An interesting theme that Anand Rangachary, Managing Director - South Asia & Middle East, Frost & Sullivan, Chennai ( >http://bit.ly/F4TAnandR ), brings up is that of IT (information technology) clusters. He cites Michael Porter's definition of cluster as “geographic concentration of interconnected companies, specialised suppliers, and service providers, firms in related industries and associated institutions in a particular field that compete but also cooperate.”

Adds Anand that in the digital age, virtual clusters have been as effective as geographic clusters in spawning innovation and creating competitive advantage. “The interplay between the various stakeholders of the extended enterprise, namely, platform, software development, product design, prototype, testing, manufacturing and marketing either through geographic or virtual proximity has played a critical role in the success of the IT industry globally,” he reminds, during the course of a recent interaction with eWorld. Our conversation continues over the email.

Excerpts from the interview:

Will a cluster approach require collaboration between the tier II and tier I companies?

Yes. As Indian IT firms seek to move up the value chain with a greater focus on innovation, new opportunities are created for players across the ecosystem. There will be an impending need for increased collaboration between tier 1 and tier 2 companies to create a value proposition that can take the Indian IT sector to the next level.

Also, as global enterprises move towards an increasingly opex-based model – where software, platforms, infrastructure and applications will all be seen as a service – India is best positioned to take the lead as the global service provider on the cloud. Cloud-based pay-per-use services also offer the promise of bridging the country's economic and digital divide and, in the process, of unlocking the enormous potential of the rural markets for mobility, banking and finance, healthcare, education, retail and energy.

All this brings forth immense opportunities for both tier 1 and tier 2 companies. On the one hand, it will require the extensive domain knowledge which the larger companies have garnered along with their expertise in managing large projects, while on the other it will require innovative and niche solutions with a broader reach from tier 2 companies.

IT clusters can facilitate closer working amongst mid-sized and large IT vendors aligning themselves towards catering to this opportunity. The pool of talent will need to work together to create the differentiation in the new-age knowledge world.

What policies will be apt for the development of IT clusters?

The next phase of growth for the IT industry would have to come from the seamless integration of IT companies with the different industry verticals. Gaining expertise in specific verticals is the starting point of collaboration and in being able to add value across all business elements of their respective client organisations.

While such a focus on domain knowledge is not something new, and many of the majors have embraced this as their central value proposition, it is still the exception rather than the rule. Collaboration, as we have seen in the past, happens primarily when all players in the value chain are either clustered in specific locations (geographic clusters), or through seamless virtual networks (virtual clusters).

The challenge for India has been the inability to create the entire ecosystem and instead rely on just software skills and outsourcing opportunities. While IT clusters were able to leverage synergies in skills and infrastructure, they fell woefully short of creating the collaborative environment for innovation.

The slow pace of development of SEZs has also contributed significantly towards this skew in competence. Industry-specific SEZs – be they in aerospace, pharma/biotech, engineering, electronics, healthcare, education or telecom – have really not taken off so far. The government's role in taking the initial lead and facilitating cluster development is undisputable. Even the half-hearted commitments have been plagued by land acquisition challenges and Centre-State political incongruities.

The first true sector-specific integrated cluster in India would arguably be the Petroleum, Chemicals and Petrochemicals Investment Region (PCPIR) initiative by the Gujarat Government. The PCPIR cluster would include one or more SEZs, industrial parks, EOUs, public utilities, logistics, administrative services, R&D centres, and so on. Large and mid-sized IT companies looking for a serious play in oil and gas/ chemicals verticals would do well to come out of their STPI/IT SEZ comfort zones and be a part of PCPIR to “co-create” IT-enabled business growth.

With that impending success story, many State Governments are expected to jump on the bandwagon to create sector-specific clusters by providing the necessary tax incentives, encouraging thus entrepreneurship and collaboration.

The advantages of a cluster have been well established and proven. IT clusters have enabled industry participants to streamline the acquisition, training and managing of talent across the country benefiting the entire sector. The returns on investments are maximised through cost optimisation attained by sharing of infrastructure. But the enablement of a collaborative environment requires well-formulated policies on copyrights and patents. Managing intellectual property will require an appropriate framework that enables knowledge transfers and ensures a win-win situation without any negative impact to business.

Does the IT industry see the need for clusters?

It would be meaningful to take a step back and look at the industry's evolution over the last decade. It has definitely taken more than 10 years of globalisation and a lot of determination and commitment to doff the tag of “body shopping hub” and be considered a trusted outsourcing partner for entities in the US and Europe. However, we seem to have, by and large, hit the glass ceiling in moving further up the value chain.

One fundamental reason for this has been the self-limiting perspective of IT as an industry in itself rather than IT being a part of each vertical as an all-pervasive business enabler. With incentives being phased out and cost arbitrage not significant anymore, compared to other competing economies, the need to move up the value chain remains no longer a luxury but a necessity.

The themes, therefore, that would drive opportunities in the coming decade for the industry would be ‘domain competence', ‘collaboration', ‘IP creation', ‘productisation', and ‘domestic rural market potential', in that sequence.

Any other points of interest?

The Central and State governments play a key role in the entire process of developing the clusters and creating a conducive environment to make these clusters collaborative in nature, which will in turn drive innovation. In the past, many States set up high-speed IT corridors to attract investments to strengthen the hold on lower ends of the value chain. Thanks to STPI, we had clusters of disparate companies providing IT/IT-enabled services with the common threads being ‘services', ‘cost arbitrage', and ‘tax incentives'. The industry grew leaps and bounds around these threads.

The success of the clusters will be highly dependent on the ability of the government measures to attract firms into the clusters, work as self-sustained units, work cohesively in a state of cooption, maximising the benefits of the knowledge pool created to drive R&D, innovation, product and application development.

>InterviewsInsights.blogspot.com

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