Infosys Makes a Smart Move

Infosys’ decision to spin off the Product, Platforms, and Solution (PPS) division as a subsidiary comes as no surprise. Services and products are fundamentally different businesses, and the two cultures could not have been perfectly compatible. The first point of departure is the software business’ elephantine gestation period.  As Joel Spolsky, successful enterprise software and web entrepreneur, memorably said, “good software takes ten years, get used to it”. Executives in charge of traditional IT services business are accustomed to working under somewhat shorter time horizons.

The PPS division, which accounts for 5.3% of revenue, will be a much smaller organization. But scale seems to matter a lot less in software than services. Invitation rates in advised outsourcing deals fall rapidly from well over 20% for the largest global heritage service providers to low single digits for those with under a billion in revenues. In comparison, every enterprise software market has viable vendors with under US$500 million in revenues.  Appian, in the Business Process Management software market, and NetSuite in the CRM market are prominent examples. These companies regularly win marquee deals and compete with much larger vendors such as Microsoft, IBM, Oracle, and Salesforce.com.  Also, while software sales benefit from scale, the right model for development is often the small and nimble independent software vendor, or even the startup.

The risk profile of enterprise software products is also very different. There would inevitably be risky bets that will not work, and failure would not be apparent until years into development. Perfectly well-rounded products fail because the ecosystem changed and a priori assumptions did not hold. For example, Infosys certainly has an uphill task with the app store solution for enterprises and telcos – Flypp. Flypp is feature-rich and appropriate for the target market, but consumers have not demonstrated an interest in accessing work and entertainment related items from corporate or telco app stores.

The coexistence of a services and products business surfaces many contradictions. Customization comes naturally to the services division, while a product manager typically strives for a more complete product. And of course, the services business can be asked to implement a competing product.

In summary, a relatively independent PPS business augurs well for the future of Infosys’ non-linear strategy.