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 

mail@dqindia.com