Honeycombed with computer cubicles and hard-wired with the latest telecommunications equipment, the offices of Infosys Technologies rise above a landscape of lush gardens, reflecting pools, and neatly manicured lawns. Pop tunes waft from open-air food courts serving Pepsi and pizza. There is a gym, a basketball court, and even a putting green to help hard-charging programmers combat stress.

The 52-acre compound is the kind of place one would expect to find in California or Washington. But to visit Infosys you'll have to travel a little farther east. Well, okay, a lot farther--to Bangalore, India. A prosperous place by Indian standards, with a gaggle of upscale shops and noisy pubs, Bangalore is also home to many of the less agreeable features of urban India. Major roads are lined with shanties. Beggars and cows wander amid backed-up traffic. An ominous sign at the train station--Do Not Entrust Your Luggage to the Unknown--attests to the plethora of local scam artists.

Locale may be the most obvious thing that distinguishes Infosys from its U.S. software rivals, but it stands apart in other ways too. Paychecks, for instance. At Infosys, annual salaries for topnotch software engineers start at $4,500--an upper-class wage in India, but less than a tenth of what it would cost to hire a U.S. programmer with comparable skills. Chairman Narayana R. Murthy, 57, and CEO Nandan Nilekani, 47, are paid just $44,000 and $42,000 respectively. None of the firm's seven founders receive stock options. And consider this difference: Infosys makes money.

In 2002, CIOs the world over clamped down on technological spending. This seemed like bad news for Infosys--designing software applications to fit the specific needs of clients is its core business. But the company's executives figured out that the new frugality could actually play to its strength as a low-cost alternative. "Corporate spending on IT services has slowed, but the case for spending on the sort of services we provide has never been more compelling," says Nilekani. "CIOs are rethinking all the basic questions: 'How come I have all this software and it isn't getting used? How come my systems still don't talk to each other? Couldn't we get all this done at the same quality level for less money with an outside partner?'"

So instead of retrenching, Infosys ramped up recruitment and launched an aggressive overseas sales and marketing blitz. The result? A banner year. In the last three months of 2002, year-on-year earnings jumped 24%, and sales gained 45%. In the financial year that will end in March, the company expects to make a record profit of $194 million on sales of $740 million, up 50% from the previous year. While Nasdaq continued its free fall and finished 2002 down 31.5%, Infosys shares went in the other direction, rising more than 12%.

The financial record alone would make Murthy and Nilekani strong candidates for Asia's Businessmen of the Year. But the success of the company they've built goes well beyond the numbers. In an age of crooked bookkeeping and executive excess, Infosys stands out as a model of corporate governance. It may be the only company in the world to publish financial statements in accordance with the accounting standards of eight countries (Australia, Britain, Canada, France, Germany, India, Japan, and the U.S.). Its annual report discloses compensation details for directors and 452 top executives. Murthy and Nilekani disdain even the most modest of perks, scrupulously reimbursing the company for personal calls each month. In a country where private corporations are often run as family fiefdoms, Murthy and Nilekani have kept their children off the payroll.

The two executives have put Infosys--and India--at the vanguard of a quiet but far-reaching revolution: the globalization of white-collar work. Over the past two decades Infosys has pioneered a powerful business model--widely emulated by rivals like Wipro and Satyam--that taps India's large pool of inexpensive, English-speaking engineers to deliver high-quality information technology services. Clients include such blue-chip multinationals as Citigroup, Cisco, Aetna, and Gap. The bottom line: India's revenues from software services, barely $500 million a decade ago, are on course to top $10 billion this year (and still rising fast), accounting for more than a sixth of the country's total exports. Improbably, IT has emerged as the first and only industry in which India is a genuine global player.

Would all this have happened without Murthy and Nilekani? Maybe. They were not the only ones to spot the industry's promise. But the transformation would not have come so far or happened so quickly. The two men's record is all the more remarkable given that India abandoned its official hostility to free markets barely a decade ago and remains deeply suspicious of the implications of global capitalism. A former leftist who is now a passionate advocate of private enterprise, Murthy accepts that he has to participate in this debate. "We cannot break free of pseudo-socialism in this country until Indian business leaders have demonstrated their maturity," he declares. "Selling the concept of decent, compassionate capitalism remains our biggest challenge."

In some ways, Nilekani and Murthy are an unlikely pair. Nilekani, who became CEO last March, is burly and mustachioed, with a broad smile and resonant baritone. He is a no-nonsense problem-solver who can rattle off data from the latest market reports and expound on recent theories of business management or corporate strategy. He takes care of day-to-day operations. Murthy, by contrast, is quiet and cerebral, his brow often furrowed. He grows animated when enumerating corporate principles and "core values" in the manner of a philosopher king. Over the years, Murthy has evolved into a business icon and elder statesman, the perfect ambassador to the corporate decision-makers Infosys must reach to break into the top tier. The two men value each other's complementary strengths and remain in constant contact. Their offices are side by side, opening on to a common reception area. Nilekani says they haggle over business decisions "all the time." It is clear, however, that their differences are much less profound than the ethos they share.

While both are among India's richest tycoons, for example, neither lives that way. Murthy and his wife, Sudha, occupy the same three-bedroom house they have owned for 15 years and do not have a housekeeper. Sudha, who heads Infosys's charitable foundation, which among other things funds programs for lepers and burn victims, does the cooking and cleaning. (Last year, in a fit of wanton indulgence, she bought a wide-screen color TV.) Nilekani, too, lives quietly, avoiding India's glittering society circuit. His wife, Rohini, runs a foundation promoting education and health, and he has been a generous donor to his alma mater, the Indian Institute of Technology in Mumbai. Nilekani has also spent millions of dollars helping Bangalore's beleaguered municipal government cope with the challenges of providing services to a city whose population has mushroomed to eight million from two million in just ten years, thanks largely to the growth of companies like Infosys. He drives his own car and rolls his eyes at the suggestion he could reach more clients via a company jet. "Gimme a break," he snorts. "I fly Indian Airlines like everyone else."

Such sentiments reflect their modest origins. Nilekani's father worked as a manager in a south Indian textile factory. Murthy was one of eight children born to a math teacher of high caste but meager means. Both went to elite universities, a decade apart. They met in 1979, when Murthy hired the younger man to work with him as a programmer at the Mumbai affiliate of an American software concern. Two years later Murthy declared his intention to strike out on his own. He was 34, well educated, and had worked overseas, an experience that helped him shed his last bits of belief in socialism. But he had never run a business before, had no capital and no customers, and lacked access to a computer. Nilekani signed on without a second thought. "I was too young to know any better," he laughs.

The leap has proved a pretty good career move. The company that Murthy, Nilekani, and five other friends launched from the bedroom of Murthy's Mumbai apartment is now India's largest publicly traded software-services exporter. Infosys employs more than 14,000 people and boasts a market capitalization of $9.2 billion. And it has generated wealth aplenty. The 8% of outstanding Infosys shares held by Murthy and members of his family are worth $460 million; the Nilekani family holds a 7% stake. Thanks to stock options, Infosys counts 87 U.S.-dollar millionaires on the payroll, bolstering its reputation as one of India's most attractive employers.

While Infosys is now a mainstay on the Indian corporate landscape, success was hardly assured. To cut overhead, the founders decamped to Bangalore, then a sleepy, inexpensive backwater. Government bureaucrats thwarted them at every turn. "It took us a year to get a phone line," remembers Murthy. "We had to make 15 trips to New Delhi for permission to import a $15,000 computer. We needed approval from an official at the Reserve Bank of India to travel abroad in search of customers."

In its first decade Infosys won just enough contracts to stay afloat. It wasn't until 1991, when a balance-of-payments crisis forced the government to loosen restrictions on overseas investment, travel, and telecommunications, that the company began to take off. Over the next ten years advances in phone and satellite technologies made it cheaper and easier for Indian providers to field complex code-writing tasks for U.S. clients. The scramble to zap the Y2K bug--a task dismissed as low-margin grunt work by many established U.S. firms--enabled Indian companies to broaden their client base. Those relationships served Indian exporters well during the boom in demand for IT services triggered by the dot-com gold rush. In 1999, Infosys became the first Indian company to list on Nasdaq, where its share price zoomed from $37 to a peak in March 2000 of $375. It couldn't last, of course, and Infosys stock tumbled like the rest. The difference is that there was a solid company beneath the froth, which was shaken, not destroyed, by the madness.

Throughout the fat years, Infosys worked hard to make the most of its good fortune, moving beyond simple code-writing to more sophisticated--and lucrative--tasks. Consider its relationship with Nordstrom, the Seattle-based retailer. In 1994, Nordstrom hired Infosys to help untangle the complexities of a new software package purchased for its employee benefits program. It was a small contract, but Nordstrom was so pleased with Infosys that it invited the company's programmers to help out with core business operations. In 1995, Infosys designed a system that would allow buyers to track which products were selling where. Nordstrom officials later calculated that hiring Infosys to do the job cost 40% less than doing it in-house, and it enabled them to get the system up and running in a third less time. These days, Nordstrom is a $20 million-plus client, employing 90 Infosys programmers--15 in Seattle and 75 in Bangalore.

Adidas, the athletic-shoe maker, hired Infosys in 1999 to run an SAP software package throughout its retail operations in Europe. Adidas CIO Gerben Otter says the savings more than made up for the initial communications glitches. Now Infosys helps Adidas with the sort of consulting and strategy work once thought of as too complex for Indian firms. "I wouldn't say they're ready to compete head-to-head with Accenture or EDS yet," says Otter, "but they're moving quickly in that direction. We do more and more advanced projects with them, including a lot of things that are cutting edge."

Today Infosys serves 315 companies, most of them in the U.S. About 60 are FORTUNE 500 firms. Is IBM running scared? Probably not--yet. Infosys is still puny compared with IBM ($80 billion in annual revenues), Accenture ($13 billion), or EDS ($21 billion). Where Infosys boasts three $30 million-plus contracts, the U.S. heavyweights juggle multiple billion-dollar accounts. Nevertheless, there is no question that Indian engineers are making their presence felt.

The five firms that dominate India's software export industry--Infosys, privately held Tata Consultancy Services (TCS), Wipro Technologies, Satyam Computer Services, and HCL Technologies--typically transfer about 70% of the work they do for U.S. and European clients back to India. That yields enormous savings, while still allowing them to pocket healthy margins. Analysts at SG Cowen Securities estimate that Infosys posted a 2002 profit margin of 34%--roughly triple that of IBM and of Accenture, and four times that of EDS.

India has also learned to turn its location to advantage. The fact that Infosys lies halfway around the world from its U.S. clients means that engineers toiling in California or New York can hand off work to colleagues in Bangalore at the end of the business day. When they come back to work the following morning, the job is done. "I don't think there's any question that Indian companies have the edge when it comes information technology outsourcing," says Partha Iyengar, research director for the Gartner Group in Mumbai.

The established players are coming to the same conclusion. Pressed by cost-conscious clients, many big U.S. firms have scrambled to set up shop in India. Accenture, for example, has hired about 600 software engineers in Mumbai, while EDS has announced plans to increase the number of employees at its software development centers to 5,000--at a time when both firms are shedding staff back home. Basu Supratim, a technology analyst with ICICI Securities in Mumbai, says that it will be all but impossible for the established players to compete with Indians on their home turf. Firms like Infosys, he argues, enjoy such tremendous cachet among domestic graduates that foreign operations will have to pay top rupee to lure them away. And the executives hired to manage the graduates will want to be paid U.S. salaries, not Indian ones. Even if the U.S. firms can clear these personnel hurdles, it could take years for them to match the local firms' ability to deliver quickly and reliably from so far away. The danger, Supratim warns, is that clients will press the U.S. providers for Indian prices before they have Indian capabilities, "meaning that profitability just gets crushed."

Nilekani doesn't seem worried about the prospect of U.S. competition on Indian turf; he argues that it will be far easier for Indian challengers to move up the software value-chain than for American players to move the other way. "The IT services company of the future is going to have to combine our business model--the emphasis on value for money--with the ability to provide extremely sophisticated business solutions," he says. "We're approaching this from one side. The incumbents are coming from the other. Our people are getting better and better. Our clients are helping us learn more about their business and giving us bigger, more complicated projects. We've hired a lot of outside consultants, and the stuff we handle has an increasingly consultative feel." And the competition outside India? "They'll have to be completely reengineered to look the way we look. It's not just hiring people, but sorting out all the different processes and technologies you need to put those people to use in an effective way. Those changes are going to be extremely disruptive."

Another area in which Infosys and other Indian firms look likely to make a dent is "business process outsourcing." This is IT-speak for call centers. But the term also encompasses a wide spectrum of more sophisticated back-office functions, such as telemarketing, processing insurance claims, or booking airline reservations. IT geeks tend to disparage back-office work: Margins are lower and employees need fewer technical skills. But the attributes that helped India succeed in software--good skills, cheap labor, and fluent English in a strategic time zone--also make it an attractive back-office location. Demand is booming; all the major Indian software players are piling in. TCS has invested in a 2,000-seat business-processing facility to handle telemarketing and debt collection for Household Credit Services, a U.S. consumer finance company. Wipro recently purchased a firm whose U.S. clients include American Express and Dell Computer. Infosys has launched a business-processing subsidiary called Progeon with $20 million in funding from Citigroup International Finance. The unit has secured a five-year, $30 million contract from GreenPoint, a U.S. mortgage firm. Consultants at McKinsey & Co. estimate that Indian exports of such services could total more than $24 billion by 2008 and generate a million new jobs.

The success of these and similar ventures could take India a long way toward Murthy's original vision of harnessing technology to advance prosperity. "For a country like India, the only way to alleviate poverty is to create jobs, not empty slogans," he says, as he gestures at the hive of activity just outside his office window. At Infosys, Murthy and Nilekani are working out business solutions for that problem every day.

Courtesy: Fortune magazine