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How will Infosys Technologies Inc. sustain its growth over the long term given the obvious limitations of its linear business model?  Ten years ago, for example, Infosys was galloping with ease at about 50-60 percent year-over-year revenue growth.  In 2008 however, Infosys is expected to muddle through at about 20-21 percent year-over-year revenue growth.  And, with an employee base approaching 100,000, Infosys will face even greater difficulty in scaling headcount. Given these challenges, my aim in writing this article is to present a bold strategy for Infosys to drive growth and shareholder wealth creation.

The Growth Imperative

I believe that Infosys is at a critical inflection point in its business evolution.  If the company does not realign its business model then its growth trajectory will likely continue its downward spiral.  To be sure, Infosys is cognizant of its predicament.  The company has launched two recent initiatives (i.e. Platform BPO and Software-As-A-Service) aimed at transitioning to a more scalable (i.e. non-linear) growth model.  In my view, however, these efforts though laudable, will not be sufficient to surmount the complex challenge of revenue deceleration.  Platform BPO, for example, is expected to constitute 25 to 30 percent of revenue by 2010 for Infosys BPO, which itself constitutes less than 20 percent of total revenue for Infosys. 

Clearly, Infosys will need to demonstrate greater imagination to drive growth.  Consequently, in my view, Infosys would be well served in evolving an internal consensus for effecting disruptive change to its business model.  

Software Products Not the Answer

Many observers believe that Infosys must focus greater attention on software products to drive growth.  In my view, however, the software product business model has a significant disadvantage vis a vis the software services model.  That is, software product development requires significant investment with little assurance of a return on that investment.  The heightened risk of the software product business model can be gauged from the plethora of failed software product companies (i.e. Wordperfect, Lotus, Ashton-Tate, Borland, Corel, I2, BAAN, Netscape, etc.).  Moreover, even the most successful software product companies have had little success in sustaining long-term growth.  In fact, many leading software product companies (i.e. Microsoft, Oracle and IBM) have realigned their business model in favor of software services to offset the flagging growth from software products.  As a result, in my view, the software product business model does not constitute a compelling option for driving growth.

Lessons from Reliance

In my view, Infosys management can gain valuable insight in terms of driving growth and shareholder wealth creation from India’s largest private sector company, Reliance Industries Limited.  How has Reliance managed to successfully drive growth for several decades?   To be sure, Reliance’s spectacular success has been driven by an unconventional strategy; Business Scope Redefinition.  Beginning with textiles, the company has assiduously redefined its business scope to pursue opportunities in emerging high-growth businesses (i.e. polyester, petroleum refining, life sciences, communications, retail and infrastructure development).

Driving Growth through Business Scope Redefinition

The implications for Infosys are clear.  The company’s predicament is similar to that of Reliance in previous years.  And, it must perform or perish.  That is, Infosys must redefine its business scope given the inevitable decline in its core business of offshore services.

In sharp contrast to the declining growth of India’s offshore services industry, India’s infrastructure sector is booming. Indeed, India will have to spend more than $1 Trillion on infrastructure by 2020; which will largely be financed via the Public-Private-Partnership (PPP) model.  In particular, India’s Tier 1 and 2 cities are facing stress as a result of heavy migration from rural areas.  Moreover, urban migration is expected to become more pronounced given India’s demographic profile and the dearth of employment opportunities in rural areas.   

In my view, Infosys can best drive growth by pursuing opportunities in the emerging high-growth business of infrastructure development.  Specifically, Infosys should develop integrated townships (i.e. Special Economic Zones) in Tier 4 and 5 cities to stem migration to larger cities. Towards that end, Infosys should create a wholly-owned subsidiary, Infosys Infrastructure for spearheading its entry into the infrastructure sector.

Each such township would be branded as an Infosys Knowledge City to highlight the association of the Infosys brand with knowledge.  Moreover, these townships would predominantly be located within India’s least developed (i.e. BIMARU) states in view of the country’s dire need for inclusive growth.  Moreover, these states would likely be more cooperative in terms of providing land for township development given their surging populations and weaker economies.

To capture economies of scale, each Infosys Knowledge City will have a size of 1,250 acres and provide an integrated work-live-play environment.  That is, each Infosys Knowledge City would be a fully self-contained environment, including commercial office space, residential accommodation, retail mall, hotel and corporate hospital.  In addition, each Infosys Knowledge City will have a world-class university for developing the human capital that will drive India’s knowledge industry.  I expect the funding for these universities to largely stem from the enlightened self-interest of India’s private sector.  An overview of the sectors within each Infosys Knowledge City is provided below.

With the exception of the University sector, each sector will be comprised of fully built-up space which will be given to customers on long-term lease.  Even the residential apartments will be leased to corporations for their corporate housing requirements.  As a result, each Infosys Knowledge City will provide Infosys with a robust perpetual income stream.   

Infosys will then leverage its balance sheet to extend the above model to additional Tier 4 and 5 cities.  In addition, Infosys will unlock value for shareholders through an initial public offering of shares of its wholly-owned subsidiary.  Eventually, Infosys will create a pan-India constellation of 50 Infosys Knowledge Cities.  At which time, infrastructure is likely to constitute the major part of the company’s earnings.

Admittedly, my proposed strategy for driving the growth of Infosys contradicts many widely held beliefs with regard to core competency focus. But why should Infosys ignore its strengths in infrastructure development?  For example, its campuses in Bangalore and Mysore are considered to be amongst the world’s best.

Moreover, the core competency argument has not deterred Quark Inc., which is building a 51-acre SEZ in India.  Nor has it deterred Hotmail co-founder, Sabeer Bhatia from building an 11,000-acre SEZ in India at a projected cost of $10 Billion.  Clearly neither of these developers can boast of any experience in developing infrastructure in India, which is not the case for Infosys.  As a result, why should Infosys have reservations in pursuing opportunities in infrastructure development? 

Others will argue that it would be unprecedented for a global IT services company (i.e. Accenture, EDS and IBM) to foray outside of its business scope.  True.  But the same could also be said of Reliance Industries Limited, which has a long history of creating shareholder wealth through business scope redefinition.  For example, Reliance expects to generate $25 Billion in revenues from its emerging retail business, which is greater than the company’s current annual revenue.  That argument could also be applied to power utility company Reliance Energy Limited (incorporated in 1929) which is actively pursuing opportunities in the development of roads, airports and metro-rail systems. 

In my view, the management of Reliance Energy Limited should be commended for its bold leadership in driving growth through business scope redefinition.  As a result of which, the company delivered a 300% return to shareholders during 2007 and was the best performer on India’s Sensex Index.   

Today, business scope redefinition is being used to drive growth across corporate India.  For example, many leading companies, including the Bharti group, Unitech, Videocon and Bajaj are actively pursuing opportunities outside of their business scope.  Interestingly, the market valuation of Bajaj Auto’s Insurance subsidiary has now surpassed that of its parent company.  

Conclusion

In short, I believe that Infosys should employ a business scope redefinition strategy to drive growth.  To that end, Infosys should develop integrated townships to support the growth of India’s knowledge services industry.  These townships can be branded as Infosys Knowledge City to reflect the association of the Infosys brand with knowledge.  My proposed strategy will also enable Infosys to better utilize its financial resources.  Of course, detractors will offer academic arguments with regard to core competency focus.  But ultimately, Infosys must choose whether to perform or perish.

Raju Agarwal