By Zinnov

The outsourcing market in India has grown phenomenally – more than 30 percent a year – for the last several years. From supplying knowledge workers to enterprises across the world, the information technology (IT) industry in India has matured to a level of providing business consulting to Global 1000 companies. Business process outsourcing (BPO) organizations have also grown up the value chain from being the providers of back office operations to providers of high-end analytical services as well as consultants on process re-engineering.

Figure 1: The Innovation Value Chain for the IT Industry in India

Now a growing number of enterprise product companies are using development centers and vendor partnerships in India to build and maintain their products as the core competency and resource pools are mature enough to create innovative solutions.

Product Innovation

In the late 1990s, a few pioneering Silicon Valley companies started operations in India to leverage the cost advantages and the availability of a huge and growing talent pool. A majority of the companies used their India operations to test product quality and to maintain older products so that their local teams could work on newer and innovative products.

This offshoring process accelerated in 2002 when companies realized there was no speedy recovery from the challenges of the economic crisis and they needed to be cautious about their operating costs. The management teams of these organizations were under tremendous pressure to increase offshoring to India. This, in turn, created a talent pool of resources working on software products and assisted in cultivating the mindset of dedicating staff members to problems of innovation.

Figure 2: The Number of Engineering Graduates Per Year in India (2005)

The economic boom in India is also slowly making India an attractive destination for global companies to sell their products. The combination of new market creation in India and the availability of talent with product development expertise has triggered efforts to create innovation from within India. The efforts are categorized as originating from two distinct types of organizations – multinational companies and Indian companies.

Innovations from Multinational Companies

As of 2005, more than 150 international companies, large and small, were doing R&D in India.

Multinational companies started hiring strong leaders to run their development centers in India. Some of these companies imported expats (professionals returning from the United States, the United Kingdom and other Western countries) to run their operations in India. The leadership teams of these companies understood that they could do a lot more from India than simply being a back office to the product teams in their home countries. Thus began a quiet revolution. The India-based leadership teams of these companies convinced their executive management to allow them to take ownership of certain products whereby the Indian teams could conceptualize and build new features and modules.

Figure 3: Product Companies Operating in India (2005)

Internet Innovation

One of the key constraints for fostering innovation in India was the distance between the resources in India and the customers in Western countries. Those who were working on the products did not understand who the customers were or how they used the products. The Internet, however, changed that. For companies such as Google, Amazon and Yahoo, the Internet was the customer; the development teams in India had access to customer information and needs.

Amazon and Google are among the few companies that started their development centers in Bangalore to create completely new products rather than simply as the back offices to their U.S. organizations. Amazon India uses a “two-pizza team” model, in which small, highly talented teams are given the tasks of coming up with innovative ways to solve customer problems and then build and release these products from the India center. For example, Amazon India Development Center played a significant part in the conceptualization and creation of a9.com, a search technology developed by Amazon.

The Google India center worked on new product development as opposed to taking over the maintenance of the existing systems built by their U.S. team. Krishna Bharat, the creator of news.google.com, moved back to Bangalore, India in 2004 to set up the Google R&D center to help Google create its next set of innovations.

Traditionally, the value from the India development centers was measured by the amount of money they had saved for the company. The new model has helped companies to measure the performance of the India centers based on the impact on the top line – by the revenue generated by the new products coming from their India centers.

Along the way, numerous companies, including Microsoft, Oracle and AMD, have partnered with Indian educational institutes for research collaboration.

Enterprise Product Companies

A new set of enterprise companies started to look beyond the constraints of not being close to the customer and has started building entire product lines in India. IT services management company Centrata and procurement service firm Ketera, both funded by Kleiner Perkins Caufield Byers (KPCB), build their entire product portfolio from their India centers. They hired experienced management teams in India that have built products before and are able to foster innovation among team members.

Venture Capital Firms

American venture firms are expected to raise more than $1 billion for funding India-based companies or companies with a major presence in India. SoftBank Asia Infrastructure Fund has earmarked $100 million of its $650 million fund for India. WestBridge Capital Partners works a $350 million India-only fund.

Product Innovation from Indian Companies

The last few years have also given rise to a set of Indian companies that have created truly world-class products. These companies refine their products by selling to Indian customers, who are known to be highly demanding. These refined and mature products are then released into other markets.

Talisma is a pioneer in developing software products in India. Talisma’s customer relationship management suite is widely used in enterprises across the world. The entire development was done from the firm’s Bangalore office, though the majority of its customers are based in the United States.

Whizible is a set of products and services built by a Pune company called Compulink Systems. Whizible 2007 integrates with Microsoft Project Server 2007 to help companies address quality management. Previous versions are used by a large number of service providers in India to manage client projects. The product has an uncanny ability to provide transparency into project execution so that the clients know the exact status of the project at any point. The product sells for a fraction of the price of competing products from other parts of the world.

IT companies also have initiatives to build their own products. Infosys, one of the largest service providers in India, also offers high end solutions in banking and capital markets, healthcare, aerospace and defense and a number of other industries. IT vendors such as Persistent Systems are starting to partner with clients to create new products in complementary ways. The intellectual property thus created belongs to the vendor rather than the client.

Challenges and Opportunities

• As cost arbitrage continues falling (1:4 in 2001 to 1:2 in 2005), companies are leveraging India centers for improving their bottom line (revenue generation) instead of acting as a low-cost centers.
• The talent pool with product development experience is still evolving, and it will be several more years before the quality/size of the talent pool will compare to that of the major technology centers across the world.
• Engineering talent in India needs frequent exposure to their customer bases to understand ever-changing needs. As more companies partner with educational institutes, this challenge will be appropriately addressed.
• The local market in India is becoming more attractive to product companies in which to sell their products to Indian enterprises. This would enable them to sell the products locally and then refine the products before they tackle Western markets.
• On average, U.S. product companies spend more than 30 percent of their total product costs on marketing and sales. Indian product companies are loathe to do this; they need to find innovative ways to share the cost of marketing between India and U.S. markets.

(This article is based on a white paper originally published by Zinnov in 2005.)

About the Author:

Founded in 2002, Zinnov – meaning zeal in innovation – is a leading research and consulting organization providing services in the area of offshore advisory, market research, competitor analysis, business research, data analytics and HR consulting to Fortune 1000 companies. They work collectively with their clients to tackle prevailing organizational challenges by analyzing the changing dynamics, improving performance and building institutional capability. The services delivered to Zinnov clients through advanced reasoning and analytical techniques provides solutions that help in integrating organizational vision, business definition and processes. Contact Zinnov at info (at) zinnov.com or visit http://www.zinnov.com.