Businessweek estimated that only about 1,000 jobs in the banking industry would be affected by the legislation. Meanwhile, banks could continue to use H-1B visa holders that were brought into the United States by foreign outsourcing firms such as

Infosys, Wipro, and Tata (a much more significant source of foreign workers). 111 The initial version of the

TARP amendment introduced by Sanders and Grassley (which was not passed) was much more stringent and would have prevented banks from hiring any workers on H-1B visas for an entire year.In

J L

VISA REFORM IN 20117 Senators Durbin (in office until2014) and Grassley (re-elected in 2010 for another six-year term) have continued to advocate for broader visa reform since the passage of the TARP amend-

ment. In January 2011, they once again declared their intent to reintroduce legislation to overhaul the H-1B

program. This announcement followed on the heels of a Government Accounting Office (GAO) report that found the H-1B program "vulnerable to fraud

and abuse" due to the inability to accurately track

the number of foreign workers in the program, how many stayed in the country after their visa expired, and problems with implementation of the protections pro- vided to American workers.113' 114, 115 The GAO also

found that demand for foreign workers exceeded the visa cap and was dominated by a few large compa- nies. In response, Durbin and Grassley wrote a letter to Homeland Security Director Janet Napolitano, ask- ing the federal government to take action to end visa abuse, stating the GAO report "verifies what we have

argued for years--that loopholes in the program have resulted in adverse effects for American and foreign workers.''116 In an interview, Grassley added, "It's

time we get the program back to its original intent where employers use H-1B visas only to shore-up employment in areas where there is a lack of qualified American workers.''117

Yet President Obama's 2011 State of the Union address seemed to signal that H-1B reform might be moving in another direction altogether. In a comment many interpreted as giving a "green light" to increase the flow of foreign workers, he stated: "Others come here from abroad to study in our colleges and universi-

ties. But as soon as .they obtain advanced degrees, we send them back home to compete against us. It makes no sense.''118 Yet despite broad bipartisan and indus-

try support for expanding the visa cap, Congressional efforts to increase the number of visas offered have

likewise repeatedly failed. For example, Representative Gabrielle Giffords (D-Arizona) introduced an unsuc- cessful bill in 2008 that proposed implementing a mar- ket-based formula with an initial ceiling of !30,000, as well as removing any limits on foreign graduate stu- dents' ability to stay in the U.S. after they finish their degrees. The obstacles to reform are many. Senators Durbin and Grassley and their supporters want to limit visa holders to no more than 50 percent of a compa- ny's work force. Other legislators have been unwilling

to pass any changes to the visa program that are not

part of a more comprehensive approach to immigration reform.119 Meanwhile, more than 60 technology CEOs

travelled en masse to Washington in March 2011 to peti- tion for increased access to the skilled foreign workers they need to continue to innovate,n° Overall, the con- sensus seems to be that H-1B visa reform is coming--

the question is what kind of change and when.

Decision Time The announcement that Delta Flight 184 was begin- ning its descent shook Adrian awake from her slumber.

Rising to consciousness, her thoughts returned to the external challenges that lay ahead for the strategy plan- ning committee at Infosys Consulting. She wondered what should be their first priority--was it the increased

competition that was bringing global competitors into Infosys's backyard? Direct competition from Tata and

Wipro? Or perhaps the recent and proposed changes in the indian and U.S. tax codes? Then there was the difficulty of predicting exactly which way U.S. H-1B visa reform would go. She wondered what the compa- ny's next steps should be in light of all these potential opportunities and threats.

Her head swimming, Adrian tried to focus her

thoughts on the internal workings of Infosys Consulting instead. How could they get to the point of profitability? Where would future growth come from? She wondered

C324 CASE 21 I Infosys Consulting in the U.S.--What to Do Now?

if it made sense for Infosys to invest further capital in the consulting arm, or if it would be better to spin it out

as a separate company? Perhaps they should partner or merge with a more established consulting firm? Or maybe they should follow Anderson's lead and relocate to Ireland to take advantage of lower corporate tax rates?

Then there was the issue of where to get the human resources to support future growth. Perhaps one of the underlying problems the company faced was that Infosys's processes and culture were not

adapting well to the U.S. market. How could they train their international employees better? Should they hire more personnel locally? What if Durbin and Grassley were successful in their attempts to limit the for- eign workers that Infosys depended on so heavily? If Infosys did have to hire more people locally, where would the money come from for higher salaries? Perhaps it would make sense to hire undergraduates from U.S. universities instead of MBAs, and then train

them for specific projects in order to keep costs down? Amidst the welter of qÿestions in her mind, the air- craft touched down at Hartsfield-Jackson International Airport. In a few hours, she would face her co-workers

in the Atlanta office, and the real work would begin.

14. www-india-today.com/itoday/19991108/business.htral.

15. www.fundinguniverse.com/company-histories/Infosys_

Technologies-Ltd-Company-History.html.

16. www.infosys.com!about/what-we-do/Pages/index.aspx.

17. Infosys Annual Report 2009-10.

18. Ibid.

Endnotes

1. "Say No to Bangalore, Yes to Buffalo: Obama," Rediff Business, May 5, 2009, http://business.rediff,corrdreport/2009/ may/05/bpo-say-no-to-bangalore-says-obama.htm.

2. Infosys, Infosys Annual Report, 2009, Infosys Technologies Ltd., www.infosys.com/investors/reports-fitings/annual-report/ annual/Infosys-AR06.pdf.

3. "Say No to Bangalore, Yes to Buffalo: Obama."

4. http://20twentytwo.blogspot.com!2008/06/inspiring- infosys-story.html.

5. "The Amazing Infosys Story," RediffNews, July 11, 2006, http://specials.rediff.com/money/2006/jul/11 sld3.htm. 6. "Infosys Technologies Limited," Hoover's Company Records, October 15, 2009.

7. http://abhisays.com/sofware-companies/early-days-of- infosys.html.

8. http://20twentytwo.blogspot.com/2008/06/inspiring- infosys-story.html.

9. Ibid.

10. "The Amazing Infosys Story," RediffNews, July 11, 2006, www.rediff.com/money/2006/jul/11 sld5.htm.

11. "MuShy, Narayana," Encyclopaedia Britannica, 2009, Encyclopaedia Britannica Online, October 15, 2009, www.bri- tannica.com/EBchecked/topic/1012874/Narayama-Murthy. 12. www.fundinguniverse.com/company-histories/Infosys- Technologies-Ltd-Company-History.html.

13. Pfeiffer, E. W. (1999), "From India to America," Forbes Asia, August 23, pp. 21-24.

19. www.infosys.com/investors/Documents/pdfs/Global_Facts. pdf.

20. www.infosys.corn/about!awards/Pages/best-managed_ company.aspx.

21. "Infosys Website," 2009, www.infosys.com.

22. "Who we are," October 15, 2009, www.infosys.com/about/ who-we-are/default.asp.

23. www.infosys.com/investors/corporate-governance/Pages/

report.aspx.

24. www.infosys.comJaboutlawards/Pages/corporate- govemance-awards.aspx.

25. www.infosys.com/about/awards/PagesYoest-managed_ company.aspx.

26. Infosys Annual Report, 2009-2010.

27. "Infosys Technologies Ltd: Company profile," Datamonitor, April 24, 2009.

28. Infosys Annual Report, 2009-2010.

29. Rothaermel, E T., and A. M. Hess (2009), "Finding an innovation strategy that works," The Wall Street Journal, August 17.

30. "The Global 2000: Special Report," Forbes, August 4, 2009, www.forbes.corn/lists/2009/18/global-09_The-Global- 2000-S oftware-S ervices_9Rank.html.

31. "Infosys tells 50 of top brass: Work with non-profit for a year, will pay you half your salary," ENS Economic Bureau, March 25, 2009, www.indianexpress.com/news/ infosys-tells-50-of-top-bras s-work-with-nord438778/.

32. "Infosys Q4 revenue falls Qoq 1st time in decade," OnlineEquityCalls.com, April 15, 2009, www.onlineequitycalls.com/2009/04/ infosys-q4-revenue-falls-qoq- 1 st-time-in-decade/.

33. Palanisamy, B. K. (2009), "Transaction based pricing model for outsourcing - Quality focused approach," www.sqs- conferences .com/de/vortraege/palanis amy_ab.pdf.

34. "Transaction Based Pricing (TBP) has arrived!" July 21, 2009, www.infosysblogs.com/microsoft/2009/07/transac- tion based_pricing_thp_l .html.

35. "Transaction based pricing," Business Editor, March 2, 2009, www.thehindubusinessline.com]2009/03/02/sto- ries/2009030251090200.htm.

36. "Global outsourcing market to be worth $1,430bn by 2009," Computer Business Review, August, 2007, www.cbr.

co.za/article.aspx ?pklArticleId=4714&pklCategoryId=404. 37. Staples, S. (2009), "Top three outsourcing initiatives of 2009" CIO, January 27, www.cio.corrdarticle/478098/ Top_Three_Outsourcing_Initiatives for 2009?page=2.

38. "IT giant Infosys group change of guard," Dataquest, August 4, 2007, http://dqindia.ciol.com/content/DQTop20 07/ ITGaints07/2007/107080405.asp.