Innovation Report Enhancing India Value Proposition through Innovation and Transformation

Transcription

1 Innovation Report 2012 Enhancing India Value Proposition through Innovation and Transformation

2 Executive Summary Innovation and the IT-BPO Industry Innovation is widely recognised as a key driver of national economic growth, with countries that rate highly on their propensity to innovate, showing signs of greater economic prosperity. On most occasions, innovation is driven by corporate firms, with external stakeholders like governments, regulators, academia and industry bodies playing key roles in supporting and nurturing innovators and their underlying research. Innovation is receiving high attention across the globe. Product-led firms, especially in technology-intensive industries have produced a series of highly visible innovations that have revolutionised the manner in which people consume goods and services. The iphone and ipad, the Android operating systems, and the Nano car are well known recent examples. Services-led firms, in contrast, tend to focus more on business model innovation that impact the manner in which they meet evolving customer needs and access new customer segments and geographies. Many firms are also pursuing process innovation to enhance the quality of their output, internal productivity and capacity utilisation, in order to improve profitability. Although popular perception is typically associated with the more tangible product innovation and the introduction of new technologies, the role played by business model and process innovation should not be underestimated and is equally important in ensuring enduring success for firms. In fact, many innovative business models and process innovations have been pioneered by product led firms like Apple, Dell and Toyota to support and enable the success of their products. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 5

3 In India, economic growth and innovation have widely been driven by the services sector over the last two decades. A significant part of this growth has been generated by the IT-BPO sector which expanded rapidly over this period and emerged as a key contributor to the Indian economy. Industry revenues have multiplied more than 100 times since FY1991 and its contribution to the country s GDP has gone up from less than 0.5 per cent to almost 7.5 per cent over this period. The industry is now one of the largest and most sought after employers, employing over 7 per cent of India s professional workforce. Most importantly, India s strong value proposition has continued to drive its global sourcing market share upwards (to 58 per cent in 2011) and allowed the BPO sector to hold on to its position as premier offshoring destination. The future global position looks equally encouraging, with India consistently ranking first in the annual Global Services Location Index published by A.T. Kearney. While not always widely visible, Indian firms have already generated several path-breaking innovations. The majority have been in the areas of business model and process innovation. However, there are now clear indicators of Indian IT services, ER&D firms and start-ups increasingly pursuing product innovation, a space traditionally dominated by MNCs. As India now readies itself to become a leading global IT-BPO innovation hub, the time is right to review the progress the industry has made in terms of innovation capacity, capability and environment and to identify key opportunities for further development. This review uses a case-study-centric approach to understand the drivers and transformational impact innovation has had on the IT-BPO industry, and aims to answer the following questions: What are the drivers and enablers of innovation in the IT-BPO industry? What innovation models and approaches has the industry applied? How has innovation transformed the industry? What impact (financial and non-financial) has been generated? How is the entrepreneurial environment evolving? Where are the opportunities for further enhancement? ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 6

4 Models of Innovation-A Case Study Perspective Imperatives and models This study examines the innovation progress by the Indian IT-BPO industry using A.T. Kearney s House of Innovation framework that assesses innovation along three key dimensions: 1. Innovation Objectives Over the last 5 to 10 years, innovation in the IT-BPO industry has been driven by four key imperatives: Increasing competition: At both global and Indian level, competitiveness has steadily increased. The last few years have seen the rapid rise of a few alternative offshoring locations including China and Philippines; competition is also coming from aggressive localisation of MNCs in low-cost countries. This has compelled Indian firms to innovate in order to retain their market position Evolving customer requirements: Customers are now demanding greater value-addition and transformation support from their IT-BPO partners and have become extremely value-conscious. As a result, IT-BPO firms have adopted innovative business and service delivery models to improve their own cost structures and meet customer requirements without compromising profitability ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 7

5 Sustaining profitable growth: The global economic slowdown and the resulting low growth rate of global IT spend ( about 5 per cent in 2011) has meant that Indian firms have had to innovate for new avenues of growth break the linear growth model and grow revenues exponentially while at the same time improving capacity utilisation Addressing emerging opportunities: Past growth has largely been concentrated around key sectors like financial services and telecom, with the US and European markets accounting for the bulk of revenues. There is now a growing recognition of the significant market opportunities in other sectors and markets including the domestic Indian market. Firms have started to develop innovative products, business models and value propositions to be able to address these new markets and customer segments 2. Innovation Models Innovations in the IT-BPO industry can be categorised into three types: Product innovation for both global and domestic markets, and around existing and new technologies Process innovation focused on efficiency improvements and technology-enablement of existing processes Business model innovation across value proposition, partnerships, pricing, cost structure and delivery networks As indicated earlier, innovation in the Indian IT-BPO industry is largely business model and process oriented. Indian firms have pioneered many successful business models that have allowed India to retain its leadership position in the global IT-BPO sourcing markets. Process innovations are now widely considered as a hygiene factor, often linked to lean operations. Interestingly, the focus on product innovation is rapidly increasing with the advent of MNC R&D centres and the strong growth of the ER&D industry. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 8

6 Sector review: Innovation by MNCs, Indian firms and Start-ups This study analysed the innovation and transformation journey by the Indian IT-BPO industry across three sectors: MNCs, Indian firms and Start-ups. Although each of these sectors pursues innovation along the three dimensions of product, process and business model, the focus and the quality of innovation produced varies across each sector. MNCs continue to lead in product innovation; Indian firms have broken new grounds in using innovative business models and processes to serve their global clients better; and start-ups in India are now intensifying their product innovation agenda. MNCs: Innovation Activities and Outcomes Innovation activities: The Indian R&D centres of MNC firms have been pioneering product innovation in the Indian and global context. For example, Juniper s India centre was key to the development of the world s first integrated security solution for smartphones. The rapidly increasing technological awareness and the increased focus on rural India have led to the development of some truly unique products. Alcatel Lucent s data server for areas with limited data networks and Intel s data gathering handheld were developed with a strong focus on the Indian rural market. Additionally, India s similarity to other emerging markets makes it an ideal test bed for other markets. MNC services firms like IBM, HP and Accenture have focused on process and business model innovation, integrating high-end offerings like consulting into their services portfolio and providing end-to- ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 9

7 end solutions. They were also quick to understand the opportunities in the Indian IT market. IBM, for example, set up its global cloud computing centre in Bengaluru to create a competitive advantage in the Indian market. Outcome: The increased innovation focus has helped MNC firms Indian R&D centres to transform from back-office centres into global product innovation hubs. Indian centres now participate in all R&D stages from conceptualisation to development to product management and have become an integral part of the global innovation networks of MNCs. A similar transformation has happened in MNC services firms. Indian setups have emerged as some of the largest contributors globally and many firms have evolved into key players in the local market. Indian Firms: Innovation Activities and Outcomes Innovation activities: Indian services firms have been at the forefront of many business model innovations, pursuing almost all possible dimensions: value proposition, pricing model, cost structure, target markets, emerging technologies like cloud and delivery network configurations. IT firms are offering specialised services (e.g., L&T Infotech in the energy sector) and are targeting emerging segments like SMBs with new technologies like cloud computing. BPO firms are shifting toward non-traditional verticals and higher value added activities like Knowledge Services and Legal Services and have introduced new models like transaction-based and outcome-based pricing. They are also focusing on large scale transformative internal efficiency programmes that benefit customers. For example, HCL s innovation in application of psychological and production theories to backoffice operations has significantly improved employee satisfaction, operational excellence and customer delight. Indian ER&D firms have leveraged engineering expertise to develop innovative product designs for their clients to drive lower costs and faster time to market. For example, HCL s design recommendations helped a manufacturer of gaming consoles meet extremely tight product release deadlines. Several Indian firms have collaborated with clients to produce breakthrough innovations; Infotech Enterprises Partnered with a global engineering conglomerate to create the world s most eco-friendly aircraft engine. Process innovation by ER&D firms has enabled considerable reductions of design cycles for clients. Mahindra Engineering Services new simulation process to verify automobile designs reduced the number of required manual interventions by 80 per cent. Indian firms have also concentrated on building leaner cost structures. For example, Ruralshores has initiated a completely rural delivery model for domestic clients. Bigger firms like TCS, Infosys and Wipro have adopted a higher on-shore delivery model and wider global footprint through international acquisitions. A large number of Indian and MNC firms are also actively engaged in domestic IT transformation via e-governance projects aimed at improving government service delivery to its citizens. For example, MindTree s innovative biometric-enabled identity management software (ComputeCell) has made a significant impact in capturing an individual s identity on a real-time basis. Outcome: Innovation has helped Indian firms capture major additional elements of the value chain. They have transformed into full-fledged business partners that are driving application development ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 10

8 and managing clients IT systems. A similar transformation can be seen in BPO firms as well, which now undertake enterprise-wide process improvements that directly impact the customers top and bottom-lines. On the ER&D front, a sizeable 15 to 20 per cent of work is now in end-to-end product development. ER&D firms are providing more value-added services and are adding newer verticals like energy, medical devices and semiconductors to their portfolio. Overall, these innovations have seen Indian firms developing into multinationals with delivery centres in nearly 70 countries and a widely diversified workforce with a rapidly increasing number of recruits in overseas geographies. Start-ups: Innovation Activities and Outcomes Innovation activities: Start-ups are emerging as key product and technology innovators in the Indian IT-BPO industry. Advancements in technologies like cloud computing and augmented reality are allowing start-ups to develop innovative offerings and to fill industry white spaces by working in areas like rural healthcare or m-governance, topics not (yet) covered by blue-chip firms. For example, Luna Ergonomics, a Noida-based start-up, has developed a mobile phone keypad technology that supports eleven Indian languages. Moreover, the proliferation of highly successful flagship products like the iphone or the Android operating system has driven significant start-up activities around developing apps. Start-ups have also generated business model innovations around novel routes to market, pricing models or revenue generation mechanisms. Novatium, for example, has tied up with several telecom companies to take its SaaS-based offerings to customers. Outcome: Many start-ups have evolved from low-cost service providers and have become much more product focused, despite higher initial investments and longer payback periods. A clear shift in target markets is also occurring from B2B to B2C segments in an attempt to take advantage of the rising technology penetration in India. Start-ups no longer operate in their own niches, but collaborate with the entire ecosystem. The success of start-ups has transformed the funding landscape by attracting more venture capitalists, private equity firms and angel investors. The number of venture capital funds has nearly tripled in the last five years from 86 in 2005 to about 240 today. Enablers of Innovation Internal Enablers A range of innovation methods have been applied in the Indian IT-BPO industry: Structured and un-structured grassroots innovation: ranging from idea-generating contests to simple suggestion box models Top-down innovation: focused on three to four topics of strategic importance driven by top management Project-based innovation: generated during specific projects or client engagements External innovation: handled through external collaborations or contract work While many established firms have implemented formal innovation frameworks and have a structured approach to innovation, many smaller firms are largely characterised by unstructured and informal methods to encourage innovation. However, even small firms are focusing on ingraining an innovation mindset among their employees. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 11

9 External Enablers Innovation is not just a singularly firm-driven exercise, but often stimulated and furthered by the external environment. The innovation ecosystem for the Indian IT-BPO industry has improved significantly in the recent times, driven by increasing interests by firms and academia to collaborate, enhanced availability of funding, the guiding activities of industry bodies, and favourable government policies. This has started to create a virtuous innovation ecosystem of multiple partners: Within IT-BPO firms, both with peers and smaller and larger organisations Academia, comprising of technology and management institutes that encourage start-ups Government departments, including the National Innovation Council, IT and Telecom departments Investors, including VC funds, angel investors, private equity funds and investment banks Industry bodies, NASSCOM and other industry interest groups IT firms continue to collaborate with their own peers to drive innovation. For example, Cisco operates joint development centres with Wipro, Infosys and HCL, and NetApp has partnered with firms like IBM, Oracle, Microsoft and SAP to develop innovative enterprise storage solutions. There have also been interesting collaborations between larger firms and start-ups, where start-ups bring new ideas and the more established firms provide access to markets and distribution reach. Iken partnered with TCS and Comviva for developing and marketing its intelligent customer analytics tool. Cisco s R&D investment in India also provides funding to innovative start-ups and has focused on rural markets from the onset. Government bodies work with firms to develop and test innovative solutions, build technical capabilities and drive inclusive growth. Top-tier academic institutes (IITs, IIMs and NITs) are becoming key innovation partners for firms. IBM was among the first in the 1990s to set up a research centre at an IIT. Today, there are close to 50 incubation centres, mostly anchored by leading academic institutions. Venture capital, private equity and angel funding has also improved, supporting many investments in emerging technologies and new markets. Today, there are over 240 venture capital funds and more than 250 angel investors in India. This is a remarkable progress from just five years ago and has gone a long way in developing entrepreneurial mindsets and spawning new ventures. Industry bodies like NASSCOM are playing an important role in catalysing innovation by providing platforms to showcase innovation by regularly engaging with thought-leaders to share new thinking on innovation. The India Innovation Fund, catalysed by NASSCOM, is aimed at emerging technologies. Overall, the entrepreneurial environment and culture have evolved strongly, underscored by the quantum of annual investments in IT-BPO start-ups reaching USD 1 billion and the willingness of senior professionals to leave leading firms and pursue their own entrepreneurial endeavours. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 12

10 Impact of Innovation Innovation can have a transformational impact on customers, firms, industries and economies: A. Impact on Customers IT-BPO firms have generated many new ideas for both revenue generation and cost reduction for their clients. Indian firms have developed specific service offerings, particularly in the telecom and financial services sectors, to deliver immediate and tangible benefits for customers. For example, several telecom operators rely strongly on their VAS outsourcing partners to generate new content in form of games, music or applications. Even for core applications, several firms, particularly those with requirements for significant networking and IT equipment, depend on IT firms to develop and maintain their infrastructure. A recent business model trend has been that IT firms are investing in capex on behalf of for their clients and charging them on an opex basis. In the BPO space, firms like Mphasis, Aegis and others have been able to offer end-to-end outsourcing services for non-core process, like collections for financial services firms, allowing clients to focus on higher value adding activities. ER&D firms have realised significant cost advantages for their customers and have achieved a higher client productivity and efficiency. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 13

11 B. Impact on Firms Indian IT-BPO players have used innovation to move up the value chain and improve their competitiveness. Product focused firms have changed from low-cost engineering firms for back-office functions to end-to-end product development centres. Service firms, previously only providers of low-cost testing and maintenance services, have emerged as true business partners for their clients. Several of these innovations, across categories, have been breakthrough and catapulted firms on a higher trajectory. For example, KPIT Cummins developed a revolutionary product that converts standard vehicles into hybrids in 4 to 6 hours and Aditya Birla Minacs has developed a highly cost-effective hub and spoke BPO delivery model, consisting of a network of urban and rural centres. C. Impact on Industry Innovation seems to be propelling an unprecedented non-linear growth in the IT-BPO industry, resulting from higher employee productivity, new business and pricing models and improved use of technologies. Innovation is clearly emerging as one of the accelerating forces behind the industry s impressive and transformational growth over the last decade. The strong recovery after the 2009 recession is another testament to the inherent innovation capabilities of the industry with firms sustaining (and even improving) revenue growth and profitability over the last 2 years. Importantly, the success of India s IT-BPO industry is creating vital innovation spillovers, leading to the setup of many smaller firms, often founded by experienced employees from larger firms (over two-thirds of start-ups are founded by senior executives with more than 10 years experience). Overall, the Indian IT-BPO industry is starting to emerge as a leading global innovation centre and key R&D hub. D. Impact on Economy Innovation in the IT-BPO industry is fostering inclusive growth in the broader Indian economy. Multiple new applications are helping improve rural healthcare, e/m-governance, education and agricultural developments. Innovations in the IT-BPO industry and their spillover effects to other industries are also driving an improvement in India s overall innovation competitiveness. India now ranks higher or at similar levels vis-à-vis its global peers (China and Brazil) on key innovation parameters. IT enablement is impacting consumer lifestyles as well. Mobile-based applications are delivering solutions for multiple lifestyle needs from social interactions to shopping to navigation to document downloads. Google used an innovative data gathering method for its Google Maps application in India by giving open access to users to mark locations. The resulting product is now revolutionising navigation in the country and Google is applying a similar approach in other countries. Probably one the most important outcomes have been the creation of an innovation-focused mindset and talent pool in the Indian economy. The success of the IT-BPO industry and the opportunities available in India have attracted some of the best global talent and inspired talented young Indians to pursue careers in the IT-BPO industry. ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 14

12 International Youth Centre Teen Murti Marg, Chanakyapuri New Delhi , India T F research@nasscom.in ENHANCING INDIA VALUE PROPOSITION THROUGH AND TRANSFORMATION 179