The Hindu Business Line : Steer smartly

While large firms can weather challenges more easily, small and medium IT enterprises will need to innovate to survive. Here are some ways to go about it.

A vast majority of the firms in the small and middle segments of the IT industry are already struggling to face the twin challenges of top-line and bottom-line growth.

Rajdeep Sahrawat

Why is innovation relevant for Indian IT firms, was a question recently posed to me by a journalist. Given the mindshare innovation currently enjoys in India, I must confess that I found the question a trifle irreverent. However since then, a thought that has niggled away at me is whether Indian IT firms really need to innovate or is innovation just one more passing fad?

Stripped of all the verbiage, innovation is simply about introduction of a new method or making existing methods cheaper and better. Successful innovations create significant value for the customer and generate wealth for the innovator.

From a firm’s perspective, innovation is about change, re-invention, continuous improvement and adapting to changing realities.

Unfortunately innovation often gets true attention only when a firm is struggling. In good times, innovation is something that is often seen but seldom heard.

Good times and the Indian IT industry seem to be inextricably linked. Contract values are increasing, industry’s projected growth rates hover in the mid-twenties, billing rates enjoy an upward bias, hiring is up, and overseas acquisitions by Indian IT firms are increasing.

Therefore, should an Indian IT firm innovate when a ‘business-as-usual’ approach seems to be working fine?

Reality check

While this may make me sound like Cassandra, rising wages and infrastructure costs, rapid scaling up of delivery capability in India by MNC IT firms, flattening productivity curves and a growing talent shortage are some of the challenges that are weakening the traditional factor-based competitiveness of the Indian IT industry.

While the larger firms have the wherewithal to address and perhaps overcome these challenges, a vast majority of the firms in the small and middle segments of the IT industry are already struggling to face the twin challenges of top-line and bottom-line growth. Lack of scale and horizontal breadth inhibit the SME firms from winning large contracts, leaving them to either becoming service providers to the larger IT firms or executing small contracts that often do not scale and are also not very profitable. Due to lack of vertical depth, SME firms are unable to develop force multiplier assets to overcome the employee and revenue linearity and increase profitability.

Moderate growth prospects and a relative inability to pay above market salaries result in the SME firms being unable to attract and retain top talent.

With the ‘me too ’ strategy adopted by most SME firms increasingly not viable, they have little option but to re-invent themselves through innovation.

Levels of innovation

A firm can innovate on different levels — inputs, processes or market facing. Input level innovation relates to inputs that are brought into the firm .i.e. talent, capital, technology etc. Process level innovation relates to firms’ internal processes .i.e. human resources, service delivery, sales, etc. Market facing innovation relates to a firm’s markets .i.e. new products and services, customer segments etc. Innovations along the inputs and process dimensions are efficiency-oriented and replicable and hence often do not result in sustainable competitiveness. Achieving high growth rates consistently will require the SME firms to relentlessly focus on market facing innovations .i.e. innovations that deliver customer value. Success along the market facing innovation dimension requires the most investment and carries the highest risk, but also delivers the greatest returns.

Make your own way

With no off-the-shelf prescriptions available, each firm will have to define its own innovation roadmap and some suggestions that may be considered are presented below.

First, a firm needs to introspect and decide its areas of focus, be it technology, vertical industry, geography or services portfolio. An ‘anytime, anywhere, anything’ strategy does not work any longer. Second, a firm’s innovation strategy and business strategy must converge rather than act in parallel. For example, to implement a market leadership strategy, a firm will have to increase investments in R&D to achieve breakthrough innovations as compared to a ‘fast follower’ strategy which will only require incremental innovations.

Third, SME firms need to overcome the ‘not invented here’ syndrome and increase collaborations with other SME firms, research institutes and large IT firms as this will allow them to mitigate risk, share investment and reduce time-to-market. Last but not the least, SME firms need to invest in developing partnerships with select customers to enable them to ‘co-develop’ products and services. While the customers benefit by getting early access to products or services they help to develop, the SME firm benefits by launching ‘market-ready’ products in a reduced time-frame. Notwithstanding brave statements and public posturing, a vast majority of the Indian IT SME firms are facing serious growth challenges and have to innovate relentlessly for survival. Success will not be easy and each firm will have to be willing to accept often traumatic change, embrace collaboration, break traditional organisational dogmas and be ready for the long haul. Maintaining status quo is definitely not an option!

The author is VP, Nasscom. Views expressed are personal.

Illustration: K.B. Jawaharr

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