India's outsourcing industry isn't exactly new. But it was back in 1981 when N R Narayana Murthy co-founded Bangalore's outsourcing heavyweight, Infosys.
Outsourcing was a $10 billion industry in India in 2005, and it should more than double by 2010, according to research firm IDC. That's due in large part to Murthy and other innovative entrepreneurs, like Azim Premji of Wipro and Ratan Tata of Tata Consultancy.
Though Tata and Wipro are both larger firms, Infosys is the country's 15th largest company, and it was the first to list its shares in the United States. Murthy served as CEO until 2002, when he gave up the job and took the position of chairman and "chief mentor." Infosys has continued its dramatic growth under Nandan Nilekani, another co-founder; last year the firm earned $555 million on $2.2 billion in revenue, an impressive profit margin.
But Indian labour isn't as cheap as it used to be, and the country is losing its tight hold on the outsourcing market. To maintain its growth, Infosys must continue to innovate, finding new sources of revenue. As a result, Infosys and other Indian outsourcers are looking for new types of business that Western firms can ship overseas. The next frontier, according to Murthy, may be consulting, traditionally a face-to-face profession.
Murthy officially retired August 20, but he will still be the company's non-executive chairman and chief mentor. In that roll, he can continue his work of encouraging young people to bring new, creative ideas to the company's management team. Murthy spoke with Forbes.com about innovation at Infosys and beyond.
A lot of companies are starting to outsource innovation, as well as research and development. Do you think that trend will continue?
I have a slightly different view. I don't know whether companies should outsource innovation. I believe in what my friend Geoffrey Moore, the author of Dealing with Darwin, says. You can outsource the contextual activities, but you have to in-source the core activities. Those are what give you a competitive advantage.
Give me an example of where innovation shouldn't be outsourced.
The ideas that provide a company with differentiation in the marketplace will have to originate from within. But implementing those ideas could be done by anybody. The design of the new features of the redesigned iPod--that had to be done by Apple itself. Actual manufacturing of the iPod could be outsourced. But the process of designing, the process of looking at what the market wants, the process of coming out with the first prototype of the video iPod, that has to be done by Apple.
What needs to change for the Indian economy to encourage more innovation?
First of all, I believe that we have to accelerate the growth of our higher education system. Second, we need infrastructure like roads, airports, etc., so we can easily commute from home to office without getting stuck in traffic jams. We need better quality airports, so we can travel abroad and so that our customers can come easily.
At Infosys, what formal policies do you have in place to encourage original thinking?
In every major decision, there is a significant representation of people below the age of 30. They're the people who have a lot more at stake in the future. Once a year, employees below 30 come and make presentations about improving the company. They discuss new concepts, new ways of developing software, new products. On that day, the only people allowed to make presentations are people under 30.
We use data and facts to decide on every issue. We have a famous saying at Infosys, "In God we trust. Everybody else bring data to the table." If you use data to decide issues, you encourage meritocracy.
How important is it to have systems like that in place? Some CEOs say, "We're such a creative company, we don't need a formal system to encourage innovation."
It's extremely important to have systems and processes because there are two levels at which innovation takes place. First, there is the freewheeling environment, the open environment, with discussions, debates, etc. But second, in order to make sure that those ideas are actually market worthy and that the corporation is in a position to leverage those ideas, you need systems and processes. They compress the cycle time and maximize the returns on those ideas.
What's next on Infosys' innovation agenda?
We are working on a huge initiative where we are bringing the power of our business model to activities which were hitherto thought unviable for (outsourcing). For example, the conventional wisdom is that consulting is an on-site activity, a customer-site activity. We're saying that there are many, many activities in consulting that can be delivered from countries like India. For example, preparation of the proposal, research, analytics, simulation. All of that can be done from India. It could be as much as 30 per cent to 40 per cent of the total effort.
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