LIVEMINT.COM & WALL STREET JOURNAL, JUNE 17, 2010
The innovation revolution
Emerging India has evolved from the world's back office into a
knowledge and innovation hub. In the next decade, expect benefits for
not just the nation but the global economy
When Americans think of Indian outsourcing, they visualize call
centres doing low-level tech support and information technology (IT)
companies fixing bugs in computer software. Indeed, that is where the
Indian industry got its start. But while the West was literally
sleeping, Indian outsourcers evolved into world-class research and
development (R&D) machines.
Its call centre operators are now helping enhance patient care for US
hospitals, optimize financial transactions for Australian banks and
streamline parts management for European engineering firms. Its IT
companies are developing mission-critical avionics systems,
next-generation telecom technologies and complex medical devices.
Despite the limitations imposed by the country's weak infrastructure
and antiquated education system, India has rapidly evolved into a
global knowledge and innovation hub.
Just 10 years ago, Indian IT companies such as Infosys Technologies
Ltd, Tata Consultancy Services Ltd (TCS) and Wipro Ltd were bidding
for small contracts to help Western companies fix the Y2K bug in their
computer systems. Their customers were desperate to fix this ticking
time bomb, but didn't have the manpower or skill to do it. So despite
severe hesitations, Western companies sent their mission-critical
systems to India for repair.
Indian outsourcers used this opportunity to expand operations, build
new skills and, most importantly, get to know their customers. The
catastrophe was averted, and both sides benefited. Indian firms used
this as a launching pad for bigger projects and entry into more
The Indian industry faced a severe problem, however. It needed to hire
hundreds of thousands of engineers, but the output of its engineering
colleges was severely limited. In 1999, India graduated only 76,000
engineers, and most did not receive high-quality education. This
number had doubled by 2004, but quality suffered.
The Indian Institutes of Technology produce world-class engineers, but
they graduate less than 5,000 engineers in all every year. To make
matters worse, the advanced types of engineering jobs Indian companies
were bidding for required engineers with Master's and PhD-level
In 2004, India graduated only 17,000 Master's and 900 PhDs in
engineering. The number of PhDs wasn't even enough to staff its
This resulted in fierce competition for experienced talent and caused
huge increases in salaries and attrition rates. For a while, it looked
like the Indian outsourcing industry would implode, like it had just
been a flash in the pan.
Move forward to 2007. In that year, India's top five IT companies
(TCS, Infosys, Wipro, Satyam and HCL) added around 120,000 engineers.
Accenture Plc and IBM India Pvt. Ltd added 14,000 each. Thousands of
other smaller companies also expanded and recruited.
In 2006, India graduated at around 222,000 engineers. And most experts
on Indian education agree that, at best, only half the engineers who
graduate from Indian colleges are employable by technology companies.
So where did the magic happen?
The answer lies in the ability of Indian entrepreneurs to rise above
all the hurdles the government and society throw at them. Just as
India's companies install their own power generators to deal with
supply problems and purification plants to provide clean water, they
have built their own surrogate education system. And herein lies
India's greatest innovation: Its companies have developed the ability
to take the output of a weak education system and turn these workers
into R&D specialists who can compete in the global arena.
Faced with severe talent shortages, escalating salaries and a lagging
education system, Indian industry had to rethink the way it recruited,
trained, developed and retained its workforce. It started by adapting
the best practices of companies that were outsourcing R&D to India.
Then, leading companies in diverse industries started improving on
these techniques and methods; refining and integrating them into a
Here are some of the things they did…
Hiring for competence rather than skill: Résumés can fail to reflect
the true aptitude and potential of job applicants or provide a basis
for comparison, and educational degrees are often not a sufficient
proxy for proof of skill and competence. So leading Indian companies
started hiring for ability and aptitude rather than only specialized
technical skills. They provided training to bridge skill gaps.
Employee training: Companies in India assume that new recruits will
have to be trained virtually from scratch. So they invest substantial
time, money and effort in doing this. Training is not relegated to
less-experienced personnel; the most senior executives participate.
Most large companies have built dedicated learning centres and some
employ hundreds of training staff. Recruits usually get between one
and seven months of training before they start work.
Continual employee development: Leading companies mandate that
employees receive between one and three weeks of training every year
in areas where they are weak. Some training is provided on evenings
and weekends, but most is provided on company time. Many companies tie
salary increases and promotions to the completion of such training
Managerial development: Shortages in managerial talent have made it
necessary to build pools of potential managers internally. Most
companies offer extensive management training, internally and
externally, through MBA-type programmes.
Performance management: Most companies have sophisticated systems that
provide frequent feedback to employees and allow them to provide
feedback on their managers. At HCL, employees not only review their
managers, these appraisals are posted on the company's intranet so
everyone can review the employees' assessments of their bosses.
Parameters include performance, strategic vision, ability to
communicate, problem-solving skills and responsiveness.
As a result, Indian IT firms have achieved some of the lowest
attrition rates in the industry. American IT firms usually experience
20-30% yearly attrition rates. The top five Indian IT outsourcers
average in the low-to-mid teens.
Workforce development helps to explain, for example, how IT service
firms have been able to increase billing rates and productivity levels
and maintain high levels of growth and profitability despite
skilled-talent shortages, rising salaries and falling exchange rates,
among other challenges. It also explains how firms in India are able
to hire bright but largely inexperienced talent to successfully engage
in R&D and other innovation.
With the economic slowdown, Indian talent supply has been able to
catch up with demand. And Western companies are more desperate than
ever to cut costs.
To achieve the 30-40% cost savings that Indian outsourcers can offer,
they are now outsourcing their most strategic internal systems.
Additionally, thanks to a combination of the recession in the US and
that country's flawed immigration policies, there is a flood of highly
educated and skilled talent returning home to India.
They see more opportunity in India than abroad, and want to be near
family and friends. They are returning with the latest skills and an
understanding of foreign markets.
So the stars are lining up for Indian outsourcing, and this industry
is gaining a second wind.
Within a decade, India is likely to become the world's second-largest
R&D centre after the US. Its innovations will likely benefit not only
India, but also the world.
Vivek Wadhwa is executive in residence/adjunct professor at the Pratt
School of Engineering at Duke University and a senior research
associate with the Labor and Worklife Program at Harvard Law School.
Also Read: MADE IN INDIA: The Indian Innovation Revolution