Can Infosys be a disruptive innovator?

What challenges do Indian companies face as they try to go global? Can India Inc produce tomorrow's Coke, Sony or Whirlpool?

In the first of a 12-part series, The Strategist tackles the issues that confront one of India's most successful software companies, Infosys, and gets Clayton M Christensen, Harvard Business School professor and the reigning guru of innovation, and Infosys Chairman and Chief Mentor N R Narayana Murthy to bend their minds to the problem

N R Narayana Murthy, chairman and chief mentor of Infosys, isn't given to hyperbole. I was, therefore, startled at the intensity of his reply when I asked him how important innovation was for Infosys to become a major global player.

"As long as Infosys innovates, it will survive and succeed," he said. "The day it stops, it will disappear like dew on a sunny morning."

That was a fine start. It was the first week of January 2004, and my 12-month journey to discover what Indian companies must do to become truly global players "" of the heft of a Coke, a Sony, a Samsung or a Nokia "" had just begun.

A natural starting point was the Indian information technology industry that has begun to generate global buzz.

Companies like TCS, Wipro and Infosys have managed to register their global presence, but are their engines of innovation fired up enough to propel them to the status of a Microsoft or an Oracle?

To answer that question, I decided to look at Infosys, and since innovation is its source of competitive advantage, turned for help to the reigning guru on innovation, Clayton M Christensen.

A professor at Harvard Business School and the author of two seminal books, The Innovator's Dilemma and The Innovator's Solution, Christensen's research shows that in well-managed firms, good management is the most powerful reason why companies fail to sustain success.

That's right. According to Christensen, firms succeed because they listen responsively to their customers and invest aggressively in the technology, products, and manufacturing-capabilities that satisfy their customers' future needs.

Paradoxically, it's for these very reasons that companies stumble and lose market leadership. They become so focused on sustaining what they do well that they lose sight of the threat of disruption from more innovative competitors.

I wondered if there was a corollary to Christensen's theorem. Could the very success that Infosys had ratcheted up over the last two decades prevent it from becoming a global force? Intrigued by the possibility, Christensen agreed to bend his mind to the question.

Before gauging Infosys' innovation strategy, it's important to recall that Christensen makes a critical distinction between sustaining innovations and disruptive innovations.

Companies pursue sustaining innovation when they pander to established customers in existing markets by offering a better-performing product or service. Think of the stream of improvements that Xerox added to the photocopier over the years.

Disruptive innovations, in contrast, are akin to Canon's launch of the desktop copier "" a simpler, more convenient, less expensive product that helps new or less-demanding customers get the job done.

Disruptive innovations are the ones that allow relatively unknown companies to leapfrog the competition and dislodge comfortably ensconced market leaders (Think Dell).

The good news is: Infosys is a disrupter. Says Christensen: "Infosys's business model is disruptive relative to the IT services industry in North America and Europe."

There's a little story behind that. Murthy tells me with a laugh that in 1971, he attended a conference in Israel where it was uniformly agreed that it was impossible to do software development from a remote location.

"But India's software industry, led by companies like Infosys, proved that that is not true. We were the first company to articulate and implement the power of the Global Delivery Model."

What made Infosys's Global Delivery Model (GDM) disruptive was its framework for distributed project management, the ability to deploy multi-location, multi-time-zone teams to execute projects efficiently and at low cost.

Like all disrupters, Infosys moved up the value ladder by deploying the model better, faster, more efficiently and in more areas.

The company evolved from writing small bits of code "offshore" at its Bangalore office to IT consulting to business process outsourcing. Now the company is gearing up for the next level, a new initiative called Thousand Board-Room Consultants.

Says Murthy: "We have to transform our people so that from reactive problem solvers, they become proactive problem definers. We want our people to go to a CEO and say: 'I have looked at your organisation. Things seem to be all right today, but you will run into this problem two years from now. Infosys can provide you a solution today."

Moving up the ladder has not only improved Infosys's margins but it has also helped the company integrate more with its customers' needs.

"It's exactly the right strategy for Infosys to follow. It does have to move up the ladder," says Christensen.

"However, while the move to create Infosys was a disruptive innovation, all the improvements in Infosys's ability to execute faster, better and more complicated IT solutions are sustaining innovations. As it moves up the ladder and becomes more and more integrated, Infosys needs to create something that has a proprietary interdependent architecture inside its product offering."

Only that will allow Infosys to unleash a disruptive product or service that will become its ticket to the club of global IT companies.

One reason Infosys might not have spawned such a product so far is the comfort with the GDM, which has made it a nearly-$1 billion company.

Christensen points out that there are two kinds of disruptive innovations: new market disruptions and low-end disruptions. New market disrupters create a new market for a product or service by making it so affordable or convenient that a whole new set of customers is born.

PCs, portable computers, even on-line auctions on eBay "" all those are examples of innovations that created consumption where no consumption existed before.

Low-end disruptions, on the other hand, are disruptive innovations based on low-cost business models. Mini-steel mills, discount retailers like Wal-Mart, and on-line book sales on Amazon.com are disruptive ideas, but based on wooing away the least attractive of the incumbents' customers.

Low-end disruptions may help make money, but they seldom generate the kind of traction Infosys needs to become a global powerhouse.

Explains Christensen: "Low-end disruption is a temporary solution. It's only viable as long as there are high-cost competitors. However, with new-market disruption, a company can keep going. And going."

Until now, Infosys has shown little signs of becoming a new-market disrupter. "It has yet to demonstrate the ability to bring sophisticated services to a new set of people who didn't enjoy them before," points out Christensen.

Murthy demurs "" but only for a minute. Thoughtfully, he says: "In a way, Christensen is right; we are playing the low-cost disruption game. But I would prefer to call it value-disruption."

Semantics apart, for Infosys to become a global giant it will need to overcome at least three hurdles posed by its innovation strategy.

Sustenance from sustaining innovations: There is a very real danger that Infosys will remain so caught up in its success that it will continue focusing on sustaining innovations "" and fail to hunt for the next big disruptive idea.

Ask Murthy what Infosys is doing to foster innovation and he points to the company's Software, Engineering & Technology (SET) Lab.

"Our people there read, import all kinds of technologies, and come up with ideas. The ideas are discussed with people in the field, and they try to integrate them on an incremental basis."

Clearly, any idea that comes out of the SET Lab has to fit into Infosys's current scheme of things; sustaining innovations that help Infosys do what it currently does, better, faster, or cheaper.

By mandate, SET Labs can never produce truly disruptive ideas "" ideas for the future that threaten Infosys's current business model. Christensen's suggestion: Infosys should set up a completely independent organisation for nurturing disruptive innovation. After a moment's reflection, Murthy agrees: "He's right. He's absolutely right."

Limited to the low-end: Infosys could also forego speedy growth if its quest for disruptive innovations is restricted to low-end disruptions based on leveraging lower costs.

Murthy points out that one of the strategic parameters for success that Infosys measures is the per capita revenue productivity of its employees.

Says he: "Infosys's strategic intent is to enhance the per capita revenue productivity of our employees."

By that thumb-rule, however, Infosys would never consider developing a disruptive innovation that targets a new market. Such innovations target markets that don't exist.

They come with no guarantees or sales projections. To nurture new market disruptions, Infosys will have to establish a new set of values, processes and resources that stoke such innovation.

A sample difference: managers responsible for generating ideas for new-market disruption will need a rewards system that doesn't penalise failure.

To understand how Infosys will need to think, I pressed Christensen to come up with a disruptive new market idea that would lead to a proprietary product for Infosys.

His response: "A new-market disruption would be for Infosys to say, well, the best microprocessor design capability resides in Intel. What we (Infosys) will do is create a set of design rules that make it possible for software engineers to design microprocessors that are optimised to run software. That will make it possible for software engineers to custom configure microprocessors to optimise the applications they are running. That would be a disruptive innovation. It would enable a larger population of engineers, who historically couldn't, to design microprocessors because Infosys made it rules-based and modular."

The trap of too little, too late: Lulled by success, Infosys could ignore its quest for new market disruption until it is too late.

Says Christensen: "Right now Infosys is at the top of its game. But, in five years, you can bet that Infosys will begin to see some maturity in its core business. At that stage, it will want to find another growth business that is becoming very large. If Infosys wants to have such a business five years from now, it has to start it today. If it waits until the numbers look bad, that will be too late."

What makes Infosys particularly vulnerable to disruption is its low-cost plank. Accepts Murthy: "I entirely agree with Christensen that if you play only the game of low-cost disruption, then the victor today will become the victim tomorrow."

Luckily for Infosys, the solutions are within reach. If it wishes, its recent foray into RFID (radio frequency identification) could be just the big disruptive innovation it needs.

The technology has potential to replace bar codes one day. Infosys could either treat RFID as yet another area to dabble in for small gains, or an opportunity to develop a revolutionary new product for smarter supply chain management.

Says Christensen, "Innovations aren't inherently sustaining or disruptive. Companies make a strategic choice when they use innovations for disruption."

Many of the companies Murthy admires "" Motorola for quality, Hewlett-Packard for human resources, Nokia and Intel for innovation "" got to be where they are by making those choices.

"What stops Infosys from being like them?'' I ask Murthy.

For a moment, he is silent. Almost to himself, he replies: "It's all in the mindset. The moment I start feeling that my compulsions are to be a truly global player, then I will start doing things that will indeed make me a global player."

Then, his voice hardens: "The journey has started. But we need to focus much more on being a global player."

Manjari Raman is a Boston-based management writer.
The column will appear in The Strategist on the third Tuesday of every month. If you would like to share your company's experience, you can email her at manjariraman@yahoo.com