Additional information to shareholders (contd.)
Intangible Assets Scoresheet

A knowledge-intensive company leverages know-how, innovation and reputation for success in the marketplace. Hence, these attributes should be measured and improved, year after year, to achieve the best performance. The profitability of a knowledge firm depends on its ability to optimize the learnability of its professionals, and in enhancing the re-usability of their knowledge and expertise.

The stock price of a company is the result of the market's valuation of the future earnings potential of the company. Thus, the market provides a value to the off-balance-sheet assets of the company - that is, those assets which are invisible or which are not accounted for in the traditional financial statements. The intangible assets of a company include its brand, products and the ability to attract, develop and nurture a cadre of competent professionals, and the ability to attract and retain marqué clients.

Today's discerning investors take a critical look at the financial and non-financial parameters that determine the long-term success of a company. These new non-financial parameters challenge the usefulness of evaluating companies solely on the traditional measures, as they appear in the financial reports of a company. Thus, the intangible assets of the company have been receiving considerable attention from corporate leaders.

The intangible assets of a company can be classified into four major categories - Human Resources, Intellectual Property Assets, Internal Assets and External Assets.

Human resources

Human resource represents the collective expertise, innovation, leadership and entrepreneurial and managerial skills endowed in the employees of an organization.

Intellectual property assets

Intellectual Property Assets include know-how, copyright, patent, products and tools that are owned by a corporation. These assets are valued, based on their commercial potential. A corporation derives its revenues by licensing these assets to outside users.

Internal assets

Internal assets are systems, technologies, methodologies, processes and tools that are specific to the organization. These assets give the organization a unique advantage over its competitors in the marketplace. Thus, these assets are not licensed to outsiders, since the competitors form the market for these assets. Examples of internal assets include methodologies for assessing risk, methodologies for managing projects, risk policies, and communication systems.

External assets

External assets are the market-related intangibles that enhance the fitness of an organization for succeeding in the marketplace. Examples are customer loyalty (reflected by the repeat business of the company) and brand value.

The Scoresheet

Last year, Infosys published models for valuing the two most valuable, intangible assets of the Company - Human Resources and the Infosys Brand. This year, an attempt has been made to publish data on some of the internal and external assets of Infosys. The scoresheet published in this report is broadly adopted from the Intangible asset scoresheet provided in the book titled The New Organizational Wealth written by Karl Erik Sveiby and published by Berrett-Koehler Publishers Inc., San Francisco. We believe that such representation of intangible assets provides a tool to our investors for evaluating the market-worthiness of a company.

The Infosys management cautions investors that these data are provided only as additional information to investors. Using such reports for predicting the future of Infosys, or any other company, is risky. The Infosys management is not responsible for any direct, indirect or consequential losses suffered by any person using these data.

The Infosys Intangible Assets Scoresheet

Notes:

1. Marqué or image-enhancing customers are those who enhance the Company's market-worthiness. These customers are Fortune 500 customers, and are reference customers for Infosys.
2. Sales per customer is calculated by dividing total revenue, excluding other income, by the total number of customers.
3. Repeat-business revenue is the revenue during current year from those clients who contributed to the revenue of the Company during the previous year also.
4. Value-added is the revenue of the Company minus payment to all outside resources. The Value-Added Statement is provided on page 130 of this report.
5. IT investment includes investment in hardware and software for the Company.
6. Total investment in the organization is investment in the fixed assets of the Company.
7. Average proportion of support staff is the average number of support staff to total staff strength of the Company during the year.
8. Sales per support staff is Infosys revenue divided by the average number of support staff during the year.
9. Education index is shown as at the year end, with primary education calculated as 1, secondary education as 2, and tertiary education as 3.

Customers

The growth in revenue is 81% this year, compared with 54%, the previous year. The most valuable intangible asset of Infosys is its customer base. Marqué customers or image-enhancing customers contributed around 46% of revenue this year. They reduce our marketing costs.

The high percentage - 83% - of revenue from repeat orders during the current year is an indication of the satisfaction and loyalty of the customers. The top 5 and 10 customers contributed around 35% and 50% of the Company's revenue during the current year as compared with 43% and 60% during the previous year. The Company's strategy is to increase its customer base, and reduce the risk of depending on a few large customers. During 1997-98, the Company added 45 new customers.

Organization

During the current year, Infosys invested around 14.12% of the value-added on its IT infrastructure and 2.88% of the value-added on R & D activities. However, due to increased value addition by Infosys employees during the current year, the investment on IT and R & D has come down in percentage terms.

A young, fast-growing organization requires efficiency in the area of support services. The sales per support staff, as well as the proportion of support staff to the total organizational staff, have shown improvements over the previous year.

The average age of the support employees is 31.15 years, as against the previous year average age of 31.35 years. This parameter is an indicator of the stability of support staff.

People

Infosys is in a people-oriented business. The education index of employees has gone up substantially to 7,326 from 4,772. This reflects the quality of employees at Infosys. The value-added per software engineer and the value-added per employee show an increasing trend. Moreover, the efficiency of the support staff has increased, as seen by the reduction in the proportion of support staff to total staff. The average age of employees is 26.56 years as against the previous year average age of 26.82 years.