Innovation and Talent in the Indian IT Industry
NASSCOM, the Indian trade association for its rapidly growing IT enabled services industry, recently concluded its annual Leadership Forum, bringing together the leaders of this industry. Although there was no official overarching theme defining the conference, it was clear that the big issue shaping most of the discussions involved the intersection of innovation and a growing scarcity of talent. In the process, though, I fear that the industry leaders are under-emphasizing some important opportunities.
I was privileged to be able to attend this conference and participate in a number of the panels and discussions. It was truly an energizing and inspiring experience, impressive in terms of the scope of the program, with over 100 speakers addressing a broad range of topics.
The Indian IT outsourcing industry has achieved substantial scale and very impressive growth. NASSCOM estimates that, for the financial year ending in March, the industry will grow to $31 billion in revenue, 32% over last year’s revenue. The industry now employs 1.6 million people, driving much broader prosperity within India. According to Julio Quinteros, an analyst from Goldman Sachs, Indian IT services companies have rapidly grown shareholder value in sharp contrast to the more disappointing performance of established American IT services companies.
The most impressive thing about the conference was that, in spite of this enormous success, there was little if any complacency. Instead, the leaders of the Indian IT services industry continued to show the same sense of urgency that has driven their success so far.
The competition for talent
Many of the discussions focused on the intensifying competition for talent within the IT services industry. Continued growth of the industry hinges on the ability to access and develop talent. Turnover rates are generally rising, especially in the business process outsourcing industry, further increasing the challenge of sustaining profitable growth. Wage rates are also rising as companies compete more aggressively to attract and retain the available talent. In the meantime, other countries such as the Philippines, Vietnam, China and the Eastern European countries are competing more effectively for IT outsourcing work.
Indian IT services firms are responding to these challenges on a number of fronts. They continue to invest heavily in scaling their recruiting and training efforts, increasingly branching out and establishing facilities in second and third tier cities in India to reach a broader pool of talent. In many cases, they are establishing development and operations centers in other low labor cost countries.
Indian firms are also investing in developing more value added services to generate more revenue per employee. One of the hottest growth sectors for the Indian outsourcing industry is so-called “knowledge process outsourcing”, focusing on providing such high value services as financial research, clinical research and engineering services for product development programs.
More generally, these Indian firms are also focusing on tightening their operational performance to enhance profitability per employee and to become more responsive to increasing customer expectations. McKinsey & Co. discussed a major report on “Operational Excellence: The Next Frontier in Offshoring” (executive summary available here) at the conference. The report offered a framework for benchmarking operational performance and found a high dispersion of performance across Indian offshoring service companies. Offshoring service companies could do a much better job of absorbing increasing wage rates if they focus more aggressively on enhancing the productivity of their operations. One of the interesting sidelights in the report was the finding that third-party service providers generally outperform captive offshore facilities.
Innovation blowback opportunities
Another key theme emerging from the discussions at the conference involved the increasing need for innovation in the offshoring business. Unfortunately, there did not appear to be any consistent definition of innovation so, at times, it was unclear what the exact nature of the opportunity is. NASSCOM has announced a joint research effort with BCG on “Developing an Innovation Ecosystem for the Indian IT Industry”. This effort in particular seems to be focused on identifying opportunities for the Indian IT industry to collaborate with other stakeholders in the Indian economy to address challenges in providing more cost-effective products and services to the Indian population.
This is a huge opportunity and has generally been under-emphasized by the IT services industry which historically has focused on overseas markets rather than the domestic market. There are some notable exceptions to this. Infosys, for example, has developed a strong partnership with ICICI Bank, one of the most innovative and successful banks in India. ICICI Bank used the Finacle application software suite from Infosys to develop an extremely cost-effective and scalable operational platform. This collaboration has helped ICICI Bank to grow rapidly, increasing its transaction volume by five-fold over a five year period.
This opportunity is particularly intriguing because it extends far beyond the domestic market, even though that is certainly attractive in its own right. As JSB and I have written, there is an opportunity to pursue “innovation blowback” strategies, using the Indian market as a catalyst for breakthrough innovation in products and services that can then be used to support global attacker strategies designed to challenge incumbents in the more developed Western economies. In recent years, ICICI Bank has started to expand internationally, leveraging its innovative operational platforms to deliver more cost-effective services to customers in countries like the UK, Canada, Singapore and China. The Indian IT services industry could fuel enormous growth for the Indian economy by more aggressively supporting these innovation blowback strategies.
Fostering talent networks
But the biggest opportunity of all requires a different form of innovation. It also requires a very different mindset for the leadership of the Indian IT service companies.
Rather than continuing to focus on attracting and retaining talent within their own companies, these firms could create enormous value by developing the management techniques required to mobilize and leverage specialized talent wherever it resides. This would require building scalable talent networks encompassing a broad range of smaller, more specialized companies.
The Indian IT services companies have been very effective in building relationships with technology product companies on a global scale. But when it comes to expanding their own IT services, they immediately focus inward. If they don’t have the capability already in place, they may go out and acquire a smaller, more specialized company, but their instinct is to bring the capability in house.
As an alternative, these companies could take their emerging skills in partnering with technology product companies and apply them to building talent networks to mobilize and leverage large numbers of more specialized service providers. The real power would be to master the techniques required to accelerate the development of talent across such a distributed network of partners, thus creating stronger incentives for partners to join the network. Focusing on this challenge would create an opportunity to innovate in “Learning 2.0” capabilities, moving from traditional training programs to more distributed learning platforms and ecologies.
Ultimately, the opportunity would be to become leaders in the formation and orchestration of creation networks. This would require mastering open innovation management techniques to attract and mobilize talent, focus the innovation initiatives across multiple participants and accelerate commercialization and learning from these initiatives.
Even broader innovation opportunities
These efforts in turn would expose the Indian IT service companies to the challenges of coordinating activities across large networks of partners given existing IT architectures. By gaining firsthand experience in the limitations of these architectures, Indian IT service companies would be well-positioned to drive another wave of innovation in IT architectures. In my talk on Web 2.0 at NASSCOM, I suggested that Indian IT service companies are natural candidates to define and deploy fundamentally new IT architectures that work from the “outside-in”.
In contrast to traditional IT architectures that emerged in the center of the firm and imperfectly extend their reach beyond the boundaries of individual enterprises, we are in desperate need of IT architectures that start with the assumption that the task is to coordinate activities across hundreds, if not thousands of firms. By starting with this perspective, we would need to re-think the nature of transactions and define roles and governance processes accordingly. In fact, we would likely move from today’s transactional architectures to much more helpful relational architectures designed to support enduring and deepening relationships across individuals and institutions.
There’s no shortage of opportunities at both the product and process level to drive the growth of Indian IT services companies. The sense of urgency that continues to pervade the leadership of these companies will serve them well in identifying and aggressively pursuing these opportunities.