Innovation and Talent in the Indian IT Industry

NASSCOM, the Indian trade association for its rapidly growing IT enabled services industry, recently concluded its annual Leadership Forum, bringing together the leaders of this industry.  Although there was no official overarching theme defining the conference, it was clear that the big issue shaping most of the discussions involved the intersection of innovation and a growing scarcity of talent. In the process, though, I fear that the industry leaders are under-emphasizing some important opportunities.

I was privileged to be able to attend this conference and participate in a number of the panels and discussions. It was truly an energizing and inspiring experience, impressive in terms of the scope of the program, with over 100 speakers addressing a broad range of topics.

The Indian IT outsourcing industry has achieved substantial scale and very impressive growth. NASSCOM estimates that, for the financial year ending in March, the industry will grow to $31 billion in revenue, 32% over last year’s revenue.  The industry now employs 1.6 million people, driving much broader prosperity within India. According to Julio Quinteros, an analyst from Goldman Sachs, Indian IT services companies have rapidly grown shareholder value in sharp contrast to the more disappointing performance of established American IT services companies.

The most impressive thing about the conference was that, in spite of this enormous success, there was little if any complacency.  Instead, the leaders of the Indian IT services industry continued to show the same sense of urgency that has driven their success so far.

The competition for talent

Many of the discussions focused on the intensifying competition for talent within the IT services industry.  Continued growth of the industry hinges on the ability to access and develop talent.  Turnover rates are generally rising, especially in the business process outsourcing industry, further increasing the challenge of sustaining profitable growth. Wage rates are also rising as companies compete more aggressively to attract and retain the available talent. In the meantime, other countries such as the Philippines, Vietnam, China and the Eastern European countries are competing more effectively for IT outsourcing work.

Indian IT services firms are responding to these challenges on a number of fronts.  They continue to invest heavily in scaling their recruiting and training efforts, increasingly branching out and establishing facilities in second and third tier cities in India to reach a broader pool of talent.  In many cases, they are establishing development and operations centers in other low labor cost countries.

Indian firms are also investing in developing more value added services to generate more revenue per employee.  One of the hottest growth sectors for the Indian outsourcing industry is so-called “knowledge process outsourcing”, focusing on providing such high value services as financial research, clinical research and engineering services for product development programs.

More generally, these Indian firms are also focusing on tightening their operational performance to enhance profitability per employee and to become more responsive to increasing customer expectations.  McKinsey & Co. discussed a major report on “Operational Excellence: The Next Frontier in Offshoring” (executive summary available here) at the conference.  The report offered a framework for benchmarking operational performance and found a high dispersion of performance across Indian offshoring service companies. Offshoring service companies could do a much better job of absorbing increasing wage rates if they focus more aggressively on enhancing the productivity of their operations. One of the interesting sidelights in the report was the finding that third-party service providers generally outperform captive offshore facilities.

Innovation blowback opportunities

Another key theme emerging from the discussions at the conference involved the increasing need for innovation in the offshoring business.  Unfortunately, there did not appear to be any consistent definition of innovation so, at times, it was unclear what the exact nature of the opportunity is.  NASSCOM has announced a joint research effort with BCG on “Developing an Innovation Ecosystem for the Indian IT Industry”.  This effort in particular seems to be focused on identifying opportunities for the Indian IT industry to collaborate with other stakeholders in the Indian economy to address challenges in providing more cost-effective products and services to the Indian population.

This is a huge opportunity and has generally been under-emphasized by the IT services industry which historically has focused on overseas markets rather than the domestic market.  There are some notable exceptions to this.  Infosys, for example, has developed a strong partnership with ICICI Bank, one of the most innovative and successful banks in India.  ICICI Bank used the Finacle application software suite from Infosys to develop an extremely cost-effective and scalable operational platform.  This collaboration has helped ICICI Bank to grow rapidly, increasing its transaction volume by five-fold over a five year period.

This opportunity is particularly intriguing because it extends far beyond the domestic market, even though that is certainly attractive in its own right.  As JSB and I have written, there is an opportunity to pursue “innovation blowback” strategies, using the Indian market as a catalyst for breakthrough innovation in products and services that can then be used to support global attacker strategies designed to challenge incumbents in the more developed Western economies. In recent years, ICICI Bank has started to expand internationally, leveraging its innovative operational platforms to deliver more cost-effective services to customers in countries like the UK, Canada, Singapore and China. The Indian IT services industry could fuel enormous growth for the Indian economy by more aggressively supporting these innovation blowback strategies.

Fostering talent networks

But the biggest opportunity of all requires a different form of innovation.  It also requires a very different mindset for the leadership of the Indian IT service companies.

Rather than continuing to focus on attracting and retaining talent within their own companies, these firms could create enormous value by developing the management techniques required to mobilize and leverage specialized talent wherever it resides. This would require building scalable talent networks encompassing a broad range of smaller, more specialized companies. 

The Indian IT services companies have been very effective in building relationships with technology product companies on a global scale.  But when it comes to expanding their own IT services, they immediately focus inward.  If they don’t have the capability already in place, they may go out and acquire a smaller, more specialized company, but their instinct is to bring the capability in house.

As an alternative, these companies could take their emerging skills in partnering with technology product companies and apply them to building talent networks to mobilize and leverage large numbers of more specialized service providers.  The real power would be to master the techniques required to accelerate the development of talent across such a distributed network of partners, thus creating stronger incentives for partners to join the network.  Focusing on this challenge would create an opportunity to innovate in “Learning 2.0” capabilities, moving from traditional training programs to more distributed learning platforms and ecologies.

Ultimately, the opportunity would be to become leaders in the formation and orchestration of creation networks. This would require mastering open innovation management techniques to attract and mobilize talent, focus the innovation initiatives across multiple participants and accelerate commercialization and learning from these initiatives.

Even broader innovation opportunities

These efforts in turn would expose the Indian IT service companies to the challenges of coordinating activities across large networks of partners given existing IT architectures. By gaining firsthand experience in the limitations of these architectures, Indian IT service companies would be well-positioned to drive another wave of innovation in IT architectures.  In my talk on Web 2.0 at NASSCOM, I suggested that Indian IT service companies are natural candidates to define and deploy fundamentally new IT architectures that work from the “outside-in”. 

In contrast to traditional IT architectures that emerged in the center of the firm and imperfectly extend their reach beyond the boundaries of individual enterprises, we are in desperate need of IT architectures that start with the assumption that the task is to coordinate activities across hundreds, if not thousands of firms. By starting with this perspective, we would need to re-think the nature of transactions and define roles and governance processes accordingly. In fact, we would likely move from today’s transactional architectures to much more helpful relational architectures designed to support enduring and deepening relationships across individuals and institutions.

There’s no shortage of opportunities at both the product and process level to drive the growth of Indian IT services companies.  The sense of urgency that continues to pervade the leadership of these companies will serve them well in identifying and aggressively pursuing these opportunities.

Comments

[troy]

The Indian IT outsourcing industry has achieved substantial scale and very impressive growth. NASSCOM estimates that, for the financial year ending in March, the industry will grow to $31 billion in revenue, 32% over last year’s revenue. The industry now employs 1.6 million people, driving much broader prosperity within India.offshore bank formation companys providers..........

[neelakantan.b]

Those are some really good observations. Indian IT is not content resting on its laurels - they are trying to do more.

On innovation blowback, I think that captives have a greater chance of utilizing some of the opportunities they present than the regular third party service companies.

[Sadagopan]

John - an illuminating article. I argue in recent sandhill piece that The well-designed global network begins to deliver goods when organizations configure their innovation networks for cost and manage them for value. I foresee for the service industry that the world is beginning to see a shift from a Vertically Integrated Model to a Globally Distributed Process Network. Its time for offshore firms to look at Business Model Innovation for sustainable competitive advantage

[Sharad Sharma]

John – As usual a nice thoughtful post. You are absolutely right about innovation blowback opportunities. Like you, I associate these with bottom-of-pyramid activities. BoP ecosystem is still nascent in the IT industry in India. But things are looking up. Increasingly the IT ventures are leveraging existing BoP ecosystems to move forward. For instance, the existing BoP ecosystem in healthcare is underpinning the creation of low-cost, high-quality medical diagnostics/imaging equipment (based on embedded sw). The banking example that you mention is also based on a similar connection. Primary education is another area that’s seeing lots of BoP innovative activity that is not (yet) getting press attention.

If one looks through conventional eyes of invention-based innovation, India doesn’t have a strong story to tell. But its important to realize that India’s IT innovation landscape is not a replica of what exists in the West and will probably never be one.

My take is that India has four distinct, yet overlapping, IT innovation ecosystems. One of those is the nascent BoP ecosystem.

The second one and perhaps the most interesting one is the jugaad-innovation ecosystem. This is generally associated with IT Services and BPO. It’s grounded in a traditional improvisational, can-do, gritty mindset that’s been combined with proven continuous-improvement methodologies to generate process and business model innovation. A number of companies, big and small, IT and non-IT, have learnt to make this work successfully. As this knowledge becomes more dispersed it will continue to underpin more success stories.

Then there is the emerging products ecosystem. Right now this is tightly coupled to the Silicon Valley ecosystem. VCs, seasoned professionals and market insights are freely flowing back and forth between the two ecosystems. The dominant startup model is the cross-continental model where the customer facing roles are based in the US and the business strategy and engineering roles are based in India.

Finally there is invention-centric, research-to-market type ecosystem. This is in a pathetic state today. This is largely because there is too little academic research happening and not enough PhD students are coming out of the system. I am not optimistic about things changing in this area anytime soon.

I write about all these four innovation ecosystems in more detail in an invited article, “IT Innovation Landscape in India”. This article was part of the “Top 100 Innovators” handbook that was given out at the leadership summit. You can find the electronic copy here… http://orbitchange.com/blog/2007/02/09/innovation-landscape/

[Rajan]

I normally dislike spending time meetings organized by NASSCOM because most of the talk is highly overrated and does not solve much purpose and these an opinion I formed after attending many of these meets.
But if I had known you would be present there I would have attempted to be present there :)

In your writing you mentioned and I think it quite fascinating. Interestingly in India there have been no networks around which could foster innovation, recent movements like barcamp & mobilemonday though serve different purpose in the rest of the world , it is increasingly being looked at as a starting point of the talent networks that you mention. Infact some service companies that I know are getting involved in it quite seriously.

- Rajan
http://rajan.wordpress.com

[Sanjay Dalal]

John:

Thank you for sharing this state of innovation and talent in the Indian IT industry.

I visited India in 2006, and my observation was that the Indian IT companies are strong innovators of services and consulting in BPO and Offshoring. They are also becoming better in Knowledge Process Outsourcing as you have pointed out.

However, the Indian IT industry does not fully serve the needs of software within India (ironical) owing to the business model disparity in serving overseas versus local cusotmers. Also, only a handful of Indian IT companies have really gone beyond service innovation into real product innovation of their own. This is possibly the ultimate quest: can Indian IT companies create world class software? Today their primary domain expertise is fulfilling specific implementation, consulting or project assignments; this is not to say that the technology companies who are offshoring to India are not finding solid talent to create great software in India. In the longer term, as wage arbitration achieves parity, and more nations fulfill the outsourcing/offshoring needs, the Indian IT companies will need to innovate beyond the service innovation in order to compete.

For example, could there be a next Microsoft or an Adobe in the making in India? I believe most Indian IT company CEOs would tell you not yet, not today. This also means that software companies in the U.S. are better able to address the needs of customers.

Do you foresee a software market analogous to the electronics market where the core product design is done in the U.S., however the manufacturing is conducted overseas in the next ten years? If that does happen, would this increase the overall revenues of software companies in the U.S. and create more higher value jobs?