Will Infosys 3.0 Work?

In an earlier post written after visiting Infosys Labs (the R&D centre of Infosys), I concluded that R&D at Infosys is moving from being a demonstrator of technological capabilities to a potential source of competitive advantage. While I hinted at the challenges involved in this transition, the extent of this challenge became clear when Gopal Devanahalli, Vice President (Products & Platforms) for the Energy, Utilities, Communications & Services vertical of Infosys addressed a group of IIMB executive education participants last month.

Traditional IT Services Model has Lost its Sheen

The focus on products and platforms is one prong of a major transformation that Infosys is undertaking. This transformation – what Infosys calls Infosys 3.0 – is the company’s response to fundamental changes it sees in the business environment. With the adoption of outsourced services by most large clients and limited prospects for economic growth in the developed world in the immediate future, the growth of the IT services industry is slowing down. Greater commoditization of services and increasing price-based competition are making the traditional IT services model less attractive (there’s plenty of evidence of this all around – we need to go no farther than the quarterly results of all the Indian IT services majors!).

Is increasing scale the answer? With annual revenue of $7.3 Billion and 150,000+ employees, the management of Infosys sees linear scaling up of the present model as a game of diminishing returns. Being a company that has always prided itself on its margins (Infosys 28% vs. Cognizant 18%) and returns to shareholders, it decided the time has come to change its basic business model.

If the first 15 years of Infosys were spent on perfecting the offshore model (Infosys 1.0), the company subsequently increased the scope of its service lines to completely new business sectors under Infosys 2.0. As a result, more than half of the company’s revenues come from “non-traditional” sectors. In the process, the company built a robust portfolio of more than 500 clients. But Infosys 2.0 appears to have run its course.

Infosys 3.0

Infosys 3.0 which was launched in April 2011 seeks to balance offerings between optimizing operations (a la traditional IT services), helping clients grow in their existing businesses (through business transformation) and working with clients to create new growth opportunities through innovation. From an organizational standpoint, the transformation and innovation strategies are particularly challenging for Infosys, because they involve creating business value rather than just cost savings and working with other CXOs of the client (rather than the CIO). The business transformation piece depends on the ability of Infosys to provide high level consulting services, and the innovation piece is based largely on the products and platforms initiative. The latter is based on an assumption that their clients need partners to innovate. I guess this is a reasonable assumption given the enthusiasm with which leading companies have embraced open innovation as an integral part of their innovation process.

Infosys 3.0 is tightly wound around the company’s perspective of the major challenges large corporations will face in the years ahead. How did they identify these? 3 years ago, the company initiated a research project to determine the trends that would define the future of these organizations. They held more than 100 workshops with clients. This enabled the company to develop what it believes is a distinctive point of view of the 7 big forces shaping the business world. This took shape under the rubric of “Building Tomorrow’s Enterprise Now” – 21 ideas for the 21^st century (3 ideas for each of the forces).

The products and platforms strategy focuses on these 7 themes. The company currently has 12 product and 13 platform offerings. A platform is defined as a managed offering with guaranteed and measurable business outcomes based on Infosys or third party intellectual property, powered by best-in-class domain expertise and cloud computing.

The Transformation Process

The shift to Infosys 3.0 involved a major re-cast of the company’s organization structure. Erstwhile industry verticals were clubbed together to form 4 integrated verticals. 3 delivery organizations were formed around the 3 main offerings – services, consulting and products/platforms. As with any organizational change of this magnitude, this change precipitated much angst in the organization, and the process is still not fully complete. But the reorganization also gave the company the opportunity to bring in new talent from outside, something that was needed to make the new strategy work, particularly in an area like products and platforms where new entrepreneurial and conceptual skills were required. For example, Infosys hired the engineering head of a leading consumer electronics company to foster consumer-oriented product/platform thinking.

As you would expect from a company that prides itself on a planned and disciplined approach to problem-solving, Infosys identified what would need to change and what would not change with the adoption of Infosys 3.0.

What would change

The management of Infosys envisaged change across 4 dimensions:

• In terms of market messaging, they saw a shift from non-linearity (internally-focused) to client value (externally-focused), and from development programs to guaranteed outcomes.
• In the area of talent management, they saw a change from utilization to engineering efficiency; from a single set of HR policies, to a set of HR management models; and to having more entrepreneurial talent who could wrap their arms around a business (e.g. product/platform) and make it successful.
• The operating model would involve a shift from revenue per person billed per month to revenue per employee. Higher risks would be inevitable, and they would have to be managed well.
• The new investment model would involve upfront investment and longer time spans to recover returns on investment. Risk would have to be managed through a portfolio approach to offerings as undoubtedly some would fail.

What would not change

At the same time, the Infosys management were clear that some things would not change:

• The company’s quest for global respect
• The core value system (C-LIFE: customer focus, leadership by example, integrity and transparency, fairness and excellence in execution)
• The principles of PSPD (Predictable, Sustainable, Profitable, De-risked - though this might have to be applied at the portfolio level)
• Excellence in execution
• Focus on operational scalability

Building the Products and Platforms Business

To succeed in the products and platforms business, the focus would be on building the right offerings, building the offerings right, gaining market traction and talent management. A team of more than 1,000 engineers has been assembled for product and platform engineering. Processes are being put in place for product management.

Some gaps in talent were identified – most of these related to product-specific capabilities like product management expertise, product marketing expertise, and product sales expertise. These are being filled.

Revenue models vary depend on the nature of the product/platform and the client. Some platforms are sold in terms of a per transaction charge while others work on a revenue share basis.

Infosys plans to offer all platforms on its own private cloud.

To avoid confusing customers, a single sales person would address each client and this sales person would sell the entire bundle of offerings (services, consulting, products/platforms) to the client. But sales support would be provided by a sales support team located within the products and platforms group for that vertical.

Will this work?

While Gopal exuded confidence that all that was needed was patience and perseverance to make this work, most of the participants in our executive education class were less sanguine. They questioned the ability of Infosys to hire and retain the people suited to a product business; the company’s ability to stay the course and wait for longer term pay-offs; and whether the existing Infosys sales force would be able to “sell” relatively more sophisticated products and platforms. Above all, they wondered how difficult it is to build a product business within a successful services company.

This is, I suspect, a legitimate concern. In a study of software product development in India that Ganesh Prabhu and I did several years ago, we found that a services mindset is different from a product mindset. In a services business, the client defines the scope and definition of what is to be delivered while in a product business the company has to make difficult choices on product definition. Products meeting “average” needs often deliver below-average returns, and successful product companies often have visionary product leaders who are able to articulate user needs better than users themselves can. Products need roadmaps and a visualization of the future.

Attracting product visionaries might require different human resource policies and compensation plans. While Infosys has committed to move away from one single HR policy as at present, the shift will take time to implement. Gopal told us that so far the products and platforms business has not found it difficult to get clearances from the top management for any “deviations” from extant Infosys policy. But we need to keep in mind that most successful companies develop what C.K. Prahalad called a “dominant logic”: mental maps and models that provide the lens through which they look at their business. This dominant logic makes it difficult to run businesses with very different models and assumptions within the same corporation.

Conclusion

Infosys appears reluctant to spin off the products and platforms business as a separate company even though this could give it the focus and flexibility that would improve its chances of success. The reason for this seems to be their preference to present a single face to the client. Client problems don’t come packaged in neat buckets. Infosys is betting that by presenting a single face to the client, these problems can be addressed through a mix of services, consulting and platforms, all provided by Infosys. Since strong customer relationships constitute one of the inimitable resources that Infosys possesses, it doesn’t want to dilute or balkanize this resource.

My assessment is that Infosys has identified the transformation challenges correctly, but the question is whether the choices they have made regarding the change management process are the right ones. In his quarterly interactions with media and analysts, Infosys CEO Shibulal shows a steely determination to stay the course and make Infosys 3.0 work. Almost 20 years ago, IBM CEO Louis Gerstner did a great job of making the IBM elephant dance; let’s hope that Mr. Shibulal is able to do the same.