MANAGEM ENT OF HUMAN ASSET S AT INFOSYS* Our assets walk out of the door each evening.

We have to make sure that they come back the next morning. (Narayana Murthy, CEO Infosys). At a time w hen organizations are debating the strategic importance of their human resources, Infosys, a consulting and software services organization, includes its human resources on its Balance Sheet to affirm their asset value1. Mr. Mohandas Pai, the Chief Financial Officer of Infosys, provides a rationale for this practice:
Investors examine financial and non-financial parameters that determine long-term success of a company. These new non-financial parameters challenge the usefulness of evaluating companies solely on traditional measures as they appear in a typical financial report. Human resources represent the collective expertise, innovation, leadership, entrepreneurial and managerial skills endowed in the employees of an organization. Our representation is based on the belief that intangible assets provide a tool to our investors for evaluating market-worthiness of Infosys.

As a know ledge-intensive company, Infosys recognizes the value of its human assets in maintaining and increasing its competitive position. At the same time, Infosys realizes that these assets can easily walk aw ay, as competitors in India and abroad covet its IT talent. Consequently, the challenge facing Infosys is: How can it attract, retain and develop its human assets in a highly competitive and dynamic environment? The answ er to this question may lie in the management of the 9000 plus Infocians (as the employees are referred to), and that of many more to be hired in the future. Overview Infosys, one of Indias leading information technology (IT) services companies, uses an extensive non-U.S. based (offshore) infrastructure to provide managed softw are solutions to clients w orldw ide2. Headquartered in Bangalore, India, Infosys has seventeen state-of-the-art software development facilities throughout India and one development center in Canada. These
*

Sumita Raghuram (Assistant Professor of Management, Fordham University, New York) wrote this case to facilitate classroom discussion rather than to illustrate either effective or ineffective handling of a business situation. The case has benefited from the inputs of many key employees at Infosys. Copyright
1 2

, 2001 Sumita Raghuram.

For details about the accounting model used to calculate human asset value please See Appendix A. For details about their products please see Appendix B. 1

enable it to provide quality, cost-effective services to clients in a resource-constrained environment. Through its w orldw ide sales headquarters in Fremont, California (and 19 other sales offices located in the United States, Canada, the United Kingdom, Belgium, Sw eden, Germany, Australia, Japan, and India), Infosys markets its services to large IT-intensive businesses. During fiscal 2000, Infosys derived 78.0% of its revenues from North America, 14.8% from Europe and 1.4% from India. Although most Infosys revenues are from the United States, Infosys maintains a diversified client base, w ith its largest client representing 7.2% of fiscal 2000 revenues. As of March 31, 2000, Infosys had approximately 194 clients. This client base comprised of mainly Fortune 500 companies, grow ing Internet companies, and other multinational companies. As a result of its commitment to quality and client service, Infosys has a high level of repeat business. For fiscal 2000 and 1999, existing clients from the previous fiscal year generated 87.0% and 90.0%, respectively, of Infosyss revenues3. History Seven software professionals founded Infosys in 1981 w ith the goals of leveraging sw eat equity and creating w ealth legally and ethically in India. This w as a daunting task in a country w here the government w as allegedly more concerned w ith redistributing w ealth than creating it. Most of Indias commerce w as ow ned and controlled by an oligarchy of families to w hich Infosys had no ties. Infosyss competitive advantage has historically been der ived from low wage costs in India relative to service providers in the United States and Europe. Their initial foray into the US market w as through a company called Data Basics Corp. as a body-shop or on-site developer of software for US customers. Later, in 1987, Infosys formed a joint venture w ith Kurt Salmon Associates to handle marketing in the US. These initial entries into the US market w ere a stepping stone for Infosys grow th in later years.4 The years betw een 1981 and 1991 w ere not easy for Infosys w hich aimed to create large-scale software factories in India using contemporary technology, methodology and softw are tools. How ever there were many obstacles. First, data and satellite communications w ere not readily available in India. Second, importation of equipment from abroad w as difficult and expensive because of high tariffs. Third, the premium at w hich one could value shares in an IPO w as decided by a government officer, not by the market, and it w as generally low ; hence, equity w as not a viable option for financing. Debt equity w as the only remaining option. 5 In 1991, partly from International Monetary Fund pressure and shrinking currency reserves, the Indian government began liberalizing the economy. The office through which an IPO w as valued was abolished and the market w as allow ed to decide w hat the stock premium w ould be. The government also abolished duty on all imports brought in for export purposes and foreign investment w as allow ed. This governmental change brought both new opportunities and new threats to Infosys, opportunities to raise capital and threats from increased competition.

3 4

Annual Report 2000. Infosys: Can they make it? Business World 7-21 November 1998, p. 19-22. 5 Ten Minutes with NR Narayana Murthy, NASDAQ/AMEX International Magazine, Issue 24, September 1999. 2

In 1993, Infosys went public on the Indian stock exchange w ith a market capitalization of $10 million. Infosyss initial public offering (IPO) raised approximately $4.4 million in gross aggregate proceeds. In 1999 Infosys was listed on NASDAQ w ith a mar ket capitalization of $10 billion 6. A NASDAQ listing w as significant for Infosys in many w ays. As Nandan Nilekani, cofounder and COO of Infosys explains, We w anted to be recognized as a global company, and it was imperative that w e were listed on the largest and deepest capital markets in the w orld. Infosys expects NASDAQ trading w ill attract global investors and thus raise the capital it can use for future grow th. A NASDAQ listing also helps Infosys in other w ays. For example, it helps it build brand equity that enhances the companys visibility beyond the India. It also enables Infosys to offer employees stock options overseas. This w ill enable Infosys to attract top-notch talent globally. The liberalization of the Indian economy also brought unprecedented competition to India. Such multinational corporations as IBM, Sun Microsystems, and Motorola could leverage their vast financial resources to compete for Indias most valuable resources, its people. MNCs could provide the Indian people w ith never before available salar ies and compensation competitive on a global scale. 7 Competition for IT talent w as further aggravated in 2000 by the increase in the quota of H-1 visas that allow organizations to hire professionals overseas. Leadership and Culture Most of the current human resource practices at Infosys result from the vision of the leaders and the culture that they have created. Narayana Murthy, know n for his leadership and vision is the public image of Infosys. His leadership style is humble and straight-forward, quite uncommon in the w orld of Indian business. Narayana Murthy believes in sharing w ealth w ith his employees and in leading by example. In a know ledge-based business like Infosys, he sees the importance of consistency in rhetoric and action in empow ering employees. Narayana Murthy is credited with creating a culture of closeness and empow erment at Infosys. His management style, rare among Indian business leaders, is based on w estern management. 8 The other founding members of Infosys contribute their ow n specialties. Though less know n, they each play a critical part in shaping the culture and running the operations at Infosys. These unique personalities, w ith their particular strengths, create the basis for a uncommon culture at Infosys. Infosys was voted Indias most admired company by a January 2000 survey in The Economic Times.9 According to Narayana Murthy, w hat Infosys has on its side is youth, speed, and imagination, and [they] are constantly innovating in every area of [their] operation. 10 The founders efforts have been paying off. According to a California-based management consultant working in India, Infosys has been critical in changing the mind-set of India. 11 Transparency is one of the important values held by Infosys. A practice illustrative of this value is its very early decision to adopt the US GAAP standards, the most stringent standards, for reporting its financial results.

Infosys, The First Indian Company to Trade on NASDAQ, Forbes 23 August 1999, p. 22. The Lightening Spark, Silicon Technology and Business Magazine, August 1998, p. 50-51. 8 Joshi, Rahul. Infosys Ha s Completed the Infancy Stage. The Economic Times 3 January 2000. 9 Infosys voted Indias most admired company, followed by HLL, Wipro. The Economic Times 3 January 2000 10 Ten Minutes with N.R. Narayana Murthy NASDAQ/AMEX International Magazine 24 September 1999, p. 13. 11 Start Up: From India To America. Forbes 23 August 1999, p. 22-23.
7

Hema Ravichandar, the Senior V-P of Human Resources, sums up the characteristics of the culture that distinguish Infosys from its competitors:
Our emphasis on transparency and communication sets us apart from the prevalent family owned businesses operating in India at. Our emphasis on getting the employees emotional buy-in into the company distinguishes us from the MNCs that have recently entered the Indian business scene.

The attempt to ensure emotional buy-in is evident in their effort to provide a self-sufficient w orkenvironment for their employees. Infosys inaugurated its facilities in Bangalore under the name of Infosys City in November 2000. Spread over 44.225 acres, it is claimed to be the largest software services campus in the w orld. It has the largest `video w all' in Asia w hich allow s for video conferencing simultaneously from multiple centers. The existing buildings also form part of the Infosys City. The City contains food courts that serve Chinese, North Indian, South Indian and Western cuisine. A state-of-the-art gym, golf course, pool tables, table tennis tables and dance-floor are already in place. The sauna, grocery store, an Infosys Store, 50 000 square feet sw imming pool and a lake w ith paddling boats w ill soon be part of the City. The eco-friendly campus now has 3,500 trees, w ith another 2,500 more w hen the City is complete. The landscape includes stone paths, rose beds, bamboo clusters w ith benches beneath them, fountains, and w ater recycling plants. Besides the enticing w ork environment, Infosys provides state of the art technology to its employees. For example, PCs used by Infocians are upgraded every two years. Management of the Hum an Resource Assets As of March 31, 2000, Infosys had approximately 5,400 employees. The current employee strength represents a grow th rate betw een 40-50% since 1996. Of these about 86% are engaged in software development (including trainees) and the other 14% are in support services. 57% of the employees are aged betw een 20-25 years, 31% are aged betw een 26-30 years and the other 12% are over 31 years of age. Approximately 85% of the employees are males and 15% are females. Infosys invests heavily in its programs to recruit, train and retain qualified employees. Further management believes that Infosys has established a reputation as one of the most preferred employers for software engineers in India. Elsew here in the software industry around employee attrition rate is around 30%; Infosys boasts an employee attrition rate of only 9.8%. Selection The first step in the strategic management of a companys human resources is selection of assets with skills and potential consistent w ith its business requirements. Infosyss business requirements are flexibility and innovation. Accordingly, it has developed clear selection criteria consistent with this business need. Selection is based on individuals ability to learn, academic achievement, conceptual know ledge, as w ell as temperament for (and fit w ith) Infosyss culture. Further, because of Infosyss reputation as a premier employer, it can select from a large pool of qualified applicants w ithin India. Competition among applicants is intense. One selection criteria in particular stands out: the Learnability. At Infosys, learnability is defined as the ability of an individual to derive general conclusions from specific situations and then apply them to a new unstructured situation.

P.S. Srivathsa, the Senior Manager of Human Resource Development, adds:

Learnability is considered an important criterion because the project life cycle is short and technology is changing rapidly so the ability of the person to take the concept learnt in one setting and to apply it to another is very important. At Infosys learnability is assessed through written tests that include mathematical and analytical questions geared towards asse ssing the aptitude of a person to derive generic patterns from a situation.

For its entry-level positions, Infosys focuses its recruiting efforts on students w ith excellent academic background from engineering departments of Indian schools. The first step in the hiring process is manpow er planning, w here the numbers are deter mined. This planning usually takes place 20 months ahead of the hiring process. Recruitment includes campus interviews, as well as inviting applications over the Internet, new spaper ads, through job fairs, and HR consultants. The initial screening is based on such criteria as academics and experience. In 1999, 185,000 resumes w ere processed and, after the initial screening, w ere reduced to 40,000 resumes. The shortlisted applicants undergo a selection test. The test comprises tw o main components: arithmetic reasoning and logical reasoning. Because of time pressures involved in testing the large volume of candidates across the country, the reading comprehension section has been eliminated, cutting dow n the testing time to one hour. Tutorials or coaching classes offered by third parties are popular among individuals w ho w is h to prepare for these competitive tests. Infosys has a question bank system from w hich questions are picked randomly for each test center. Those w ho score above the cut-off in the selection test are called for an interview . Interview s are conducted jointly by the human resource managers and the technical manager. At the interview stage screening criteria used are aspirations, expectations, flexibility, presentation skills, and communication skills. In 1999, 10,000 candidates w ere interview ed, and offers were extended to approximately 3,330. Of these, approximately 2,050 accepted. Rejected candidates may reapply after 9 months. People do come back and, if they have picked up the necessary skills, they are hired. Training and Development At Infosys, training and development is the next step in building its human assets where the objective is to match the available skills and abilities to its business requirements. In the headquarters at Bangalore, the education and research center is housed in a building that can train 1,000 softw are engineers simultaneously. It comprises fully equipped classrooms, labs w ith video-conferencing units, individual faculty rooms, and a 30,000 square foot library w ith a capacity for 10,000 books. In addition, under construction are a management development training center and a Wireless Center for Excellence to be built by Nortel Netw orks. The Wireless Center is expected to be the e-commerce research center w ith a capacity for 650 people w orking on research in w ireless Internet capabilities. The education and research department of Infosys offered 241 courses in 1998-1999, including courses in business, database management, e-commerce, quality systems, programming language (e.g., Java, C++), netw orking concepts, software development, languages (e.g., French, Japanese), interpersonal skills (e.g., communication) and managerial skills (leadership, team management, negotiation). Full time faculty teaches 75% of these courses; professionals teach 10% of the courses and outside vendors offer rest of the courses. The full time faculty

comprises 40 individuals from academics and industry. The human resources department supplies additional 5 facilitators, w ho provide the soft-skills training; the quality control department delivers the training for quality. All fresh technology entrants receive 14.5 w eeks of training: 3 days of orientation (e.g. corporate culture, customers), 5 weeks of foundation courses (e.g., programming, systems development, interpersonal skills), 7 w eeks of technology courses (e.g. C++, UNIX, HTML) and 2 w eeks of group project. In 1998-99, 1750 new entrants received the basic training. In addition, training is provided as a part of the continuing education. In 1998-99, 2000 employees received training as a continuing education: about 8 days/person in technical and softw are engineering, 1.5 days/person in managerial skills, and 3 days/person in project management. Beyond entry-level training, people may nominate themselves for the scheduled courses. Close to 100 courses are offered each quarter, with duration from 1 day to 6 days. Most courses are presented in classrooms, some in labs. In addition, course may be offered on request. Training needs are assessed through various mechanisms; the objective is to fine-tune them to business needs. First the corporate management deter mines segment-w ise technology requirements. These expectations are communicated to the education and research department. So, for instance, the education and research department may be informed of the requirement for 500 people w ith know ledge in Internet technology in the near future. Specific skill needs such as interfacing w ith Microsoft or Java may be deter mined through a deeper analysis. Typically, about 3-6 months advance notice is provided. Training needs may also be assessed through the regular planning meetings. In these meetings, the expected projects for the coming year are forecasted. These projections deter mine skill requirements (e.g., 300-400 project managers for 500 projects). Based on current skill availability and skill demand, training needs are deter mined. The education and research department also tracks specific technologies; the number of requests for the technology from clients may also deter mine course-offerings. Infosys also offers training and development support to academic institutions by providing exposure to industry, in the form of sabbaticals at Infosys, training programs, and sharing courseware. Careers Charged w ith the responsibility of developing human assets in a fast paced environment, career management at Infosys faces tw o challenges: a shift from a focus on technical expertise in the career to a focus on management expertise, and the speed w ith which this refocusing must be accomplished. Nandita Gurjar, the Corporate Development Manager describes the first challenge as follow s:
Management skills have become increasingly relevant for Infosys because of its everincreasing volume of business as well as its shift towards consulting business. As the number of projects to be handed has increased, the demand for project management skills in goal setting, communication, coaching, delegation and team management has also increased. Invariably the technical personnel are chosen to move to a management track. This choice is ironic in some ways because the better an individual is in technical skills (such as writing code) the more likely he/she is to be moved away from using the

technical expertise into a management track requiring management expertise. Technical expertise provides an individual legitimacy and respect from co-workers making them a natural choice as a team leader. Within a short time span the team leaders are required to manage projects, clients and the people working on these projects. It, therefore, becomes necessary for the individual to abandon their technical expertise something that has been very salient to their identity in the course of education and early career, when they aspire to be smart techies, and start collecting a repertoire of managerial capabilities. While developing management skills by attending management development programs 2-3 years ago was one of the nice things to do; it has now become a business necessity. The nature of management skills required is further complicated by the fact that at Infosys, managers are also required to mange from remote. Team members are spread geographically and may not meet each other or the team leader for a year or perhaps never. As hiring overseas gathers momentum, the demands may be further exacerbated by the fact that team members may belong to different backgrounds and may not completely understand the organization and the country culture.

The second challenge facing career management is the compression in career, an effect of the speed at w hich employees must move from one stage in their career to another. The new hires are very young (22 years old) and they are put under managers who are 24 years old. At 30 these employees are managers of managers. At 35 an individual can potentially become a vice-president. Management skills become necessary at a very early stage in the life and career of an individual at Infosys. Rapid change is a constant challenge. Nandita summarizes this challenge as follow s:
It is a challenge to teach a 24-year-old to become a manager. The young individual believes, I have not yet grown, but you are saying, you have to do it. Just when you become used to something you are pulled out of it and it is time to move on to something else. Those who can cope with this change emerge as leaders (perhaps at the age of 32); others fall back and become comfortable where they are. The whole career development progress in Infosys is therefore comparatively shorter than in other companies.

To address the pressing need for management development, Infosys has put in place some training programs. These include: First time manager program: This is a 5-day program for new managers, designed to change a manager's mindset from an individual to a more managerial one, w here the focus has to shift from managing individual performance to managing team performance. The manager of managers program: The program is geared tow ards teaching managerial skills (such as delegation, team management) to more senior managers. Infosys leadership program: The program emphasizes the dynamic environment outside of Infosys and the adaptation to its environment. Once again, the objective is to create a mindshift for the senior managers, from looking inw ard at the internal operations to becoming aw are of external change factors.

Compressed careers bring w ith them another challenges: stress and burnouts. With technology-assisted communication devices (e.g., Palm pilots, cell phones and home computers) employees are multi-tasking, even in meetings. The potential for stress is enormous, intensified by the time zone differences that make the employees accessible around the clock. Thus,

working around the clock, coupled w ith extensive travel and minimal time to manage w ork and nonw ork needs may cause many employees in the future to burnout. Perform ance Appraisal Perfomance appraisal is a rigorous comprehensive process at Infosys, tied to the future development of the individuals skills and capabilities. First, an evaluation of personal skills is carried out for the tasks assigned to an individual during the appraisal period. The criteria used to evaluate performance on tasks are derived from the business goals and include: timeliness, quality of w ork, customer satisfaction, developing others, know ledge dissemination, peer satisfaction in the team, increased business potential, and developing optimal task solutions. The evaluation of personal skills and abilities is carried out for the follow ing: learning and analytical ability, decision making, team leadership, change management, communication skills, teamw ork, planning and organizing skills. Each criterion is described and measured on a 5-point scale. Further, each of the scale points are anchored to descriptions of expected behavior 12. Performance appraisal is carried out semi-annually, in July and January. 360-degree appraisal is carried out for all employees. Appraisals are sought from peers, direct supervisors, subordinates and customers. A minimum of 6 to 7 appraisal reports are collected for each employee. All appraisal forms are completed on- line and the data is maintained in a central database. The appraisal information is used to identify training courses and other developmental interventions. Future objectives for both task accomplishment and individual skills development are based on the results of the semi-annual evaluation. Com pensation
We compensate our human asset s in three ways. We add learning value through training and development and appraisal practices. We add emotional value through initiatives directed towards supporting employees with their work and personal needs, and we add financial value through monetary compensation. (Hema Ravichandar, Senior Vice President Human Resource Development).

Although Infosys faces strong domestic and international competition for its human assets, through enticing offers from competitors, the compensation level at Infosys equals the average industry level for each country. It is neither above market nor below the mar ket level. The belief is that financial value, w hen combined w ith learning and emotional values, yields a total compensation greater than that offered elsew here in the industry. Infosys is one of the first Indian companies to offer stock option plans to their employees.13 Currently Infosys offers three option plans that cover all Infosys employees: 1994 Employees Stock Offer Plan: Established in September 1994, the plan provides for the issuance of 6,000,000 w arrants to eligible employees. 1998 Stock Option Plan: Infosyss 1998 Stock Option Plan provides for the grant of nonstatutory stock options and incentive stock options to employees. A total of 1,600,000 equity shares are currently reserved for issuance pursuant to the 1998 Plan. Unless terminated sooner, the 1998 Plan w ill ter minate automatically in January 2008. All options under the 1998 Plan w ill
12 13

Please see Appendix C for description of one such scale. The Lightening Spark, Silicon Technology and Business Magazine, August 1998, 50-51. 8

be exercisable for ADSs represented by ADRs. 1999 Stock Option Plan: The 1999 Plan provides for the issue of 6,600,000 equity shares to employees. A compensation committee comprising a maximum of seven members administers the 1999 Plan. Options w ill be issued to employees at an exercise price not less than the Fair Market Value. Fair Market Value means the closing price of Infosyss shares on the stock exchange w here there is the highest trading volume on a given date and if the shares are not traded on that day, the closing price on the next trading day. Under the 1999 Plan, options may also be issued to employees at exercise prices that are less than Fair Market Value, only if specifically approved by the members of Infosys in a general meeting. 14 In addition such statutory benefits as pension, medical and leave, Infosys also offers a loan program that employees find very attractive. Loans may be taken for pursuing a degree program such as an MBA, or to meet such personal needs as purchasing a car or a house. The interest rate varies (4% for a car purchase and 0-4% for house purchase). To date, almost all loans have been repaid. Infosys Overseas HRM Overseas, the main thrust of human resource management at Infosys has come from its Global Delivery Model. The objective of this model is to support customers using virtual teams that span geographic locations. Recently, how ever, the focus has shif ted from producing at low est cost and selling at maximum price to producing at locations that provide other benefits. For example, production demands arising from customer needs in Canada, London or the USA may require that production be carried out in that specific country. Or, in another instance, the dot com customers require latest technical expertise that may not be available in India, so that developers must be hired from Silicon Valley in California. Currently, the greatest need at Infosys is to hire people at all overseas locations, w ith about 1000 hires in the next year in the US and 100 in Canada. Before the NASDAQ listing, Infosys could not pay overseas hires, because Indian stock options are not fungible. How ever, since 1999, Infosys has been recruiting actively in North America (including Canada). A draw back that Infosys faces in attracting candidates is that it has very low brand equity in the US. The NASDAQ listing helped build the brand equity for Infosys in its ow n immediate mar ket, but to most people it is still relatively unknow n The recruitment strategies being used at the campuses in the U.S. are similar to those used by all other companies. These include lobbying w ith campus career centers, giving talks to student groups, sending email campaigns, participating in career fairs, etc. How ever, certain aspects of the recruitment unique to Infosys offer it a recruiting advantage. Prasad Tadimeti, the HR manager of Infosys, USA describes these recruiting practices:
We offer to provide extensive training, that few other companies will offer. The training includes classroom training and mock projects. After a year our employees are as good as the best Bachelor of Science computer scientist in the world. Subsequently, employees have the opportunity to sign up for any course as a part of their continuous learning process. With an increasing hiring rate, Infosys plans to set up training facilities in US itself. The other aspect of recruitment that provides an advantage to Infosys is our
14

Infosys, Annual Report 2000, p.155 9

willingness to hire anyone with any reasonable math or science background (for example, economics, math, statistics, physics or chemistry. This is a departure from the hiring practices of other firms that focus on the traditional computer science, computer engineering, and electrical engineering backgrounds. This approach to hiring is attracting a lot of attention. Given our proven track record of training non-computer background people in India, we can do it again here, as long as there is some degree of analytical background in the curriculum and the person has a good GPA.

Although learnability is an important criterion for hiring even in North America, the written test used in India to screen out applicants cannot be used in the USA. Instead, the screening criterion is a GPA of 3.0. This compares to a 70% cutoff used by Infosys for students from Indian universities. The other characteristics considered important are interpersonal skills and communication ability, ability to w ork under pressure and to travel extensively. While hiring in North A merica, Infosys particularly emphasizes communication and interpersonal skills, because of their experience that candidates in North America possess these more than candidates in India. In contrast employees hired in India are stronger in technical skills. A team comprising both skills is therefore very advantageous, and can potentially create learning from each others skills. Subject know ledge is a distant third or fourth level criterion, based on an assumption that, if the person has applied his/her mind to understand a concept in his/her ow n discipline, then it is not very probably difficult to teach the person software programming. Overseas, Infosys maintains the same compensation strategy as in India, namely, that they are not industry leaders in pay. To attract candidates they emphasize the entire employ ment package. Features of the package include career advancement opportunities, long ter m careers, job challenge, training opportunities, autonomy and more early career responsibility compared to competitors. Culture has so far not been a major barrier in Infosys ability to do business in India. Prasad provides insight into one significant difference in the managerial approach.
The employment relationship in Indian businesses is implicit in that there is a mutual understanding that the manager will act in the best interest of the employee. Several employment related issues are left implicit - short-term needs may not be fulfilled with the expectation that benefits may be forthcoming in the long run. The employment is expected to last a long time period. Even if performance is sub-par, efforts are made to help the person by either transferring to another line of business or by providing remedial training. In the Western context, on the other hand, employment contracts are more explicit. Employees may want to know the performance criteria and the performance goals against which they will be evaluated. They are less tolerant of ambiguity in the relationships and expectations have to be met instantly for trust to be generated. This difference in expectations from the employment relationship is a challenge that Infosys is facing and expects to continue facing as it diversifies into a global company with heavier influx of different cultures.

Future Plans Infosys plans to maintain its grow th rate in India and to expand overseas. It has already set up a software development center in Toronto and plans to set up more centers soon. It plans to hire substantial number of employees over the next few years in its overseas offices (e.g., 100 employees in Toronto by mid 2001).

10

As a part of its grow th strategy, Infosys is exploring possible candidates for acquisitions in United States. Infosys believes that pursuing selective acquisitions of IT services and software applications firms could expand its technical expertise, facilitate expansion into new vertical markets, and increase its client base. As part of its business strategy Infosys is gearing to move up the value chain and provide endto-end solutions to clients 15. Infosys w ill have to achieve these objectives in the face of many challenges 16. These include increased global competition and labor cost, rapid growth, and increased employee diversity. As Infosys expands overseas, it w ill experience increased competition from firms w ith potentially low er labor costs and w ith a greater ability to respond to changing client IT preferences. Historically Infosys labor costs have been low er than those of service providers in the United States and Europe. How ever, because w ages in India are currently increasing at a faster rate than in the United States, Infosys will experience shrinking profit margins in future. The rapid grow th of Inofsys challenges its ability to transmit its corporate culture worldw ide as well as its ability to attract and retain skilled personnel. Overseas hires and acquisitions w ill result in Infosys experiencing increased employee diversity of cultures. Increased diversity w ill also come from a different set of skills required for expansion into consulting business. Infosys human resource management practices w ill have to be assessed in light of these challenges. What adjustment w ill Infosys have to make to harness its human assets as they move in to the future?

15 16

For details about Infosyss strategy please see Appendices D. For details of competition and risk factors please see Appendix E & F. 11

Appendix A

Lev and Schwartz Hum an Capital Accounting Model Infosys places an asset value on its human capital based on an accounting model put forth by Baruch Lev and Aba Schw artz. Lev and Schw artzs model is based on human capital theory, which recognizes human capital as one of several forms of holding w ealth for a business enterprise, such as money, securities and physical capital. In this model of accounting, human capital is treated like other forms of earning assets and thus is an important factor explaining and predicting the future economic grow th of the company. Lev and Schw artzs accounting model is based on the measurement of human capital using the formula, V r = T t=r I(t)/(1+r) t-r, w here Vr = the human capital value of a person r years old; I(t) = the persons annual earnings up to retirement; r = a discount rate specific to the person; T = retirement age. The formula uses an earnings profile, w hich is a graphic mathematical representation of the income stream generated by a person. Typically, earnings increase w ith age. As the person reaches retirement age, productivity declines as a result of technological obsolescence and health deterioration. This model postulated in 1971 remains largely unused as a result of criticism from Accounting professionals w ho argue that human capital cannot be purchased or ow ned by the firm and therefore would not be recognized as an asset. Additionally, critics of human capital theory state that labor force does not have a service potential; meaning employees are paid for rendering current services and no asset is formed by these payments. Regardless, this model is one of few that exist to value human capital, a source of know ledge for companies. While very basic, the Lev and Schwartz model provides a means by which to disclose human capital values to stakeholders.17 The Lev & Schwartz model has been used by Infosys to compute the value of the human resources as of March 31, 1999. The evaluation is based on the present value of the future earnings of the employees and on the follow ing assumptions: 1. Employee compensation includes all direct and indirect benefits earned both in India and abroad. 2. The incremental earnings are based on group/age have been considered. 3. The future earnings have been discounted at 25.32% (previous year 26.95%), this rate being the cost of capital for Infosys. Beta has been assumed at 1.48 based on average beta for software stocks in the US.

17

Lev, Baruch and Aba Schwartz. On the Use of the Economic Concept of Human Capital in Financial Statements. The Accounting Review 44(1971): 103-110. 12

As of March 31

2000 No. of Employees

Value of human resources (Rs. in lakhs) 196,513.84 8,165.20

1999 No. of Employees

Production Support Technical* Support Others

4,292 450

2,854 389

Value of human resources (Rs. in lakhs 1 lakh=1,000,00) 76,984.25 7,168.97

647 19,062.73 523 10,416.52 5,389 223,741.77 3,766 94,569.74 * Note: Support - technical includes trainees, employees in R&D activities and support personnel allocated to production.

Number of employees Value of human resources Total revenue Softw are revenue Employee cost Value-added Net profits excluding extraordinary income Total revenue/Human resources value (ratio) Total software revenue/Human resources value (ratio) Value-added/Human resources value (ratio) Value of human resources per employee Employee cost/Human resources value (%) return on human resources value (%)

2000 5,389 223,741.77 92,146.48 88,232.37 33,455.91 72,330.70 28,594.86 0.41 0.39 0.32 41.52 14.95% 12.78%

1999 3,766 94,569.74 51,273.84 50,889.12 16,605.64 37,411.49 13,291.54 0.54 0.54 0.40 25.11 17.56% 14.05%

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Value-added statement Year ending March 31 Total revenue Less: Softw are and development expenses (other than employee costs and provision for post-sales client support) Administration expenses (other than provisions) Subtotal Total value-added Applied to meet Employee costs Provision for post-sales client support Provision for bad and doubtful debts and doubtful loans and advances Provision for contingencies Provision for e-investing the company Provision for investment in subsidiary Income tax Dividends (including Dividend tax) Retained in business The figures above are based on Indian GAAP financial statements. 2000 92,146.48 12,916.31 6,854.47 19,815.78 72,330.70 1999 51,273.84 9,326.92 4,535.43 13,862.35 37,411.49

33,455.91 209.63 94.03 333.00 350.00 3,970.00 3,303.65 30,614.48 72,330.70

16,605.64 219.19 39.87 666.00 705.96 2,294.00 1,331.83 15,549.00 37,411.49

_________________________ Source: 1999-2000 Annual Report

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Appendix B

Products Infosyss services include software development, maintenance and re-engineering services, ecommerce and internet/intranet consulting as w ell as dedicated OSDCs for certain clients. In each of its service offerings Infosys assumes full project management responsibility for each project it undertakes. Dedicated Offshore Softw are Development Centers Infosys has pioneered the concept of dedicated Offshore Softw are Development Centers (OSDCs) in w hich a software development team that is dedicated to a single client uses technology, tools, processes and methodologies unique to that client. Each dedicated OSDC is located at a company facility in India and is staffed and managed by Infosys. Once the project priorities are established by the client, Infosys, in conjunction w ith the clients IT department, manages the execution of the project. By focusing on a single client over and extended time frame, the dedicated OSDC team gains a deeper understanding of the clients business and technology and can being to function as a virtual extension of the clients softw are team. The Indian offshore development model became popular in the mid-1990s as a method of dividing softw are project activities betw een a service providers offshore software development facility and a clients on-site location. This model contains many features that are attractive to IT consumers w ho are primarily located in the United States, Europe and Japan. These features include: (i) access to a large pool of highly skilled, English-speaking IT professionals, (ii) relatively low labor costs of IT professionals offshore, (iii) the ability to provide high-quality IT services at internationally recognized standards, (iv) the capability to w ork on specif ic projects on a 24-hour basis by exploiting time zone differences betw een India and client sites, and (v) the ability to accelerate the delivery time of larger projects by parallel processing different phases of a projects development. While some U.S. and European companies have commenced their ow n operations in India, most large corporations have opted to form strategic alliances w ith local Indian IT companies to reduce the risks and start-up costs of operations in India. Infosys has a long history of executing projects betw een its clients sites in North America, Europe and Asia and the companys offshore software development facilities in India. In a typical software development or re-engineering assignment, Infosys assigns a small team of tw o to five IT professionals to visit a clients site and deter mine the scope and requirements of the project. Once the initial specifications of the engagement have been established, the project managers return to India to supervise a much larger team of 10 to 50 IT professionals dedicated to the development of the required softw are or system. A s mall team remains at the clients site to track changes in scope and address new requirements as the project progresses. The clients systems are then linked via satellite to Infosyss facilities enabling simultaneous processing in as many as four offshore software development facilities. Once the development stage of the assignment is completed and tested in India, a team returns to the clients site to install the new ly developed softw are or system and ensure its functionality. At this phase of the engagement, Infosys will often enter into an ongoing agreement to provide the client w ith comprehensive maintenance services from one of its offshore software development facilities. In contrast to development projects, a typical maintenance assignment requires a larger team of 10 to 20 IT professionals to travel to the clients site to gain a thorough understanding of all aspects of the clients system. The majority of the maintenance team subsequently returns to
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the offshore software development facility, w here it assumes full responsibility for day-to-day maintenance of the clients system, w hile coordinating w ith a few maintenance professionals who remain stationed at the clients site. By pursuing this model, Infosys completes approximately 68% of its project work at its offshore software development facilities in India. Its project management techniques, risk management processes and quality control measures enable it to complete projects seamlessly across multiple locations w ith a high level of client satisfaction. Certified under ISO 9001, TickIT and at Level 5 of the Capability Maturity Model, Infosys rigorously adheres to highly evolved processes. These processes govern all aspects of the software product life cycle, from requirements to testing and maintenance. Infosys has invested in redundant infrastructure w ith warm backup sites and redundant telecommunication capabilities w ith alternate routings to provide its clients w ith high service levels. Additionally, Infosys utilizes tw o telecommunications carriers in India and has installed in its principal facilities multiple international satellite links connecting w ith netw ork hubs in Fremont, California and in Quincy, Massachusetts. A different ocean cable connecting Europe and the United States serves each of these hubs. Moreover, Infosys has installed w ireless links among its facilities in Bangalore and intends to install w ireless links among its other Indian facilities by the end of 2000. Softw are Development Infosys provides turnkey software development w ith projects varying in size. These include development of new applications or development of new functions for existing applications. Each development project typically involves all aspects of the software development process, including definition, prototyping, design, pilots, programming, testing, installation and maintenance. In the early stage of a development project, Infosys personnel often work at a clients site to help deter mine project definition and to estimate the scope and cost of the project. Infosys then performs design review , softw are programming, program testing, module testing, integration and volume testing primarily at its ow n facilities in India. Softw are Maintenance Infosys also provides maintenance services for large legacy software systems. Maintenance services include minor and major modifications and enhancements (including Year 2000 and Eurocurrency conversion) and production support. Such systems are either mainframe-based or client/server and are typically essential to a clients business. Infosyss IT professionals take an engineering approach to software maintenance, focusing on the long-term functionality and stability of the clients overall system. Infosys performs most of the maintenance w ork at its ow n facilities using satellite-based links to the clients system. In addition, Infosys maintains a small team at the clients facility to coordinate support functions. Softw are Re-Engineering Infosyss re-engineering services assist clients in migrating to new technologies w hile extending the life cycle of exis ting systems that are rich in functionality. Projects include re-engineering software to migrate applications from mainframe to client/server architectures, to extend existing applications to the Internet, to migrate from existing operating systems to UNIX or Window s NT or to update from a non-relational to a relational database technology. For companies w ith extensive proprietary software applications, implementing such technologies may require rewriting and testing millions of lines of software code. Infosys has developed proven methodologies that govern the planning, execution and testing of the softw are re-engineering process.
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New Services Infosys is also focused in certain new service areas such as (i) Internet consulting, w hich includes developing applications for Internet/intranet solutions and e-commerce solutions; (ii) Euro conversion, w hich assists clients in making their systems Euro compliant; and (iii) engineering services, which include software product design. For example, Infosys recently developed an integrated e-commerce online shopping site for one of its US clients, w hich include four different systems and gave the company complete cycle responsibility for the project.

____________________________ Source: Infosys 2000 Annual Report

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Appendix C

Perform ance Appraisal Example of one Behaviorally Anchored Rating Scale Timeliness (includes the ability to plan, schedule and track the assigned, in such a manner that the w ork flows as envisaged and the w ork is completed on time). A Way above expectations Displays abilities to plan, schedule and track w ork independently. Accomplishes w ork w ell in advance resulting in being able to contribute tow ards other activities of the project. Displays ability to plan, schedule and track w ork. Accomplishes w ork w ithin allocated time. Displays ability to plan, schedule and track w ork. Able to meet project deadlines. Needs assistance in planning tracking w ork. Unable to meet project deadlines independently. Not able to plan, schedule and track w ork for most of the assigned responsibilities. Severe impact on the project deadlines.

B+

Exceeded expectations

Met expectations

B-

Met expectations w ith assistance Below expectations

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Appendix D Infosys Strategy Business Strategy Pursue world-class operating model. The management believes that one of the most critical contributing factors to Infosyss success has been its commitment to pursue high-quality standards in all aspects of its business, including deliverables to the customers, human resource management, investor relations, planning, finance, physical and technological infrastructure, sales and marketing. Invest heavily in human resources. Infosys believes that its continued success will depend upon its ability to recruit, train, deploy and retain highly talented IT professionals. Even as the field of software engineering has been attracting the best and brightest Indian students, management believes Infosys has become, for Indian engineering graduates, one of the most sought after employers. Focus on managed software solutions. Since its inception, Infosys has dedicated itself to providing managed software solutions, many of which are offered on a fixed-price, fixed-time frame basis. By taking full project management responsibility in every project, Infosys provides its clients high-quality, cost-effective solutions w ith low risk. Capitalize on a well-established offshore development model. As one of the pioneers of the offshore software development model, Infosys has made significant investments in its infrastructure and has developed the advanced processes and expertise necessary to manage and successfully execute projects in multiple locations w ith seamless integration. Maintain disciplined focus on business and client mix. Infosys provides a w ide range of software services and maintains a disciplined focus on its business mix in an effort to avoid service or client concentration. Beginning in fiscal 1996, Infosys aggressively sought to minimize its client concentration and to accept as clients only those that met strict guidelines for overall revenue potential and profitability. Growth Strategy From fiscal 1994 to fiscal 2000, Infosys experienced compounded annual revenue and net income grow th rates of 62% and 73%, respectively, and grew from approximately 480 IT professionals to approximately 4,625. The follow ing are the key elements of Infosyss growth strategy: Broaden service offerings. To meet all of its clients IT needs, Infosys strives to offer a comprehensive range of services by continuously evaluating new and emerging technologies. Increase business with existing clients. In fiscal 2000, Infosys provided software services for more than 190 clients in the United States, Europe, Australia, Asia and Japan. Develop new clients. Infosys pursues several new client development strategies. Increase revenue per IT professional. To increase its revenue per IT professional, Infosys continually focuses on building expertise in vertical markets, refining its software development
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tools and methodologies, and storing and disseminating experiential know ledge in order to improve efficiency and productivity. Expand and diversify base of IT professionals. Management believes that a critical element of Infosyss growth strategy is its ability to increase its base of IT professionals. Pursue selective strategic acquisitions. Infosys believes that pursuing selective acquisitions of IT services and software applications firms could potentially expand Infosyss technical expertise, facilitate expansion into new vertical markets and increase its client base.

____________________________
Source: Infosys Annual Report 2000

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Appendix E Com petition The market for IT services is highly competitive. Competitors include IT services companies, large international accounting firms and their consulting affiliates, systems consulting and integration firms, temporary employ ment agencies, other technology companies and client inhouse MIS departments. Infosys expects that future competition w ill increasingly include firms w ith operations in other countries, potentially including countries w ith low er personnel costs than those prevailing in India. Part of Infosyss competitive advantage has historically been a cost advantage relative to service providers in the United States and Europe. Since w age costs in India are presently increasing at a faster rate than those in the United States, Infosyss ability to compete effectively will become increasingly dependent on its reputation, the quality of its services and its expertise in specific markets. Infosys believes that its ability to compete also depends in part on a number of factors outside its control, including the ability of its competitors to attract, train, motivate and retain highly skilled IT professionals, the price at w hich its competitors offer comparable services and the extent of its competitors responsiveness to client needs.18

18

Infosys, Annual Report 2000, p.143

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Appendix F
Risk factors Management of growth. Infosys has experienced significant growth in recent periods. The companys revenues in fiscal 2000 grew 68.2% over fiscal 1999. As of March 31, 2000, Infosys employed approximately 4,625 software professionals worldw ide with 17 softw are development facilities in India, and one global development center in Canada, operationalized in fiscal 2000. In comparison Infosys employed 3,160 employees in 11 facilities as of March 31, 1999 and 2,190 in nine facilities as of March 31, 1998. In fiscal 1999, Infosys approved major expansions to its existing facilities and the building of new facilities. Infosyss inability to manage its grow th effectively could have a material adverse effect on the quality of the companys services and projects, its ability to attract clients as well as skilled personnel, its business prospects, and its results of operations and financial condition. Political and economic environment. During the past decade and particularly since 1991, the Government of India has pursued policies of economic liberalization, including significant relaxation of restrictions on the private sector. The current Government of India, formed in October 1999, has announced policies and taken initiatives that support the continuation of the economic liberalization policies pursued by previous governments and has, in addition, set up a special IT task force to promote the IT industry. How ever, the speed of economic liberalization could change, and specif ic laws and policies affecting IT companies, foreign investment, currency exchange rates and other matters affecting investment in Infosyss securities could change as w ell. Government of India incentives and regulation. Infosys benefits from a variety of incentives given to softw are firms in India, such as relief from import duties on hardw are, a tax exemption for income derived from software exports, and tax holidays and infrastructure support for companies, such as Infosys, operating in specially designated Softw are Technology Parks. There can be no assurance that these incentives w ill continue in future. Restrictions on US immigration. Infosyss professionals w ho work on-site at client facilities in the United States on temporary and extended assignments are typically required to obtain visas. As of March 31, 2000, substantially all of Infosyss personnel in the United States w ere working pursuant to H-1B visas (745 persons) or L-1 visas (218 persons). Although there is no limit to new L-1 petitions, there is a limit to the number of new H-1B petitions that the United States Immigration and Naturalization Service may approve in any government fiscal year. In years in which this limit is reached, Infosys may be unable to obtain the H-1B visas necessary to bring its critical Indian IT professionals to the United States on an extended basis. The US Government reached this limit in March 2000 for its fiscal year ended September 30, 2000 and in May 1999 for the fiscal year ended September 30, 1999. While Infosys anticipated that such limit w ould be reached prior to the end of the US governments fiscal year and made efforts to plan accordingly, there can be no assurance that Infosys will continue to be able to obtain a sufficient number of H-1B visas. Changes in existing US immigration laws that make it more difficult for Infosys to obtain H-1B and L-1 visas could impair its ability to compete for and provide services to clients and could have a material adverse effect on the its results of operations and financial condition. Dependence on skilled personnel; risks of wage inflation. Infosyss ability to execute project engagements and to obtain new clients depends, in large part, on its ability to attract, train, motivate and retain highly skilled IT professionals, particularly project managers, software
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engineers and other senior technical personnel. An inability to hire and retain additional qualified personnel w ill impair Infosyss ability to bid for or obtain new projects and to continue to expand its business. Infosys believes that there is significant competition for IT professionals w ith the skills necessary to perform the services offered by the company. There can be no assurance that Infosys w ill be able to assimilate and manage new IT professionals effectively. Any increase in the attrition rates experienced by Infosys, particularly that of experienced software engineers and project managers, w ould adversely affect Infosyss operational and financial results. There can be no assurance that Infosys will be successful in recruiting and retaining a sufficient number of replacement IT professionals with the requisite skills to replace those IT professionals w ho leave. Further, there can be no assurance that Infosys will be able to redeploy and retrain its IT professionals to keep pace w ith continuing changes in IT, evolving standards and changing client preferences. Historically, Infosyss wage costs in India have been significantly low er than wage costs in the United States for comparably skilled IT professionals. How ever, at present w age costs in India are increasing at a rate faster than in the United States. In the long-ter m, w age increases may have an adverse effect on Infosyss profit margins unless it is able to continue increasing the efficiency and productivity of its professionals. Infrastructure and potential disruption in telecommunications. A significant element of Infosyss business strategy is to continue to leverage its eight softw are development centers in India and to expand the number of such centers in India as w ell as outside India. Infosys believes that the use of strategically located netw ork of software development centers w ill help in many w ays. It will provide it w ith cost advantages, the ability to attract highly skilled personnel in various regions, the ability to service clients on a regional and global basis and the ability to provide 24hour service to its clients. Pursuant to its service delivery model, Infosys must maintain active voice and data communication betw een its main offices in Bangalore, the offices of its clients, and its other software development facilities. Although Infosys maintains redundant softw are development facilities and satellite communications links, any significant loss of the companys ability to transmit voice and data through satellite and telephone communications w ould have a mater ial adverse effect on its results of operations and financial condition. Risks associated with possible acquisitions. Infosys intends to evaluate potential acquisitions on an ongoing basis. As of the date, however, Infosys has no understanding, commitment or agreement w ith respect to any mater ial future acquisition. Since Infosys has not made any acquisitions in the past, there can be no assurance that the company w ill be able to identify suitable acquisition candidates available for sale at reasonable prices, consummate any acquisition, or successfully integrate any acquired business into its operations. Further, acquisitions may involve a number of special risks. These include diversion of managements attention, failure to retain key acquired personnel and clients, unanticipated events or circumstances, legal liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the companys results of operations and financial condition. Under Indian law , except in certain limited circumstances, Infosys may not make any acquisition of, or investment in, a non-Indian company w ithout RBI and, in most cases, Government of India approval. Even if Infosys does encounter an attractive acquisition candidate, there can be no assurance that RBI and, if required, Government of India approval can be obtained.

_____________________________ Source: Infosys 2000 Annual Report

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