Entrepreneurship, Innovation and Succession: India's Changing Business LandscapePublished: September 16, 2011 in India Knowledge@Wharton
Over the past 20 years, India’s information technology and outsourcing companies have grown at an extraordinary pace, with many reaching revenue numbers in the billions of U.S. dollars and seeing staff sizes grow exponentially. But this is almost entirely in the services arena; in product space, Indian companies have been singularly unsuccessful. Services may well have been the path of least resistance, said panelists during a discussion at the 15th Wharton India Economic Forum in Philadelphia.
“Whether you use Accenture, IBM or Wipro, India is literally the back office for global information technology,” according to Vish Tadimety, chairman and CEO of CyberTech Systems and Software, a leading provider of geo-solutions in India and the U.S. But thus far, Indian companies have not proved as successful in the product and shrink-wrapped software realm. With so many Indian multinationals increasing operations outside the country, many in the Indian business community are asking if India is preparing to remain competitive in the changing economic ecosystem. Does India have the resources, structures and innovation it needs to meet the challenges of the coming decade? What are the opportunities for first-time entrepreneurs in India?
At the WIEF, leaders of global corporations and first-time entrepreneurs discussed these and other questions, offering advice to those hoping to make their mark in the new economy.
During a panel discussion titled, "Technology and Innovation: India’s Future Growth," Bharat Goenka, co-founder and managing director of Tally Solutions, a leading business management software company in India, noted that complacency among Indian entrepreneurs has held the country back in the software product arena. “Over the past two decades, we have seen a few hundred companies entering the product space and then moving on to the simpler exercise of earning money from a handful of customers, rather than trying to scale across to tens of thousands or millions of customers,” said Goenka. “That is usually a business-landscape problem. Money is difficult to get back so you will always take the easier path to earn money.”
But as Indian companies continue to expand operations overseas, a more focused and aggressive approach will be needed. “There is knowledge now available at a global level,” noted Sudhir Agarwal, president of Aegis, a leading global business process outsourcing (BPO) provider. He noted that companies like his are no longer remaining in India simply because they are Indian. Instead, they are evaluating locations based on where they can best meet customers’ needs. “That could be anywhere in the world,” he said. Aegis today works from more than 50 locations and has 50,000 plus workers worldwide.
Innovative Services Exist
N.V. (Tiger) Tyagarajan, the COO of Genpact, a leading BPO company, disputed the notion that innovation was merely about products, citing examples of Indian innovation in services, processes and intellectual capital. But he also agreed that the most successful businesses would be the ones that position themselves as global, rather than Indian. Genpact, he noted, is growing faster outside India than in the country. “I sometimes get very schizophrenic when someone asks if we’re an Indian company. I don’t know. Some 95% of our customers are outside [India], 99% of our shareholders are outside. More and more -- 35% today, in the future maybe 55% -- employees are outside India,” he said.
On the leadership front, countries of origin are also becoming less relevant. “My cost of global leadership is the same if I hire in the U.S., India or Germany,” noted C.P. Gurnani, CEO of Mahindra Satyam, a global IT and BPO company. However, Gurnani was very optimistic about the outlook for young Indian MBAs. “It is an interesting time to be an Indian and most interesting to be in a transnational or multinational company. We are experimenting, doing what other companies desire to do, because our growth is a necessity of invention.”
Exciting as this time may be, hyper-growth also presents its share of challenges. Primary among them is the problem of succession. When you are growing at 30% to 40%, how do you groom the next set of leaders? “Employees don’t have time to mature to become the next leader, so it can be hard to find the second or third in line when someone leaves,” said Tyagarajan.
The challenge is exacerbated by Indian employees’ tendency to move quickly from company to company. “When you get a CV in India, the most common thing is everyone works in a company for two years. It’s astonishing,” according to Gulbir Madan, founder and chairman of Brahma Management, an India-focused asset management firm based in New York City, and moderator of the panel, "Challenges and Opportunities for First-Time Entrepreneurs."
High attrition rates not only drain businesses of time and training resources, they also drive wages up. Milan Patel, CEO of ACS International Resources, a leading global technology firm, doubled all of his employees’ salaries last year. “I had to; I was losing about two to six employees a month because they were very well qualified and cross-trained,” he said.
For employers, the high turnover rate of Indian employees creates a lot of headaches. But panelists also acknowledged that, for employees, jumping ship was the best way to move up and make more money. “The only thing that you should think about in terms of your career is how many times can you pack your bags and move to another location,” noted Tyagarajan. “If you can, you’ll have a professional advantage. If you can’t, you will be disappointed.”
Keeping qualified employees is a problem; finding qualified new ones is not. That is what Naveen Tewari discovered in 2007 when he started InMobi, the world’s second-largest mobile-advertising firm after Google. Because so many companies like Amazon and Microsoft had already set up back offices in India, he found a deep pool of qualified workers. “[They] have done the hard job of training people” said Tewari.
Staff Numbers Surprise
For his part, Patel of ACS countered that high turnover rates made these large teams a necessity for long-term survival -- so that there will be a qualified manager to fill the shoes of a departing executive. “You can have a hole fairly quickly,” he stated.
When addressing a roomful of would-be entrepreneurs, Tewari and Sachs were optimistic about the opportunities for raising funding from angel networks and venture capital funds. Tewari noted that one angel network he was familiar with looked at 80 business plans, and funded three, during a six-week cycle. “If one group sees 80 business plans, half of them will be [unviable], but if they see 80 business plans it means their activity leverage is very high and somebody or the other is going to fund it if you have a nice plan,” he said.
He noted that VCs call him whenever an interesting mobile-Internet company pops up, and during a recent week, he received nine calls from nine different VCs about a single plan. “If you have one good deal in the market, everyone is on it,” he said. Sachs, who received his funding from U.S. VCs and Indian angel investors, was equally upbeat. “The VCs' business model is they must deploy capital. I met with a lot VCs who said they were desperate for good companies and entrepreneurs to put their money in, so I think for people in this audience if you build something interesting, the money is there.”
Where Are The Start-ups?
Patel of ACS added a more sobering note. He is part of an angel network that recently shortlisted three businesses to invest in, out of about 10 to 15 they reviewed. However, all three businesses -- which were focused on online marketing, e-commerce and gaming, respectively -- were already in operation. “[They were] not business models that were just on paper; they were functioning, had a growth path, had a story. So they were maybe one or two years into their plan.”
Because technology companies don’t require licenses in India, setting up a tech company is less complicated than establishing other types of businesses. Once he had financing, Tewari said that setting up his company took about 30 days and the process was relatively straightforward. “We were never asked for a bribe. We never needed to give or take favors. It was fairly clean,” noted Tewari.But Patel warned that establishing a company still came with a fair amount of red tape and paperwork, such as incorporating the articles and the memorandum of association, and appointing the directors. “If you’re doing it on your own and think that you are going to go over there and knock it together in a week or a month and then come back, I don’t think so,” he said.
For Sachs, processing payments was by far the biggest challenge. The Ignighter team launched in India with an American portal for payment, not realizing that very few Indians used credit cards that worked internationally. The result: a 70% default rate. “The online payment landscape is a nightmare in India right now… If you don’t have an Indian payment gateway, it’s virtually impossible to collect revenue,” he pointed out.
The problem of payment collection is not merely technical. Patel noted that large companies have a habit of working on their vendors’ money -- payment cycles can be 90 days or longer. When working with smaller companies, the challenge is to ensure that they are properly financed so that payments are not dragged out -- or dropped completely. “People love doing work on your money. It’s one of those things in India -- you sell them something and they don’t pay you, and then you have to go begging for your own money,” he said. He added that he has an employee on his four-person accounting team whose entire job is retrieving overdue payments. “His job is to show up in people’s offices, just wait all day for the accounting guy to cut him a check."
Patel’s parting advice to would-be entrepreneurs stressed the pragmatic over the inspirational. He extolled the virtues of purchasing, rather than renting, the worksite -- the value of his company’s real estate went up 4.5 times, even when the business itself was just breaking even.
Hands-on Effort Needed
He also warned against being an absentee manager. “If you want to do it, you have to be there and have to put in the time there. Going there two weeks every quarter may not just cut it,” he said.
Tewari took a different tack, saying not to worry about getting a lot of experience before creating a start-up, and to avoid the golden-handcuff trap. [Once you take up a regular job, you get too fond of the pay and perks.] “Those golden handcuffs will push you out of entrepreneurship for two or five years of experience. In my viewpoint, experience is grossly overrated,” he noted.
He admits, however, that the entrepreneurship process can be extraordinarily grueling and disheartening, especially when one sees classmates making a lot of money in jobs at established firms. During those times, the fear and doubt can be crushing. “At the end of all of this, when you are trying to lay out the story, the negatives seem so fairy tale-ish and people love it. But when you are going through it, it’s stress, stress, stress. It is bad.”
But, ultimately, it is worth it for those who are willing to take risks and think big. “The whole experience of entrepreneurship is so beautiful that it is like cocaine,” said Tewari. “You will not be able to give it up.”