Innovation in IT Industry

Descriptive title of study:
Comparative analysis of Indian IT firms vis-à-vis American IT firms with respect to their innovation practices and value-proposition.

Objectives:
1) To compare the innovation practices of leading Indian and American IT companies.
2) To compare the value proposition offered to the client by leading Indian and American IT companies.
3) To study the relationship between revenue per employee, profitability and innovation practices of these companies.
4) To study the relationship between revenue per employee, profitability and value proposition offered by these companies.

Need for the study:
The Indian IT services companies today face perhaps some of the biggest challenges ever. The IT & ITES companies account for revenue in excess of $40 billion, which indicates their considerable size. But lately growth has slowed down. Indian companies have been slow to shift to higher-end services and so far this year has seen no significant IT services contract being signed by Indian majors. In fact, many of the reasonably sized to big-ticket contracts (upwards of $50 million) have gone to MNC services providers like IBM, Accenture, HP-EDS, CSC and others. They have now developed a well-rounded global delivery network as opposed to just an offshore model in select countries, as Indian majors have.
The Indian companies in the past have leveraged the low-cost model of India by using the abundant talent pool domestically. The MNCs have too been able to exploit this not only in India but have gone a step ahead by exploring countries like , Philippines, destinations in East Europe, Russia, China, among others. The MNCs tend to sell a superior value proposition due to their deep domain knowledge and ability to provide end-to-end services that cover the entire gamut from transformational IT services to BPO. The significant offshore leverage that MNCs have built by ramping up presence in low-cost countries gives an additional edge. It is pretty much a level playing field now for both Indian and foreign players. When all things are equal — cost, quality, people, delivery capability — whoever offers a superior proposition will get the business. It’s time that the Indian IT majors, accelerated their shift to a better integrated global delivery network and offer a superior value proposition, lest they are left with only the much smaller contracts. This will help improve revenue per employee and help them offer higher-margin services without incurring additional costs.


Background information:
2007 was a test of resilience for the Indian Information Technology – Business Process Outsourcing (IT-BPO) sector. Nonetheless, the sector successfully countered fresh headwinds of a slowing economy and a financial sector crisis in the US, and sharp appreciation of the INR against the USD, in addition to the already existing supply-side constraints – and maintained its double-digit revenue growth. Driving the sector’s strong performance was more diversified geographic market exposure and continued expansion of the service portfolio, leading steady growth in scale by Indian-origin service providers as well as Multinational Corporations (MNCs) having operations in India.
While many of the challenges faced by the sector persist, and are likely to remain over the foreseeable future, Indian IT-BPO’s demonstrated ability to overcome them and continue on its strong growth trajectory reinforces the conviction in its fundamentally strong and sustainable value proposition. India continues to be the ‘nerve-centre’ for global sourcing with over 2/3rd of the Fortune 500 and a majority of the Global 2000 firms leveraging global service delivery – now sourcing from India.
Positive market indicators and a strong track record strongly support the optimism of the industry in achieving its aspired target of USD 60 billion in software and services exports and USD 73-75 billion in overall software and services revenues, by FY2010.
Yet, the size and scope of the opportunity for Indian IT-BPO, and the strategic advantages in realizing its full potential – are significantly larger. Though India is uniquely advantaged to best address these opportunities, they are not lost to others. Timely, coherent and continued action is needed to ensure that India makes the most of these opportunities and maintains its lead.
LITERATURE REVIEW:

Hemmerts, M., “Innovation management of Japanese and Korean Firms: A Comparative Analysis”, Asia Pacific Business Review, Vol. 14 No. 3 (2008): 293-314.
Ab: The technology strategy of firms can be described in general as their selection of investments into the development of new products and processes. Both Japanese and Korean firms may be characterised as strongly entrepreneurial since their average R&D intensity is higher than that of their rivals from all other leading countries. The cultural aspect responsible for this similarity is their collectivism. However Japanese firms have become known as technological forerunners in electronics, microelectronics and automobiles. The strategic behaviour of the Japanese firms in the field of innovation appears to be mostly risk averse and conservative. Korean firms, on the other hand, have become known for their aggressive, risky and diversification strategies. This difference primarily appears because Japanese firms are consensus driven thereby taking more time in decision making, whereas Korean management style is more hierarchical.

Ibata-Arens, K., “Comparing National Innovation Systems in Japan and the United States: Push, Pull, Drag and Jump Factors in the Development of New Technology”, Asia Pacific Business Review, Vol. 14 No. 3 (2008): 315-338.
Ab: Japan and USA have both come up with national level policies supporting new business creation emerging sectors which have played an important role in facilitating growth in new industries. But Japan has lagged behind the USA in terms of its capacity to produce new technology bases start-ups, particularly in life sciences .Japan however has been catching up in this regard by giving high importance to VC funding and national mindset for small-scale businesses and start-ups. The following factors in life sciences innovation discussed in the study have been discussed: market, scientific seeds, commercialization, venture capital, policy, patent system and socio-political culture. The US is predominantly following push approach while Japan is moving from a drag to a push approach in these factors.


Taplin, R., “Japanese Intellectual Property and Employee Rights to Compensation”, Asia Pacific Business Review, Vol. 14 No. 3 (2008): 363-378.
Ab: The study states that the changes in the laws regarding IPR have made the Japanese patent system more specialized and better able to cope with this area of law with its complexities. In terms of IP development in Japan, the changes to the procedures for attacking the validity of patents are also important as they render proceedings fairer and more efficient. There will be more developments in the future, and these changes will help to ensure that Japan has a fast and reliable patent enforcement system. Importance has been given to the inventors for without inventive and creative people there is no innovation in any society; over time, both economy and society perish without creative talented people. Also Japanese industry, which is keen to protect itself from products produced by Asian competitors at lower cost, has shown signs of attaching more importance to intellectual property rights and their enforcement. I light of this, both government and industry have been keen to have a specialist patents enforcement system.

Okada, Y., “From Vertical to Horizontal Inter-firm Cooperation: Dynamic Innovation in Japan’s Semiconductor Industry”, Asia Pacific Business Review, Vol. 14 No. 3 (2008): 379-400.
Ab: Japanese semiconductor industry was traditionally cooperating horizontally among fiercely competing semiconductor manufacturers was possible only in pre-competitive leading-edge research areas and with the help of government subsidies. The situation changed in the 1990s when Japanese companies faced path-disturbing contingencies. Despite the need for drastic and quick changes, the companies told the equipment manufacturers to prove themselves in market competition. Unexpected consequences of small companies cooperating in one area and competing in another have emerged. Unlike in the past, cooperation between Japanese semiconductor manufacturers is now more open, fluid, calculative and rational, though still with some traditional sense of commitment. Though newly emerging conditions shifted the nature of cooperation from vertical to horizontal and that of competition from firm-based to modularized-product based, it has been enduring value of cooperative learning and synergetic effects that has maintained the continuity of Japanese traditional institutions.

Storz, C., “Innovation, Institutions and Entrepreneurs: The Case of ‘Cool’ Japan”, Asia Pacific Business Review, Vol. 14 No. 3 (2008): 401-424
Ab: Japanese entrepreneurs created their own innovation system for the game software by converting and displacing institutions and by combining them to form a new institutional setting. Conversion means that the established institutions are channelled to fit a new purpose. Displacement is bringing in new institutions, such as Japanese game software firms sought out and attracted young, performance-oriented designers, thereby displacing established institutions in personnel management. The industry also tells that politically it may be wise to embrace variety. The variation of a given set of dominant and peripheral institutions opens up options for new combinations. Therefore there is no one “best practice” model for innovation and that innovation need not occur through start-ups in the form of a Silicon Valley model. With few exceptions, the leading Japanese game software publishers are not start-ups. But in the face of declining market shares in the United States, a few adjustments in Japan may be necessary.

Bhardwaj, D., “Relationship marketing in context to the IT industry”, Vision- The Journal of Business Perspective, Vol. 11 No. 1 (2007): 57-66
Ab: The study gives one of the best ways for a service firm to increase its market share- win new customers or clients and reduce the loss of customers or clients. By directing its strategy to its existing customers, relationship marketing directly addresses the last two- expanding relationships and reducing customer defections. Relationship management is an ongoing activity with existing and new customers, and it should be tracked through milestones such as targets of performance set for the marketing personnel in terms of revenue growth through repeat business, referrals and customer satisfaction and “Return on Relationship (ROR)” scores among many others. The focus therefore has to be laid on measurement for effective results for all service firms especially for IT firms. Relationship marketing is here to stay as the key strategy for marketers and this is substantiated best by the fact that for top IT companies, majority of the business is coming from existing customers and this is an indication enough of the times to come, in the IT business.

Chen, Y., “The upgrading of Multinational Regional Innovation Networks in China”, Asia Pacific Business Review, Vol. 13 No.2 (2007): 373-403
Ab: the findings of this research suggest potential new stage of globalization of R&D characterized by MNCs moving beyond dichotomy of advanced research in the Triad countries and low end routine research in developing countries. MNCs have begun to seek a wider scope of assets from a greater geographical scope targeting emerging economies such as India and China. Their main motive is to relocate their technology driven centres and market-driven centres to these countries. Focussing mainly on China, the factors cited for this trend are highly motivated and entrepreneurial engineers and the mediation of the transnational Chinese returnee community. To reduce the risk most R&D centres start as small experimental units, often in the production and product adaptation unit or software development unit. The companies are surprised by the motivated pool of talent in these countries which leads them to upgrading these units to high-end research centres. The commitment to having foreign R&D centres locate in China remains a central feature if China’s innovation strategy. Therefore they follow a process of evolution and learning-by-doing. Besides the increase in scale and scope, the technology level of these centres often rises gradually. This up gradation requires strong and supportive regional innovation networks linked to the global innovation networks. The findings state that China attracts both asset-seeking and asset-exploiting types of innovation embedded in MNCs’ regional innovation networks.

Sun, Y., M.V. Zedtwitz and D.F. Simon, “Globalization of R&D and China”, Asia Pacific Business Review, Vol. 13 No. 2 (2007): 311-319.
Ab: China has become a major attraction for foreign R&D. It is clear that China is not satisfied to be a manufacturing base for the world and now strives to become an innovation-oriented country. It can be expected that foreign companies will continue to invest in China to establish their R&D facilities. Chinese leaders have stated their commitment to become an innovation centre over the nest 10-15 years, strengthening indigenous R&D capabilities while continuing to welcome and harness foreign R&D activities. The future performance of such innovation centres depends upon a combination of factors largely tied to the degree to which these centres become integrated into the fabric of the country’s overall R&D system and market for talent.
Jauhari, V., “India’s Preparedness for Knowledge Based Economy: Opportunities and Challenges”, Journal of Services Research, Vol. 7 No. 1 (2007): 59-80.
Ab: The study uses Knowledge assessment Methodology (KAM) developed by the World Bank. It is a user friendly tool designed to assist client countries to understand their strengths and weaknesses in terms of their ability to compete in the knowledge economy. Using this index India has been compared with numerous other countries such as Singapore, Taiwan, Hong Kong, Korea, Malaysia, Thailand, Mongolia, Philippines, China and Vietnam over the time period 1995 to 2004. The comparison shows that China is placed better than India on Knowledge Economy Index. India though having low scores in Economic Incentive Regime, Education and Information Infrastructure, has high score in Innovation which shows an advantage in the knowledge economy. The key factors included to assess innovation are Foreign Direct Investment, Royalty and license fees, Scientists and engineers in R&D, Patent applications, Research collaborations between universities and industry and Aggressiveness companies absorbing new technology.

Ghai, S.C., “India’s Competitiveness in Software Industry Based in Porter’s Diamond Model”, PhD. Thesis, University Business School, Panjab university, Chandigarh, (2006).
Ab: The study looks at the relation importance of four basic determinants of Porter’s Model. The company strategy is rated as the most important determinant for competitiveness, followed by cost of manpower and quality of demand respectively. The determinant least important is related and supporting industries and institutions. The factor conditions considered ion the study are manpower costs, capital resources, availability of software technology parks, entrepreneurial skills and geographical location. The highest importance goes to the large availability of engineers and English language proficiency. The cost factors such as cost of manpower, telecommunication and cheap capital/ venture capital are rated very high. Demand from developing countries, innovation and new developments in software products are too very essential for a competitive edge of the firms. The government’s role is considered to be very important such as better infrastructure, favourable foreign policy towards major buyers and tax incentives are needed, but subsidies might not be very beneficial. The future of the onsite services looks positive for the next five years while off-shore projects, customized products, IT training and consultancy will be the growth drivers in the next ten years. A comparison of competitive advantage of India and China for the software industry shows that India has an edge in availability of skilled manpower, national vision and strategy, manpower cost and educational infrastructure, while China has an edge in Government support, manpower cost and national vision and strategy.

Goyal, P. and A. Sahay, “Offshore Outsourcing of Business Processes: Understanding IPR Implications, Metamorphosis, Vol. 6 No. 2 (2007): 105-114.
Ab: Firms in today’s economy primarily invest in intangible assets and keep their investment in fixed assets at minimal level, since intangible assets are value drivers. Intellectual property can be defined as a combination of human capital- brains, skills, insights, and potential of those in the organization- and structural capital- things like the capital wrapped up in customers, processes, databases, brands, and IT systems. It is the ability to transform knowledge and intangible assets into wealth creating resources, by multiplying human capital with structural capital. In case of offshore outsourcing, the relevant regulatory environment would be that of both the regulatory environment in the country of the client and that of the service provider. Therefore IPR laws are very important in this context. An environment that supports and demonstrates protection of IPRs is desirable an therefore evaluation of regulations and enforcement of domestic and offshore destination, IPR international conventions and standard and regulations, industry standards, firm level IPR protection methods and competitor access to same service provider is very important. For the IPRs that can have high IPR implications, the organization should look at creating, exploiting and protecting these to create a competitive position.

Nirjar, A., “Innovations and Evolution of Software SMEs: Exploring the Trajectories for Sustainable Growth”, Vision- The Journal of Business Perspective, Vol. 12 No. 2 (2008): 47-59.
Ab: Three trajectories of growth are possible for a software firm: the process of software development i.e. new tools, techniques and languages can be developed is the first. Second is by substitution of generic packages by customized software, third is by organizational innovations in managing people and processes. These three have at times been found to be inter-related and interdependent. For the software SMEs in India, continuous growth is possible through efforts for acquiring technological sophistication and advancement and endeavouring to move up the software development value ladder by performing technologically more complex tasks. Software development being essentially knowledge-intensive and an innovation-driven activity, the firms need to concentrate on certain aspects, which are critical to its competitive performance. A consistent effort towards adopting and utilizing the latest technology would have a commendable effect on enhancing firm’s innovativeness and would assure that the firm is able to perform the activities and develop the products which are highest standard thereby ensuring their acceptability across the globe. The software firms should involve in attaining the status of high innovativeness firms. The software value proposition has been depicted as programming services as the lowest, lead by project implementation, package implementation, system integration and IT led business strategy respectively.

Jackson, K. and P. Debroux, “Emerging Patterns and Enduring Myths of Innovation in Japan”, Asia Pacific Business Review, Vol. 14 No. 3, 451-467.
Ab: It is possible to stay reasonably optimistic about the future if Japan as an innovation country. The third basic plan in science and technology launched in 2006 focuses on the commercialization of technologies, and on public education in the scientific and social potential effect of the discoveries of the last decade. Focus is put on patents and patents and their management, and on the financing of research through competition driven subsidies, while keeping a national evaluation system. For now, Silicon Valley cluster model for innovation may remain largely alien to the Japanese scientific and business environment. It is unlikely that the same entrepreneurial drive based on innovative start-ups will suddenly emerge in Japan. However, successive governments in Japan and private organizations appear now to share a commitment towards keeping Japan a competitive country in the world. The national innovative system should be more flexible and responsive. Consequently, in their own way and without changing fundamentally their traditional paradigm, what Japanese organizations are trying to achieve in terms of innovative activity may prove to be successful in the long term.



“Measuring Innovation 2006: BCG Report” www.bcg.com/publications/files/2006_
Innovation_Metrics_Survey.pdf, visited on September 08, 2008.
Ab: Companies globally are attaching ever-greater strategic importance to innovation and raising their spending on it proportionately. Yet there is a critical element missing: metrics and measurement. Although companies certainly realize the importance of measurement, few companies, in practice, rigorously track their innovation efforts from start to finish. And among those firms that do try to measure innovation carefully, few are confident they’re getting it right. Without a doubt measuring innovation is a challenge. It is also, however, a necessity, given the rising sums most companies are investing in innovation and the competitive implications of earning a poor return on that investment. Yet few companies, at this point, are measuring their innovation efforts with a sufficiently high degree of thoroughness, rigor, or accuracy. For the companies to improve, two ideas are given: aligning metrics with innovation strategy, and focusing on a suite of measures that covers all three components of innovation—inputs, processes, and outputs. Understanding which type of innovation your company needs to meet its objectives will help determine the type of metrics you need to institute and concentrate on.

Farrell, C.J., “How to Measure Innovation in the Products and Services of Firms and Use it to Explain GDP Growth for the Second Half of the 20th Century”, http://www.techmatt.com/techmatt/Farrell0308.pdf, visited on September 06, 2008.
Ab: In the 1980’s it was thought that the problem of measuring innovation had been solved by Richard Foster’s pioneering work. But the practical implementation of his measurement was difficult in most cases, and impossible in others - so only a few iconic examples exist. And in the 1990’s Harvard Business School’s Clayton Christensen explored a further limitation - innovation often changes the engineering basis of measurement. But by using economic, instead of engineering data, these difficulties are overcome. This opens the door to enumeration by the market and delivers a new innovation tool. The output of innovation can be quantified by the relative desirability of new products and services to the final purchaser - measured in utils. The study compares different new products considered to be innovations such as tyres, pens and computers over the years. The firms that survive take the products of their better technology forward; those that don’t are absorbed or disappear. The economist Joseph Schumpeter aptly called it ‘creative destruction’.

“NASSCOM-IDC Study on the Domestic Services (IT -ITES) Market Opportunity” http://www.nasscom.in/upload/5216/Domestic%20Services.pdf, visited on August 29, 2008
Ab: The Indian Information Technology (IT) and IT Enabled Services (ITES) success story and its paradigm changing impact on global service delivery is now a well acknowledged fact. However, much of the success achieved by the sector has been attributed to the meteoric growth in exports – that has overshadowed the latent opportunities unlocked and growth observed in the domestic market over the past few years. ITES-BPO is a very nascent segment of the domestic market, driven by voice based services with customer care and sales and marketing activity accounting for approximately 70 percent of the total. While cost savings have been the primary driver of offshore outsourcing, vendors do not have comparable differences in labour costs to leverage while serving the domestic market. As a result, the primary motivation for the domestic market, in its early years of evolution are not cost savings but access to specialist skills and freeing client resources to focus on the core business. Scalability and process efficiency is expected to return some degree of cost savings in the domestic market as well. However this may not compare with the levels achieved by overseas (e.g. US/UK) clients. Notwithstanding its relatively smaller contribution to the industry revenues, this segment has over the past twelve-eighteen months witnessed a noticeable increase in interest and activity on the part of customer organisations as well as service providers.

“NASSCOM-McKinsey Report 2005: Extending India's Leadership of the Global IT and BPO Industries”, http://www.mckinsey.com/locations/india/mckinseyonindia/Pdf/
NASSCOM_McKinsey_Report_2005.pdf, visited on September 05, 2008
Ab: The addressable global market for off-shore IT is around US$150-180 billion. Going forward, the more traditional IT outsourcing service lines such as hardware and software maintenance, network administration and help desk services will account for 45 per cent of the total addressable market for off-shoring and are likely to drive the next wave of growth. Service lines that have driven recent growth, i.e., application development and maintenance (ADM) and R&D services are already 30-35 per cent penetrated and are not as likely to grow dramatically. The addressable market for the global BPO industry is equally sizeable and could expand by more than 10 times from its current size of approximately US$11.5 billion to at least US$120-150 billion. BPO growth will be driven largely by traditional industries (e.g., retail banking) and cross-industry functions such as Human Resources and Finance & Accounting. India's leadership position in the global offshore IT and BPO industries is based on five main advantages: abundant talent, creation of urban infrastructure, operational excellence, a conducive business environment and continued growth in the domestic IT sector that provides enabling infrastructure and develops a broad-based skill base. To stay in the lead, India should adopt majorly the following four points: accelerate trade development efforts, improve talent supply, strengthen local infrastructure and drive operational excellence.
“NASSCOM-BCG Innovation Report 2007: Unleashing the Innovative Power of Indian IT-ITES Industry”, http://www.nasscom.in/upload/53197/NASSCOM-BCG%20
Innovation%20Report%202007-%20Exec%20Summary.pdf, visited on August 27, 2008
Ab: 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. The following six suggestions have been given to aid innovation in the IT industry: NASSCOM should scale existing innovation initiatives, NASSCOM should promote an ‘Indi Innovation Framework’, Government should synergise its various innovation-related initiatives, Establish Innovation Clusters of research institutes, academia and industry, Government should implement bold changes in the policies related to innovation and Collaborate with international educational institutes to increase quality of local research.

“NASSCOM Software Product Study”, http://www.nasscom.in/upload/57998/
Software_Product_study_exec_summary.pdf, visited on August 30, 2008
Ab: While India’s contributions to global technology intellectual property (IP) creation have grown steadily, relatively few Indian software product businesses have achieved significant global success. However, recent trends in market activity aided by a maturing ecosystem indicate that Indian software product businesses are now approaching an inflection point in their evolution. The next decade will be a period of disruptive growth for this segment, with the annual revenue aggregate of Indian software product businesses forecast to grow from USD 1.4 billion in FY2008 to USD 9.5 to 12 billion by FY2015. The following factors contribute in the software product differentiation and innovations: accelerating growth and increasing global recognition, widening industry product portfolio, broadening industry-base, increasing incubation support and venture capital (VC) interest and growing addressable market potential.


“NASSCOM Strategic Report 2008”, http://www.nasscom.in/upload/SR2008_Exec_%20
Summary.pdf, visited on August 30, 2008
Ab: While many of the challenges faced by the sector persist, and are likely to remain over the foreseeable future, Indian IT-BPO’s demonstrated ability to overcome them and continue on its strong growth trajectory reinforces the conviction in its fundamentally strong and sustainable value proposition. India continues to be the ‘nerve-centre’ for global sourcing with over 2/3rd of the Fortune 500 and a majority of the Global 2000 firms leveraging global service delivery – now sourcing from India. The study lays emphasis on better value proposition. Indian IT-BPO is at the forefront of enhancing the global sourcing value proposition. The maturing supplier landscape in India is also helping buyers explore means of enhancing the global sourcing proposition, by delivering additional business and strategic value beyond the established primary benefits. Indian IT-BPO is delivering this additional value through a combination of improvements in quality, speed and flexibility, productivity and delivery innovation. India-based IT-BPO companies are making focused investments in capability building across domain, process, technology expertise coupled with enhanced flexibility to deliver on this enhanced proposition.




Nollen, S., “Intellectual Property in the Indian Software Industry: Past Role and Future Need”, http://www.iipi.org/reports/India_Software.pdf, (2004) visited on September 10, 2008

Ab: The Indian software industry created very little new and valuable intellectual property in the past. Intellectual property development was not important to the industry’s growth and development. Few companies filed for patents or registered copyrights in the US. Foreign-owned firms operating in India did so more frequently but Indian-origin output of patents and copyrights was still relatively small. However, the rate of patenting and copyrighting activity has accelerated dramatically in the last two years. Protection of intellectual property in India has been below international standards in some respects. India does not grant software patents. Some copyright standards are equal to the world’s most stringent, but others are not. Enforcement is the principal weakness. Both standards and enforcement are likely to be improved in the future, but not immediately.


“A ‘Certified’ Opportunity for India’s Software Products Industry”, http://download.microsoft.com/download/6/9/f/69f8c76b-198e-4114-9c12-f0b13e4d7e4e/certified_opportunity.pdf, visited on September 11, 2008
Ab: In recent years, India has emerged as a global leader in information technology services and support, but the country’s commercial software sector has not yet achieved the same level of success. Despite impressive advances, the Indian software-products industry is experi­encing growing pains as it continues to evolve and mature. The greatest barrier to growth is a lack of established and efficient processes for software develop­ment. Without these protocols, ensuring consistent product quality, reliability and scalability – and, in turn, customer satisfaction – is difficult. Addressing these issues systematically will unlock the innovation and growth potential of India’s software industry, which by one estimate is projected to reach $50 bil­lion by the end of 2008. The study discusses the importance of building the ‘made in India’ brand through training, consultation, assessment and certification of the available talent pool as software development unlike IT asks for higher level of programming and understanding skills.

“Globalization of Engineering Services: The Next Frontier for India: Booz, Allen and Hamilton Report”, http://www.boozallen.com/media/file/Globalization_of_
Engineering_Services.pdf, visited of September 12, 2008
Ab: A new window of opportunity is opening for India now. Even as Indian vendors continue to move from strength to strength as providers of Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) services to companies around the world, this model is now helping to expand outsourcing to Engineering Services Outsourcing (ESO). The study cites the experience and strong track record of ITO and BPO as an excellent value proposition to boost the confidence of would-be global clients in India’s capabilities. The “India Inside” label is going to make a positive impact in the global arena. In innovation particularly, firms that outsourced such development work to India met projected savings goals. The delivery models have been well developed for ITO and BPO which shall be a very important factor to be replicated in ESO.


Nollen, S., “Software Idustry Performance in India and China”, http://www.ris.org.in/
India_Globalisation_Software%20in%20India%20and%20China_Stanley%20Nollen.pdf, visited on September 13, 2008
Ab: The Indian software industry has grown rapidly as the world’s leading exporter while the Chinese software industry that is equally as large and fast growing is little known outside China. Indian software firms are competitive exporters because of the low cost of skilled labor, but Indian firms have neither higher labor productivity nor lower labor wages than Chinese software firms. India’s labor advantage over Chinese firms is that its firms have a more skilled workforce without higher cost, and more experienced managers. Indian software managers achieved quality certifications for their firms, unlike Chinese managers, and quality certifications contribute to firm growth. The Indian national culture that tolerates uncertainty and the independence of action exhibited by Indian professionals is conducive to software production. Among the most important strategies of Indian software firms is the establishment of non-equity strategic alliances with foreign firms. The NRI base was important for India’s performance but no longer is. Also English language proficiency of managers has the largest impact. It is true that software services firms grew up as the license raj was being dismantled, but much beyond that, the government promoted software exports very directly.
Arora, A., V.S. Arunachalam, J. Asundi and R. Fernandes, “The Indian Software Industry”, http://www.heinz.cmu.edu/project/india/pubs/rndmgmt.pdf, visited on September 08, 2008
Ab: Nearly two thirds of the revenues of the Indian software industry are from exports, with a much smaller domestic market. Indian software exports consist largely of low-end software development services. Given the tight labour market conditions in the US, especially for IT workers, the availability of software development services from India has been of substantial value to many large and medium sized US firms that have been able to free up their in-house IT staff for more valuable and creative projects. Experienced engineers trained in IT are now in short supply in India as well, impeding the ability of Indian software firms to offer high end services. The Indian industry is largely complementary to the US industry. Indian firms compete with US firms providing low-end software development and maintenance services. However, many of these US firms rely on Indian programmers as well and have significant India based operations. Further, US firms are likely to increase their involvement with India, both through outsourcing and through directly setting up subsidiaries and software development centres in India. Indian firms hope to use their existing links to acquire domain knowledge and knowledge about the businesses that their clients are in, and to use that knowledge to move up the value chain.


Nanda, R. and T. Khanna, “Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry”, http://www.hbs.edu/research/pdf/08-003.pdf, visited on September 09, 2008
Ab: This study explores the importance of cross-border social networks for entrepreneurship in developing countries by examining ties between the Indian expatriate community and local entrepreneurs in India’s software industry. Entrepreneurs who live in hubs, where the local institutional environment is stronger, are able to avail of these benefits and do not necessarily gain significantly from relying more on diaspora networks. Entrepreneurs based in smaller cities, however, are faced with a weaker institutional environment, where information asymmetries create barriers to trade. diaspora networks help to overcome weaknesses in the informational and contracting institutions in developing countries. Therefore it is those who have lived abroad prior to starting their business who are most likely to access the diaspora networks, hence ‘brain circulation’ might be critical for developing countries to tap into their diaspora.
Liang, L., Sethi, A. and P. Iyengar, “Impact of Software Patents on the Software Industry in Industry”, http://www.sarai.net/research/knowledge-culture/critical-public-legal-resources/whysoftwarepatentsareharmful.pdf, visited on September 10, 2008
Ab: Software has traditionally been protected under copyright law since code fits quite easily into the description of a literary work. Software Patenting has recently emerged as an alternative that software companies are increasingly employing to, in order to protect their products. The issues involved in conferring patent rights to software are, however, a lot more complex than taking out copyrights on them. Specifically, there are two challenges that one encounters when dealing with software patents. The first is about the ‘instrument of patent’ itself and whether the manner of protection it confers is suited to the software industry. The second is the ‘nature of software’, and whether it should be subject to patenting.

Dossami, R., “Origins and Growth of Software Industry in India”, http://iis-db.stanford.edu/pubs/20973/Dossani_India_IT_2005.pdf, visited on August 20, 2008
Ab: The evolution of India’s software industry can be traced back to its origins in 1974 to the present time. Domestic entrepreneurship drove the industry’s origination, survival and innovation during a time when the state used policy to promote SOEs and to crowd out the private sector. The state’s policies effectively prevented the private development of software in India. The private sector, in collaboration with TNCs, found an innovative solution, that of exporting programmers instead. The growth of the industry, which happened in the mid-1980s, was preceded by a paradigmatic shift in government policy from hostility to the private sector to support for it. While policy reform has put in place several of the conditions for future growth, the shortage of domain skills arising from small domestic markets, limited university research and interactions with the commercial sector remains. Some of these skills are being acquired through cross-border interactions and alliances.


Cusumano, M., A. MacCormack, C.F. Kemerer and W. Crandall, “A Global Survey of Software Development Practices”, http://ebusiness.mit.edu/research/papers/178_
cusumano_intl_comp.pdf, visited on September 11, 2008
Ab: The study compares four countries/ regions viz. India, Japan, USA and EU. Anecdotal evidence emerging about the process and practice strengths developing in India is well founded. They also show some continued strengths in Japan. No Indian or Japanese company has yet to make any real global mark in widely-recognized software innovations, which have long been the province of U.S. and a few European software firms. Indian organizations are doing an admirable job of combining conventional best practices, such as specification and review, with more flexible techniques that should enable them to respond more effectively to customer demands. If such a trend is replicated across the broader population, it suggests the Indian software industry is likely to experience continued growth and success in future.


Mishra, V., “A Study of Performance in Indian Software and Service Industry”, http://www.usc.es/~economet/reviews/eers413.pdf, visited on September 12, 2008
Ab: The study does a comparative analysis of five major Indian IT companies viz. Infosys Technologies Ltd., Wipro Technologies Ltd., HCL Technologies Ltd., Satyam Computer Services Ltd. and I-Flex Solutions Ltd. with a “Strategy” perspective. There has been a separate focus on the strategies followed by each Individual organization strategies over the period of years, and how have they been able to make mark for themselves riding on their respective strengths. The growth strategy for the industry as a whole is summarized in three stage: start up, growth and acceleration.


“R&D and Intellectual Property Rights in Information and Communication Technology Industry in India: A Study by FICCI”, http://www.ficci.com/general/it-spam/back.pdf, visited on September 13, 2008
Ab: Intellectual capital has become critical to the industry and its growth. Successful multinational companies give tremendous value to their intellectual property. It is widely believed, that stronger IPRs in India will greatly benefit software companies across sectors, and will encourage greater product development in India. Strong levels of protection for intellectual properties have encouraged foreign investment in India, with many companies choosing to either set up their own facilities in India or to outsource a large part of their business to India. There has been significant increase in the appreciation of intellectual property and the awareness level has also increased tremendously. This is evident from the increase in the number of patent applications filed in the Indian Patent office, it has risen approximately 150% in 1997-98 from 1993-94 crossing the 10,000 mark for the first time in 1997-98.


Chakraborty, C. and D. Dutta, “Indian Software Industry: Growth Patterns, Constraints and Government Initiatives”, http://rspas.anu.edu.au/papers/asarc/
chakraborty.pdf, visited on September 13, 2008
Ab: Measured by the age of many industries, the computer or information technology (IT) software industry in India is still in its infancy. Yet, its growth and development has caught the attention of the world market so much so that India is now being identified as the major powerhouse for incremental development of computer software. When compared to Ireland. Mexico, Philippines, Singapore, China and Israel, India definitely leads in software services while lags in software packages and data entry.


Budhwar, R., “Indian Software Industry: the Way Forward”, http://www.fms.edu/downloads/conclub_ITinIndia-TheWayForward.pdf, visited on September 13, 2008
Ab: The study emphasizes the movement upwards in the value chain of the software industry be Indian Software Companies. Broadly, consulting and IT strategy form the top end of the value chain, followed by application design and development, application management, package implementation and finally, network and telecom infrastructure management, that constitute the bottom of the value chain. The way ahead can be achieved through: building up domain knowledge, knowledge management, investing in R&D, scaling up quickly, inorganic growth and global delivery model.













DATA/ METHODOLOGY

A comparative analysis of major Indian and American IT companies regarding their innovation practices and value proposition has to be done. Five companies are selected from each country on the basis of their revenues for the financial year 2007-08 and 2007 respectively. The top five Indian companies on this criterion are Tata Consultancy Services Ltd., Infosys Technologies Ltd., Wipro Technologies Ltd., HCL Technologies Ltd. and Satyam Computer Services Ltd. The top five American IT companies are IBM, HP (after acquiring EDS), Accenture, Fujitsu and CSC. The study will rely on secondary data from various sources for the relevant attributes for each of the company and industry for the last three years. The objectives mentioned will be attained by measuring innovation practices by taking number of patents filed, value of patents, and expenditure on R&D etc. The value proposition will be studied by measuring the share of revenue generated from services at various levels of value chain depicted as programming services as the lowest, lead by project implementation, package implementation, system integration and IT led business strategy respectively (Nilekani, N. 2001). The movement upwards on the above mentioned value chain is called technological growth. The technique of Multidimensional scaling shall be used to find the position of these companies on the innovation practices and value proposition against revenue per employee and profitability. This can be done by using two dimensional imaging.
Multidimensional scaling (MDS) is a set of related statistical techniques used in information visualization for exploring similarities or dissimilarities in data. MDS is a special case of ordination. An MDS algorithm starts with a matrix of item–item similarities, and then assigns a location of each item in a low-dimensional space, suitable for graphing or 2D or 3D visualization.
The sources of data that will be used for the study are:

http://www.wipo.int/ipstats/en/statistics/patents/patent_report_2007.html
Company annual reports
DataQuest (various issues)
http://www.nasscom.in



THE CHAPTER SCHEME

CHAPTER 1:
1.1 Objectives of the Research
1.2 Need for the Study
1.3 Background Information
1.4 Literature Review
1.5 Research Methodology

CHAPTER 2:
2.1 About IT industry
2.2 Evolution of Indian IT industry
2.3 CMMI levels
2.4 Services offered by Indian and American IT companies


CHAPTER 3:
3.1 About Innovation
3.2 Innovation in IT industry
3.3 The IT Value Chain
3.4 Why innovate and move up on value chain

CHAPTER 4:
4.1 Data on attributes of innovation for last three years
4.2 Data on attributes of value proposition for last three years
4.3 Analysis
CHAPTER 5:
5.1 Recommendations
5.2 Conclusion
5.3 Bibliography

BIBLIOGRAPHY

“Global Software Production Network: A Study of the IT Services Industry in India”: http://www.allacademic.com//meta/p_mla_apa_research_citation/1/0/5/3/9/pages105390/p105390-1.php (Accessed on August 21, 2008)
http://www.wired.com/science/discoveries/news/2004/10/65269 (Accessed on August 23, 2008)
Singh S (2008), “Time to rewrite the code”, Economic Times, August 06, 2008
IT-Industry Factsheet: http://www.nasscom.in (Accessed on August 24, 2008)
Nilekani, N., http://www.infosys.com/industries/consumer-packaged-goods/gma-article.pdf, (2001) visited on September 10, 2008
http://en.wikipedia.org/wiki/Multidimensional_scaling, visited on September 11, 2008
http://www.statsoft.com/textbook/stmulsca.html, visited on September 11, 2008

“Comparative Analysis of Indian IT Firms vis-à-vis American IT Firms with Respect to their Innovation Practices and Value-Proposition”

ECONOMICS MIX

Developing economies need a balance in their liberalization policies

Developing economies have emerged as the major contributors in business today. They serve as a catalyst in various financial markets, mergers and acquisitions, research and development etc. They host most of the sunrise industries such as ITES and have forced most of the MNCs to change their business models before. The BRIC nations have been predicted by Goldman Sachs Investment Bank to become among the four most dominant economies by the year 2050. The report states that in BRIC nations, the number of people with an annual income over a threshold of $3,000 will double in number within three years and reach 800 million people within a decade. This predicts a massive rise in the size of the middle class in these nations. In 2025, it is calculated that the number of people in BRIC nations earning over $15,000 may reach over 200 million. This indicates that a huge pickup in demand will not be restricted to basic goods but impact higher-priced goods as well. According to the report, first China and then a decade later India will begin to dominate the world economy. The rapid growth needs a high scale of investment in various sectors of the industry which attracts many risks such as volatility of financial markets, value of currency, bubble-bursts etc. which are shared by the companies, investors, employees, government and society at large. The liberalization policies of such economies have to be framed carefully. India is a case in point which experienced a rollercoaster ride in the last few years.
John Maynard Keynes, the 20th century British economist, in his Keynesian Theory promoted a mixed economy in which both the state and the private sector are considered to play an important role. He believed that in the long run economic systems would not automatically correct themselves to optimal level, even if they did, it would be a very long run indeed. He tersely states his view in his famous quote- “In the long run, we are all dead”. This theory is in stark contradiction to that advocated by Milton Friedman, the American Nobel Laureate economist and public intellectual, who was a strong proponent of laissez-faire capitalism. Milton asserted that business is not the business of the government that is markets and the private sector operate best without state intervention.
Keynesian Theory seems to be the closest to be followed for the liberalization policies in the developing economies, but there is also a need to leave a major portion of the market to the demand and supply equilibrium as argued by Milton in his Monetarist School of Economics or Quantities Theory of Money. In the current Indian scenario, the government needs to regulate the investments, convertibility, exchange rate, inflation, while not hampering the growth. The government should not confine itself to being a watchdog, but make investments in infrastructure, energy and education. The liberalization has to be implemented in a phased manner. It also has an obligation to regulate the impact of rapid industrialization on the environment. Red-tapism is another hurdle to economic development that has to be minimized. India saw FDI inflows of $11.12 billion in 2006 while this year by May these have already reached a figure $10 billion. This is in spite of the roadblocks due to inhibiting policies, labour-laws and bureaucracy. A T Kearney has ranked India as the second most attractive destination in ‘FDI Confidence Index’ for 2005 and the most attractive location for off-shoring of services. Economic growth is driving FDI and trade, and not vice versa. India is the second fastest growing major economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007. The financial markets in the country have seen ups and downs in recent months. Rupee appreciation has cut the margins and hence the profits of exporters, though inflation is fairly under control. In these circumstances, the government needs to protect the interests of all the parties- be it investors or companies. It is high time it realizes its role in pushing the growth story to new heights.
The significance of Milton’s Monetarism and the concept of laissez-faire increase over the Keynesian Theory as the economy moves towards development. Thus at a developing stage, there needs to be a perfect economics mix, a blend of the two major theories to have a balanced and sustained growth.

-Parikshit A

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