Business Accent

Innovate or perish

Rajdeep Sahrawat

The Indian IT industry is currently enjoying a quintessential Indian summer. 10 years of double-digit growth have made Indian IT the cynosure of all eyes and firmly established India as the premier IT outsourcing destination. Rajdeep Sahrawat asks whether this bull run will continue unabated.

Strong demand for outsourcing from traditional markets like the US and Britain, coupled with growing demand from continental Europe and the Asia-Pacific region, will ensure that Indian IT’s growth momentum is maintained—at least in the short-term. However, is this bull run likely to continue unabated or will the Indian IT Industry need to innovate and transform itself to make the next decade mimic the previous one?

Let us look at some key features of the Indian IT industry today. According to Nasscom, Indian IT exports in 2003-04 were $9.2 billion. Of this, the top 20 organisations accounted for nearly $5.8 billion (63 percent). The list includes the Indian subsidiaries of MNCs such as IBM, HP and others. The remaining $3.4 billion (37 percent) came from the other 3,000-plus Indian IT companies. This is a sign of a maturing industry where a few dominate and the rest struggle to grow.

Not enough R&D

Demand fulfillment dominates senior management attention instead of demand creation. Increasing capacity to meet growing demand translates into hiring more software engineers and building bigger campuses. Unlike other knowledge-intensive industries, revenue growth is linearly linked to increasing headcount. The focus is often on short-term results to satisfy the investor and analyst community. Large cash reserves are generally used for dividend payouts rather than on investments for future growth engines or for M&A activity. No top-20 Indian IT organisation (except i-flex) is betting on products or Intellectual Property (IP) assets as a core part of their growth strategy.

Research and development investments are dwindling, and this is evident from the lack of patents filed by the IT industry. The industry has also not developed any meaningful collaboration with academic institutes either in India or overseas for R&D. This is in stark contrast to the Indian pharmaceutical industry, another knowledge-intensive sector. From almost a zero base in the early nineties, the Indian pharmaceutical industry filed over 800 patents in 2003-04. Here, not just traditional financial metrics, but also R&D investments, number of patents and new drug discoveries are key future growth metrics.

Limited and localised

Technology-enabled services constitute a predominant portion of the Indian IT industry offerings. Within the services portfolio, a significant proportion of the work includes application maintenance and development. Due to the commodity nature of this work, it does not command a price premium and offers low-entry barriers to competition.

Lack of geography-specific domain and regulatory knowledge is an inhibitor for Indian IT organisations which are asked by clients to work on the business side of engagements or the ‘what to do’ phase. Apart from adversely affecting premium-pricing objectives, this also brands Indian IT organisations as ‘doers’ instead of ‘influencers.’ Another serious impact of lack of domain knowledge is that Indian IT continues to find it very difficult to evolve their customer relationships from suppliers to partners.

Acquiring the right skills

A stated aspiration of the Indian IT industry is to execute more system integration and consulting engagements in order to increase margins and achieve customer lock-ins. While it is a laudable objective, these engagements will require vastly different skill-sets, upfront investments in building IP assets, and different ways of doing business including building partnerships with customers and traditional rivals. Acquiring specialist firms in overseas markets is a possible way to bridge the skill-gap, but integrating the acquisitions into the core service operations will be a challenge. The acquisition of A T Kearney by EDS never delivered on the anticipated synergies.

The Indian IT industry has embraced the global delivery mantra and is investing heavily in building the requisite infrastructure. While there is no doubt that delivery and technology capabilities will be created, developing local domain knowledge capabilities and local management talent will not be easy. The other challenge in becoming truly global organisations will be to remove the India-centricity and develop an ‘anytime anywhere’ culture. The recent ABN AMRO deal is an acid test of the capabilities of the Indian IT industry to deliver large-scale services globally.

Not enough collaboration

Leading Indian IT organisations rarely collaborate with each other. This behaviour pattern partly stems from the demand fulfillment history of the industry wherein there was enough for everybody. Unlike the West, where die-hard industry rivals will collaborate when required, there are hardly any instances of peer-to-peer collaboration within the Indian IT industry, and most organisations prefer the organic route. As a result, there are very few global IT initiatives in which Indian IT is leading the way.

So how should the Indian IT industry translate its current strong performance into long-term good health? Some possible approaches to consider are:

• Develop force multipliers

A force multiplier is a military concept referring to a factor that dramatically increases (hence, multiples) the combat-effectiveness of a given military force. The IT industry needs to identify its own force multipliers which will enable it to achieve a steep change in growth rate and increase the rate of return on capital employed (ROCE). These force multipliers can come from:

- New products
- IP asset creation and deployment in services
- Re-designing the supply chain process
- New business models
- Partnerships within and outside the industry.

• Develop business leadership skills

New ways of doing business will require new business leadership skills. It is debatable whether having an IT industry background is a must-have for an IT industry leader. Lou Gerstner is a great example of a non-IT careerist enjoying spectacular success while transforming IBM. Therefore, the Indian IT industry must give up its technology background fixation and instead welcome domain and management discipline specialists from other industries. This will not only generate new ideas but also allow the adoption of best practices from other sectors in the IT industry.

• Foster an internal entrepreneurial culture

A potential casualty of the rapid growth of the larger Indian IT organisations is entrepreneurship. Conformity to processes and playing safe tends to replace the entrepreneurial zeal which drove the early growth of these organisations. While process conformity is important to grow existing businesses, incubating new ideas for future growth will require an entrepreneurial culture in an organisation.

A possible approach for this is to set up a separate unit/initiative to focus on new ideas and ventures. These units should be responsible for identifying new growth ideas from internal and external sources, and incubating the promising ones in their early days before they become stand-alone businesses.

• Increase R&D investments

Most large Indian IT organisations have access to large cash reserves which should be invested in R&D to develop future growth engines.

Instead of concentrating its R&D investment internally, the industry should collaborate on research with academia not only in India but globally.

The R&D focus should move away from pure technology to domain/industry problem-related research. Indian IT organisations should develop relationships with industry and management institutes which are often at the forefront of research into industry needs and business processes, and also often consulted by the very organisations IT industry wants to sell to. Collaboration with industry bodies is important for the Indian IT industry to develop geography-specific domain capabilities which will enable them to act as advisors to their clients.

However, senior management should be patient as these investments will take time to fructify.

Web of collaboration

The Indian IT industry is skewed in favour of a few large organisations that tend to dominate the field. However, entrepreneurial passion and new out-of-box ideas will come from smaller organisations that do not have the support of a large core business to survive.

A Silicon Valley-type eco-system, where entrepreneurship is encouraged and rewarded, needs to be created in India. IT start-ups with promising ideas need to be funded and mentored. As the venture capital eco-system in India is weak, industry associations need to ensure that the smaller IT firms get the support and attention they need. An important activity that industry associations can undertake is to create an eco-system including an India fund which encourages VC firms and large Indian IT organisations to invest in start-up Indian firms with promising growth prospects.

Texas Instruments (TI) is a good example of a large organisation working with and supporting smaller specialised firms to evaluate and incubate promising ideas. TI acts as a venture capitalist managing a portfolio of ideas in which a few will perish and a few will succeed. Large Indian IT companies need to adopt a similar approach and incubate idea generation in India. Emerging technologies like RFID, wireless and so on cannot be fully exploited by single organisations, so a web of collaboration needs to be developed in the industry with the larger organisations working in partnership to exploit these emerging technologies.

While the Indian IT industry scores high on current performance, it is the long-term health of the industry which causes concern. The industry needs to re-invent itself today to ensure its future. This re-invention can be led by strong and innovative industry leaders who are ready to challenge the successful paradigms of the past and are willing to invest in innovation to transform their organisations. Short-term sacrifices will have to be made in order to achieve long-term growth and ensure that the next decade is as good as the last decade has been for the Indian IT industry.

The author is Global Head, Value Engine Program, Tata Consultancy Services.

E-mail: rajdeep.sahrawat@tcs.com