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

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7000 Fax: 91 22 6749 7001

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Fax: 91 124 459 7001

First Print: July 2007

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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 Arun Maira

President, NASSCOM 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

• Creating IP in emerging technology areas

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 • 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

15
 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:
• 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

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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

21
 - 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

22
 - 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.
- 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
- 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.

23
 *****

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.

24
26
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 Kiran Karnik

Partner and Director, BCG President, NASSCOM

Neeraj Aggarwal Rajdeep Sahrawat

Partner and Director, BCG Vice President, NASSCOM

Navneet Vasishth Akanksha Pundir

Project Leader, BCG Senior Manager, NASSCOM

27
 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
28
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 Monsoon Multimedia India

Accenture Technology Lab MphasiS

Adobe Systems India Nucleus Software Exports

Aricent Patni Computer Systems

Cognizant Technology Solutions Persistent Systems

Eastern Software Systems Philips Innovation Campus,

Philips Electronics India
Evalueserve

HCL Technologies rapidEffect

Hughes Systique Corporation Satyam Computer Services

IBM Corporation Skelta Software

Intel India Subex Azure

Ittiam Systems Tata Consultancy Services

KPIT Cummins Infosystems TechMahindra

Marketics Technologies (India) Wipro Technologies

Microsoft India WNS Global Services

MindTree Consulting Zensar Technologies

29
 Key authors

The Boston Consulting Group The Boston Consulting Group

Arun Maira Suresh Subudhi

maira.arun@bcg.com subudhi.suresh@bcg.com

Gaurav Malhotra Sushma Vasudevan

malhotra.gaurav@bcg.com vasudevan.sushma@bcg.com

James Abraham Yashraj Erande

abraham.james@bcg.com erande.yashraj@bcg.com

Kunal Mundra
mundra.kunal@bcg.com NASSCOM

Navneet Vasishth Akanksha Pundir

vasishth.navneet@bcg.com apundir@nasscom.in

Neeraj Aggarwal Kiran Karnik

aggarwal.neeraj@bcg.com kkarnik@nasscom.in

Ravi Srivastava Rajdeep Sahrawat

srivastava.ravi@bcg.com rajdeep@nasscom.in

Rohini Srivathsa
srivathsa.rohini@bcg.com Other

Saurabh Tripathi Sanjay Dutt

tripathi.saurabh@bcg.com sanjay@dutts.net

Seema Bansal
bansal.seema@bcg.com

30
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