NASSCOM BCG Innovation Report 2007 Executive Summary
NASSCOM BCG Innovation Report 2007 Executive Summary
NASSCOM BCG Innovation Report 2007 Executive Summary
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
<strong>NASSCOM</strong>-<strong>BCG</strong><br />
<strong>Innovation</strong> <strong>Report</strong> <strong>2007</strong><br />
Unleashing the Innovative Power<br />
of Indian IT-ITES Industry<br />
<strong>Executive</strong> <strong>Summary</strong>
For the complete report, please contact publications@nasscom.in
<strong>NASSCOM</strong>-<strong>BCG</strong><br />
<strong>Innovation</strong> <strong>Report</strong> <strong>2007</strong><br />
Unleashing the Innovative Power<br />
of Indian IT-ITES Industry<br />
<strong>Executive</strong> <strong>Summary</strong><br />
National Association of Software and Service Companies<br />
International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi-110 021, India<br />
Phone: 91-11-23010199, Fax: 91-11-23015452, E-mail: research@nasscom.in<br />
Website: www.nasscom.in
Copyright ©<strong>2007</strong><br />
National Association of Software and Service Companies<br />
International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi -110 021 India<br />
Phone: 91 11 2301 0199 Fax: 91 11 2301 5452 E-mail: research@nasscom.in<br />
The Boston Consulting Group (India) Private Limited<br />
14th Floor, Nariman Bhavan, 227, Nariman Point, Mumbai 400 021, India Tel: 91 22 6749<br />
7000 Fax: 91 22 6749 7001<br />
The Boston Consulting Group (India) Private Limited<br />
3rd Floor, Tower A, DLF Cybercity, Gurgaon 122 002, Haryana, India Tel: 91 124 459 7000<br />
Fax: 91 124 459 7001<br />
First Print: July <strong>2007</strong><br />
Published by<br />
<strong>NASSCOM</strong>, New Delhi<br />
Designed & Produced by<br />
Creative Inc.<br />
Phone: 91 11 4163 4469<br />
Printed at<br />
P.S. Press Services<br />
Disclaimer<br />
The information contained herein has been obtained from sources believed to be reliable.<br />
The information contained in sections of the report reflects data that was derived from both<br />
public and confidential information collected and received by <strong>BCG</strong> during the conduct of a<br />
joint study by <strong>NASSCOM</strong> and <strong>BCG</strong>. Readers should note that <strong>NASSCOM</strong> and <strong>BCG</strong> have not<br />
independently verified all of the data and assumptions used in these analyses. Each reader<br />
of this report should conduct their own independent evaluation of the information provided<br />
herein. <strong>NASSCOM</strong> and <strong>BCG</strong> shall have no liability for errors, omissions or inadequacies in<br />
the information contained herein or for interpretations thereof.<br />
The material in this publication is copyrighted. No part of this can be reproduced either on<br />
paper or electronic media without permission in writing from <strong>NASSCOM</strong> and <strong>BCG</strong>. Request<br />
for permission to reproduce any part of the report may be sent to <strong>NASSCOM</strong> and <strong>BCG</strong>.<br />
4
Foreword<br />
After its remarkable growth in the past two decades, the Indian IT-ITES industry is now a<br />
credible player on the world stage, and many Indian fi rms are seen as potent challengers<br />
to global incumbents. The primary engine of the Indian industry’s growth has been India’s<br />
low-cost talent pool. The industry has taken the initiative in leveraging this cost advantage to<br />
fuel growth. But global incumbents have also recognised India’s advantage and have become<br />
adept at tapping the local talent pool. To continue their growth and to attain newer heights,<br />
Indian fi rms need to recognise the importance of ‘<strong>Innovation</strong>’ for maintaining their competitive<br />
edge and fuelling further growth.<br />
The term ‘<strong>Innovation</strong>’ refers to changes to products, services, processes or business models.<br />
In the organisational context, innovation may be linked to performance and growth through<br />
improvements in effi ciency, productivity, quality, competitive positioning, market share, etc.<br />
Future winners will be decided based on their capability to innovate and translate their<br />
innovations into fi nancial results.<br />
Today, India promises more opportunities for innovative technology fi rms, both Indian and<br />
international, than any other country perhaps. On one hand, there is a huge unfulfilled market in<br />
India’s billion plus population for many products and services, including healthcare, education,<br />
fi nancial services, retail, e-governance, etc. These untapped markets present signifi cant<br />
opportunities for low-cost and innovative IT solutions that may enable lean, cost-effective<br />
and value-creating business models. IT and telecom technologies will be keys to provide the<br />
breakthroughs as some pioneering ventures have shown. At the same time, India also has<br />
technologically competent domestic Industries and fi rms that can be crucibles for innovations<br />
applicable even in advanced export markets. The Indian IT-ITES industry needs to tap into the<br />
enormous local talent both within its boundaries and in other Indian Industries to capitalise on<br />
these opportunities. Firms that have the ambition to grab these opportunities by developing<br />
innovative business ideas and tune up their cultures and systems for collaborative innovations<br />
will reap huge benefi ts. Thus, the ability to innovate effectively will be one of the critical levers<br />
of competitiveness and sustained growth.<br />
In this context, the <strong>NASSCOM</strong>-<strong>BCG</strong> <strong>Innovation</strong> <strong>Report</strong> <strong>2007</strong> addresses three aspects of the<br />
innovation agenda – the factors that form a powerful imperative for innovation; the fi rm level<br />
agenda and approach for fi rms to spur innovation; and fi nally, recommendations to expand<br />
and rev up the innovation ecosystem in India.<br />
5
We hope that this report will stimulate useful discussions and, more importantly, actions on<br />
how fi rms as well as, ecosystem participants like the government, industry bodies, venture<br />
capital organisations and academia can accelerate the ability of Indian fi rms to innovate new<br />
products, services and solutions that will fuel their own growth and also meet the needs of<br />
society in India and elsewhere.<br />
Kiran Karnik<br />
President, <strong>NASSCOM</strong><br />
Arun Maira<br />
Chairman, <strong>BCG</strong> India<br />
6
<strong>Executive</strong> <strong>Summary</strong><br />
In today’s intensely dynamic and competitive business environment, success is no longer simply<br />
about providing quality services and solutions at an affordable price. Instead, it is increasingly<br />
about creating new products, solutions and services that provide a radically better experience<br />
for the consumer. Firms which innovate will be the ones that survive and grow.<br />
<strong>Innovation</strong> is not only about technology but is also about understanding untapped user needs<br />
that require to be addressed in an ingenious and path-breaking manner. <strong>Innovation</strong> must occur<br />
at every stage of a product or solution development and release cycle, through to pricing,<br />
support and value addition to the consumer. Thus, managing innovation is fast becoming the<br />
number one priority in a global business environment where technology itself is increasingly<br />
becoming standardised, commoditised and ubiquitous. The overall framework for developing<br />
an agenda for innovation in the Indian IT-ITES Industry is given in Exhibit 1.<br />
Overall framework for developing an agenda for innovation in Indian IT-ITES industry<br />
Exhibit 1<br />
7
IMPERATIVE FOR INNOVATION<br />
With each success comes greater expectation. This is the challenge now facing many<br />
segments of industry globally, including India’s successful IT-ITES industry. Delivering ‘more’<br />
or ‘better’ can be done by improving effi ciency, but beyond a point the value curve begins<br />
to flatten and it becomes increasingly difficult to keep providing ever increasing<br />
value-for-money. The only way to do so is through innovation: not just executing the same<br />
series of steps more effi ciently, but by doing new things in different ways to achieve new levels<br />
of output.<br />
Why <strong>Innovation</strong><br />
The Indian IT-ITES industry realises the need for innovation and the benefi ts that it can offer. In<br />
our discussions with fi rms, we clearly heard an articulation of the IT-ITES industry’s aspiration<br />
to signifi cantly increase innovation, developing path-breaking services/products and delivery<br />
mechanisms, etc. that will be the envy of the world. The industry wants India to be acknowledged<br />
as a world leader in IT-based innovations and not just a world-leader in low-cost talent pools<br />
and commodity services.<br />
The Indian IT-ITES industry does not intend to confi ne innovation to purely commercial gains.<br />
The industry aspires for innovation to have a clear and tangible impact on improving the<br />
well-being of Indian society as a whole. Industry leaders strongly feel that innovative usage<br />
of IT can help improve the reach and quality of our healthcare services, reduce the extent of<br />
unemployment and underemployment as also take connectivity to a billion people.<br />
The Indian IT-ITES industry has shown a tremendous growth with a CAGR of above 25%<br />
over the previous fi ve years. This impressive growth has been refl ected in both the exports<br />
of the software and services sector as well as the surge in the domestic market. India has<br />
led the fi rst phase of growth of the IT phenomenon due to some inherent advantages that it<br />
offers: abundance of talent, superior delivery quality, cost advantage and favourable policy<br />
interventions by the government towards IT infrastructure along with other growth-oriented<br />
policy moves.<br />
However, the traditionally successful Indian IT-ITES business model is increasingly coming<br />
under strain and competitive advantages are weakening on several fronts such as:<br />
a. Rising factor costs in India are eroding the traditional competitive advantages.<br />
b. Geographical and cultural affi nity, growing concerns in the key western markets over<br />
outsourcing to India, similar time zones and active local government support are resulting<br />
in Latin America, Eastern Europe and China posing a serious threat to India.<br />
8
c. Global vendors are building sizeable delivery capability in India – The top three global<br />
IT-ITES fi rms (Accenture, HP Services and IBM Global Services) have been ramping up<br />
their offshore delivery centres in India to offer the same ‘India Advantage’ as the Indian<br />
IT-ITES fi rms.<br />
d. Productivity improvement by following the current business model in the Indian IT-ITES<br />
industry is unlikely to keep pace with increasing costs due to wage infl ation. The rupee<br />
appreciation against major trading currencies is going to further add to this problem.<br />
These factors combined are going to put a signifi cant pressure on the current healthy<br />
margins of the Indian fi rms.<br />
e. The structure of the Indian IT-ITES industry is currently skewed towards a small number<br />
of large fi rms which dominate the industry. A vast majority of the fi rms in the middle and<br />
small segments are caught in the middle and are struggling to address the twin challenges<br />
of top-line and bottom-line growth<br />
f. Manpower supply constraints will prohibit a linear expansion of the current model beyond<br />
a certain threshold. If the current Tier 1 players grow at an average of their 2005-06<br />
CAGR of ~40%, the Tier 1 players alone would require 1.8 million employees by 2012.<br />
Besides a supply constraint, this high rate of growth will put tremendous strain on a fi rm’s<br />
governance and management capabilities.<br />
g. A strong and vibrant domestic IT market is critical to anchor the growth for the Indian<br />
IT-ITES industry beyond the short-term horizon. Inspite of the recent surge in the domestic<br />
IT market several challenges remain including high tariffs and import duties, poor rate of<br />
commercialisation of domestic R&D, lack of IT adoption in key verticals sectors including<br />
agriculture, healthcare, education and in the SMB segment.<br />
Current Status of <strong>Innovation</strong><br />
The Indian IT-ITES industry has evolved through three distinct phases. Phase 1 was typically<br />
an export-led growth driven by factor arbitrage for relatively commoditised services like<br />
application development and management. The Indian IT-ITES firms invested little in R&D and<br />
consequently created little intellectual property assets. During phase 2, the Indian IT-ITES firms<br />
gained domain experience and developed a reputation for superior delivery and hence were<br />
able to capture value in the market. During phase 3 (current phase), the fi rms are moving into<br />
higher value services like IT consulting, systems integration, engineering services, contract<br />
R&D, etc. End to end outsourcing services with multiple year contracts have also started<br />
replacing the erstwhile wage arbitrage driven transaction services.<br />
9
Our research shows that developing economies and their leading fi rms typically move through<br />
three phases for sustainable growth and the journey taken by the Indian IT-ITES industry so<br />
far is in line with this evolution cycle:<br />
• Driving growth through exports of basic services<br />
• Moving up the value chain in terms of breadth of offerings<br />
• Getting serious about innovation by investing in innovation, institutionalising the<br />
innovation gains in terms of domain capabilities and IP pools, and fi nally profi ting from<br />
the innovations.<br />
In case the transition from the second phase to the third phase is characterised by large sales<br />
but insuffi cient focus on innovation, it can leave fi rms / economies extremely vulnerable. This<br />
vulnerability depends on the extent of the fi rm’s ‘sales at risk’ and the extent to which their IP is<br />
currently protected. The traditionalists view IP strength purely from the lens of ‘patenting’, but<br />
it can also be represented by the depth of domain capabilities and acceptability of solutions,<br />
a view more pertinent while discussing the Indian IT-ITES industry.<br />
The most vulnerable position to be in, as a fi rm or as an economy, is to have strong current<br />
sales that are not protected for the future. Over the years, while sales have grown through a<br />
strong export performance, IP creation and domain capabilities have not shown similar growth<br />
curves for the Indian IT-ITES industry. Having established the benchmarks, the current success<br />
of the industry and its leadership status in select areas has made it an attractive target for<br />
attack by ‘imitators’ who promise to do it ‘cheaper and better’.<br />
The industry is at an infl ection point and needs to differentiate itself by creating new sources of<br />
competitive advantage through sustained innovation. The argument for the infl ection point is<br />
further supported by recent developments in the industry’s business environment which is in the<br />
midst of a paradigm transformation. Commoditisation of IT services, advent of new disruptive<br />
technologies, e.g., Services Oriented Architecture (SOA) and the blurring of the distinction<br />
between hardware, software and services indicate the need for IT-ITES fi rms to develop<br />
more market-facing capabilities and domain expertise and move to a more consumer-centric<br />
business model. Customers are becoming more knowledgeable and demanding. They want<br />
to move from pure factor arbitrage predicated vendor services to partnerships which deliver<br />
business value and productivity gains through innovation.<br />
Benefits of <strong>Innovation</strong><br />
There is significant revenue potential to be recognised through innovation leverage. Our analysis<br />
shows that the Indian IT-ITES industry can tap additional revenue streams worth ~50 USD<br />
Billion by the year 2012 through innovation. This would come about through an accelerated<br />
growth trajectory and access to hitherto untapped or under-penetrated market segments.<br />
10
In addition to the new revenue pools, strengthened innovation capabilities would also improve<br />
the market perception of the fi rms in terms of key valuation multiples. A recent <strong>BCG</strong> study of<br />
fi rms across the globe has shown that recognised innovators signifi cantly outperform their<br />
peers in terms of total shareholder returns. This trend was observed both globally and across<br />
different geographical regions.<br />
Therefore the Indian IT-ITES industry needs to make aggressive investments in innovation to<br />
fi rstly, accelerate its growth trajectory and secondly, to develop new sources of competitive<br />
advantage to maintain its leadership status.<br />
FIRM LEVEL INNOVATION<br />
Firms are the atomic unit of market competition. They are also the entities that bring products<br />
and services to the end customer. As a result, innovation ultimately has to occur in the context<br />
of the fi rm and the industry it targets, irrespective of whether it is a start-up or a large fi rm.<br />
Current footprint of innovation<br />
The need for innovation has been expressed often enough in the Indian IT-ITES industry.<br />
However, in the current context, several ingrained mental models are preventing fi rms from<br />
innovating more. Some of these include:<br />
• Clear trade-off between investing in innovation and short-term profi t where the latter<br />
always wins<br />
• Current level of innovation is enough to sustain my business<br />
• Collaboration is not really needed in services space to innovate – fi rms are better off on<br />
their own<br />
• Why should I share value of innovation with others by collaborating<br />
• Shareholders don’t value innovation<br />
• If I put the right processes in place, innovation will take care of itself<br />
• My employees are intelligent and motivated – innovation will take care of itself<br />
These perceptions have a strong impact on the decision making and behaviour of a fi rm’s<br />
leadership and, thereby, tend to limit the fi rm’s innovation agenda.<br />
The innovation portfolio of a firm can be measured on two dimensions – the extent of innovation<br />
and the area of innovation. The fi rst dimension, i.e., the extent of innovation is defi ned by the<br />
extent to which the competitive boundaries are pushed and what sort of relative competitive<br />
advantage is gained by the fi rm through innovation. Three distinct types of innovations affect a<br />
11
fi rm’s competitive advantage. Sustaining innovations help fi rms maintain their current position<br />
in the market. Enhancing innovations, on the other hand, help a fi rm gain a clear advantage<br />
over its peers within the ambit of market boundaries. Finally, breakthrough innovations can help<br />
a fi rm to redefi ne the market boundaries and create unique ‘blue ocean’ strategic spaces for<br />
itself. On the second dimension, i.e., area of innovation, fi rms can make three broad choices –<br />
the inputs to the fi rm, the business processes of the fi rm and the market-facing areas like<br />
delivery and business models, products and services.<br />
Current footprint for the Indian IT-ITES industry leaves scope for improvement<br />
Exhibit 2<br />
The current innovation footprint of the Indian IT-ITES industry as outlined in Exhibit 2 above, is<br />
heavily skewed away from market-facing and breakthrough innovation efforts and is focussed<br />
predominantly on sustaining, and some enhancing, innovations on inputs and business processes.<br />
While sustaining innovations are important, only a signifi cant shift towards more market-facing<br />
breakthrough and enhancing innovations will provide the necessary revenue impetus in the medium to<br />
long-term. There are several areas of innovation which can address this need, for instance:<br />
• Penetrating new customer segments in intellectual asset-intensive service lines like<br />
engineering and R&D services<br />
• Creating IP in emerging technology areas<br />
12
• Developing and codifying specific domain expertise to target consulting<br />
and SI services<br />
• Technical innovations to own standards for next generation of technologies<br />
Pathways to innovation<br />
As market pressures increase, Indian IT-ITES fi rms will have to change their innovation<br />
portfolio to include more market-facing innovations. Already, Tier 1 players in the Indian<br />
IT-ITES industry are facing significant pressure on margins and differentiation.<br />
At the same time Tier 2 and Tier 3 players are lagging behind the top tier fi rms in both top-line<br />
and bottom-line growth.<br />
These challenges can be mitigated by making a conscious shift in a fi rm’s innovation<br />
portfolio. The target or aspirational innovation portfolio to address these challenges should<br />
be overweight on the market-facing and breakthrough aspects. The gap between the current<br />
innovation portfolio and the target portfolio will point to the extent of change a fi rm will have<br />
to embrace. Assessing the capabilities and success-criteria of the current versus the target<br />
portfolio will shape the actions that fi rms will need to take to bridge the gap successfully. This<br />
change in portfolio will require a well thought out transformation roadmap, i.e., a pathway<br />
to innovation.<br />
The pathway to innovation for any fi rm can be defi ned in terms of two broad dimensions: the<br />
motivation for innovation and discipline for innovation. Discipline is achieved through policies<br />
and practices and also importantly comes through a push from the top. Motivation is achieved<br />
through working together and changing attitudes and comes more from a pull across the<br />
organisation. Actions that firms take for encouraging innovation will have an impact on the<br />
dimensions of both motivation and discipline of the fi rm for innovation.<br />
In the journey towards an optimal innovation portfolio, firms will have to go through three steps:<br />
• Creating-the-Foundation: This includes putting in place a defined process to aid<br />
in innovation management and also enhancing motivation through specific and<br />
directed incentives<br />
• Walking-the-Talk: This includes designing the appropriate organisation structure with<br />
permeable boundaries that is aligned for enabling innovation. It also requires investing<br />
visibly in emphasising the culture of innovation<br />
• Working-with-other-Stakeholders: Creating the right portfolio of innovations needs<br />
signifi cant collaboration with other ecosystem participants and requires well-defi ned<br />
collaboration models as well as shared aspirations<br />
13
Each of these steps that has several sub-steps and options that can be taken by fi rms to<br />
achieve their desired objective as illustrated in Exhibit 3 below.<br />
Three step process required for firms to move along the innovation pathway<br />
Exhibit 3<br />
The Indian IT-ITES fi rms have a central role in the development of the Indian innovation<br />
ecosystem. As the key delivery mechanism for commercialising innovations, and as probably<br />
biggest benefi ciaries of innovation, they need to take the lead in driving innovation culture and<br />
discipline within their own boundaries and then also spurring other ecosystem constituents to<br />
collaborate and participate in this exciting journey.<br />
BUILDING INDIA’S INNOVATION ECOSYSTEM<br />
<strong>Innovation</strong> does not thrive in isolation or silos. An enabling environment at the national/regional/<br />
industry level is required to foster innovation at the firm level. A typical innovation ecosystem<br />
provides linkages among the various innovation stakeholders including firms and entrepreneurs,<br />
investors, government and governmental bodies, industry bodies and educational and research<br />
institutions. These linkages encourage collaboration for idea generation and transformation of<br />
ideas into a business outcome. The degree of participation of the different constituents and the<br />
nature and strength of their interactions gives the ecosystem its vibrancy and its raison-d’etre.<br />
14
Our study of international ecosystems has revealed that the ecosystem constituents need<br />
to successfully play myriad roles to produce a vibrant ecosystem. These roles infl uence the<br />
formation of strong linkages between the constituents. Poor performance on any of these roles<br />
by the constituents often renders the ecosystem sterile.<br />
The powerful role of an innovation ecosystem has adequately been demonstrated in the growth<br />
of global technology innovation ecosystems like Silicon Valley, Taiwan, Israel, Eureka, etc.<br />
Benchmarking the Indian innovation ecosystem with international ecosystems<br />
In order to benchmark the Indian innovation ecosystem, eight international ecosystems were<br />
studied during this project and mapped onto a continuum. On one end of the continuum are<br />
ecosystems which are dominated by one or few stakeholders, and are thus overly dependant<br />
on the dominating stakeholder, e.g., the principal stakeholder in the Cuba bio-tech ecosystem is<br />
the Cuban government. The other end of the continuum represents a highly collaborative model<br />
in which all constituents play their roles effectively e.g. Silicon Valley, Israel, Eureka, etc.<br />
Relative to international ecosystems, Indian ecosystem is weak on multiple dimensions<br />
Exhibit 4<br />
It is important to also note that ecosystems can and do travel along this continuum as shown<br />
in Exhibit 4 above. For example, both Israel and Taiwan started off as ecosystems with strong<br />
15
governmental involvement and correspondingly weaker involvement of other constituents but<br />
have transitioned into a more mature ecosystem as other constituents have become more<br />
active and infl uence of the government has relatively reduced to a more equal participation.<br />
A relative comparison of the ecosystems based on the impact of constituents highlights that<br />
the Indian ecosystem is in a relatively nascent stage. The system is weakened by the twin<br />
effects of insuffi cient participation (in terms of roles being played) by different constituents and<br />
also weak or negligible interactions between them.<br />
While there is ample evidence to show that a vibrant collaborative ecosystem can generate<br />
multi-billion dollar opportunities, these structural weakness are preventing India from becoming<br />
a global hub for breakthrough innovations in the IT-ITES industry.<br />
Eureka is a loosely coupled inter-governmental initiative in Europe which has 35 member<br />
states and EU countries as full-time members. It has 11,000 partners from industry including<br />
40% SMEs, research centres, universities and national administrations. It currently has<br />
600 innovative projects underway with budget of Euro 1.8 Billion and since inception,<br />
Euro 24 Billion have been raised and 1,800 projects have been completed – amongst them<br />
were airline e-Tickets and digital radios. Eureka focuses on providing an ecosystem that<br />
enables European fi rms, research centres and universities to collaborate and develop new<br />
technologies. It promotes ‘close-to-market’ innovations by providing a support network<br />
which provides branding and access to various resources and reduces cost, risk and time<br />
to market for participants through collaborative efforts.<br />
Recommendations for developing the Indian innovation ecosystem<br />
The Indian innovation ecosystem faces several challenges with respect to the performance of<br />
various constituents as well as the interaction sets between them. Some of the key ecosystem<br />
challenges are:<br />
• Insuffi cient mentoring and networking support for start-ups and entrepreneurs<br />
• Lack of entrepreneurs focussed on IP development in emerging technologies<br />
• Lack of knowledge sharing between IT-ITES fi rms and key user industries<br />
• Severe lack of funding at the seed / start-up stage<br />
• No platforms for all stakeholders to interact<br />
• No market-place for innovation trading in India<br />
• Tenuous partnership between industry and academia<br />
• Lack of meaningful collaborations between industry and research institutes<br />
16
Solving these problems will involve implementing some already known measures but, more<br />
importantly, it will also call for some completely fresh and bold initiatives.<br />
1. <strong>NASSCOM</strong> should scale existing innovation initiatives<br />
To ensure that innovation stays high on the agenda of the Indian IT-ITES fi rms, existing<br />
<strong>NASSCOM</strong> innovation initiatives need to be scaled up by extending their reach and<br />
institutionalising them.<br />
The current <strong>NASSCOM</strong> innovation awards need to move beyond generic recognition of specific<br />
achievements by fi rms towards shaping the innovation agenda of the industry. A greater<br />
proportion of recognition should be given for innovations which are breakthrough in nature<br />
rather than incremental innovations. Additionally, the award winners should be supported in<br />
terms of fully leveraging their innovations in terms of press coverage, global marketing support,<br />
networking, funding support, etc.<br />
<strong>NASSCOM</strong> should also continually track the innovation trajectory of the Indian IT-ITES industry.<br />
The innovation survey, done for the fi rst time this year, should be converted into a regular<br />
initiative to capture the performance and perspectives of Indian IT-ITES companies on different<br />
aspects of innovation.<br />
2. <strong>NASSCOM</strong> should promote an ‘Indi <strong>Innovation</strong> Framework’<br />
The ‘Indi <strong>Innovation</strong> Framework’ will adopt a three-pronged approach:<br />
• Indi <strong>Innovation</strong> Certification Programme<br />
The ‘Indi <strong>Innovation</strong>’ Certifi cation Programme can holistically address an entrepreneur’s<br />
need of branding, mentoring and networking support thereby increasing the probability of<br />
entrepreneur’s success. To ensure that the ‘Indi <strong>Innovation</strong>’ brand symbolises high quality<br />
innovations, ‘Indi <strong>Innovation</strong>’ certifi cation of an entrepreneur’s idea will require evaluation<br />
against a set of rigorous criteria.<br />
This brand will provide the certifi ed entrepreneurs with an advantage while competing in the<br />
market place for resources and provide access to a support network especially created under<br />
the ‘Indi <strong>Innovation</strong> Framework’.<br />
• India <strong>Innovation</strong> Fund<br />
The Indian innovation ecosystem faces severe lack of seed / angel stage funding, a stage<br />
where the risk is the highest. Three kinds of risks typically exist during early stage funding:<br />
• Idea risk – what if the idea and technology are wrong<br />
17
• Execution risk – what if the execution is faulty<br />
• Market risk – what if the market doesn’t accept the idea<br />
Investors seem to be uncertain about which risks to take and the consequent risk aversion<br />
has forced majority of venture capitalists to focus on funding only execution risk leading to a<br />
major gap for seed / angel stage funding.<br />
The India <strong>Innovation</strong> Fund promoted by <strong>NASSCOM</strong> will focus on providing risk capital at the<br />
angel or seed stage. Some key guiding principles for the India <strong>Innovation</strong> Fund are:<br />
• Promote innovation in emerging technologies<br />
• Develop sustainable linkages between entrepreneurs, centres of research excellence,<br />
and established fi rms<br />
• Foster technology seeding and exchange of information globally<br />
• Promote and nurture IP driven entrepreneurship<br />
• Provide priority to commercialisation of domestic R&D<br />
The fund will be created through a public private partnership between the government and the<br />
private sector. This approach will allow the government to play a passive role of being a ‘limited<br />
partner’ (supplier of capital) while the investment decisions are made by a set of professional<br />
fund managers. The government’s funding support will ensure that investments at the riskiest<br />
stage of business can be funded adequately by low cost domestic capital. Additionally, the fund<br />
will also attract private fi rms to invest as it gives them access to a unique PPP fund managed<br />
by professional managers.<br />
By leveraging the ‘Indi <strong>Innovation</strong> Framework’ this fund will be able to eliminate several<br />
information asymmetries that exist between the entrepreneur and the venture capital fi rms at<br />
the seed stage of funding especially in high risk areas.<br />
• Thematic <strong>Innovation</strong> Platforms<br />
<strong>NASSCOM</strong> could bring together several ecosystem constituents to launch theme-based<br />
fundamental and applied innovation platforms to provide thought leadership in themes which<br />
are relevant to the Indian IT-ITES industry.<br />
Fundamental innovation platforms will focus basic science themes while applied innovation platforms<br />
will focus on themes that apply these scientific innovations to specific problem domains.<br />
Thematic innovation platforms will serve as powerful open networks for ideas and mechanisms<br />
for producing collaborative intellectual property. Many of these platforms would fi nd lot of<br />
synergies with innovation clusters of industry, academia and research institutes by allowing<br />
entrepreneurs to not only exchange ideas, but also transact IP assets. These platforms can<br />
18
e made operational through a mix of websites, blogs, publications, special interest groups<br />
and regular events including seminars.<br />
Several international examples exist of portals engaged in similar activities. Some initiatives that<br />
have already gained significant traction are Innocentive, NineSigma, Yourencore, and Yet2.com.<br />
Success for the ‘Indi <strong>Innovation</strong> Framework’ requires the simultaneous and active participation of<br />
several stakeholders like venture capitalists, entrepreneur mentoring organisations, governmental<br />
bodies, large IT firms, industry bodies, educational and research institutions. This is an important<br />
because unless the incentives and interests for all participants are aligned, their wholehearted<br />
participation might be suspect thereby endangering the success of this initiative.<br />
3. Government should synergise its various innovation-related initiatives<br />
There are several innovation-oriented initiatives being operated by the government which<br />
provide funding and institutional support for research and researchers. There is often a lack<br />
of co-ordination between these initiatives causing overlaps and effort duplication and leading<br />
to a poor ROI for government innovation investments. A potential serious fallout of this is that<br />
‘innovation’ as a national agenda loses sheen and focus.<br />
There are a number of mechanisms which the government can adopt to synergise its disparate<br />
innovation initiatives.<br />
• Create a National <strong>Innovation</strong> Policy which identifies the strategic focus areas, operational<br />
guidelines, capacity building roadmap, key institutions, funding mechanisms, etc. Specific<br />
innovation-related programmes can be launched under the aegis of the National <strong>Innovation</strong><br />
Policy. As the Science Policy of India metamorphosed into Science & Technology<br />
Policy, perhaps a time has come for it to metamorphose into Science, Technology &<br />
<strong>Innovation</strong> Policy<br />
• Launch national mission mode projects in key technology areas like automotive,<br />
aerospace, defense, space, healthcare, etc. Adopting a mission approach will obtain<br />
better synergies through co-ordination of different initiatives and collaboration among<br />
industry and research institutions.<br />
• Establish a nodal body, National <strong>Innovation</strong> Commission, to provide innovation thought<br />
leadership to both the government and the private sector. This body should be staffed<br />
with experts in different fi elds from not only India but also overseas. A parallel exists in<br />
the National Knowledge Commission.<br />
Irrespective of the chosen co-ordinating mechanism(s), the three guiding principles for a<br />
national innovation agenda are:<br />
19
• Social welfare goals: E.g., IT enabled healthcare delivery for rural areas, innovative<br />
education access programs for far fl ung and underdeveloped areas, virtual agricultural<br />
markets, etc.<br />
• Academia and research interests: cutting-edge technologies and emerging fi elds in<br />
telecom, IT, fundamental sciences, etc.<br />
• Commercial and usability considerations: Financial potential of a technology, potential use<br />
of technology in defence, space exploration or other areas of national strategic interest.<br />
An international parallel of a similar coordinating mechanism exists in Israel where the<br />
Offi ce of the Chief Scientist (OCS) is the nodal body to coordinate the research areas and<br />
investments of the Israeli government. The OCS also infl uences the research agenda of the<br />
Israeli private sector through stimulating collaboration between the government research<br />
agencies and the private sector fi rms. The OCS has distributed R&D grants worth USD<br />
400 million and funds an average of one thousand projects over the last few years. The<br />
OCS has also subsidised more than 200 start-ups located in various technology incubators<br />
in Israel.<br />
4. Establish <strong>Innovation</strong> Clusters of research institutes, academia<br />
and industry<br />
Lack of physical proximity is often a major barrier preventing collaboration between<br />
Indian academia, research and industry. There is a clear shortage of ‘boundary spanners’<br />
– people who can speak the language of both sides. While some of the Indian IT fi rms have<br />
tie-ups with international educational institutes, the breadth and depth of their tie-ups with<br />
Indian educational institutes pales in comparison. This initiative could bridge this gap by<br />
bring the academia, research institutes and industry closer to each other to foster more<br />
meaningful collaborations.<br />
For promoting these innovation clusters, focus should be to build thematic clusters which<br />
leverage local industries and institutions and allows the cluster participants to leverage the<br />
concentration of talent already available in the vicinity or attract talent around a particular<br />
theme. Such thematic innovation clusters would lead to focussed research and accelerated<br />
creation of IP assets. As an illustration, Pune and Chennai could be innovation clusters for<br />
automotive and wireless technologies respectively. International examples of such efforts which<br />
have yielded positive results are Taiwan and Germany.<br />
Apart from generating wealth and encouraging entrepreneurship in the local economy, the<br />
innovation clusters present a win-win situation for all cluster participants:<br />
20
• Academia and research institutes will be able to enhance their brand, get better access<br />
to funding for post-graduate and doctoral research, develop curriculum which is better<br />
aligned with industry needs and also gain fi nancially from collaborative IP creation. The<br />
faculty and students can participate in wealth creation through entrepreneurship.<br />
• IT fi rms would develop a better understanding of market facing needs by collaborating<br />
with local user fi rms resulting in development of user relevant IP assets. Working with<br />
the academia and research institute will allow the fi rms to gain early access to research<br />
outputs and also infl uence the research agenda of the institutes.<br />
• User industry fi rms can reduce their R&D costs through outsourcing their R&D and<br />
collaborating with IT fi rms and research institutes.<br />
5. Government should implement bold changes in the policies related<br />
to innovation<br />
There is little doubt that the Indian innovation related policy framework needs to be revamped<br />
to provide stimulus to the national innovation agenda. While some of these changes<br />
will be amendments to existing regulations, there is also a need for introducing some<br />
bold measures.<br />
• Patents & Copyrights: India has amended its Patent Act 1970 under WTO’s agreement on<br />
Trade-Related Aspects of Intellectual Property Rights (TRIPs) and the existing regulations<br />
are aligned with global agreements. However, the overall IPR environment in India can<br />
be improved still further:<br />
- Create a National Patent Fund or encourage existing funds to provide fi nancial<br />
support to technology entrepreneurs (especially new start-ups) for the entire patent<br />
life-cycle management.<br />
- Establish more patent offi ces, especially in cities which are major IT hubs including<br />
Pune, Hyderabad, etc.<br />
- Improve effi ciency of existing patent offi ces through upgrading their infrastructure<br />
- Invest in capacity building for IPR enforcement in judiciary<br />
- Create IP courses in secondary and tertiary education curriculum, especially in<br />
technology, management and law institutes<br />
• Business Environment: Although the Indian business environment has demonstrated<br />
a signifi cant improvement over the last few years, India still ranks 116 out of 155<br />
countries when it comes to the ease of doing business. Some recommendations for<br />
improvement are:<br />
- Simplify entry and exit procedures for fi rms through ‘single window’ clearances<br />
21
- Streamline the import and export procedures and make the existing custom offi ces<br />
more effi cient by upgrading their infrastructure<br />
- Structure the Indian bankruptcy law along the lines of developed countries e.g.<br />
businesses that fail should be able to restructure and remove their debt<br />
- Simplify procedures for entrepreneurs to exit from businesses which have failed to<br />
minimise the current situation of good capital being stuck in bad businesses<br />
- Rationalise the statutory compliance requirements which pose a signifi cant financial<br />
and operational burden on the entrepreneur<br />
- Provide special incentives to encourage the Indian Diaspora to invest in technology<br />
start-ups in India<br />
• Venture Capital: While risk capital availability in India has shown a tremendous surge,<br />
some policy reforms are required to stimulate further growth:<br />
- Treat investments by banks in venture capital funds which invest in seed stage<br />
funding as part of the bank’s priority sector obligations<br />
- Stimulate seed capital funding by providing strong fi nancial incentives to the<br />
investment community including tax write-offs for losses, no tax on profi ts for a<br />
stipulated period, direct tax benefi ts for investments, etc.<br />
- Provide incentives to local industry fi rms and fi nancial institutions to invest in<br />
domestic venture capital funds with additional incentives for investments in seed<br />
funds. Incentives could include investments in VC funds being classifi ed as R&D<br />
expenses, zero capital gains tax on returns from VC funds, etc.<br />
- Relax constraints on institutional investment in domestic venture funds<br />
- Allow the creation of venture capital funds as Limited Liability Partnerships (LLP)<br />
and Limited Liability Corporations (LLC)<br />
- Stimulate investments by High Net Worth Individuals (singly or as a group) in<br />
technology start-ups by providing financial incentives including offsetting the<br />
investment against taxable income<br />
• Commercialisation of domestic technology: To stimulate the demand and supply side<br />
of technology development, some specifi c recommendations are as follows:<br />
- Provide priority funding for technology development projects which are being executed<br />
either by a consortium of fi rms or by a consortium of private sector and public<br />
sector institutions<br />
- Encourage public private sector partnerships for R&D in sectors which have little<br />
private sector participation currently, e.g., defence, space, atomic energy, etc.<br />
- Provide preference in government procurement for IP assets created in India<br />
22
- Create enabling legislation to encourage commercialisation of IP assets created through<br />
government funding or owned directly by the government. A parallel exists in the<br />
Bayh-Dole Act in the USA.<br />
- Encourage research institutes to invest in industry focussed research by linking a<br />
proportion of the funding provided to institutes to the number of patents generated<br />
/ licensed by the institute<br />
- Remove restrictions on the participation of research scientists and academics in<br />
commercialisation of their research outputs<br />
- Encourage technology educational institutes to set up incubation centres to stimulate<br />
entrepreneurship among both the academia and student community. The incubation<br />
centres should be provide more than mere infrastructure and should be able to<br />
facilitate the services required by a entrepreneur through linkages with entrepreneurs,<br />
venture funds, government agencies, etc. Additional stimulus to this could be provided<br />
by reserving a portion of the various government research grant programmes for<br />
ventures launched from these incubation centres.<br />
6. Collaborate with international educational institutes to increase<br />
quality of local research<br />
An important reason preventing the quality and quantity of academic research in India,<br />
especially in IT related technologies is the lack of best-in-class post-graduate and doctoral<br />
research programmes. India produces less PhD scholars in IT technologies annually than any<br />
one leading academic institution in the USA.<br />
While initiatives like innovation clusters can address this shortfall, their impact will happen only<br />
in the medium to long-term. A pragmatic approach to improve the quality of academic research<br />
in a reduced time-frame is to develop partnerships with international institutes who are eager<br />
to invest in collaborations with Indian academic institutions. Such bilateral collaborations<br />
will benefi t both Indian and the international institutes. While Indian academia get access to<br />
cutting edge technology and process know-how for accelerating the quality and quantum of<br />
research, the international institutes will get access to the Indian talent and knowledge about<br />
the domestic market. A parallel exists in the efforts by ‘National Research Foundation’ in<br />
Singapore which strongly encourages collaboration of Singapore educational institutions with<br />
their global peers.<br />
To make such collaborations sustainable, the government and the Indian academia will have<br />
to review many aspects of the education regulatory framework and be prepared to take some<br />
bold steps in amending regulations which impede such collaborations especially those related<br />
to operational autonomy of academic institutes and allowing FDI in the education sector.<br />
23
*****<br />
The Indian IT-ITES industry today stands on the cusp of a unique moment where bold initiatives<br />
created through ‘out-of-box’ thinking and high innovation aspirations can enable the industry<br />
to maintain its leadership in face of growing global competition. Failure to act now will be an<br />
unfortunate case of lost opportunity.<br />
<strong>Innovation</strong> is therefore critical to for the Indian IT-ITES industry to meet the upcoming challenges<br />
and set itself on an even more aggressive growth trajectory. To make this exciting journey<br />
towards the innovation high ground successful, the fi rms need to transform their mindsets and<br />
approach and also collaborate and contribute with other ecosystem constituents. The other<br />
ecosystem stakeholders including industry bodies, VCs, academia and research institutes,<br />
and the government need to put their collective passion and might behind this initiative to give<br />
it momentum and strength.<br />
A successful innovation wave will not only strengthen the Indian IT-ITES industry but will also<br />
give rise to products and services that will benefi t a wider cross section of society in both India<br />
and other parts of the world and greatly help in addressing the digital divide in India.<br />
24
Acknowledgements<br />
Several persons and organisations have played a very important role in the creation<br />
of this report. We would like to thank all member companies of <strong>NASSCOM</strong> for<br />
sharing data and their valuable experiences with us. We would like to also thank the<br />
<strong>NASSCOM</strong> <strong>Executive</strong> Council for their guidance and support in this initiative.<br />
We would like to take this opportunity to acknowledge the invaluable contribution<br />
by the government agencies, venture capital fi rms and other experts.<br />
We would also like to thank the <strong>BCG</strong> and <strong>NASSCOM</strong> teams that worked on this<br />
project for their hard work and commitment.<br />
James Abraham<br />
Partner and Director, <strong>BCG</strong><br />
Kiran Karnik<br />
President, <strong>NASSCOM</strong><br />
Neeraj Aggarwal<br />
Partner and Director, <strong>BCG</strong><br />
Rajdeep Sahrawat<br />
Vice President, <strong>NASSCOM</strong><br />
Navneet Vasishth<br />
Project Leader, <strong>BCG</strong><br />
Akanksha Pundir<br />
Senior Manager, <strong>NASSCOM</strong><br />
27
Topic forum participants<br />
Firms<br />
Alexius Collette, CEO,<br />
Philips <strong>Innovation</strong> Campus<br />
Dr Anand Deshpande, Founder, Chairman<br />
and MD, Persistent Systems<br />
Anil Pillai, CEO, rapidEffect<br />
Anupama Arya, CEO, Mobera Systems<br />
Dr Balu Sarma, Technology Growth Leader,<br />
GE India Technology Centre<br />
Divakaran Mangalath, CTO,<br />
Wipro Technologies<br />
Frank Jones, President, Intel India<br />
Dr Ganesh Natrajan, Vice Chairman and<br />
MD, Zensar Technologies<br />
Dr Gautam Shroff, Vice President R&D, TCS<br />
Dr G Venkatesh, <strong>Executive</strong> Director<br />
and CTO /Chief Strategy Offi cer, Sasken<br />
Communication Technologies<br />
Dr Lin L Chase, Vice President, Accenture<br />
Labs India<br />
Dr M Vidyasagar, Board member - TCS<br />
Corporate Technology Board<br />
Manoranjan Mohapatra, President and<br />
COO, Aricent<br />
Naresh Gupta, CEO, Adobe India<br />
Nicholas M Donofrio, <strong>Executive</strong> Vice<br />
President, <strong>Innovation</strong> and Technology,<br />
IBM Corporation<br />
Pramod Bhasin, CEO and Managing<br />
Director, GENPACT<br />
Ravi Pandit, Chairman and Group CEO,<br />
KPIT Cummins<br />
Ravi Venkatesan, Chairman, Microsoft<br />
Corporation (India)<br />
Srinivas Polisetty, MD, CSC<br />
Vijay K Thadani, COO, NIIT<br />
Vijay Kapur, CTO, Microsoft<br />
Vineet Nayar, President, HCL Technologies<br />
Vipul Jain, CEO and MD, Kale Consultants<br />
Other ecosystem participants<br />
Abhay Havaldar, Managing Director,<br />
General Atlantic Partners<br />
Alok Mittal, Partner, Canaan Partners<br />
Dr Aruna Katara, <strong>Executive</strong> Chair,<br />
I2IT Pune<br />
Dr B Bowonder, Director Research and<br />
Dean of Studies, TMTC<br />
Dr Deepak Pental, Vice Chancellor,<br />
Delhi University<br />
Prof Deepak Phatak, Subrao M Nilekani<br />
Chair Professor, Kanwal Rekhi School of<br />
Information Technology, IIT Bombay<br />
Dr Jai Menon, Corporate Director – IT and<br />
Technology, Bharti Telecom<br />
Dr J Khurana, Director (IPR), DIT<br />
Mukti Trivedi, Scientist, TIFAC<br />
Dr N Kumar, Secretary, Dept. of Training<br />
and Technical Education<br />
Dr N S Samant, Joint Secretary, DBT<br />
Philip O’ Neil, National Project Coordinator,<br />
Eureka London<br />
Dr R A Mashelkar, Former Director<br />
General, CSIR<br />
Rajiv Ranjan, Chief (Joint Secretary) NMCC<br />
Dr Reuben Abraham, Director, Base of<br />
Pyramid Learning Lab, ISB<br />
Dr Rishikesha T Krishnan, Professor of<br />
Corporate Strategy, IIM Bangalore<br />
Sajid Mubashir, Director, Home Grown<br />
Technology Programme, TIFAC<br />
Sanjay Anandram, MD, Jump Startup<br />
Fund Advisors<br />
Sanjay Dutt, Industry Expert<br />
Sharad Sharma, MD, Yahoo R&D India<br />
S N Zindal, Director General, STPI<br />
Sunil Rai, Joint Director, SPJIMR Pune<br />
V Govindrajan, Member Secretary, NMCC<br />
Dr V B Taneja, Scientist “G” (R&D HOD), DIT<br />
Vinutha Raju, AVP, 2i Capital India<br />
V S Mahalingam, Director (CAR<br />
Technology), DRDO<br />
28
Consulted firms<br />
AppLabs<br />
Accenture Technology Lab<br />
Adobe Systems India<br />
Aricent<br />
Cognizant Technology Solutions<br />
Eastern Software Systems<br />
Evalueserve<br />
HCL Technologies<br />
Hughes Systique Corporation<br />
IBM Corporation<br />
Intel India<br />
Ittiam Systems<br />
KPIT Cummins Infosystems<br />
Marketics Technologies (India)<br />
Microsoft India<br />
MindTree Consulting<br />
Monsoon Multimedia India<br />
MphasiS<br />
Nucleus Software Exports<br />
Patni Computer Systems<br />
Persistent Systems<br />
Philips <strong>Innovation</strong> Campus,<br />
Philips Electronics India<br />
rapidEffect<br />
Satyam Computer Services<br />
Skelta Software<br />
Subex Azure<br />
Tata Consultancy Services<br />
TechMahindra<br />
Wipro Technologies<br />
WNS Global Services<br />
Zensar Technologies<br />
29
Key authors<br />
The Boston Consulting Group<br />
The Boston Consulting Group<br />
Arun Maira<br />
maira.arun@bcg.com<br />
Suresh Subudhi<br />
subudhi.suresh@bcg.com<br />
Gaurav Malhotra<br />
malhotra.gaurav@bcg.com<br />
Sushma Vasudevan<br />
vasudevan.sushma@bcg.com<br />
James Abraham<br />
abraham.james@bcg.com<br />
Yashraj Erande<br />
erande.yashraj@bcg.com<br />
Kunal Mundra<br />
mundra.kunal@bcg.com<br />
<strong>NASSCOM</strong><br />
Navneet Vasishth<br />
vasishth.navneet@bcg.com<br />
Akanksha Pundir<br />
apundir@nasscom.in<br />
Neeraj Aggarwal<br />
aggarwal.neeraj@bcg.com<br />
Kiran Karnik<br />
kkarnik@nasscom.in<br />
Ravi Srivastava<br />
srivastava.ravi@bcg.com<br />
Rajdeep Sahrawat<br />
rajdeep@nasscom.in<br />
Rohini Srivathsa<br />
srivathsa.rohini@bcg.com<br />
Other<br />
Saurabh Tripathi<br />
tripathi.saurabh@bcg.com<br />
Sanjay Dutt<br />
sanjay@dutts.net<br />
Seema Bansal<br />
bansal.seema@bcg.com<br />
30
NATIONAL ASSOCIATION OF SOFTWARE AND SERVICE COMPANIES<br />
International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi 110 021, India<br />
Phone: 91-11-23010199, Fax: 91-11-23015452<br />
e-mail: research@nasscom.in, Website: www.nasscom.in