Infosys, Innovation and the Changing Face of IT

Infosys (INFY) has nailed it. It has hammered the problem right on its head and this means great news (hopefully) for its investors.

Earlier this week, there was a story in The Economic Times about Infosys being granted two patents by the US Patents and Trademark Office.

Apart from the angle of the article's “Ahh, Patents!” tone, it failed to convey one very important thing. Perhaps the game of outsourcing will now no longer be the same.

The News: In Plain View

Earlier this week, Infosys was granted two patents by the US Patents and Trademark Office. Surprisingly none of them has anything to do with the traditional business of Infosys.

One of the patents discussed making a mobile network appear seamlessly connected, even when the underlying technology and its characteristics keep on changing. The vision here is of ubiquitous mobile connectivity and the esoteric concept of “invisibility” for the technology to end user. The other patent talked about an even more esoteric technology, using a 3D hologram in mobiles.

Stunning, isn't it - especially when a traditional software outsourcing firm spins off a surprise like this magnitude.

click to enlarge

Apparently, INFY has filed for 100 patents in the last 18 months. Developed and filed by SETLabs, the software innovation lab of Infosys, it has been quite a journey.

SETLabs, or Software and Engineering Technology Labs, is the dedicated innovation and software engineering research lab of Infosys. In the late 90s, fueled by the Y2K bug (by the way what did they exactly debug?), India became synonymous with outsourcing. Software giants with even a minimal amount of IT services started outsourcing and soon, companies like Infosys and Wipro (WIT) became giants in their own right.

The late 90s were the times of fantastic liquidity, great EPADS and undervalued PEs. But Infosys, in a sheer stroke of long sighted-ness, invested in one of the finest ideas. It financed the setting up of SETLabs in 1999. And all these years, with a constant investment from Infosys into SETLabs, it has come up with something extremely endurable: innovative technology.

In effect, Infosys has built a moat around its business to protect itself from the downturns of the economy, especially in times like these.

The Inside Story

SETLabs is internally divided not as an organization but as Strategic Business Units called Centers of Excellence (CoEs). SETLabs is very much present in domains and fields as diverse as grid computing to mobile networks, pervasive computing, data warehousing and J2EE. For a more detailed report, click here

Analysis and Interpretation: Plain and Simple

• The development of significant high-tech Intellectual Property [IP] should help protect the business from any economic downturns.
• This clarity in thinking on the part of management (of investing in innovation) signifies quite a strategic move from a 'body-shop' oriented business model to that of an 'idea shop', which actually means that Infosys is able to control a larger part of the end result, bringing in larger profits.
• The shift above is actually from process management to innovation management. Something which signifies that management is getting very serious about capitalizing on the third wave of outsourcing.
• Products like Mantra (a process focussed maintenance platform), Nconnect (middleware to create faster mobile applications) Influx (a business process modeling system) can usher Infosys into domains typically outside its reach. [for more details see Products.]
• It's clear that Infosys doesn't want just to maintain the world's software projects, it wants to actively develop, brainstorm and tweak them, keeping the core engine as its own IP. [for a better view of competitors and market, see Implications ]
• With the higher impetus on creating newer technologies on the basis of “old wines”, like Enterprise Architecture [EA], Infosys should have pretty good business opportunities coming up. Key findings of an in-house report claim that 36% of EA teams surveyed actively participate in their company's strategic business planning; 19% of all EA teams spend most of their time on Business Architecture, a 36% increase vis-à-vis last year’s survey, a reflection of the increasing relevance of EA (integration and information integrity are key concerns of EA).

Infosys has already reported EPADS of $2.02 for this fiscal year [for a quick reappraisal of the financial report see this piece ]. Traditionally, I am not much of a buyer of a 'body shop' software model of business but given INFY's transformation into an 'idea shop', I am listening intently.

Disclosure: The author doesn't hold any positions in INFY or its competitors, but his clients may hold significant positions in INFY and its competitors.

Comments

[Backwash]

What are "EPADS"?

[JonathanLiss, SAEditor]

Earnings Per Average Diluted Share

[ThomasVictor]

Frankly, the commercial value of these patents is not clear at all.

Lots of software patents are just commonsense and not worth anything.

As far as Infosys getting more into IP (intellectual property) goes, I'm more optimistic about INFY's mega banking software product 'Finacle'

May 28th: "BBVA, one of the top 15 banks in the world, will implement Finacle Universal Banking Solution.....As a strategic imperative, the bank decided to replace legacy solutions with a leading world-class banking solution."

That sounds very promising - there must be a lot of big banks around the world that need that kind of leap from old banking systems to state of the art systems.. and I'veseen a LOT of expensive failures - success at BBVA could be the start of something really big for Finacle.

[Quixote]

Firstly, as Thomas noted, the commercial value of these patents is not clear. Also, unless one obtains truly 'breakthrough' patents (which are rare), the volume of patents dont really mean much. And 100 in 18 months is not really a large number when you compare that to other 'IP based' companies of that size (in fact its quite small).

While it is good that Infy is trying to move away from a 'body shop' model, it is not clear whether they will be successful at it; note that Infy has been trying to move into IP since a long time (more than 10 years). Maybe they are investing more into it these days.

Also, some of the areas quoted in the article are not Infy's core strengths; success in those areas is going to be significantly more difficult than growing employee count.

[Soham Das]

Hi All,
Nice to have you all here..

@Thomas, I don't know if you gave the links a read, but on Jump Up! [the blog to which I have linked] in fact at the end signs off with this thought that, there is a huge cusp between getting patents granted and implementing them in a business, especially one like this. So the point was always acknowledged. Yet the takeaway essentially is, Infy at the end of the day is showing some real initiatives to stay at the top of the next wave of outsourcing.

And what remains,yes, Finacle is indeed a milestone in their business and received a lot of rave reviews from Gartner as well.And I do see, Finacle being a clincher, but unfortunately it is just one single product in its line.
But understand this, that in the coming years, Infosys will really not be earning its bread and butter from maintaining and developing databases and servers. It will be moving in areas and domains which is not even its core strength, thus perhaps even changing its entire core competency in the process, moving higher up in the chain. And as again said, Infosys is just now happy with maintaining world's servers, it wants to actively develop and have stake in them, which again is a good news.

@Quixote, Most of the points I have covered with a reply to Thomas. Yet, some more clarification is needed. Some of the areas are indeed outside Infosys' tradional business domain, like grid computing, pervasive computing etc. But in the coming years [read half a decade or so], the way the world carries out its projects will change too. So in effect, what is a weak point today can be made a strong point tomorrow by investment and focus, which Infy seems to be doing fine. And secondly Infy has to move up the value chain before the third wave comes in, so its imperative to explore newer areas rather than beat around the same old bush.
Incidentally Infy's research initiative reminds me of GE and Honda in its own humble ways. [I know I know,presumptuous to even compare them]. But think of it, Honda's robots and cars have very less to do with each other, yet Honda is pursuing those frontiers aggressively.
GE is not exactly known as a semi research company, but in Niskayuna it has a dedicated site to research and develop cutting edge solid state devices.
Hope you get the point.

[bonchibuji]

Nice one Soham....I have been writing and talking about the necessity of these kinds of innovations from Indian IT. "It's innovation and ideas that will keep a company up."

The sad part is that among the other majors, I believe TCS doesn't even think about having an R&D group..

and Wipro was once the biggest 3rd party R&D in the world..now, that is also in shambles.....Hope they will wake up and come around...

anyway, nice analysis....thanks...