Time for Action

To become the global leader, Indian IT industry needs a self-sustaining IT

Innovation Ecosystem that involves both the government and the industry itself

Similar to the word

strategy, innovation is also a much used and abused term. While management gurus

extol innovation centricity, most organizations claim to be either innovating or

wanting to innovate.  However, the reality is that very few organizations

'walk-the-talk'. Majority of the innovation plans tend to either remain as good

intentions or incremental improvements in core operations tend to be branded as

innovation. 

Very few firms

institutionalize innovation as part of their DNA. Innovation generally becomes

part of management lexicon only when a firm's growth curve is flattening and it

is struggling to identify new growth engines. 

Unfortunately the Indian IT

industry is no different. In these prosperous times, it has recently preferred

to play safe and tended to forget its rich history of entrepreneurship and

risk-taking. There are very few examples of true innovation, which have been

pioneered by the large Indian IT firms in the recent past. A glaring example of

this is the Indian BPO industry, which was actually pioneered by new

entrepreneur entrants and not by the established Indian IT firms.  

Before proceeding to the

'why' and 'how' of innovation, here are some key trends of the Indian IT

industry: 

• The top 20 IT firms
  
  including the India subsidiaries of MNC' account for nearly 70 % of the
  
  industry's revenues. The balance 30 % is accounted by the remaining 2,000
  
  plus Indian IT companies. A vast majority of the emerging companies are in
  
  the sub-$10 m revenue tier with very moderate growth rates.  Therefore
  
  while the bigger firms are getting bigger with growth rates in excess of 20
  
  %, the smaller companies are not growing at the same pace. This is a sign of
  
  a maturing industry and indicates that there is a lack of depth and upward
  
  velocity in the Indian IT industry. Where are the next $500 m + Indian IT
  
  firms going to come from?

• As part of innovation,
  
  most leading IT firms in India have recently been announcing new growth
  
  engines including consulting, remote infrastructure services, transaction
  
  BPO. Most of these are commodity service lines launched out of necessity and
  
  there is nothing innovative in them. These service lines will require large
  
  investments and the Indian firms will encounter strongly entrenched
  
  competition which will probably not allow high growth curves beyond the
  
  initial repaid growth from a small base.

• Technology enabled
  
  services constitute a predominant portion of the Indian IT industry's
  
  offerings.  A significant proportion of the work is done on mainstream
  
  technologies, which does not command a price premium and also offers low
  
  entry barriers to competition. Little attempts are being made by the IT
  
  industry to invest in emerging technologies including nanotechnology,
  
  biotechnology, IP or new verticals including healthcare, life sciences etc.

• Unlike other knowledge
  
  intensive industries, the business model of the industry is very similar to
  
  contract manufacturing where revenue growth is almost linearly linked to
  
  increased hiring and building bigger campuses.  Little attempt is being
  
  made to identify 10x factors of growth through sustained R&D. On the
  
  contrary R&D investments are dwindling and this is evident from the lack
  
  of patents filed by the IT industry. Hardly any significant collaboration
  
  exists between the IT industry and the academic or research institutes
  
  either in India or overseas for technology R&D.

This

is in contrast to the Indian pharmaceutical industry where there is a strong

focus on investing in R&D to identify future growth engines. 

• Collaboration is rare in
  
  the Indian IT industry. Most firms prefer to adopt a go-it-alone approach
  
  whether it is for commercial engagements, investing in emerging technologies
  
  or any industry level initiative. This behavior pattern partly stems from
  
  the demand fulfillment history of the industry wherein there was enough for
  
  everybody. Unlike overseas where industry rivals will collaborate when
  
  required and larger firms actively develop collaborative networks of
  
  specialized firms, there are hardly any instances of peer-to-peer
  
  collaboration within the Indian IT industry. No wonder that there is hardly
  
  any global technology initiatives in which Indian IT is leading the way.

• The Indian domestic
  
  market continues to receive step-motherly treatment from most of the larger
  
  firms in the industry. This has potentially serious implications for the
  
  industry's global leadership aspirations, as hardly any nation's firms have
  
  achieved global leadership in an industry without a strong domestic market
  
  in that industry e.g. Japanese and Korean domestic consumer electronics
  
  industry.

The above trends reveal that

while the performance of the Indian IT industry continues to be good in the

short-term, to achieve a long-term sustainable growth, it has to embrace

innovation vigorously.

But innovation is not a

process, which can be prescribed and mandated. It is a culture, which needs to

be created and nurtured before it can become self-sustaining. 

At the heart of every

successful innovation ecosystem is the entrepreneur. Innovation will thrive if

and only if an ecosystem is created which encourages entrepreneurship, rewards

risk taking and does not treat failure as a deadly sin. Entrepreneurs fired by

the zeal to do something different created the Indian IT industry. 

But there is no magic wand,

which can be waved to create an Indian innovation ecosystem a la Israel, Taiwan

or the Silicon Valley. A self-sustaining innovation ecosystem will require all

the stakeholders to come into play simultaneously as the chain is ultimately

only as strong as the weakest link. The key stakeholders in an innovation

ecosystem are (not in order of priority):

• IT industry

• Vertical industries
  
  especially which use IT as an enabler for competitive advantage

• Academia

• Research and development
  
  organizations

• Venture capital and
  
  funding institutions

• Government

The following are some ideas

for creating an innovation ecosystem in India: 

• Vertical industry
  
  involvement: 'What to innovate' and 'Access to market' are the two most
  
  significant challenges for an innovator. The vertical industries are in the
  
  best position to know the current and future technology needs of their
  
  industries and can provide the inputs on 'what to innovate' to the
  
  entrepreneurs. For example, the automobile industry knows that a car of the
  
  future will incorporate a significant amount of software and firmware. A
  
  majority of these technologies need to be experimented with before they can
  
  be commercially deployed. Similar to the automobile component-manufacturing
  
  network actively nurtured by the automobile manufacturers, a network of
  
  software entrepreneurs can be incubated by the automobile industry for
  
  developing automotive software.    

Ultimately the vertical

industries will be the buyers of the entrepreneur's outputs. Thus their

involvement in the innovation lifecycle will ensure that there is a continuous

feedback to the entrepreneurs during development and there are no surprises when

the products hit the market.

• Access to funds: Timely
  
  access to funds is probably the single most important input for an
  
  entrepreneur. Unfortunately the venture capitalists located in India are not
  
  keen on seed capital and ideation stage funding. A majority of the
  
  Government VC funding involves complex procedures and requires the
  
  entrepreneur to provide fixed assets as collateral.

To provide funds at the

ideation stage, a National IT Innovation fund should be created with

participation from the IT industry and Government. To avoid a subsidy culture

and promote rigorous evaluation of proposals, the fund management can be vested

with professional VCs. Unlike the commercial VC funds, this fund can have some

focus areas including ideation stage funding, products focused on Indian market,

key technologies etc. Creating an INR 100 crore National IT Innovation fund

should not be a problem at all as it represents approaximately1 % of the profits

and less than 0.3 % of the revenues of the Top 10 Indian IT firms.

• Management mentoring:
  
  Most entrepreneurs are technologists at heart and have little or no skills
  
  in managing a business. The Indian VC community also often falls short in
  
  providing management mentoring to the entrepreneurs. The IT industry should
  
  'adopt' promising start-ups, which cannot only be provided funds but also be
  
  mentored by senior professionals from the industry. If each of the top 10 IT
  
  industry firms adopts 10 start-ups, it will result in 100 start-up firms
  
  receiving quality management mentoring from professionals in their own
  
  industry. This model can also benefit the IT firms as their professionals
  
  will interact with entrepreneurs and take the entrepreneurial culture back
  
  to their parent firms.

• Skill development: While
  
  management mentoring is a 'quick-fix', a more sustainable way is required to
  
  provide business management skills to the entrepreneur community. IT
  
  industry and Indian management institutes can create business management
  
  courses aimed at entrepreneurs. The industry and government can subsidize
  
  the cost for the start-up entrepreneurs. To increase participation, the
  
  courses can be structured in a way that while they are initially class room
  
  intensive but subsequently enable e-learning.

• Commercializing R&D:
  
  Government research institutions and academic institutions have created a
  
  significant amount of IP assets through basic and applied research. Given
  
  the focus of these institutes it will be far-fetched to assume that they
  
  will be able to commercialize their assets effectively. A more productive
  
  model will be if entrepreneurs are allowed access to the IP assets of these
  
  institutes through a commercial licensing model to develop solutions. This
  
  model will provide a ROI to the government, encourage business and research
  
  collaboration and encourage the entrepreneurs to work on emerging
  
  technologies instead of commodity technologies.

• Incubation centers: A
  
  serious impediment to entrepreneurship is the high-cost of infrastructure
  
  and the non-availability of facilities for specialized testing, product
  
  certification etc. The government should establish or incentivize industry
  
  to establish incubation centers with state-of-the-art computing and
  
  communication infrastructure where entrepreneurs can operate in a
  
  'plug-and-play' mode. These incubation centers can be vertically focused and
  
  established in close proximity to the vertical industry concentrations to
  
  encourage interaction between the entrepreneurs and industry and encourage a
  
  collaboration network among entrepreneurs. For example an incubation center
  
  for automotive technologies can be established in Pune, where there is a
  
  large concentration of automobile and automobile component manufacturers.

Some of the leading

government research and development and academic institutions have world-class

infrastructure, which is often underutilized. Entrepreneurs can be provided

access to these facilities at no-cost or nominal cost basis. A big benefit of

this would be the development of an interaction between R&D and

entrepreneurship.

The UK Government has

adopted this approach by establishing Science and Technology parks close to

major universities like Oxford and Cambridge to encourage collaboration between

academia and entrepreneurs.

• Regulatory environment:
  
  As with most initiatives, the government has a critical role to play in
  
  developing the innovation eco-system. The government is both a large
  
  investor in research and development and a large buyer of IT products and
  
  services. The role has to go beyond providing financial subsides. Some ideas
  
  for creating a innovation conducive regulatory environment are:

  • Aligning the patent
    
    and copyright laws with the international benchmarks and making the
    
    process of patenting less cumbersome.

  • Increasing the
    
    conviction rate and penalties for piracy, patent and copyright
    
    infringements through fast-track dedicated courts.

  • Providing financial
    
    incentives including tax-free income for domestic earnings for a defined
    
    period, interest free loans etc.

  • Improve government
    
    procurement procedures and make it simpler for entrepreneurs to apply
    
    for government contracts

  • Reimburse patenting
    
    and product certification expenses

  • Incentivize
    
    deployment of 'made-in-India' products especially in the government
    
    sector

• Evangelizing
  
  entrepreneurship: The importance of role models cannot be overemphasized to
  
  attract entrepreneurs to the IT industry. Although, the IT industry has
  
  itself grown through efforts of entrepreneurs in the 80's, it has somewhere
  
  along the way neglected to highlight the importance of entrepreneurship in
  
  its success. The industry should evangelize entrepreneurship through awards,
  
  industry events etc. As first time success is rare in the entrepreneurial
  
  world, the key message, which needs to be articulated is that it is
  
  acceptable to fail as long as you try again.  The Phoenix Awards in
  
  Singapore are aimed at the entrepreneurs who may have failed but
  
  successfully launched new ventures subsequently. 

It is clear that while

everyone in India desires and talks about innovation, it is not something, which

will happen by-itself. Dedicated and sustained efforts need to be invested by

all stakeholders to create an IT innovation ecosystem where entrepreneurship is

encouraged and nurtured. Due to its rich management and financial resources, the

Indian IT industry has to take a leadership role as it probably has the greatest

stake in driving innovation for achieving long-term health of the industry. 

-Rajdeep Sahrawat,

Vice President, NASSCOM. Views are personal 



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