Dysfunctions Of Size: Why 15 Infys Are Better Than One As Corp Lifespans Fall

It has been apparent for some time that India’s IT majors, Tata Consultancy Services (TCS) and Infosys, among them, face headwinds. This has become apparent in recent quarters, as revenue growth slows and both companies have been underachieving.

While there are many reasons for their current troubles – including an uncertain global environment and automation at the lower end of the tech value chain – one key factor for their underperformance may be their sheer size: both TCS and Infosys (In 2015-16, TCS’s topline was Rs 85,000 crore and Infy’s Rs 53,000 crore) may be too big to remain successful for long. Big companies, especially those with large staff complements, tend to be leaden-footed, and slow to innovate. They are also more focused on today’s cash cows and less on tomorrow’s pot of gold.

To combat the loss of agility that comes with size, TCS broke itself up into 23 mini profit centres, each with its own P&L account and business head. That change from 2009 was an important reason why TCS outperformed the industry till recently; two months ago, Infosys CEO Vishal Sikka did the same, breaking his company into 15 major units, each with its own P&L account, reports The Times of India. Thus there are four mini-CEOs running the banking and financial services vertical based on geography, three running energy and utilities, three for manufacturing and high-tech, etc.

"It gives us scalability, it gives us isolation and accountability of individuals," The Economic Times quoted Sikka as telling analysts in August.

Splitting a large company into several smaller units, each with around $500-700 million in revenues, is a good first step, but this step will not yield results beyond a few years, as TCS’s current stall indicates. At the end of the day, a small P&L unit is a small P&L unit, not one capable of taking enormous risks or disruptive innovation. The top management at Infy will never allow any unit to bet the farm for exceptional growth; only independently listed units can do that.

This means that to reap the benefits of small, both TCS and Infy must start listing their smaller units separately, so that their growth is not constrained by the priorities of the parent, and also allowed to go bust if they get their bets wrong. Listing separately will allow these units to access risk capital – thus insulating the mother ship from going under if they fail.

The problem with merely having smaller P&L accounts within a larger company is that the parent company will continue to remain large, and will circumscribe the unit’s freedom by prescribing rules on HR practices, restricting cannibalisation, and putting floors on margins. This cannot spur risk-taking and innovation.

Studies on the longevity of large companies show that their average lifespan has been steadily falling over the last century. A BBC report says that the longevity of companies in the US S&P 500 index has fallen by 50 years, from 67 years in the 1920s to just 15 years now. Another report, this one by the Boston Consulting Group (BCG), based on a much larger sample of 35,000 publicly listed companies, indicates that corporations “are perishing sooner than ever before. Since 1950, the total life span of companies and the length of time that their shares are publicly traded have significantly decreased”, to just around 30 years.

The BCG study found that “companies don’t just die younger; they are also more likely to perish at any point in time. Today, almost one-tenth of all public companies fail each year, a four-fold increase since 1965. The five-year exit risk for public companies traded in the US now stands at 32 percent, compared with the 5 percent risk they would have faced 50 years ago.”

This means roughly one-third of companies die before they turn five. This could be because many more startups are funded, and not many are expected to live long, but the BCG study found another interesting fact: it wasn’t only the risky tech companies that were faltering and failing. “Mortality risk grew for companies of all sizes and ages.” Another discovery: mortality risk was higher not only for slow-growing or declining companies, but also fast-growing ones. “That is, accelerated growth correlates with shorter life spans, whereas companies with more moderate growth face the lowest risk.”

Given these realities, India’s IT companies, TCS with nearly 3,71,000 employees and Infosys with around 2,00,000, will have problems with longevity if they continue to grow bigger. Their best protection against the debilitating effects of size and scale would be to become smaller, not bigger.

And it’s not just IT. Mukesh Ambani, Chairman of Reliance Industries, said some time ago that his investments in telecom and technology through Reliance Jio (and other companies) will cross not just Rs 1,50,000 crore, but Rs 2,50,000 crore. He is effectively betting the farm on Jio, which, in his own words, is the “world’s biggest start-up”.

The simple point to make is this: why bet the farm when each business can be insulated from the successes or failures of the others through a physical separation and independent listing? Why risk the cash generating refining business when Jio is the capital-guzzler?

If the average size of firms is falling even in the agile markets of the US, isn’t it foolhardy to presume that one big company is all it takes for long-term success in India?

Whether it is TCS, Infy or Reliance, size is as much a disadvantage as advantage, especially when disruption is the norm in today’s businesses.

They should break up into smaller units, even if a holding company remains, in order to ensure the long-term success of at least some of the progeny.

See also—Should TCS be split up? Big IT may now be facing “diseconomies of scale”