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For years I have impressed Indian friends by telling them I was in the office of Infosys' founders one morning in 1991, when a phone call from the U.S. told them they had won their first $1 million contract, to build an inventory-management program for Reebok. In the context of the Indian IT industry, the experience is analogous to being in the room with Steve Jobs and Steve Wozniak when they sold their first Macintosh. The two Infosys founders I was visiting that morning included me in their celebration: N.R. Narayana Murthy, Nandan Nilekani and I toasted each other with cups of sweet, milky tea.

If I get props for that story, it's because, among Indians, Bangalore-based Infosys has a cachet not unlike that of Apple in the U.S.: Infosys is cool. The story of its founding in 1981 — by seven friends with $250 between them — was part of industry lore a decade later, at the time of that phone call. Infosys' revenue was just $5 million, but it was one of the standout performers in the Indian IT sector, then in its infancy. It was a new type of company for the country, not family-owned and -operated but created by executive entrepreneurs.

As the company's revenue has grown (it now exceeds $7 billion), so too has its reputation for good governance, social responsibility and people management. It is routinely ranked among India's most admired companies — and its greenest and most conscientious corporate citizens. In a country with few international business successes, Infosys is as much a symbol of the newly emerging India as it is its barometer.

India's economy is at a point where growth has slowed, and the next leap forward requires bold new strategies. Infosys finds itself in a similar predicament. For the first time in years, the company has had to revise downward its growth estimate: in July the company said sales would expand 5% in fiscal 2012 — 13, instead of the 9% it had previously predicted. When it reported disappointing operating margins for the quarter ending on Sept. 30, its share price slumped by 8.8%. "It's a challenging time," says S.D. Shibulal, who was on the other end of that famous phone call from the U.S. and who now runs the company. Infosys is hardly alone. Long the pacesetter for the Indian economy, the IT industry is struggling to keep up with its success over the past 20 years. The country's tech companies are collectively projected to expand 11% to 14% this year, half the rate of growth in the go-go years of the past decade.

On the surface, all Indian IT companies face the same set of problems. Their biggest market, the U.S., has slowed down, and their presence in places like Asia and Europe is too small to compensate. But there are also more-fundamental challenges at play. India's traditional advantage in technology services — its vast annual supply of English-speaking engineers willing to work for a fraction of what their Western counterparts are paid — is being eroded by a decline in the quality of education, higher salary expectations and stiffer competition from countries like the Philippines, Malaysia and Indonesia, where tech salaries are even lower. If the trend continues, it will imperil the business model that underpins India's IT sector.

Infosys believes it knows a way out.

SMARTER, NOT HARDER
for over a decade, foreigners seeking a glimpse into India's mighty IT machine made a pilgrimage to the Infosys campus a three-hour drive southwest of its Bangalore headquarters, where tens of thousands of young software engineers have been trained for world domination. When at full capacity, the campus can accommodate nearly 15,000 students, the majority of whom are put through six months of training. Most of them end up at the offices of Infosys' clients around the world, maintaining or improving existing IT systems.

Infosys spent over $450 million on this campus (a second, smaller one is in the western city of Pune), and the investment has paid off handsomely. The company's business model has depended on being able to produce huge numbers of skilled engineers, and its workforce is currently in excess of 150,000 employees. (Microsoft has fewer than 95,000.)

Last year, however, the company unveiled a business plan designed to enhance revenue by means other than simply training more and more engineers. The scheme was dubbed Infosys 3.0. In Shibulal's conception, 1.0 was the company in its start-up phase, and 2.0 the period of rapid global expansion in the late 1990s. The most ambitious element of the plan calls for the development of software products and platforms that can be customized for individual clients. So rather than have hundreds of engineers working separately on one-off software solutions for two banking clients, Infosys will develop an original software product both banks can buy. Each can then have smaller numbers of engineers customize the product to their unique needs. Rather than pay a one-time fee or an annual maintenance contract, clients will pay a subscription for the product and updates.

The plan, says Ashok Vemuri, who heads Infosys' U.S. operations, is the logical evolution from the manpower-intensive business model. "This way, we make the most of our intellectual capital and are not dependent mostly on human capital." Products and platforms would allow the company to capitalize repeatedly on each idea it develops and to differentiate itself from the legions of other companies (including its Indian rivals) that offer old-fashioned elbow grease. And, says Sanjay Purohit, who heads the new-products division, "the beauty of it is that if the client is more comfortable with 1.0 or 2.0 services, we still have the campus."

Infosys has already developed new products for sectors like banking and finance, energy, retail and manufacturing. Since the 3.0 plan was announced, the company says it has notched up 40 customers, with sales worth $350 million. That's still only a fraction of revenue, but Purohit says in five to seven years, he hopes products and platforms will make up a third of all sales.

TO BOLDLY GO ...
industry analysts have responded to infosys 3.0 with some caution. After all, Indian IT companies have a poor record in software development. They are adept at working with businesswide platforms and customizing them for clients, but no Indian company has developed a product that has sold in large numbers. (This extends to retail software: there is no Indian equivalent of Microsoft's Windows or a globally popular Indian-made video game.) Infosys 3.0 may be entirely logical, but its execution is not guaranteed. "Infosys can develop some compelling platforms," says Bhavan Suri, an analyst who studies the company for William Blair & Co., a Chicago-based financial-services firm. "The bigger question is, Can they successfully sell these types of products?"

Shibulal acknowledges that getting clients to see Infosys as a maker of products won't be easy. But he says the company has overcome deeper skepticism: "In the 1980s, I used to go into meetings with potential clients in the U.S. with a map. I would point to India and say, 'This is where I'm from, I speak English, and I can solve your IT problem.'" That the Indian IT industry no longer has that hurdle is in no small part attributable to Infosys' success.

Can India pull off a 3.0 transformation too? Shibulal diplomatically evades the question. But it is instructive that change at Infosys has come from the top. Shibulal is the fourth of the seven founders to take the reins, and very likely he will be the last. When he moves on — the company requires its CEOs to retire at 60, and he will hit that mark in 2015 — Infosys will pass into the hands of a manager who wasn't present at its birth.

The first two CEOs have gone on to flourishing post-Infosys careers: Murthy is a much admired philanthropist and sought-after management guru, and Nilekani leads the Indian government's giant program to issue every citizen a smart ID card. Shibulal says he hasn't decided what he'll do next but feels the passing of the torch to professional managers will be good for Infosys. "It will be a chance for another refresh," he says. If that management change can consolidate a successful transition to Infosys 3.0, then the company will retain its status as a pioneer. India is in as much need of that as ever.

• Bobby Ghosh / Bangalore
• Can Infosys re-engineer its business model? The health of India's IT industry may depend on its ability to do so