Blogging at Zinnov

Amit Aggarwal,
Engagement Manager

The latest growth mantra for Large IT vendors in India has changed from ‘netting big fishes’ to ‘catching the young SMBs’. Cisco, SAP, IBM and Microsoft were some of the early adopters to identify this opportunity and invest heavily in it. Their efforts have already started to reap benefits with the SMB sector contributing around 35 to 40% of their India revenues. Within the last 3 to 4 years, the SMB sector has graduated on IT adoption curve from ‘nascent stage’ to ‘growth stage’. As per Zinnov estimates, IT spend in SMB sector was $6.2 billion in 2007 which is 30% of India’s total IT spend!

The current scenario of the SMB sector reminds me of the growth story of the Indian mobile where not many had anticipated an explosive growth rate of 100% CAGR. In 2001, it still appeared a far fetched dream that subscriber base in the ‘B circle’ would surpass that of the ‘Metro’ and the ‘A’ circle by 2008. Perhaps, the same holds true for SMB sector also which has a huge base of 7.6 million SMB and a PC penetration rate of 21%. SMB IT spending of $6.2 billion and the 25% growth in IT spending is just the tip of the iceberg. There are multiple drivers acting simultaneously in the SMB ecosystem to take this segment on a high growth trajectory – reduction in price of PC, increase in penetration of broadband, emerging IT ecosystem in Tier-II/Tier-III cities, initiatives by MNC IT giants (Microsoft – Project Vikas, Cisco – ‘Network on Wheels’, IBM – SME Toolkit), new players entering SMB market etc.

One of the key aspects of SMB that should be carefully considered by IT product companies is its heterogeneity. SMB sector is a huge conglomeration of different SMB clusters with varied needs and pain points. However, increase in customization might mean increase in price points of solutions to be offered, which again could be a deterrent for the price conscious SMB segment! I am sure this market is going to witness many innovations right from creating a balance between customization to economical solution offerings, and designing a simple yet groundbreaking solution to some unmet needs that will replicate the success of the Indian mobile story.

For report on ‘IT opportunity in SMB sector’ click here

Study reveals that the increase in Decision Making abilities of captive management teams in India will drive the growth in the market

Zinnov, today released the much awaited report titled the ‘Strategic Guide to R&D Captive Landscape in India, 2008’. The released report encompasses the details and insights of the current scenario of Indian product engineering offshoring market and forecasts a growth of 23% in the same by 2012.

The Zinnov Study also shows that there are close to 600 captive centers spread across five major IT cities (Bangalore, Pune, NCR, Hyderabad, Chennai) in India today. Of these, while majority of them (312) are based in Bangalore, Pune and NCR follow closely with a count of 96 and 87 captives respectively. The R&D Offshoring market today is segmented into three horizontals primarily, Software Product development (53%), Engineering Services (21%) and Embedded Systems (26%) which amounts to a total of 5.83 Billion USD.

Potential Growth by 2012
Category CAGR
Captives 20%
Vendors 28%

Talking about the report Mr. Pari Natarajan, Chief Executive Officer, Zinnov said, “The majority of growth in captives in India today has been observed due to expansion plans of the large captive centers, which are further expanding their operations. While the entry of Software Product Development Captives had slowed down in 2007, it is expected that in the months to come technical support offshoring will grow in India.”

Attrition Rate in Captives (2006-08)
Small 15-18%
Medium 12-15%
Large 8-13%

Segregating the subject further and talking about the available talent pool, the report notes that India produces around 600,000 fresh engineering graduates per annum and reflects an optimistic growth rate of 14.1% by 2012. Reflecting the present landscape, it denotes that a good number of over 100,000 professionals with specific skill-sets of product development reside in Bangalore and the NCR region alone. However, captives continue to face an average attrition rate of 13%, instigated by growing demand of experienced professionals in specialized domains.

“Despite the depressed economic conditions and a marked slowdown in the growth rate of the industry at this point and time, the long term potential of the industry is robust. We believe that the powerful forces like the potential market for local products, willingness of MNC product companies to invest in India start-ups, high economic growth of the middle class population and risk taking abilities will continue to drive growth. Furthermore, since India has now gained familiarity and experience with offshoring, simultaneously increasing the breadth of service lines, some significant high-potential industries like Manufacturing, High-tech Telecom, Retail and IT & ITES, would bring in sheer volumes,” he added.

To discuss this subject further, Zinnov is hosting a one of its kind conference titled ‘R&D Offshoring 2008’, on March 13-14, 2008 in Bangalore. The event would run into several individual tracks that would help understand the India Opportunity, Top Management Challenges, Human Capital, Productivity and Innovation, Cost Escalation and Organization Structure best suited. It would see a congregation of the country’s leading names, decision makers and influencers across the value-chain.

For captive centers report details click Here
For service providers report details click Here

Information on OffshoringR&D2008 click Here

In 2006, the total size of VC and PE deals was estimated to be approximately USD 6.4 billion. A major chunk of this was consumed by UK and China. It woud be safe to say that at least 80% of the top U.S. VCs have made their presence in India. Many of their India specific funds are a part of global funds which comprises of countries like China, Israel and India. Since 2000 India specific funds have been invested in IT along with Retail, Manufacturing, Pharma and Real-Estate.

With the Offshoring boom, large multinational IT players have made their presence flet in India (e.g. Intel, Cisco, Microsoft, Google etc). They have been investing in startups since early 2000. Their focus has been on early stage technology and consumer service start-ups.

Cisco and Intel were the earliest players, investing in the Indian market. Between 2000 and 2005, the focus was primarily on computing & networking hardware and software and wireless services. There are quite a few startups that were funded in the last 2 years mostly in Internet, Web and mobile Services areas

Many Startups are coming up in the area of Web 2.0, VAS and Infrastructure. The various reasons for a corporate to invest more in India are –

o More scope of selling the products in the local market
o Access to maximum percentage of talent pool in various domains
o Huge expatriate movement, will benefit entrepreneurs and leaders
o Chances of grooming products on the self product line and scope of integration
o Huge revenue generation mechanism through M&A

According to Zinnov’s study more than 225 VC’s and PEs are investing money in Indian startups along with 13+ corporate VCs. IBM plans to invest 6 billion dollars in India which is 3 times the amount already being invested. Cisco has already committed $100 million towards venture capital investments in high-growth, early stage companies based in India. Along with Intel’s investment of over U.S. $700 million in India over the last 10 years, Intel Capital has provided funding to more than 40 companies in seven Indian cities since it started investing in 1998. Google in early 2007 had partnered with Seedfund and Erasmic to provide an impetus for entrepreneurship in product engineering to enhance innovation in the area of consumer, internet and mobile service.

The early entrants are investing their money directly in startups; however this trend has been changing, it is found that companies like Google, Nokia, and Yahoo have started investing through their partners. The reasons being –

o Less risk taking attitude
o Low maturity in the investment market
o Operational difficulties

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Pranab Sen
Senior Consultant – Advisory Services
Zinnov Management Consulting Private Limited

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Sources: www.indiavca.org, www.vccircle.com, www.venturewoods.org, www.us-ivca.org etc.

Chandramouli C S
Engagement Manager, Zinnov

In my last blog I talked about the potential for IT products in India and gave few examples about large product companies looking to tap the Indian market by localizing their product offerings. Things looked very bright for future and I was personally excited to see the day when products are “Made for India”

Zinnov worked on a benchmarking project to understand the product localization strategy of large MNC companies from 3 different domains. The domains we chose for the study was Semiconductor, Internet (Search, Web 2.0, and WebServices) and Enterprise Product companies (ERP, Databases). The results were not just astonishing, but opened up new dimension of localization strategy.

For most companies localization is about multi-language products or making the product lite on features. Seldom companies have realized the need to build scratch products focused on India consumers. Here are few snippets of the study, have categorized it based on domain for simplicity.

Internet companies: We studied 3 large internet companies who have their R&D captive centers in India; Only 2 of the three companies had a localization focus. India ranks 5th globally among the top internet users, Internet penetration is about 3.5% of total population. Number of Internet users has grown by 700% in the last 7 years and one of the fastest growing markets in Asia (Behind China and Japan)

For Internet companies the localization is simple and straight – Language and Content. For these companies doing multi Indian language support is localization. Having a India centric portal is one area where companies are working on, but needs lot of improvements. They have tried to customize few product offerings targeting Indian customers but it’s still very preliminary and has a long way to go.

My question to here is “How many of us read Hindi News online, Transact in Kannada Online”. In a country like China localization of language makes sense, but my guess is more than 80% of Indian Internet users are English speaking.

Enterprise Product: Looks like Enterprise product companies have their Product Managers on Job. Out of the 3 company’s studied, all the 4 companies had a strong India focus. With about ~ 235,000 SMB’s registered with registrar of companies and about 6 million establishments (one employee beside owner) India is definitely a great market to sell enterprise software.

One of the largest ERP makers has a clear SMB focus defined for India and has customized their product suite to the market requirement. They have stripped down the massive product into simple (Easy to Install, Easy to Use, Key functionalities) and cost effective solutions. Making less expensive “Lite robots out of heavy monster” is the goal. Multi-Language support is still being carried but unlike Internet companies that’s not the only focus.

I refrain from talking piracy in SMB market for now.

Semiconductor: The idea is clear and loud, “low cost chips for emerging markets”. Estimates say that Indian semiconductor market is about ~1 Billion USD in size, and is growing at 30%. With the huge potential and competition in consumer electronics & Mobile markets, chip makers are forced to keep the cost low. Zinnov looked into 4 companies in this vertical and all of them had a low cost chip design focus.

Based on the above analysis it’s clearly evident that most of the companies do not have a 360 degree localization strategy. To what I understand Product development is about identifying a need/problem which a customer may/may not know himself and finding best product solution to solve it. Most successful companies have done it earlier in matured markets and now feel that playing around the core product (Change language, a little content, reduce cost) is localization. I still haven’t seen a product entirely built from scratch for Indian customer needs.

After all we are different aren’t we?

Note: I have not talked about Desktop product companies here. With piracy level in India was close to 73 per cent compared to the worldwide average of 36 per cent and 23 per cent in the US and Canada there is a different strategy companies have to adopt in this area.

Priyanka Rana
Consultant, Market Expansion

Lately, a few of the multinational companies have shifted their India base back to the US. Salaries have been on the rise and employees with specialized skills here get approximately 60-70% of salaries that they would normally get in the US, along with the drop-down in efficiency which may arise due to time difference. Dipping value of the dollar vis-à-vis rupee also doesn’t make the situation easy. So am I saying that offshoring to India doesn’t make sense? No, but offshoring just to save cost doesn’t make sense. On one such talks, Pari (our CEO) and I were discussing the areas where companies go wrong in offshoring and identified few do’s and don’ts in this arena:

1) India center shouldn’t just be looked upon as a cost-cutting measure but should be looked upon as a strategic unit. India has a vast talent pool that is not so inexpensive but which definitely is talented. Besides, India is also a potential market and a growing ecosystem for a lot of industries. Therefore, it makes sense to capture full advantage of this country.
2) Dependence on the various teams between the two destinations (say US and India) should be less. The pieces of work sent here should be independent pieces.
3) The impact of time difference should not be underestimated. While the same geographical factors can be utilized for support activities, they cannot be overlooked by Product Development companies for research centers.
4) Offshoring center should be autonomous and must have authority to make decisions. Waiting for overseas approvals brings delays in the system.
5) Two-in-the-box reporting system should be avoided, and, if required, authority, roles and responsibility of the managers should be clearly defined. Similarly, staff augmentation model should be avoided and, ideally, must be in place for transitioning processes.
6) Documentation is important and should be encouraged as a culture. It avoids over-dependence on individual employees and eases the transitioning of processes.
7) There should be metrics (to measure productivity etc.) in place. This would help evaluate each center to estimate the workflow and avoid finger pointing. Productivity of each resource (irrespective of where they are placed) should be estimated as the same and hence the burden of work should be equal.
8) Hybrid models of having a captive and third-party vendor is gaining ground and one should not feel hesitant in dividing work accordingly. For processes which are simple in nature and which require a small and independent team, a third-party vendor is a good option.
9) Communication between the two centers should be open and frequent. Long-term goals should be shared and weekly reports should be sent.
10) Cultural differences should be understood and worked upon.

These are but a few of the pointers to be looked at while opening an offshoring center. The process does take time but once the wheels are oiled and centers function smoothly, there is no dearth of benefits one can acquire from such business models. There are quite many examples to learn from, like the R&D center of Yahoo! and Microsoft in Bangalore and Hyderabad. They have managed to successfully offshore some critical part of their Product Development here. I am sure there would be many more to be followed!!

Priyanka Rana
Consultant - Market Expansion

I had a discussion with my friend (who is a journalist by profession and doesn’t appreciate management jargon) about my work and told her about a project I am working on, which involves identifying how companies localize. She wanted to know what localization is and I tried my best to explain in a way we relate best - sharing a recipe!!
Have you ever tried eating chinese cuisine in a Chinese Restaurant in India? It is adapted for the Indian taste, keeping in mind the availability of Indian vegetables and probably a Chinese won’t appreciate that dish as much as an Indian does!! That’s localization for you in a lay person’s term.

For a company to capture new markets, especially companies offering consumer-based products, it needs to tweak the product for the local use. A simple task of checking various country portals of Yahoo! can give anyone a fair idea of how companies look at minor details to win the attention of natives. They use a videogame console as a game icon in Korea (a country known for its popularity of video games), while they use a rugby in the US and cricket wickets in India.
There are a few questions that revolve around this issue and I have tried to answer them in this blog.

How important is localization?

A lot of people might shrug and call it over-rated. I have given some examples here to validate my point. Kelloggs was a flop in Indian market. Cornflakes, popular in other countries, did not match well with Indian habit of eating cereals with hot milk. How many of us like the advertisements of Heads & Shoulders or Garnier Fructis? They both show young models of countries we don’t relate to!!! These companies saved money by using the same advertisement everywhere, but did it really help? On the other hand, we have examples like Nokia, which offers sms text in Hindi, a made-in-India version which is prone to dust. Nokia has been such a hit in India that they are expecting India to be their second largest market, next only to China.

What are the strategies usually used for localization?

Strategy for localization itself has to be localized depending on the culture and nature of people. It would also depend on the similarity between nationals of the country the product originally belonged to and the country where the product is being launched. Besides looking at practical things like usability issues, regulations, and infrastructure support, companies can follow strategies listed below:

• Partnering/buying with local players
• Hiring local teams/native CEOs
• Competitor Strategies - Looking closely at the existing products to understand the needs and familiarity of the nation
• Hiring advisory companies for market expansion, who have experience of that country
• Partnering with the existing ecosystem—suppliers, complimentary goods etc.
• Pricing and volume of sales have to be calculated on the basis of realistic market trends and not on board room meetings.
• Having a clear Sales strategy roadmap defined for the localized product and setting up processes to take regular feedbacks from customers

All said and done, we will never stop having paradoxes like Hyundai Santro. When Santro was launched, analysts told them it would be a flop in the Indian market and need to localize the look of the car. However, the product proved everyone wrong to become a roaring success!

Chandramouli
Consultant, Zinnov

For decades, the US has been considered throughout the world as the “Land of Opportunities.” Majority of the products built till date is to address the customer needs of the US market and this trend is set to continue.

In the last decade or even prior to that, global product companies had set up their subsidiaries with significant investments to leverage India as a key sourcing hub for IT R&D. Many companies started their R&D centers and used India talent as coding factories for their global products. The mantra for these companies will be and continue to be “Made from India”

However, in the last 12 months, there were subtle changes in the mindset of these MNC companies. India is being seriously considered as a market for IT products. India Inc. is shaping itself to be the next big market not only in Asia but also globally. Companies are evaluating options of localizing the products for Indian customer needs. What began as coding factories few years earlier is now looked more from a strategic point of view. Senior management teams are now taking initiatives to understand the Indian market needs and potential. For the first time in the history, 1.1 billion population of India is looked upon, as billion potential customers are waiting to make their lives better with IT products.

One great example of product localization that comes to my mind is the “Yuvraj Singh International Cricket 2007”, the Indianized version of “Brian Lara International Cricket 2007”. Microsoft has taken a good initiative to touch billion Indian sentiments. India being a cricket crazy nation, the product would definitely play on million minds as the gaming market matures. The other example of product localization is the Hindi version of Google news, which was launched recently.

With consumer internet companies leading the pack of localization, it will be interesting to see how the market shapes up in the next few years. So will our dream of “Made from India” take a 360 degree shift and become “Made for India”? Let us wait and watch!

Organizations, on their quest to improve their competitive position in the market, access new market and improve the operational efficiency are using M&A as a way to achieve these goals. The size and frequency of the deals have increased and so is the complexity of the integration process

People, Process and Technology integrations make up the core aspects of the acquisition and merger process. Organizations should look at leveraging offshoring as a strategy to accelerate the integration process and reduce the costs involved in the integration process. The integration of complex business processes, technology implementation and IT projects can be outsourced to large vendors. When these activities are measured through a series of stringent service levels and penalty/bonus clauses, it will enable the offshoring vendors to execute better on the integration when compared to the internal teams. These vendors can also drive cost savings significantly due to offshoring labor cost arbitrage apart from reengineering and economy of scale.

The Offshoring vendor who would offer M&A integration as a service and are willing to take up the risks along with it can make great strides in competing with some of the large outsourcing vendors in the world. When executed effectively, offshoring can be used as a tool even by Mid-sized organizations without the financial muscle to execute effectively on their M&A strategy.

Aniket Arekar
Research Manager
Zinnov

The real estate industry has emerged as one of the most happening industries in the country in the recent times. The industry got a major boost when government permitted 100% FDI in the infrastructure sector. Many foreign companies have since joined hands with domestic players to exploit the huge growth potential of the industry.

MNC’s like American International Group Inc., High Point Rendel of UK, Edsaw-US, Japan’s Kikken Sekkel, Lee Kim Tah Holdings and Cesma International from Singapore have shown keen interest in the sector. Recently, Dubai based, Emmar Properties, the largest listed real estate developer in the world, joined hands with Delhi based MGF Developments with an investment of US$ 500 mn resulting in India’s largest FDI in real estate sector.

Total FDI inflow in the country in FY 2006 was $ 7.5 bn. Introduction on real estate venture capital funds in the country and change in FDI policy related to the development of Special Economic Zone’s (SEZ’s) is another reason for the spurt in the industry. Private sector biggies like reliance Industries Ltd. Has proposed to spend Rs. 50,00 cr (~$11 bn) on its various projects. Alongside, Nokia, M&M and ONGC are investing and pouring huge amounts in building infrastructure for commercial and industrial use.

Cashing in on realty boom, Gammon India ltd. comes out triumphant with net sales of Rs. 1429.36 cr ($325 mil). The company also significantly boosted its profits, which was up 173.26%, during the fiscal. With a upswing at the top line and strong growth at the bottom line, Punj Lloyd, B L Kashayp & Sons Ltd. And Simplex Infrastructure Ltd., with net sales of Rs.1,407.33 cr ($320 mil) and Rs.1334.62 cr ($305 mil) , respectively.

These increasing investments in infrastructure and the rising demand for commercial as well as housing units augur well for the industry, in general. However, things such as rising input costs and continuation of housing tax incentives would be things to watch out for industry players.