2007/04/27 11:20 Stephen Pratt, "Innovation and Management in Knowledge-Intensive Business Services"

2007/04/27 11:20 Stephen Pratt, "Innovation and Management in Knowledge-Intensive Business Services", Innovation in Services Conference, Berkeley, California

This digest was created in real-time during the meeting, based on the speaker's presentation(s) and comments from the audience. The content should not be viewed as an official transcript of the meeting, but only as an interpretation by a single individual. Lapses, grammatical errors, and typing mistakes may not have been corrected. Questions about content should be directed to the originator. The digest has been made available for purposes of scholarship, posted on the Coevolving Innovations web site by David Ing.

Intro by AnnaLee Saxanian

  • Kids go to soccer together
  • Was at Deloitte and Booz Allen
  • Offered services to India
  • Started the first U.S-based consulting branch of an Indian company


[Stephen Pratt]

Three years ago, decided to create Infosys Consulting

  • Customer: great work, but paid $144M, is there a way to cut costs
  • Reflected, customer was right, hadn't found an innovative way to do this
  • Tried doing a project with onsite consulting, with developers in India
  • Had friend who started as Deloitte consulting in India

It worked

  • Workers liked it
  • Customer found higher quality
  • Higher profits

Previous firm wasn't in a position to take advantage of this, so went to do it ourselves

  • $200M run rate this year
  • Expect to double again within next 2 years
  • At Infosys, say, what took you so long?
  • 3 years ago, 25,000 people, today it's 78,000 people, adding 2000 per month, at 100 people per day
  • Passed the market capitalization of Accenture
  • A great model for investors, most in U.S. and some in U.K.
  • Only 3% of clients are in India
  • 70% of employees are in either India or China
  • Over 90% of clients are in North America or Europe

Are services companies going insane?

  • Einstein:  Insanity is doing the same thing over and over again, and expecting different results

Consulting: innovation going down, quality going down

  • Model isn't working
  • Clients have gotten ahead of consulting firms and services firm
  • When a services firm falls behind its client, it's a problem
  • Big disruption

Inflection points for services companies: three

Early 1900s, consulting industry started by Edwin Booz

  • Hire retired workers to give advice to executives
  • Inconsistent quality

1926: James McKinsey

  • More like a law firm, hire people out of business school, hire them, train them
  • Management consultant

Worked until 1980, when technology came onto scene

  • McKinsey said we don't this
  • Created an opening for accounting firms: Arthur Anderson, Deloitte, Touche-Ross
  • Results in large consulting firms
  • Not working
  • Client in Chicago, consultants in New York, fly in, rent cars, take spots in client offices
  • Why? No competition was driving away from this
  • But, Dell said, we won't manufacture in Manhattan, we'll build in Penang, Malaysia

Maybe the companies need a new business model

  • Friedman: a flat world mindset

Fourth generation of consulting:

  • Good onsite consultants, working with clients, rich and high-touch, excellent communication skills
  • Things that don't have to be onsite can be where ever is best in the world
  • A fundamental disruption in the services business, especially in consulting
  • Feel that Infosys is leading here, with third generation companies (Accenture, IBM) following
  • Some will be successful, some will be left behind

Things are changing quickly, it's an exciting time

Tremendous debate about this

  • Charlie Rose, Allen Blinder talking anti-globalization, saying it's a net adder of jobs, but need to create a social safety nets
  • Companies aren't going back, they're here to stay
  • Impact on society, U.S. needs to step up to orchestrate the world's work force
  • Isolationism is a bad idea, we'll lose

What's the flat world?

1. Opening of emerging economies, India and China, with Brazil and Russia next

  • Hundreds of millions of people with access to market and information
  • Workforce is amazing:  India has done well educating in sciences

2. Demographics:

  • U.S., Japan, Italy, rapid aging, need workers to pay pensions for retirees
  • In U.S., unemployment is low, but using people around the world
  • Demographic shift in advanced countries

3. If have people available in countries, but not way of accessing it, it's a problem

  • Telecommunications has become free
  • Skype
  • 5 to 10 years ago, used to unplug fax machines to get a 9.6 line
  • Now, we're upset if we can't get 100 Megabit, upset if can't get it in a taxi in New York

4. Consumers are getting comfortable with technologies

All causing disruptions, particularly in services


  • GDP of emerging companies growing
  • Number of companies from emerging companies in Fortune 5009
  • Aging workforce in developed countries, can see China 1-child policy
  • Talent pool, number of engineering graduates in China high
    • e.g. can't put hub in Australia, it would require hiring every engineering graduate
  • Age of citizens, computers going down
  • Cost of telecom falling

Idea of flat world came from conversation with CEO at Infosys and Tom Friedman, but also don't agree with everything that Friedman said

How to win in a flat world?  Four shifts

1. Dread: mindset of Chinese coming to sell below our cost, and being afraid of that

  • Need to think about how can be the one causing dread
  • The most creative using capital
  • Want to be the "China price"
  • Leader: Toyota, doing counter-intuitive things, e.g. building manufacturing plants in the U.S., when people think that everything is moving to India
  • Renault: want to create a car for emerging markets, the Logan, low-cost, $5000 can be sold in India and China, successful
  • Renault also learned a lot about cost discipline and manufacturing, that could be applied in mature markets

2. Shift, from generating customer loyalty through goods/service so they'll stay around forever

  • Now, can compare prices on the Internet, almost perfect information
  • Demand to have the best product is extreme
  • Can't have loyalty customers by relying on good customer service, have to rely on innovation
  • e.g. InnoCentive: affiliated with one of major consumer brand companies
  • Have problems, but not enough problem solving people
  • They put the problem out to the world, and say they'll pay $75,000
  • Someone in Budapest comes back with the answer, and they charge the company $100,000 for the innovation

3. Shift from collecting information, more centralized databases to get a 360-degree view of the customer

  • People had access to more information, but so what?
  • From spending money to collect information, to making money
  • e.g. Harrah's Casinos, Total Rewards program, the frequent loser's club
  • Consumer perceives more value

4. Moving from the mentality of winning in the straightaway, i.e. straight line

  • Reality is life is more chaotic
  • Companies need to be designed for change, variable cost structures
  • If things go down, cut back, and if they go up, scale
  • When tolerances weren't so tight in companies, used to be able to absorb this
  • Now companies are changing positions in the turns, either downturn or disruption, where companies pass each other

Philosophy: battle of the skeptics versus the rebels

  • Skeptics:  this is hooey, it will destroy America, or my kids will never get a job
  • Rebels:  this is the future, the way we're going to make great countries is to lead this thing

Battle, even within companies

  • We've been doing this for 50 years, versus no, we need to do this
  • Corporate personalities come out
  • A lot of whitewater
  • Vote for rebels

Have to set sacred cows free (coming from an Indian company, says a lot)

  • Manufacturing went through this, and services is now going through this

(Will skip consulting as a case study)

Infosys 3 years ago, started at 25,000, now growing at 2,000 per month

  • Operating margin was 25% after tax, now 26% after tax
  • Most consulting firms run at 12% after tax, we're double that
  • From client's perspective, we can do things as good quality or better, and charge 30% less
  • The value of the company, from $15B to $32B, trading at 10-times-revenue

Think flat!


Wage rates going up in India, the differential with U.S. won't last more the 10 to 15 years.

  • That would be an economic miracle
  • If the wages in India were even close to the U.S. it would be
  • Hotel rooms are as expensive as Manhattan
  • This will happen more slowly than people think
  • It will be at least a decade before getting in shouting distance
  • It will be difference places within India and China, then Brazil and Russia
  • Wage differences are 6:1 or 4:1

There are skill shortages globally, everyone is competing for the same skill base

  • It will be educational system versus educational system
  • How many can IIT generate?

Clients ahead.  Clients now pay for connection to someone who can do it.  Social network.  What's to stop the customer from going around?

  • Right now, clients are hiring consultants to get a result, e.g. fix inventory turns
  • Days of give advice and run away are numbered
  • Only advice firms are going away
  • Big market, e.g. for large oil and gas majors to see if metrics change
  • What's the fifth generation?
  • Maybe private equity, consulting professional that go in to fix the company, then the improved company would have a high value and could IPO
  • But we won't lead this, we'll have some else that will do this:  it's risky, negative cash flow
  • Will see much tighter alignment between hiring someone and results

Education statistics

  • Number of U.S. citizens graduating is much smaller
  • Being an immigrant nation, think would embrace smart people moving into the country
  • We're putting in limits on smart people, and letting low labour in
  • H1-B visas down to 65,000 per year, and on the first day, got 120,000 applications
  • Closed applications, and decided to have lottery
  • For people in the U.S., their jobs are better
  • e.g. Deutsche Bank, doing credit analysis, found problems having skills
  • We say: we'll hire Ph.D.s, and let them do analysis, not only crunching numbers, but telling them what to crunch
  • Now, they're only limited by the creativity on site

H1-B and O1 blocks are limiting Nokia's growth in U.S., so we're doing more in Asia.  We have four people in Germany, UK and Asia that can't get to Palo Alto.

Original management consulting based on law firms.  Law firms are dinosaurs, how can they improve?

  • Will have to have some "equivalent to us" forces.
  • Audit firms are also dinosaurs, could do supporting analyses remotely
  • Career paths in law firms start at student and go through to partner
  • Due for disruption

An oil well in a flat world.  How do you train or harness your employees?

  • Gave a keynote at the consulting summit
  • Some attributes of consulting profession that need to be retained
    • We do what we say
    • Critical analysis of business problems
  • Also, we spend a lot of time breaking down walls
    • Either your technology or your business walls have to come down
    • Need technology and business people to work together
  • Also, ego in past on background, e.g. what school
    • Spend time culturally breaking down
  • We don't have this completely figured out

Transfer of some of work, but in the case of law firms, it's the entry level work that builds people.  If you're building a pure information job, how do you train people for senior positions in the U.S.?

  • Two distinct disciplines:  technology and business
  • The majority of people are near clients, here or Europe, some in Japan
  • Hire MBAs, and they go through the consulting professions
  • There are some people who transfer from Infosys Technologies to Infosys Consulting
  • Ideal candidate: computer science undergrad, who became an MBA
  • Will take a generation to find out