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NASSCOM-BCG Innovation Report 2007

Unleashing the Innovative Power of Indian IT-ITES Industry Executive Summary

For the complete report, please contact publications@nasscom.in

NASSCOM-BCG Innovation Report 2007
Unleashing the Innovative Power of Indian IT-ITES Industry Executive Summary

National Association of Software and Service Companies International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi-110 021, India Phone: 91-11-23010199, Fax: 91-11-23015452, E-mail: research@nasscom.in Website: www.nasscom.in

Copyright ©2007

National Association of Software and Service Companies International Youth Centre, Teen Murti Marg, Chanakyapuri, New Delhi -110 021 India Phone: 91 11 2301 0199 Fax: 91 11 2301 5452 E-mail: research@nasscom.in

The Boston Consulting Group (India) Private Limited 14th Floor, Nariman Bhavan, 227, Nariman Point, Mumbai 400 021, India Tel: 91 22 6749 7000 Fax: 91 22 6749 7001 The Boston Consulting Group (India) Private Limited 3rd Floor, Tower A, DLF Cybercity, Gurgaon 122 002, Haryana, India Tel: 91 124 459 7000 Fax: 91 124 459 7001

First Print: July 2007 Published by NASSCOM, New Delhi Designed & Produced by Creative Inc. Phone: 91 11 4163 4469 Printed at P.S. Press Services Disclaimer The information contained herein has been obtained from sources believed to be reliable. The information contained in sections of the report reflects data that was derived from both public and confidential information collected and received by BCG during the conduct of a joint study by NASSCOM and BCG. Readers should note that NASSCOM and BCG have not independently verified all of the data and assumptions used in these analyses. Each reader of this report should conduct their own independent evaluation of the information provided herein. NASSCOM and BCG shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The material in this publication is copyrighted. No part of this can be reproduced either on paper or electronic media without permission in writing from NASSCOM and BCG. Request for permission to reproduce any part of the report may be sent to NASSCOM and BCG.
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Foreword
After its remarkable growth in the past two decades, the Indian IT-ITES industry is now a credible player on the world stage, and many Indian firms are seen as potent challengers to global incumbents. The primary engine of the Indian industry’s growth has been India’s low-cost talent pool. The industry has taken the initiative in leveraging this cost advantage to fuel growth. But global incumbents have also recognised India’s advantage and have become adept at tapping the local talent pool. To continue their growth and to attain newer heights, Indian firms need to recognise the importance of ‘Innovation’ for maintaining their competitive edge and fuelling further growth. The term ‘Innovation’ refers to changes to products, services, processes or business models. In the organisational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. Future winners will be decided based on their capability to innovate and translate their innovations into financial results. Today, India promises more opportunities for innovative technology firms, both Indian and international, than any other country perhaps. On one hand, there is a huge unfulfilled market in India’s billion plus population for many products and services, including healthcare, education, financial services, retail, e-governance, etc. These untapped markets present significant opportunities for low-cost and innovative IT solutions that may enable lean, cost-effective and value-creating business models. IT and telecom technologies will be keys to provide the breakthroughs as some pioneering ventures have shown. At the same time, India also has technologically competent domestic Industries and firms that can be crucibles for innovations applicable even in advanced export markets. The Indian IT-ITES industry needs to tap into the enormous local talent both within its boundaries and in other Indian Industries to capitalise on these opportunities. Firms that have the ambition to grab these opportunities by developing innovative business ideas and tune up their cultures and systems for collaborative innovations will reap huge benefits. Thus, the ability to innovate effectively will be one of the critical levers of competitiveness and sustained growth. In this context, the NASSCOM-BCG Innovation Report 2007 addresses three aspects of the innovation agenda – the factors that form a powerful imperative for innovation; the firm level agenda and approach for firms to spur innovation; and finally, recommendations to expand and rev up the innovation ecosystem in India.
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We hope that this report will stimulate useful discussions and, more importantly, actions on how firms as well as, ecosystem participants like the government, industry bodies, venture capital organisations and academia can accelerate the ability of Indian firms to innovate new products, services and solutions that will fuel their own growth and also meet the needs of society in India and elsewhere.

Kiran Karnik President, NASSCOM

Arun Maira Chairman, BCG India

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Executive Summary
In today’s intensely dynamic and competitive business environment, success is no longer simply about providing quality services and solutions at an affordable price. Instead, it is increasingly about creating new products, solutions and services that provide a radically better experience for the consumer. Firms which innovate will be the ones that survive and grow. Innovation is not only about technology but is also about understanding untapped user needs that require to be addressed in an ingenious and path-breaking manner. Innovation must occur at every stage of a product or solution development and release cycle, through to pricing, support and value addition to the consumer. Thus, managing innovation is fast becoming the number one priority in a global business environment where technology itself is increasingly becoming standardised, commoditised and ubiquitous. The overall framework for developing an agenda for innovation in the Indian IT-ITES Industry is given in Exhibit 1.

Overall framework for developing an agenda for innovation in Indian IT-ITES industry

Exhibit 1

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IMPERATIVE FOR INNOVATION
With each success comes greater expectation. This is the challenge now facing many segments of industry globally, including India’s successful IT-ITES industry. Delivering ‘more’ or ‘better’ can be done by improving efficiency, but beyond a point the value curve begins to flatten and it becomes increasingly difficult to keep providing ever increasing value-for-money. The only way to do so is through innovation: not just executing the same series of steps more efficiently, but by doing new things in different ways to achieve new levels of output.

Why Innovation?
The Indian IT-ITES industry realises the need for innovation and the benefits that it can offer. In our discussions with firms, we clearly heard an articulation of the IT-ITES industry’s aspiration to significantly increase innovation, developing path-breaking services/products and delivery mechanisms, etc. that will be the envy of the world. The industry wants India to be acknowledged as a world leader in IT-based innovations and not just a world-leader in low-cost talent pools and commodity services. The Indian IT-ITES industry does not intend to confine innovation to purely commercial gains. The industry aspires for innovation to have a clear and tangible impact on improving the well-being of Indian society as a whole. Industry leaders strongly feel that innovative usage of IT can help improve the reach and quality of our healthcare services, reduce the extent of unemployment and underemployment as also take connectivity to a billion people. The Indian IT-ITES industry has shown a tremendous growth with a CAGR of above 25% over the previous five years. This impressive growth has been reflected in both the exports of the software and services sector as well as the surge in the domestic market. India has led the first phase of growth of the IT phenomenon due to some inherent advantages that it offers: abundance of talent, superior delivery quality, cost advantage and favourable policy interventions by the government towards IT infrastructure along with other growth-oriented policy moves. However, the traditionally successful Indian IT-ITES business model is increasingly coming under strain and competitive advantages are weakening on several fronts such as: a. Rising factor costs in India are eroding the traditional competitive advantages. b. Geographical and cultural affinity, growing concerns in the key western markets over outsourcing to India, similar time zones and active local government support are resulting in Latin America, Eastern Europe and China posing a serious threat to India.
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c. Global vendors are building sizeable delivery capability in India – The top three global IT-ITES firms (Accenture, HP Services and IBM Global Services) have been ramping up their offshore delivery centres in India to offer the same ‘India Advantage’ as the Indian IT-ITES firms. d. Productivity improvement by following the current business model in the Indian IT-ITES industry is unlikely to keep pace with increasing costs due to wage inflation. The rupee appreciation against major trading currencies is going to further add to this problem. These factors combined are going to put a significant pressure on the current healthy margins of the Indian firms. e. The structure of the Indian IT-ITES industry is currently skewed towards a small number of large firms which dominate the industry. A vast majority of the firms in the middle and small segments are caught in the middle and are struggling to address the twin challenges of top-line and bottom-line growth f. Manpower supply constraints will prohibit a linear expansion of the current model beyond a certain threshold. If the current Tier 1 players grow at an average of their 2005-06 CAGR of ~40%, the Tier 1 players alone would require 1.8 million employees by 2012. Besides a supply constraint, this high rate of growth will put tremendous strain on a firm’s governance and management capabilities. g. A strong and vibrant domestic IT market is critical to anchor the growth for the Indian IT-ITES industry beyond the short-term horizon. Inspite of the recent surge in the domestic IT market several challenges remain including high tariffs and import duties, poor rate of commercialisation of domestic R&D, lack of IT adoption in key verticals sectors including agriculture, healthcare, education and in the SMB segment.

Current Status of Innovation
The Indian IT-ITES industry has evolved through three distinct phases. Phase 1 was typically an export-led growth driven by factor arbitrage for relatively commoditised services like application development and management. The Indian IT-ITES firms invested little in R&D and consequently created little intellectual property assets. During phase 2, the Indian IT-ITES firms gained domain experience and developed a reputation for superior delivery and hence were able to capture value in the market. During phase 3 (current phase), the firms are moving into higher value services like IT consulting, systems integration, engineering services, contract R&D, etc. End to end outsourcing services with multiple year contracts have also started replacing the erstwhile wage arbitrage driven transaction services.
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Our research shows that developing economies and their leading firms typically move through three phases for sustainable growth and the journey taken by the Indian IT-ITES industry so far is in line with this evolution cycle: • • • Driving growth through exports of basic services Moving up the value chain in terms of breadth of offerings Getting serious about innovation by investing in innovation, institutionalising the innovation gains in terms of domain capabilities and IP pools, and finally profiting from the innovations. In case the transition from the second phase to the third phase is characterised by large sales but insufficient focus on innovation, it can leave firms / economies extremely vulnerable. This vulnerability depends on the extent of the firm’s ‘sales at risk’ and the extent to which their IP is currently protected. The traditionalists view IP strength purely from the lens of ‘patenting’, but it can also be represented by the depth of domain capabilities and acceptability of solutions, a view more pertinent while discussing the Indian IT-ITES industry. The most vulnerable position to be in, as a firm or as an economy, is to have strong current sales that are not protected for the future. Over the years, while sales have grown through a strong export performance, IP creation and domain capabilities have not shown similar growth curves for the Indian IT-ITES industry. Having established the benchmarks, the current success of the industry and its leadership status in select areas has made it an attractive target for attack by ‘imitators’ who promise to do it ‘cheaper and better’. The industry is at an inflection point and needs to differentiate itself by creating new sources of competitive advantage through sustained innovation. The argument for the inflection point is further supported by recent developments in the industry’s business environment which is in the midst of a paradigm transformation. Commoditisation of IT services, advent of new disruptive technologies, e.g., Services Oriented Architecture (SOA) and the blurring of the distinction between hardware, software and services indicate the need for IT-ITES firms to develop more market-facing capabilities and domain expertise and move to a more consumer-centric business model. Customers are becoming more knowledgeable and demanding. They want to move from pure factor arbitrage predicated vendor services to partnerships which deliver business value and productivity gains through innovation.

Benefits of Innovation
There is significant revenue potential to be recognised through innovation leverage. Our analysis shows that the Indian IT-ITES industry can tap additional revenue streams worth ~50 USD Billion by the year 2012 through innovation. This would come about through an accelerated growth trajectory and access to hitherto untapped or under-penetrated market segments.
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In addition to the new revenue pools, strengthened innovation capabilities would also improve the market perception of the firms in terms of key valuation multiples. A recent BCG study of firms across the globe has shown that recognised innovators significantly outperform their peers in terms of total shareholder returns. This trend was observed both globally and across different geographical regions. Therefore the Indian IT-ITES industry needs to make aggressive investments in innovation to firstly, accelerate its growth trajectory and secondly, to develop new sources of competitive advantage to maintain its leadership status.

FIRM LEVEL INNOVATION
Firms are the atomic unit of market competition. They are also the entities that bring products and services to the end customer. As a result, innovation ultimately has to occur in the context of the firm and the industry it targets, irrespective of whether it is a start-up or a large firm.

Current footprint of innovation
The need for innovation has been expressed often enough in the Indian IT-ITES industry. However, in the current context, several ingrained mental models are preventing firms from innovating more. Some of these include: • • • • • • • Clear trade-off between investing in innovation and short-term profit where the latter always wins Current level of innovation is enough to sustain my business Collaboration is not really needed in services space to innovate – firms are better off on their own Why should I share value of innovation with others by collaborating? Shareholders don’t value innovation If I put the right processes in place, innovation will take care of itself My employees are intelligent and motivated – innovation will take care of itself

These perceptions have a strong impact on the decision making and behaviour of a firm’s leadership and, thereby, tend to limit the firm’s innovation agenda. The innovation portfolio of a firm can be measured on two dimensions – the extent of innovation and the area of innovation. The first dimension, i.e., the extent of innovation is defined by the extent to which the competitive boundaries are pushed and what sort of relative competitive advantage is gained by the firm through innovation. Three distinct types of innovations affect a
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firm’s competitive advantage. Sustaining innovations help firms maintain their current position in the market. Enhancing innovations, on the other hand, help a firm gain a clear advantage over its peers within the ambit of market boundaries. Finally, breakthrough innovations can help a firm to redefine the market boundaries and create unique ‘blue ocean’ strategic spaces for itself. On the second dimension, i.e., area of innovation, firms can make three broad choices – the inputs to the firm, the business processes of the firm and the market-facing areas like delivery and business models, products and services.

Current footprint for the Indian IT-ITES industry leaves scope for improvement

Exhibit 2 The current innovation footprint of the Indian IT-ITES industry as outlined in Exhibit 2 above, is heavily skewed away from market-facing and breakthrough innovation efforts and is focussed predominantly on sustaining, and some enhancing, innovations on inputs and business processes. While sustaining innovations are important, only a significant shift towards more market-facing breakthrough and enhancing innovations will provide the necessary revenue impetus in the medium to long-term. There are several areas of innovation which can address this need, for instance: • Penetrating new customer segments in intellectual asset-intensive service lines like engineering and R&D services •
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Creating IP in emerging technology areas

• •

Developing and codifying specific domain expertise to target consulting and SI services Technical innovations to own standards for next generation of technologies

Pathways to innovation
As market pressures increase, Indian IT-ITES firms will have to change their innovation portfolio to include more market-facing innovations. Already, Tier 1 players in the Indian IT-ITES industry are facing significant pressure on margins and differentiation. At the same time Tier 2 and Tier 3 players are lagging behind the top tier firms in both top-line and bottom-line growth. These challenges can be mitigated by making a conscious shift in a firm’s innovation portfolio. The target or aspirational innovation portfolio to address these challenges should be overweight on the market-facing and breakthrough aspects. The gap between the current innovation portfolio and the target portfolio will point to the extent of change a firm will have to embrace. Assessing the capabilities and success-criteria of the current versus the target portfolio will shape the actions that firms will need to take to bridge the gap successfully. This change in portfolio will require a well thought out transformation roadmap, i.e., a pathway to innovation. The pathway to innovation for any firm can be defined in terms of two broad dimensions: the motivation for innovation and discipline for innovation. Discipline is achieved through policies and practices and also importantly comes through a push from the top. Motivation is achieved through working together and changing attitudes and comes more from a pull across the organisation. Actions that firms take for encouraging innovation will have an impact on the dimensions of both motivation and discipline of the firm for innovation. In the journey towards an optimal innovation portfolio, firms will have to go through three steps: • Creating-the-Foundation: This includes putting in place a defined process to aid in innovation management and also enhancing motivation through specific and directed incentives • Walking-the-Talk: This includes designing the appropriate organisation structure with permeable boundaries that is aligned for enabling innovation. It also requires investing visibly in emphasising the culture of innovation • Working-with-other-Stakeholders: Creating the right portfolio of innovations needs significant collaboration with other ecosystem participants and requires well-defined collaboration models as well as shared aspirations
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Each of these steps that has several sub-steps and options that can be taken by firms to achieve their desired objective as illustrated in Exhibit 3 below.

Three step process required for firms to move along the innovation pathway

Exhibit 3 The Indian IT-ITES firms have a central role in the development of the Indian innovation ecosystem. As the key delivery mechanism for commercialising innovations, and as probably biggest beneficiaries of innovation, they need to take the lead in driving innovation culture and discipline within their own boundaries and then also spurring other ecosystem constituents to collaborate and participate in this exciting journey.

BUILDING INDIA’S INNOVATION ECOSYSTEM
Innovation does not thrive in isolation or silos. An enabling environment at the national/regional/ industry level is required to foster innovation at the firm level. A typical innovation ecosystem provides linkages among the various innovation stakeholders including firms and entrepreneurs, investors, government and governmental bodies, industry bodies and educational and research institutions. These linkages encourage collaboration for idea generation and transformation of ideas into a business outcome. The degree of participation of the different constituents and the nature and strength of their interactions gives the ecosystem its vibrancy and its raison-d’etre.

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Our study of international ecosystems has revealed that the ecosystem constituents need to successfully play myriad roles to produce a vibrant ecosystem. These roles influence the formation of strong linkages between the constituents. Poor performance on any of these roles by the constituents often renders the ecosystem sterile. The powerful role of an innovation ecosystem has adequately been demonstrated in the growth of global technology innovation ecosystems like Silicon Valley, Taiwan, Israel, Eureka, etc. Benchmarking the Indian innovation ecosystem with international ecosystems In order to benchmark the Indian innovation ecosystem, eight international ecosystems were studied during this project and mapped onto a continuum. On one end of the continuum are ecosystems which are dominated by one or few stakeholders, and are thus overly dependant on the dominating stakeholder, e.g., the principal stakeholder in the Cuba bio-tech ecosystem is the Cuban government. The other end of the continuum represents a highly collaborative model in which all constituents play their roles effectively e.g. Silicon Valley, Israel, Eureka, etc.

Relative to international ecosystems, Indian ecosystem is weak on multiple dimensions

Exhibit 4 It is important to also note that ecosystems can and do travel along this continuum as shown in Exhibit 4 above. For example, both Israel and Taiwan started off as ecosystems with strong
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governmental involvement and correspondingly weaker involvement of other constituents but have transitioned into a more mature ecosystem as other constituents have become more active and influence of the government has relatively reduced to a more equal participation. A relative comparison of the ecosystems based on the impact of constituents highlights that the Indian ecosystem is in a relatively nascent stage. The system is weakened by the twin effects of insufficient participation (in terms of roles being played) by different constituents and also weak or negligible interactions between them. While there is ample evidence to show that a vibrant collaborative ecosystem can generate multi-billion dollar opportunities, these structural weakness are preventing India from becoming a global hub for breakthrough innovations in the IT-ITES industry. Eureka is a loosely coupled inter-governmental initiative in Europe which has 35 member states and EU countries as full-time members. It has 11,000 partners from industry including 40% SMEs, research centres, universities and national administrations. It currently has 600 innovative projects underway with budget of Euro 1.8 Billion and since inception, Euro 24 Billion have been raised and 1,800 projects have been completed – amongst them were airline e-Tickets and digital radios. Eureka focuses on providing an ecosystem that enables European firms, research centres and universities to collaborate and develop new technologies. It promotes ‘close-to-market’ innovations by providing a support network which provides branding and access to various resources and reduces cost, risk and time to market for participants through collaborative efforts.

Recommendations for developing the Indian innovation ecosystem
The Indian innovation ecosystem faces several challenges with respect to the performance of various constituents as well as the interaction sets between them. Some of the key ecosystem challenges are: • • • • • • • •
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Insufficient mentoring and networking support for start-ups and entrepreneurs Lack of entrepreneurs focussed on IP development in emerging technologies Lack of knowledge sharing between IT-ITES firms and key user industries Severe lack of funding at the seed / start-up stage No platforms for all stakeholders to interact No market-place for innovation trading in India Tenuous partnership between industry and academia Lack of meaningful collaborations between industry and research institutes

Solving these problems will involve implementing some already known measures but, more importantly, it will also call for some completely fresh and bold initiatives.

1. NASSCOM should scale existing innovation initiatives
To ensure that innovation stays high on the agenda of the Indian IT-ITES firms, existing NASSCOM innovation initiatives need to be scaled up by extending their reach and institutionalising them. The current NASSCOM innovation awards need to move beyond generic recognition of specific achievements by firms towards shaping the innovation agenda of the industry. A greater proportion of recognition should be given for innovations which are breakthrough in nature rather than incremental innovations. Additionally, the award winners should be supported in terms of fully leveraging their innovations in terms of press coverage, global marketing support, networking, funding support, etc. NASSCOM should also continually track the innovation trajectory of the Indian IT-ITES industry. The innovation survey, done for the first time this year, should be converted into a regular initiative to capture the performance and perspectives of Indian IT-ITES companies on different aspects of innovation.

2. NASSCOM should promote an ‘Indi Innovation Framework’
The ‘Indi Innovation Framework’ will adopt a three-pronged approach: • Indi Innovation Certification Programme The ‘Indi Innovation’ Certification Programme can holistically address an entrepreneur’s need of branding, mentoring and networking support thereby increasing the probability of entrepreneur’s success. To ensure that the ‘Indi Innovation’ brand symbolises high quality innovations, ‘Indi Innovation’ certification of an entrepreneur’s idea will require evaluation against a set of rigorous criteria. This brand will provide the certified entrepreneurs with an advantage while competing in the market place for resources and provide access to a support network especially created under the ‘Indi Innovation Framework’. • India Innovation Fund The Indian innovation ecosystem faces severe lack of seed / angel stage funding, a stage where the risk is the highest. Three kinds of risks typically exist during early stage funding: • Idea risk – what if the idea and technology are wrong?
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Execution risk – what if the execution is faulty? Market risk – what if the market doesn’t accept the idea?

Investors seem to be uncertain about which risks to take and the consequent risk aversion has forced majority of venture capitalists to focus on funding only execution risk leading to a major gap for seed / angel stage funding. The India Innovation Fund promoted by NASSCOM will focus on providing risk capital at the angel or seed stage. Some key guiding principles for the India Innovation Fund are: • • • • • Promote innovation in emerging technologies Develop sustainable linkages between entrepreneurs, centres of research excellence, and established firms Foster technology seeding and exchange of information globally Promote and nurture IP driven entrepreneurship Provide priority to commercialisation of domestic R&D

The fund will be created through a public private partnership between the government and the private sector. This approach will allow the government to play a passive role of being a ‘limited partner’ (supplier of capital) while the investment decisions are made by a set of professional fund managers. The government’s funding support will ensure that investments at the riskiest stage of business can be funded adequately by low cost domestic capital. Additionally, the fund will also attract private firms to invest as it gives them access to a unique PPP fund managed by professional managers. By leveraging the ‘Indi Innovation Framework’ this fund will be able to eliminate several information asymmetries that exist between the entrepreneur and the venture capital firms at the seed stage of funding especially in high risk areas. • Thematic Innovation Platforms NASSCOM could bring together several ecosystem constituents to launch theme-based fundamental and applied innovation platforms to provide thought leadership in themes which are relevant to the Indian IT-ITES industry. Fundamental innovation platforms will focus basic science themes while applied innovation platforms will focus on themes that apply these scientific innovations to specific problem domains. Thematic innovation platforms will serve as powerful open networks for ideas and mechanisms for producing collaborative intellectual property. Many of these platforms would find lot of synergies with innovation clusters of industry, academia and research institutes by allowing entrepreneurs to not only exchange ideas, but also transact IP assets. These platforms can
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be made operational through a mix of websites, blogs, publications, special interest groups and regular events including seminars. Several international examples exist of portals engaged in similar activities. Some initiatives that have already gained significant traction are Innocentive, NineSigma, Yourencore, and Yet2.com. Success for the ‘Indi Innovation Framework’ requires the simultaneous and active participation of several stakeholders like venture capitalists, entrepreneur mentoring organisations, governmental bodies, large IT firms, industry bodies, educational and research institutions. This is an important because unless the incentives and interests for all participants are aligned, their wholehearted participation might be suspect thereby endangering the success of this initiative.

3. Government should synergise its various innovation-related initiatives
There are several innovation-oriented initiatives being operated by the government which provide funding and institutional support for research and researchers. There is often a lack of co-ordination between these initiatives causing overlaps and effort duplication and leading to a poor ROI for government innovation investments. A potential serious fallout of this is that ‘innovation’ as a national agenda loses sheen and focus. There are a number of mechanisms which the government can adopt to synergise its disparate innovation initiatives. • Create a National Innovation Policy which identifies the strategic focus areas, operational guidelines, capacity building roadmap, key institutions, funding mechanisms, etc. Specific innovation-related programmes can be launched under the aegis of the National Innovation Policy. As the Science Policy of India metamorphosed into Science & Technology Policy, perhaps a time has come for it to metamorphose into Science, Technology & Innovation Policy • Launch national mission mode projects in key technology areas like automotive, aerospace, defense, space, healthcare, etc. Adopting a mission approach will obtain better synergies through co-ordination of different initiatives and collaboration among industry and research institutions. • Establish a nodal body, National Innovation Commission, to provide innovation thought leadership to both the government and the private sector. This body should be staffed with experts in different fields from not only India but also overseas. A parallel exists in the National Knowledge Commission. Irrespective of the chosen co-ordinating mechanism(s), the three guiding principles for a national innovation agenda are:
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Social welfare goals: E.g., IT enabled healthcare delivery for rural areas, innovative education access programs for far flung and underdeveloped areas, virtual agricultural markets, etc.

• •

Academia and research interests: cutting-edge technologies and emerging fields in telecom, IT, fundamental sciences, etc. Commercial and usability considerations: Financial potential of a technology, potential use of technology in defence, space exploration or other areas of national strategic interest.

An international parallel of a similar coordinating mechanism exists in Israel where the Office of the Chief Scientist (OCS) is the nodal body to coordinate the research areas and investments of the Israeli government. The OCS also influences the research agenda of the Israeli private sector through stimulating collaboration between the government research agencies and the private sector firms. The OCS has distributed R&D grants worth USD 400 million and funds an average of one thousand projects over the last few years. The OCS has also subsidised more than 200 start-ups located in various technology incubators in Israel.

4. Establish Innovation Clusters of research institutes, academia and industry
Lack of physical proximity is often a major barrier preventing collaboration between Indian academia, research and industry. There is a clear shortage of ‘boundary spanners’ – people who can speak the language of both sides. While some of the Indian IT firms have tie-ups with international educational institutes, the breadth and depth of their tie-ups with Indian educational institutes pales in comparison. This initiative could bridge this gap by bring the academia, research institutes and industry closer to each other to foster more meaningful collaborations. For promoting these innovation clusters, focus should be to build thematic clusters which leverage local industries and institutions and allows the cluster participants to leverage the concentration of talent already available in the vicinity or attract talent around a particular theme. Such thematic innovation clusters would lead to focussed research and accelerated creation of IP assets. As an illustration, Pune and Chennai could be innovation clusters for automotive and wireless technologies respectively. International examples of such efforts which have yielded positive results are Taiwan and Germany. Apart from generating wealth and encouraging entrepreneurship in the local economy, the innovation clusters present a win-win situation for all cluster participants:
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Academia and research institutes will be able to enhance their brand, get better access to funding for post-graduate and doctoral research, develop curriculum which is better aligned with industry needs and also gain financially from collaborative IP creation. The faculty and students can participate in wealth creation through entrepreneurship. IT firms would develop a better understanding of market facing needs by collaborating with local user firms resulting in development of user relevant IP assets. Working with the academia and research institute will allow the firms to gain early access to research outputs and also influence the research agenda of the institutes. User industry firms can reduce their R&D costs through outsourcing their R&D and collaborating with IT firms and research institutes.

5. Government should implement bold changes in the policies related to innovation
There is little doubt that the Indian innovation related policy framework needs to be revamped to provide stimulus to the national innovation agenda. While some of these changes will be amendments to existing regulations, there is also a need for introducing some bold measures. • Patents & Copyrights: India has amended its Patent Act 1970 under WTO’s agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and the existing regulations are aligned with global agreements. However, the overall IPR environment in India can be improved still further: Create a National Patent Fund or encourage existing funds to provide financial support to technology entrepreneurs (especially new start-ups) for the entire patent life-cycle management. Establish more patent offices, especially in cities which are major IT hubs including Pune, Hyderabad, etc. • Improve efficiency of existing patent offices through upgrading their infrastructure Invest in capacity building for IPR enforcement in judiciary Create IP courses in secondary and tertiary education curriculum, especially in technology, management and law institutes Business Environment: Although the Indian business environment has demonstrated a significant improvement over the last few years, India still ranks 116 out of 155 countries when it comes to the ease of doing business. Some recommendations for improvement are: Simplify entry and exit procedures for firms through ‘single window’ clearances
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Streamline the import and export procedures and make the existing custom offices more efficient by upgrading their infrastructure Structure the Indian bankruptcy law along the lines of developed countries e.g. businesses that fail should be able to restructure and remove their debt Simplify procedures for entrepreneurs to exit from businesses which have failed to minimise the current situation of good capital being stuck in bad businesses Rationalise the statutory compliance requirements which pose a significant financial and operational burden on the entrepreneur Provide special incentives to encourage the Indian Diaspora to invest in technology start-ups in India

Venture Capital: While risk capital availability in India has shown a tremendous surge, some policy reforms are required to stimulate further growth: Treat investments by banks in venture capital funds which invest in seed stage funding as part of the bank’s priority sector obligations Stimulate seed capital funding by providing strong financial incentives to the investment community including tax write-offs for losses, no tax on profits for a stipulated period, direct tax benefits for investments, etc. Provide incentives to local industry firms and financial institutions to invest in domestic venture capital funds with additional incentives for investments in seed funds. Incentives could include investments in VC funds being classified as R&D expenses, zero capital gains tax on returns from VC funds, etc. Relax constraints on institutional investment in domestic venture funds Allow the creation of venture capital funds as Limited Liability Partnerships (LLP) and Limited Liability Corporations (LLC) Stimulate investments by High Net Worth Individuals (singly or as a group) in technology start-ups by providing financial incentives including offsetting the investment against taxable income

Commercialisation of domestic technology: To stimulate the demand and supply side of technology development, some specific recommendations are as follows: Provide priority funding for technology development projects which are being executed either by a consortium of firms or by a consortium of private sector and public sector institutions Encourage public private sector partnerships for R&D in sectors which have little private sector participation currently, e.g., defence, space, atomic energy, etc. Provide preference in government procurement for IP assets created in India

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Create enabling legislation to encourage commercialisation of IP assets created through government funding or owned directly by the government. A parallel exists in the Bayh-Dole Act in the USA.

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Encourage research institutes to invest in industry focussed research by linking a proportion of the funding provided to institutes to the number of patents generated / licensed by the institute

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Remove restrictions on the participation of research scientists and academics in commercialisation of their research outputs Encourage technology educational institutes to set up incubation centres to stimulate entrepreneurship among both the academia and student community. The incubation centres should be provide more than mere infrastructure and should be able to facilitate the services required by a entrepreneur through linkages with entrepreneurs, venture funds, government agencies, etc. Additional stimulus to this could be provided by reserving a portion of the various government research grant programmes for ventures launched from these incubation centres.

6. Collaborate with international educational institutes to increase quality of local research
An important reason preventing the quality and quantity of academic research in India, especially in IT related technologies is the lack of best-in-class post-graduate and doctoral research programmes. India produces less PhD scholars in IT technologies annually than any one leading academic institution in the USA. While initiatives like innovation clusters can address this shortfall, their impact will happen only in the medium to long-term. A pragmatic approach to improve the quality of academic research in a reduced time-frame is to develop partnerships with international institutes who are eager to invest in collaborations with Indian academic institutions. Such bilateral collaborations will benefit both Indian and the international institutes. While Indian academia get access to cutting edge technology and process know-how for accelerating the quality and quantum of research, the international institutes will get access to the Indian talent and knowledge about the domestic market. A parallel exists in the efforts by ‘National Research Foundation’ in Singapore which strongly encourages collaboration of Singapore educational institutions with their global peers. To make such collaborations sustainable, the government and the Indian academia will have to review many aspects of the education regulatory framework and be prepared to take some bold steps in amending regulations which impede such collaborations especially those related to operational autonomy of academic institutes and allowing FDI in the education sector.
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***** The Indian IT-ITES industry today stands on the cusp of a unique moment where bold initiatives created through ‘out-of-box’ thinking and high innovation aspirations can enable the industry to maintain its leadership in face of growing global competition. Failure to act now will be an unfortunate case of lost opportunity. Innovation is therefore critical to for the Indian IT-ITES industry to meet the upcoming challenges and set itself on an even more aggressive growth trajectory. To make this exciting journey towards the innovation high ground successful, the firms need to transform their mindsets and approach and also collaborate and contribute with other ecosystem constituents. The other ecosystem stakeholders including industry bodies, VCs, academia and research institutes, and the government need to put their collective passion and might behind this initiative to give it momentum and strength. A successful innovation wave will not only strengthen the Indian IT-ITES industry but will also give rise to products and services that will benefit a wider cross section of society in both India and other parts of the world and greatly help in addressing the digital divide in India.

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Acknowledgements

Several persons and organisations have played a very important role in the creation of this report. We would like to thank all member companies of NASSCOM for sharing data and their valuable experiences with us. We would like to also thank the NASSCOM Executive Council for their guidance and support in this initiative. We would like to take this opportunity to acknowledge the invaluable contribution by the government agencies, venture capital firms and other experts. We would also like to thank the BCG and NASSCOM teams that worked on this project for their hard work and commitment.

James Abraham Partner and Director, BCG

Kiran Karnik President, NASSCOM

Neeraj Aggarwal Partner and Director, BCG

Rajdeep Sahrawat Vice President, NASSCOM

Navneet Vasishth Project Leader, BCG

Akanksha Pundir Senior Manager, NASSCOM

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Topic forum participants
Firms
Alexius Collette, CEO, Philips Innovation Campus Dr Anand Deshpande, Founder, Chairman and MD, Persistent Systems Anil Pillai, CEO, rapidEffect Anupama Arya, CEO, Mobera Systems Dr Balu Sarma, Technology Growth Leader, GE India Technology Centre Divakaran Mangalath, CTO, Wipro Technologies Frank Jones, President, Intel India Dr Ganesh Natrajan, Vice Chairman and MD, Zensar Technologies Dr Gautam Shroff, Vice President R&D, TCS Dr G Venkatesh, Executive Director and CTO /Chief Strategy Officer, Sasken Communication Technologies Dr Lin L Chase, Vice President, Accenture Labs India Dr M Vidyasagar, Board member - TCS Corporate Technology Board Manoranjan Mohapatra, President and COO, Aricent Naresh Gupta, CEO, Adobe India Nicholas M Donofrio, Executive Vice President, Innovation and Technology, IBM Corporation Pramod Bhasin, CEO and Managing Director, GENPACT Ravi Pandit, Chairman and Group CEO, KPIT Cummins Ravi Venkatesan, Chairman, Microsoft Corporation (India) Srinivas Polisetty, MD, CSC Vijay K Thadani, COO, NIIT Vijay Kapur, CTO, Microsoft Vineet Nayar, President, HCL Technologies Vipul Jain, CEO and MD, Kale Consultants
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Other ecosystem participants
Abhay Havaldar, Managing Director, General Atlantic Partners Alok Mittal, Partner, Canaan Partners Dr Aruna Katara, Executive Chair, I2IT Pune Dr B Bowonder, Director Research and Dean of Studies, TMTC Dr Deepak Pental, Vice Chancellor, Delhi University Prof Deepak Phatak, Subrao M Nilekani Chair Professor, Kanwal Rekhi School of Information Technology, IIT Bombay Dr Jai Menon, Corporate Director – IT and Technology, Bharti Telecom Dr J Khurana, Director (IPR), DIT Mukti Trivedi, Scientist, TIFAC Dr N Kumar, Secretary, Dept. of Training and Technical Education Dr N S Samant, Joint Secretary, DBT Philip O’ Neil, National Project Coordinator, Eureka London Dr R A Mashelkar, Former Director General, CSIR Rajiv Ranjan, Chief (Joint Secretary) NMCC Dr Reuben Abraham, Director, Base of Pyramid Learning Lab, ISB Dr Rishikesha T Krishnan, Professor of Corporate Strategy, IIM Bangalore Sajid Mubashir, Director, Home Grown Technology Programme, TIFAC Sanjay Anandram, MD, Jump Startup Fund Advisors Sanjay Dutt, Industry Expert Sharad Sharma, MD, Yahoo R&D India S N Zindal, Director General, STPI Sunil Rai, Joint Director, SPJIMR Pune V Govindrajan, Member Secretary, NMCC Dr V B Taneja, Scientist “G” (R&D HOD), DIT Vinutha Raju, AVP, 2i Capital India V S Mahalingam, Director (CAR Technology), DRDO

Consulted firms
AppLabs Accenture Technology Lab Adobe Systems India Aricent Cognizant Technology Solutions Eastern Software Systems Evalueserve HCL Technologies Hughes Systique Corporation IBM Corporation Intel India Ittiam Systems KPIT Cummins Infosystems Marketics Technologies (India) Microsoft India MindTree Consulting Monsoon Multimedia India MphasiS Nucleus Software Exports Patni Computer Systems Persistent Systems Philips Innovation Campus, Philips Electronics India rapidEffect Satyam Computer Services Skelta Software Subex Azure Tata Consultancy Services TechMahindra Wipro Technologies WNS Global Services Zensar Technologies

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Key authors
The Boston Consulting Group The Boston Consulting Group

Arun Maira maira.arun@bcg.com

Suresh Subudhi subudhi.suresh@bcg.com

Gaurav Malhotra malhotra.gaurav@bcg.com

Sushma Vasudevan vasudevan.sushma@bcg.com

James Abraham abraham.james@bcg.com

Yashraj Erande erande.yashraj@bcg.com

Kunal Mundra mundra.kunal@bcg.com

NASSCOM

Navneet Vasishth vasishth.navneet@bcg.com

Akanksha Pundir apundir@nasscom.in

Neeraj Aggarwal aggarwal.neeraj@bcg.com

Kiran Karnik kkarnik@nasscom.in

Ravi Srivastava srivastava.ravi@bcg.com

Rajdeep Sahrawat rajdeep@nasscom.in

Rohini Srivathsa srivathsa.rohini@bcg.com

Other

Saurabh Tripathi tripathi.saurabh@bcg.com

Sanjay Dutt sanjay@dutts.net

Seema Bansal bansal.seema@bcg.com

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