How Great Entrepreneurs Lure Their Competitors' Sheep Away

About 2,000 years before Clayton Christensen coined "disruption" or Renee Mauborgne the "blue ocean," Chinese strategists passed down a fable about a peasant who stole a sheep. The fable defines a strategic pattern that many have labeled since: a pattern at the heart of history’s most significant companies, social movements, and civilizations. Richard Branson gets it. Mohandas Gandhi got it. And if you understand the pattern, you too can just walk away with the prize, while your competition looks on unable to react.

Here is the pattern:

1. The peasant (you) sees an opportunity. The sheep is roaming free for the taking.

2. But the shepherd (your competition) wants to stop you from taking it.

3. You identify a commitment that will prevent the shepherd (your competition) from stopping you.

4. You take action; you steal the sheep (the new market opportunity).

5. The shepherd stands frozen before an impossible choice. If he chases after you he leaves his entire flock unprotected, so he must let you go.

Consider Phaneesh Murthy, founder and CEO of iGATE (NASDAQ: IGTE), one of the fastest-growing Indian IT firms, headquartered in Silicon Valley where Murthy is based. iGATE has grown to $1 billion in revenue from $300 million in under five years, and its stock price has tripled in that time. It is consistently ranked as one of the best Indian companies to work for.

Murthy learned the "sheep stealing" pattern decades ago as an early leader at Infosys, one of the two Indian firms that transformed the country into an IT outsourcing powerhouse. The Infosys story is inspiring. I covered it in detail in my third book, The Way of Innovation.

In Murthy’s New York hotel room overlooking buzzing mid-afternoon streets, he summarized the pattern succinctly.

"You take what a company sees as an asset and turn it into a liability," he says. "For example, when we launched Infosys, the big technology consulting firms saw their armies of onsite consultants as an asset. Outsourcing turned that asset into a liability."

The result is now history; Infosys transformed how not just software is built but entire industries as a result.

Murthy left Infosys in part to apply the pattern again. The asset he sees his former employer and their peers like Wipro now attached to is having armies of developers swarming their campuses. I’ve visited both Wipro’s and Infosys’ campuses, with bike lanes, basketball courts, fountains, and even luxury dorms.

So Murthy is seeking to turn this perceived asset—the size of their army of developers—into a liability. The logic is radical, so let me lay it down piece by piece.

First, iGATE stopped charging by the hour, as nearly every other IT firm does, because when you charge by the hour you generate, according to Murthy, "diametrically opposed objectives...the customer always wants to reduce and company wants to increase [the hours a job takes]." (One day a law firm will figure out how to do this!)

Then you charge for performance. For example, iGATE agreed to build a loan-processing system for a bank, at its own expense, and charge the bank $1,000 per loan processed (a huge discount from the bank’s $2,500 average cost at the time). With this structure iGATE aligns its interests with its clients.

They learn the customer’s business and make discoveries and improvements that no traditional IT company could convince their clients to pay for. For example, at the time making consumer loan decisions was done manually by expensive, highly trained underwriters. iGATE believed they could replace those underwriters with a set of rules. Their client was skeptical, but since iGATE was covering the development cost, the client had nothing to lose. iGATE gave it a try and it worked. 

Accepted dogma held that a lender’s pull-through rate—the percentage of customers that accept the loan after it is approved—depended on the loan specifications (rate, term, etc.). iGATE had a different hypothesis: None of that really mattered; all that mattered was how quickly the lender turned around the approval. Again, since the client had nothing to lose, they gave iGATE the go-ahead to prove their hypothesis. iGATE invested in reducing the turnaround time to 17 days from over 40 days on average. As a result the client’s pull-through rate jumped to 75% from 42%. 

Now, Infosys and Wipro could certainly copy this pay-for-results model. But doing so is disruptive because the strategy conflicts with their commitments. Their organizations, incentive systems, and mindsets are geared toward selling hours and deploying people. The iGATE model would force the utilization and employee metrics they are so committed to growing to reverse direction. So if history plays out as it has for 2,000 years, the competition will think and plan and test and measure, potentially for years, protecting their flock while iGATE walks away with the sheep.

I know I should end the story here, but I can’t resist a short preview. Three hours before meeting with Murthy, I was standing 50 blocks south in a boardroom presenting to the CEO and top team of one of the world’s largest book publishers. I laid out the strategy of a fascinating disruptor I had met early in the week that is applying the same strategic principle to disrupt the children’s learning market. A million downloads in their first two weeks indicate it is working. Stay tuned.

To apply this pattern ask:

1. What is my competition committed to?

2. What does that tell me they will not do or defend?

3. What opportunity does that present to me?

[Image: Flickr user h.koppdelaney]

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2 Comments

  • jorjun

    When it comes to low cost labour, the case for destroying jobs is always clear. Dressing this process up as innovative strikes me as disingenuous.

  • Broderick Boyd

    So just to clarify, we need to identify where our competitors are committed already (things, clients, business structures) that they can't step away from even if they wanted to, and then go after the clients/business models that they aren't committed to, and then for the most part, we'll be able to more easily get away with the unguarded sheep/clientele? I like it. How can we use this to protect the sheep in our own company?