INNOVATION SPECIAL ...... RETURN OF THE CAPTIVES

RETURN OF THE CAPTIVES



Why India has become a nerve centre for a fresh wave of global innovation centres

After 23 years with global information technology (IT) gi ants like IBM and SAP, in 2014 Lalitha Indrakanti, 42, made the surprising move to foods & agriculture multina tionnal Cargill. “I couldn't have asked for more,“ Indra kanti told ET Magazine earlier this week.

If you're wondering why a techie would be so upbeat about such a switch, the answer is a simple one: Indra kanti had joined as head of Cargill's business services centre in Bengaluru, which provides the parent company back-end services across functions like IT, human re sources, logistics and sourcing.

The Cargill centre has 1,800 of the 4,000 employees that Cargill employs at its six such service centres across the world, including China and Brazil. India is the largest and the only one in which all business verticals are present. “In no other country could we have dreamt of touching 1,800 in such a short time,“ says Indrakanti.

Numbers tell only part of the story. The growing confidence of the HQ and the rising complexity of work that India does make Indrakanti happier. “We have a seat at the table at the HQ,“ she says. Over 60% of the global finance work is done out of India. More importantly, in a range of new areas and technologies like digital, artificial intelligence (AI), data analytics, India is the only go-to place. The global Cargill app was developed here. Its new immersive learning centre (ILC) in Bengaluru will work on new ideas, seed new products and accelerate prototyping before being rolled out globally. The ILC also has a machine learning microlab to help Cargill focus on this space. “India's young tech-savvy workers willing to experiment is a big draw. Even the cost of failure here is much lower,“ says Indrakanti. By 2019, she expects the staff count to nudge 3,000.

GICs or global innovation centres have been around since the 1990s when MNCs like Texas Instruments first set foot in India. Of late, though, there has been a surge in interest. “From being a critical part of sourcing strategy, India is now a critical part of an MNC parent's innovation agenda,“ says Somak Roy, senior analyst, Forrester, a market research firm. A slew of new MNCs are looking at India while old ones are scaling up their presence.Last year, Apple Inc set up an R&D centre in Hyderabad which will eventually employ 4,000 people and work on Apple Maps. Many like Google, LinkedIn, Uber, GroupOn, Facebook, Rubrik have built or are building their R&D campuses in India, in most cases their largest outside of the US.

Vijay Govindarajan, professor at Dartmouth College's Tuck School of Business, says there are three phases of evolution for GICs, and General Electric (GE) is a good example of that. The first step is to do plain-vanilla business process outsourcing on labour-cost arbitrage. In the second phase, they leverage talent to innovate for their global products. GE has graduated to the “third phase, which is about reverse innovation, creating products in India relevant for other markets“.

New sectors and new geographies are adding momentum to the GIC wave. Over 20 Japanese MNCs -including Sony, Toshiba, Hitachi -have set up or are exploring India centres.German auto component maker ZF-TRW Automotive, Swiss software development firm Luxoft Holdings, Latin-American beer giant AB InBev and department store chain Falabella are all scouting for a centre here. “From labour arbitrage the game is now shifting to tech arbitrage. It's a sign of India's growing maturity in the GIC space,“ says Arup Roy, research director, Forrester India. Unsurprisingly, Rishabh Kaul, cofounder of Belong, an online job search platform, says he is seeing a surge in GIC clients.

New sectors beyond the traditional banking, financial services & insurance, and IT are a part of the new surge. With the Amazonisation of retail, the big retailers -JC Penney, Walmart, L Brands and Target -have set up GICs in India. Many digital native MNCs from Amazon to Expedia too are here. Consulting firm Zinnov says new sectors include aerospace, manufacturing, oil & gas and medical devices. Bengaluru-based Nasscom vice-president VS Viswanathan says the IT industry lobby gets one new MNC query every two weeks. Lalit Ahuja, founder at ANSR -the company that helps MNCs set up GICs in India -could not be more upbeat: “MNCs have tasted blood. GICs in India are at an inflection point.“ Having helped companies like Target set up their GICs, Ahuja reckons that at a global level India today already has over half of the number of GICs and 65% of the global captive headcount. Ahuja's ANSR alone has helped set up 27 GICs in India that today employ over 50,000 executives and have brought in investments of over $1 billion.

A Sunset & a Sunrise

A chunk of India's $150-billion IT industry, which contributes over 9% to GDP and employs close to 4 million people, is under threat. Built on cost arbitrage in the 1990s, their business model is facing challenges. Digital disruption and new technologies like cloud computing, artificial intelligence (AI), IoT (internet of Things) and big data are the new buzzwords. A report by consulting firm Bain & Co says that IT budgets are shifting towards digital technologies, from 20% till recently to as much as 45% today. Unsurprisingly, from 14% of the revenues today Nasscom expects digital-led businesses to bring 60% of the IT industry's revenue by 2025.

It is in this context that green shoots of GICs and their potential hold significance. GICs -a subset of the IT industry and earlier called captives -have been around since the 1990s with MNCs like GE, American Express and Texas Instruments as pioneers. Perhaps low-profile by choice, they were often overshadowed by the media-savvy outsourcing giants like Infosys and TCS and their dazzling year on year growth of up to 40% in the go-go years. The trend has now reversed, what with IT outsourcing slowing down, and the staid and steady GIC growth -between 2005 and 2016, 711 new GICS were setup -looks impressive. More importantly, they hold out hope for an industry staring at its sunset.

Up the Value Chain

But there are other important deeper shifts. Pioneer of In dia's BPO pioneer Raman Roy says: “Earlier, we were order takers. The HQ knew what they required and we replicated it here. Some called it `your mess for less'.“ No longer. “To day, with new technologies like AI, cyber security, the HQ doesn't have the answers. We have a seat at the table. It's a part nership where we sit as equals,“ he adds.

Take retailer Target, for example. Its GIC started in 2005 driven largely by cost arbitrage. Steadily, the importance and the complexity of the India GIC has risen. “2011 was our inflection point when the Target.com platform, developed in India, went live. From a transactional centre used to taking orders, our role became more strategic,“ says Anand Venkateswaran, vice-president, Target. Amid Amazon's threat and that of digital disruption, the India GIC is becoming critical. To accelerate innovation, three years back it launched its only accelerator program that has nurtured 30 Indian startups, bringing new tools and innovation to its fold.

Other retailers have followed suit. “We design, prototype and build technology-fueled products that bridge the gap between what's next and what's best. We are not just ready for the future of shopping. We're creating it,“ says Hari Vasudev, vice-president (technology), Walmart Labs. Set up in 2011, the lab has 1,100 employees today.

It is a similar story at SAP Labs, which started in India in 1998. “Today, our network of three labs in India with 7,300 employees contribute significantly to SAP's flagship products like SAP HANA, the platform for next-gen applications and analytics,“ says Dilipkumar Khandelwal, managing director, SAP Labs India.

Texas Instruments set up its India captive way back in 1985, “driven not so much by cost arbitrage as much as finding great talent,“ says Santhosh Kumar, managing director, Texas Instruments. Today, with 1,200 employees, the India GIC focuses on new projects like autonomous cars and electric vehicles, and is co-creating products with its global customers in India. “Our relationship with the HQ has matured. We are not dependent but interdependent,“ Kumar says.Interestingly, close to 100 global leaders of the MNC are today based out of India.

Deepak Visweswaraiah, MD at data management firm NetApp, sums it up well: “The R&D landscape in India has attained a mature credibility on two aspects. One is the ability to drive ecosystem connects. The sec ond is its ability to influence and lead global product charters.“ Visweswaraiah wears two hats, one as a India GIC leader and another as one of the global senior vice presidents leading a global team.

Why India

For many reasons, India is uniquely positioned to capture the global GIC wave. “China is the hardware capital of the world. And India is the software capital,“ says Anand Subramaniam, engagement manager, consultancy firm Zinnov. It helps that the ongoing disruption in the corporate world -from automobiles to consumer electronics -is all about software as a differentiator.

Most MNCs have had experience of outsourcing IT services to India in the past. India's abundant supply of young engineers is a huge plus. “India's amazing talent supply relevant to our industry is at a scale like no other. We are partnering with colleges to further build on it,“ says Nivruti, Rai, country head, Intel India. India has big edge over China on many counts: proficiency in English, cultural adaptability and a better alignment with the MNC culture. Addi tionally, at least three GIC heads spoke about concerns around data security and patent protection in China. As a result, most GICs in China focus on the domestic market needs rather than the HQ needs.

Three other important factors are catalysing India's GIC wave. For many MNCs like Facebook, Google, LinkedIn and Uber, the lure of India's domestic market is rising.From telecom to energy, India is also leapfrogging technologies in many sectors. Problems in India (think 4G and 5G) today have global relevance, making India an even more compelling location for GICs.

Also, India's poor bandwidth, low technology penetration, price sensitivity and a young tech-savvy population make it a great testbed to create and test new products before rollout in other markets. LinkedIn, which set up its technology centre in 2011 in Bengaluru, has launched three critical madein-India products, including LinkedIn Lite in 60-odd countries. “The technology centre here powers our innovation, technology and research that make the LinkedIn experience richer for members globally,“ says Akshay Kothari, country manager and head of product, LinkedIn India.

The Multiplier Effect

“GICs are where the innovation happens and hardcore development gets done. These are the most valuable jobs that India can attract and will do the most to boost innovation. Other countries offer huge incentives to companies to locate R&D centers there,“ says Vivek Wadhwa, distinguished fellow, Carnegie Mellon University.

The relative share of corporate R&D is rapidly shifting from hardware to software in a range of industries. “Value creation has shifted to embedded software.

We do lot of manufacturing in China. I haven't heard of many who are looking at China's software capabilities. They think of India,“ says Vijay Ratnaparkhe, MD, Robert Bosch Engineering and Business Solutions Which has 20,000 staff in India.

With the GICs working on cutting edge technologies, number of patent applications in India is rising. In 2015-16 it surged by 30% to 3.41 lakh vis-a-vis a year ago. Qualcomm leads with 1,884 patent applications. “Qual comm really values India's talent, their skill sets and knowledge. Not just India, these engineers work across projects in multiple locations,“ Larry Paulson, vice-president, Qualcomm India.

GICs are playing a critical role in nurturing India's startup ecosystem. Stints at a GIC play a foundational role in grooming new entrepreneurs. Texas Instruments has been a great incubator for over 10 entrepreneurs including Raghunandan G of TaxiForSure (which was acquired by Ola), Venugopal Gopinathan, cofounder of Angiometrix, a medical device company, Mettl cofounder Tonmoy Shingal and Amagi Media cofounder Baskar Subramanian. “Just two GICs ­ GE and Amex ­ helped build India's BPO wave in the past. I expect the same in future,“ says serial entrepreneur K Ganesh. Already, Indian startup are slowly evolving from global copycat business ideas (think Ola, Flipkart, Olx) to more innovation-led ones. Examples: product discovery platform Unbxd Inc and Betaout, a marketing automation platform for ecommerce companies.

GICs are also revving up the startup ecosystem with their accelerator programs. Accelerators of many like Microsoft, SAP, NetApp, Target are mentoring young startups.“A chance to work on real global-scale projects gives these startups a great advantage,“ says Ganesh.

Nasscom president R Chandrasekhar says it has identified eight technology areas ­ including AI, IoT, cloud computing, machine learning, cyber security -and over 150 jobs of the future. A platform-based online and offline course offering is in the works that will help train and upskill Indian workers and students in these relevant technologies.

This may not tackle the looming layoffs in India's IT outsourcing industry. But, perhaps, it will pave the way for a new -and more promising -future for India's tech industry.

Malini Goyal



Aug 27 2017 : The Economic Times (Mumbai)