Innovation in Suppliers of Outsourced services: Case of Indian Software Industry

1. Innovation in Suppliers of Outsourced services: Case of Indian Software Industry Rakesh R. Mishra Doctoral Student (0)-9339273557 Indian Institute of Management Calcutta rakeshr@email.iimcal.ac.in

2. Contents Background and Research Context Growth of Market for Indian Software Service firms Indian Software Service Industry Structure Research Questions? What is Innovation ? Service ? Types of Innovation Approaches to Study of Innovation in Services Theoretical Paradigms to study Innovation in Service Drivers of innovation in services Model of Industry dynamics (Mehra, 1994) Innovation is Indian Software Firms: Model of Indian Software Service firms Dominant Drivers of Innovation in Indian Software firms Hypothesis about emerging trends of New service design

3. Background and Research Context Phenomena of Disintegration (Outsourcing) - relationship between the market size for the product of a firm and the extent of vertical integration optimum for the firm (Stigler 1951, Langlois, 1988, Pavitt, 2003) Outsourcing in Software Services � Separation of Software and Hardware (IBM, 1960) Standardization (Greenbaum 1976, Kraft 1979) Globalization Service producer makes a bundle of competence available to the customer at their disposal which is used by client organizations according to their inputs

4. Indian Software service Industry Structure

5. Continued ��� A long tail structure of the industry It has been found that major R & D expenditure and technological innovations are not likely events where all the firms are offering similar products and main market dynamics is price competition (Desai 1982; Siddharthan 1988; Nath 1993) large and small firms all are likely to be engaged in minor cost reducing innovations. Arrow(1971)

6. Research Questions? What is the strategy of firms or group of firms What is the type of Innovations Indian software firms do � technological / non-technological What is the driver of the Innovation? (Market/ Strategy / R&D/ Competition) What are the determinants of the innovation What is the model of innovation adopted in Indian Software firms Is the boundary of the firm stable

7. What is Innovation ? Adoption of an idea pertaining to device, system, policy, program, process, product or service which is new to the organization at the time of adoption. Idea may be generated in the organization or may be purchased from outside. (Daft, 1982; Damanpour and Evan 1984; Damanpour 1991) Innovation thus has become a means of effecting changes that are needed to meet the new strategic challenges. (Damanpour and Schnieder, 2006; Schumpeter 1934). innovation is measured only after idea has been successfully implemented

8. Representation of services Based on Gallouj(2002) C - Service Provider�s Competence term C� - Client�s Competences term T - Technical and process characteristics term Y - The Service Characteristics

9. Types of Innovation Damanpour, 1987 Technological Innovation Tool, technique, physical equipment or system by which the employees, the units or the organization extend their capabilities Schon (1967). Administrative Innovation Implementation of new policy pertaining to recruitment of personnel, the allocation of resources, the structuring of tasks, authority and rewards are examples of administrative innovation (Damanpour, 1987). Ancillary Innovation Innovation in boundary spanning units e.g. marketing and public relations

10. Types of Innovation (Oslo Manual 3rd Ed, 2005) Product Innovation (Technological) Introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. Product innovations can utilize new knowledge or technologies. Process Innovation (Technological) Implementation of a new or significantly improved production or delivery method Marketing innovation implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing Organizational Innovation implementation of a new organizational method in the firm�s business practices, workplace organization or external relations

11. Approach to Study Innovation in Services [Gallouj, 2002] Technologist approach: Assimilative Approach Impact analyses Sectoral technological trajectories (Pavitt, 1984) Lakshmanan(1987) also pursues evolutionary approach but diff. The Service-Based Approach: demarcation approach (Drejer, 2004) highlights the existence of particular form of innovation in services different from technologist approach It attempts to produce �local theories� of innovation more closely tailored to particular service industries. Integrative Approach: an integrated analysis should be possible (Drejer, 2004;Gallouj and Weinstein (1997); Preissl(2000)

12. Theoretical Paradigms Sundbo, 1997 Technology-economy paradigm (Dosi et al. 1988) Innovation as technological development Entrepreneur paradigm (Kent, Sexton & Vesper, 1982) Entrepreneur�s act is the core innovation process Strategic Innovation paradigm (Teece, 1987; Kanter, 1989; Nystrom, 1979, 1990; Porter, 1990; Rumelt, Schendel and Teece, 1994; Sundbo, 1995). Firm�s strategy as the core innovation determinant. Innovations are largely market driven and formulated within the framework of a strategy.

13. Drivers of Innovation External drivers Customer needs (Customer demand, reconstructed need) Changes in the Environment (Abstract need) Internal drivers Market Orientation Strategy Plan of the organization Organizations resources vis-�-vis its ability to adopt certain innovations Constrained resources or path-dependencies (Ghemawat, 1991) Competence to innovate Organization structure and decision architecture (Quinn, 1985) Intelligence gathering ability of the Organization (regarding technology, competitor strategy and customer requirements)

14. Dynamics of Industry (Mehra, 1994)

15. Fig1: Model of Indian Software Service firms

16. Continued ��. Knowledge Base Knowledge of employee [C], Knowledge embodied in capital goods, components and supplies [T] Experience Base Information Management Competence Organizational competence Competence achieved due to performance Competence in the use of theoretical Knowledge (Guilhon and Gianfaldoni, 1990; Guilhon, 1992).

17. Elements of Indian Software Service firms and Innovation Knowledge Base � Change in the Knowledge base. Conquest of new source of raw materials (Schumpeter) (Radical innovation) Experience Base - Change in the Experience base. (Incremental innovation) (Guilhon and Gianfaldoni, 1990)

18. Continued �..

19. Dominant Drivers of Innovation External Drivers Changes in environment Changes in the Customer need

20. Trend of Change in environment Deepening economic integration, increasing economic openness and growing economic interdependence between countries Cross-border movement of goods and services is easy Raw-materials (bundle of competence in case of services) of various countries accessible to the organizations

21. Trend of Changes in the Customer need Organizations are increasingly focusing on their �Core competence� and attempting to create value by focusing on their core processes and outsourcing their non-core processes. Services related to non-core processes are being outsourced (procured from market).

22. Emerging trend of new service design Finding new service opportunities while interacting with client or by customer canvassing New service development in provider�s firms will be focused on finding cost-effective new �bundle of competence� Globally for the service opportunities found above (Raw material focused)

23. Continued �. Dynamics of the industry predicted in the model shows that Innovation charter of these firms will focus on finding new business opportunities to leverage their complex resource mix and venture into other industries. Firms will try to find new bundle of competence that can meet customer�s need in a cost-effective manner

24. Conclusion Identification of non-core processes and availability of cheaper �bundle of competence� which can be procured in a cost effective manner especially from geographically distant locations will determine the new services. Looking at the dynamics of the industry model we see that new service design and process innovation will be guided by the consideration of leveraging the complex resource mix of the firm.

25. Case of Indian Software Industry Onsite �coding� expertise full range of service involved in the software development Call centers and Business process outsourcing. medical transcription, digitizing of drawing etc. Business Consulting

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