Innovation Transforming the growth landscape

Innovation

transforming the growth landscape

Capitalising IP in Indian IT-BPM

kpmg.com/in

1 | Six converging technology trends

© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Foreword

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Table of contents

01Executive summary

IP generation

IP management

IP commercialisation

About KPMG in India

About NASSCOM

Acknowledgement

Way forward - Enabling India's IP strategy

Rising importance of Intellectual Property (IP)


1 | Innovation transforming the growth landscape


Foreword

Pradeep UdhasChairman of India Global Program, KPMG in India

Gary MatuszakGlobal chair, Technology, Media and Telecommunications practice, KPMG

R ChandrasekharPresident, NASSCOM

IP filing trends globally are at an all time high, having recovered from the setback due to the global financial crisis, according to the World Intellectual Property Indicators Report 2013. Interestingly, according to the same report, origin countries for IP filing have shifted from high-income to middle-income countries between 2007 and 2012. It is indeed heartening to note that the Annual Report of the Indian Patent office which has been tracking top five Indian patent applicants from the information technology sector, shows more than five times increase in number of applications between the years 2009 -12. This trend clearly indicates that the IT industry is slowly but surely making a transition towards IP driven products and services.

While the IT-BPM industry has grown by leaps and bounds to cross the USD 100 billion mark, the Industry has to identify the next big growth engine. Technology leaders agree that the next phase of business models would be driven by the rise of SMAC and the convergence of technologies. To effectively utilize these trends, it is imperative for IT-BPM companies to create, manage and monetize Intellectual Property (IP).

For Indian IT-BPM firms – which have grown large by offering the value proposition of cost savings and efficiencies in delivering business processes, the challenge lies in successfully transitioning to an IP led model, both as creators and custodians. It is important to acknowledge that IP very often is tacit and may not always have a legal recourse for protection. Hence, processes to identify, capture and protect IP have to be largely internal to the organisation. Further, with time and increase in focus on product development and generation of IP, organisations will be focussing not only on traditional R&D, but also in end to end managing of IP portfolio. Commercial value of an asset can be fully realized through effective protection and monetization strategies, and it is an opportune time for us to work with the Industry to deliberate and develop strategy on IP.

This paper attempts to outline the benefits to be gained by successfully adopting an IP based model for the Indian IT-BPM industry, and also lays down a roadmap for India to succeed on this path. We hope that this paper would be helpful to seed an IP strategy in the company as we work together to take the next leap for growth.

Innovation transforming the growth landscape | 2


Executive summary

The Indian IT-BPM industry crossed the USD 100 billion mark, with the dominance of IT-BPM services. While it would be wrong to assume that this did not involve IP, there is no doubt that the next phase of growth will require a more systematic and focused approach to development and monetization of IPR.

Some of the largest IT-BPM companies in the world – Google (Market cap: USD 384 billion), Microsoft (Market cap: USD 300 billion), IBM (Market cap: USD 200 billion) have reached their success milestones through years of accumulated innovation, persistence and business acumen1.With Indian companies mostly offering third party services, most of the IP generated and resident in the country would be tacit. Clearly, companies now need to transition to more robust processes in their journey to identify, protect and monitor IP for growth and sustenance.

But before we delve into how IP can be a panacea for the IT-BPM industry, it is important to first define IP. Most organisations define IP as the creations of the mind and human endeavors individually and collectively in the form of an asset (both tangible and intangible, also product or service), which can be commercialised and governed to achieve economic benefits, ownership, a strategic position in the market and driver customer demand.


1 Market capitalization as per Google Finance, accessed January 28, 2014


Understanding Intellectual Property (IP)Indian IT-BPM firms have a long way to go in leveraging and monetizing their IPR as their initial growth has been driven by offering cost advantage in comparison to other locations. With respect to IP, most companies in India are at an initial stage of IP development. In the past decade, Indian firms have acquired the scale and skills necessary to deliver large scale, complex transformation projects. A vast majority of these projects had their revenues directly linked to resources deployed. On the positive side, India’s technology leaders have shown confidence that they excel in most of the criterion necessary for innovation.

To enhance the benefits that can be realized from IP, it is imperative that organisations gain a proper understanding on the IP value chain. The value chain details the various steps associated in evolution of an IP asset from the state of building a roadmap, managing information and workflows, to the state of a tangible product. The three steps typically involved in an IP value chain are IP Generation, IP Management and IP Commercialisation. With increase in focus on product development and generation of IP, organisations in India are focusing not only on traditional R&D, but also in end to end managing of the IP portfolio. They realize the commercial value of an asset can be fully realized through effective protection and monetization strategies.

The paper also delves into the dynamics of IP creation, and the various avenues open to organisations for creating IP. As far as IP management is concerned, three key challenges that Indian IT-BPM companies face include talent management, lack of opportunity identification and issues with the legal ecosystem.

To overcome the problem of talent management, the IT-BPM industry is focusing on communication and soft skills, as well as providing training to build expertise across multiple and specialized domains and adoption of newer technologies leveraging SMAC. The Government of India has also taken measures to improve the legal ecosystem for protection of patents and is consulting stakeholders on the efficient way forward. IT-BPM firms are also exploring various avenues for commercialising their IP – these include licensing IP, spin-off, joint venture and patent pooling.

Way forward – Enabling India’s IP strategyGoing forward, technology vendors should seek to work closely with their customers and individual innovators to stay abreast of the latest technological developments, and come up with solutions that can take advantage of SMAC. The emphasis should be on tapping inputs from various channels, mediums and devices and using these as critical inputs for new solutions and incremental innovations. This paper suggests a way ahead to service providers, startups, the Government, academia and customers, for India to emerge as the innovation hub.



Rising importance of Intellectual Property (IP)

01

IT-BPM scenario and opportunity for India

The last three years witnessed a shift in the global ICT spend towards more explorative and disruptive technologies, with the next growth phase driven by the market moving to high stakes driven competition in the platform technologies. Innovation and intellectual property would play a significant role in increasing the market share of the products which now constitute to about 14.7 per cent of the total spend in 2013 (among services, hardware and products)1. IDC predicts worldwide ICT spend to reach USD 5 Trillion by 2020 and 98 per cent of growth to be driven by platform technologies (SMAC)2 which will result in a significant increase in product market share and opportunities going forward.

1 “The IT-BPM Sector in India - Strategic Review 2013”, NASSCOM, February 2013

2 “IDC Predictions 2013: Competing on the 3rd platform”, IDC, 2013



IT-BPM market and opportunities in USD Billion

Indian IT-BPM industry spend is USD 108 million USD in 2013 and is growing at the rate of 10.8 per cent CAGR. Projecting on the current growth rate, the Indian IT-BPM spend can potentially reach USD 221 billion by 2020 indicating a gap of USD 79 billion to the NASSCOM set target spend in 2020.

Indian share in the global product scenario can impact the total IT-BPM share. India will be relevant in 2020 only through IP led innovation focused on tapping the potential global market for products.

0.5% 0.5% 0.5% 0.7%

IT-BPM industry in India contributes to about 6 per cent of the total GDP. However, this is likely to reduce to 4 per cent by 2020 unless the industry embarks on innovation led growth to become relevant.

Sources:• “The IT-BPM Sector in India - Strategic Review 2013”, NASSCOM,

February 2013 • “The IT-BPO Sector in India - Strategic Review 2012”, NASSCOM,

February 2012

• “Global IT-BPO spend outlook” Gartner, January 2014• “NASSCOM sets 300 billion target by 2020”, http://www.thehindu.

com/business/companies/nasscom-sets-300-billion-target-by-2020/article4475749.ece, accessed on 28 January, 2014


221

300

1.3 1.5 1.6

60.4 70.8 77.2

11.712.8 13.3

2011 2012 2013 2020E Constrained

Growth

2020E Innovation

Driven Growh

Total Spend Indian software product markets Services Hardware

Source: NASSCOM Strategic Review, 2012 and 2013 Source: KPMG in India:

Projection based on

CAGR of 2011 - 13.

Source: NASSCOM

sets USD 300 billion

target by 2020

CAGR10.8%

~79

Contribution of Indian IT-BPM to Nation’s GDP

6%

2013:

Indian GDP –

1.8 Trillion USD

4%

2020 Constrained

Growth:

Indian GDP –

5 Trillion USD

6%

2020 Innovation Led

Growth Indian GDP –

5 Trillion USD

Share of Indian software products Globally

IT-BPM industry market size in India

Share of Indian IT-BPM spend to global spend

18%

5.2% 5.2% 5.3% 3.6% 6.0%


The Indian IT-BPM industry has expanded significantly in the last decade and technology and business leaders agree that the next decade will be substantially different from the previous one and will witness a rise in non-linear business models. The next phase of business models will be driven by effectively leveraging and monetizing IP capabilities and targeting the global product market. Currently, there is an addressable market of USD 300 billion for software related products in 2013 of which Indian share is about USD 1.6 billion (~0.5 per cent) and is growing at the rate of 9.3 per cent compared to the global product market growth rate of 5.6 per cent.3

Future outlook

The following trends would define the nature of the industry going forward:

Monetization of Intellectual Property: Global addressable market for products is already close to USD 300 billion in 20135. Considering the steady growth rate of nearly 5.6 per cent, the

product market is expected to grow close to USD 439 billion by 20203. Going forward, the success of global technology majors will be attributed to the creation, development and monetization of their vast intellectual property portfolios4.

Rise of SMAC: Platform markets and technologies will drive big share shifts. Cloud and platform will act as powerful contributors to BPM transformation. There will be a shift from traditional onsite delivery model to cloud based and off-premise/ mobile model6. SMAC platforms are helping to create a level playing field for the competition as organisations are not required to be driven by significant investments resulting in rising market for the startups.

Convergence of Technologies: With IP at its helm, next innovation growth wave will have to concentrate on convergence of technologies. Innovation ecosystem will change because of convergence and will result in collaboration of multiple parties.

Global outlook on innovation

In a recent global innovation survey conducted by KPMG in US, India’s technology leaders have shown confidence that they excel in most of the criteria necessary for innovation. India’s experience in the services sector, maturity of customer adoption and availability of quality talent has positioned India

positively in the global context. India with its vibrant mobile communications market, global outreach and outsourcing services leadership seems destined to close the innovation gap with China if it can update its infrastructure and scale more startups into globally recognised technology players5.

Q: Overall how do you rate the success of your country in enabling technology innovation?

USA China India Japan Korea Israel

Availability of talent 64% 62% 75% 20% 49% 79%Access to technology infrastructure 67% 57% 69% 23% 60% 75%

Access to alliances and partnerships 67% 57% 64% 23% 54% 59%

Ability to drive customer adoption in local and international markets

63% 57% 71% 17% 51% 64%

Development of technology breakthroughs that will have a global impact

64% 53% 69% 20% 47% 85%Mentoring and access to innovation network (start up CEOs, founders etc.)

58% 58% 72% 29% 42% 73%

Access to capital 63% 62% 65% 17% 48% 68%Supporting ecosystem (legal, law firms, accounting firms etc.) 61% 51% 60% 20% 36% 39%

Educational system 42% 42% 65% 17% 47% 55%

Government incentives 23% 52% 56% 11% 38% 34%

3 Innovation transforming the growth landscape Report, KPMG in India, 20144 Non-linear models – Driving the next phase of growth for the Indian IT industry , KPMG, 20115 Technology Innovation Survey, KPMG Global, 20136 “IDC Predictions 2013: Competing on the 3rd platform”, IDC, 2013

Source: Technology innovation survey 2013: The changing landscape of disruptive technologies, KPMG in US, 2013

Country confidence index components



Global competition to India

The innovation engine of Israel closely trailed India on the index. Israel earned the highest marks for disruptive technology breakthroughs that will have a global impact, followed by talent, technology infrastructure, networking and mentoring. This startup nation churns out high-tech advances despite its relatively small population size in sectors ranging from security & robotics to software. The U.S. ranked third, with their tech titans judging their country weak in two important

areas: government incentives and educational system. The U.S. excelled in access to alliances and partnerships; benefits that come with market maturity. China’s fourth-placed score was driven by high marks for talent, capital and innovation networks. China tech leaders rated their market successful or extremely successful on nearly every factor, except ecosystem and educational systems7.

Gary Matuszak

Global Chairman, Technology, Media and Telecommunications KPMG

The growth in India’s information technology industry – by an estimated USD 100 billion in the past 13 years -- reflects confidence the global community has in India’s ability to support this business trend. In KPMG’s 2013 Global Technology Innovation Survey, global tech executives ranked India third (behind China and the United States) in regards to which country shows the most promise for disruptive breakthroughs that will have a global impact. India’s relatively high ranking reflects the country’s anticipated continuing strength in technology innovation. India’s technology leaders in the KPMG survey gave their country high marks for talent, mentoring, and technology breakthroughs. Out of 10 success factors, they gave the lowest rating to government incentives. The global community sees India’s technology infrastructure and Intellectual Property protection as two areas that require improvement for India to continue as a leader. The Government of India is attempting to address the infrastructure, offering tax and policy incentives for the technology sector and to provide world-class infrastructure for IT-BPM companies. Meanwhile, India’s intellectual property (IP) protection regulations have continued to attract criticism. There is hope that the potential beneficial impact on India’s economy due to stronger IP patent protection could lead to improved regulations. Stronger IP protection would attract more investors in the country.

7 Technology Innovation Survey, KPMG in US, 2013



Intellectual Property in the Indian IT-BPM industry

Organisations in India have defined Intellectual Property on a wide spectrum of innovation ranging from reusable knowledge assets to high end software products. While some organisations associated intellectual property with defined revenue streams, significant number of organisations also reported realization of value from intangible IP assets. Based on the survey conducted by KPMG in India for the purpose of this report, Indian technology providers listed the following top criteria in defining IP to their organisations.

There should exist a clear ownership for the asset to be considered as IP:

• Entitlement through defined copyright/patent

• Ability to protect the asset with governing laws and regulations

An IP asset provides value to the organisation in one form or the other:

• Ability to derive commercial benefits through defined revenue streams/ cost savings

• Ability to impact the valuation of IP asset

• Recognised driver of non-linear growth

• Demonstrated capability to reduce costs and add value to the customer

An IP asset should help the organisation position itself in the market

• Ability to address specific markets, customers and demographics

• Recognised competitive advantage to the owner

The vital objectives for various organisations differ as per the ecosystem they belong to. The responses for the top three given objectives for various organisations are as below.

Key parameters Indian IT-BPM organisations use to define a knowledge asset as IP

Increase in no. of Pending Patents by Top three Indian IT companies globally (Infosys, TCS, Wipro)

Source: Innovation transforming the growth landscape Report, KPMG in India, 2014

Source: Non-linear models – Driving the next phase of growth for the Indian IT industry, KPMG in India, 2011; Company financial reports


Greater valuation

Non Linear growth potential

Customer Demand

Reusability/ Widespread Application

Competitive Advantage

Ability to protect

Ownership

Commercial value

8%

8%

17%

17%

42%

50%

67%

92%

407526

812

1313

1825

FY2009 FY2010 FY2011 FY2012 FY2013

CAGR - 35%


Company Initiatives to drive SMAC Investments and Products in SMAC space

Infosys Has set up a USD 100 million fund to invest in start-ups, besides funding internal innovation

Social Edge (Consumer conversion tracking),

On Mobile, mConnect (Enterprise Middleware)

Shoppingtrip360 (retail analytics tool)

Cloud ecosystem hub (Unified hybrid cloud management)

TCS Formed its Innovation Labs and Co-Innovation Network (COIN) to bring together academic institutions, start-ups, venture funds and clients

CubbuZZ (Social networks and promotions platform)

Perfecto Mobile, mKRISHI (Mobile based rural delivery Platform), iON(IT as a Service)

BaNCS (Cloud solutions for BFSI and Capital markets)

Cognizant Set up an Emerging Business Accelerator with a mindset of Venture Capital Ecosystem

Truemobi (enterprise mobility suite)

Platinum (Information management solution), CareServ (medical management solutions)

Cloud360 (Enterprise cloud service management)

Wipro Picking up stakes in cloud and big data firms

Opera Solutions Axeda, Infocrossing

Tech Mahindra

Has established a USD 50 million fund exclusively for investments in global technology start-ups

Launched an initiative – i5 Startnet – to scout for firms in SMAC

SMAC investments of Indian service providers

Source: Indian IT companies look for start-ups to drive competitiveness", Nitish Mittal, August 13, 2013; Everest Group, http://www.everestgrp.com/2013- 08-indian-it-companies-look-for-start-ups-to-drive-competitiveness-sherpas-in-blue-shirts-11782.html, accessed September 4, 2013 and Company websites

Social Media

Analytics

Mobility & mobile devices

Cloud

Indian BPM organisations have grown rapidly based on the value proposition of cost savings and efficiencies in delivering business processes. IP creation in such organisations is focused on realizing intangible benefits ranging from innovation in business processes, leading industry practices and methodologies which result in managing risk and reducing complexity to customers. Hence IP created, though intangible, still provides significant competitive advantage to its owners.

S. Gopalakrishnan

Executive Vice Chairman, Infosys Limited

As more and more IT consumption moves to online, the next generation of innovative companies in this space must be built leveraging IP. Indian companies are investing more into creating IP. Start-ups are increasingly built around unique IP. This is exciting to see and will transform the IT industry in India.



The Intellectual Property value chain

With increase in focus on product development and generation of IP, organisations in India are focusing not only on traditional R&D but also in end to end management of the IP portfolio. They realize that the commercial value of an IP asset can be fully realized only through effective protection and monetisation strategies. This is leading to IP being on the CEO’s agenda across organisations and investments into product based technologies being given utmost importance.

Recent trends in India range from bottom up creation of IP to continuous performance tracking of IP to name a few, with every trend focusing on extracting maximum value out of IP assets. The IP value chain is a framework designed to align IP strategy of an organisation with its business strategy. The value chain details the steps associated in evolution of an IP asset from the state of an opportunity/idea to creation, management and commercialisation resulting in a tangible product.

Creation of IP through R&D & bottom up approach

Acquisition of IP through M&A, outsourcing/ IP buy

Collaboration to generate IP with industry, educational institutions

Managing IP strategy to develop and execute IP roadmap

Managing capabilities to ensure talent, infrastructure availability

Managing performance to ensure investments and performance are monitored

Managing protection to ensure IP is being protected

IP Valuation to evaluate the economic potential

Monetization strategies to derive commercial value out of the asset

Financial management to assess the impact on tax & transfer pricing regulations

Ganesh Natrajan

CEO, Zensar Technologies

The future revenues and profits of the IT industry will be determined by the effective design, creation and deployment of IP - all companies need to put IP on the CEO's agenda and develop an eco-system for success.


IP generation IP management IP commercialisation


Intellectual Property ecosystem

The intellectual property ecosystem is a platform for various players in the industry who contribute to the development of IP and are impacted by IP to successfully collaborate and co-create an IP focused culture. While the value chain provides

the organisations with strategies and a wide ranging approach of end to end IP management within organisations, the ecosystem details out the responsibilities of various players to create a culture of innovation within the country.

Ecosystem Players Responsibilities

Service providers • Indian IT service providers

• BPM service providers

• IP generation and product development

• Leverage strong services background

• Encourage product spin offs, collaborations with other players in the ecosystem

Start ups • Technology start ups

• Incubation labs

• IP generation and product development

• Drive innovation through bottom up culture of innovation

• Focus on disruptive technologies

Government • Ministry of Communications and Information Technology

• Indian Patent office

• Promote organisations focusing on R&D and IP

• Incentivize through fiscal benefits

• Enable skill set development

• Enforce protection

Funding agencies • Angel investors

• Venture capitalists

• Private equity

• Identify and promote startups

• Ensure fair and reasonable valuation of IP assets

Academia • Educational institutions

• Training centers

• Research parks

• Partner with industry to leverage industry infrastructure in driving innovation

• Offer research capabilities for development of innovative products and services

• Develop ‘ready to hire’ talent pool

Market • International customers

• Domestic customers

• Drive demand for high value products & processes

• Leverage disruptive technologies

• Partner with technology vendors in driving innovation

IP ecosystem



IP generation

02

IP in India has been traditionally generated by captive R&D organisations and acquired in various forms of knowledge, products or organisations. In the survey conducted by KPMG in India for this report, organisations reported an increase in collaboration as an emerging form of generating IP. This is largely driven by convergence of technologies and platforms. The following are the top IP generating methods as per the study.


IP Creation

IP Aquisition

IP Collaboration

Top methods of IP generation for Indian IT-BPM organisations


17%

33%

42%

58%

67%

Knowledge Centers

Continuous Improvement Cells

Innovation & Product Groups

Ideation Culture

R&D

8%

33%

Outsourcing/Buy

M&A

33%Joint Ventures/Partnerships


IP creation

Top down vs. Bottom up – The changing dynamic

Historically IT companies have set aside specialist departments to focus on creating IP. These departments have been the biggest source of IP product and innovation in the market. However, as IP organisations are partnering with their customers much more closely, they are proactively identifying opportunities for improvement. These opportunities translate

into ideas which bubble up through these employees within organisations and find their way as commercial IP driven products. This bottom up approach coupled with enterprise social collaboration is increasingly driving IP generation in the industry.

Top down vs. bottom up approach to IP creation


Top down Bottom up

Due to the services based focus of the Indian IT-BPM industry in the past, the need for product based R&D was minimal and organisations hosting R&D within their organisations were focusing on generating services based IP. However, with increasing penetration into the product landscape, organisations are strengthening their R&D set ups with product development capabilities. This is supported by start-up organisations following the bottom up approach to convert maximum ideas into IP.

Opportunity identification• Analysis of market trends • Analysis of customer feedback• Identification of opportunities• Potential Roadmap for opportunity pursuit

Rewarding• Platform for rewarding of successful pursuit of

opportunities• Integration of rewards with performance management

IP generation & product development• Generation of IP through creation, acquisition or

collaboration• IP kill of unsuccessful opportunities• Continuous improvement

Finalizing budgets• Decision making on the potential opportunities• Approval of budgets and roadmap

Establishing product strategy• Feasibility analysis of opportunities• Business case & market landscaping• Shortlist of opportunities to pursuit• Requirements gathering for productizing

Platform for crystallization of ideas• Provide mentorship for maturing ideas• Provide time & resources for converting idea into

product roadmap• Involvement of idea owners throughout the roadmap

Platform for idea capture• Provide platform for idea capture such as ideation

forums• Ideation challenges, yearly events• Public events

Ideas bubbling up from various teams in the organisation• Identification of ideas during projects• Capturing and collaboration of ideas• Ideas from customer feedback• Ideas from solving new problems which can be reused• Ideas from other leading industry practices• Ideas from market trends

Establishing product strategy• Feasibility analysis of opportunities• Business case & market landscaping• Shortlist of opportunities to pursuit• Requirements gathering for productizing

Finalizing budgets• Decision making on the potential opportunities• Approval of budgets and roadmap

IP generation & product development• Generation of IP through creation, acquisition or

collaboration• IP kill of unsuccessful opportunities• Continuous improvement


Newgen Software is a provider of Business Process Management (BPM), Enterprise Content Management (ECM), and Customer Communication Management (CCM) solutions. Newgen follows bottom up approach for harvesting IP within the organisation. Employees of Newgen are encouraged to share ideas through a forum by the name of iSpark, an Idea Management System which aims to critically evaluate the idea from technical and commercial aspects and arrive at a product roadmap every week. For selected strategic ideas/products/business opportunities, Newgen has created ‘Centres of Excellence (COE)’ for support these initiatives. A COE within Newgen connotes explicit focus, resource and market development investment to harvest the associated opportunities. This is followed by involving the resources in different stages of product development and by also rewarding through performance management within the organisation.

Case study: Newgen Software

Keshav R. Murugesh

Group CEO, WNS Global Services; Chairman, NASSCOM BPM Council

Intellectual Property will become a critical component of the Business Process Management industry as we look to grow into a 50 billion dollar industry by 2020. Creating IP-led transformational breakthroughs across domains and industries, and driving further value in outcomes will be key to achieving that goal. Generation of IP in an organisation, in my opinion, is more about fostering a culture of radical thinking and assuaging the fear of failure. WiNCUBATE is WNS’s in-house entrepreneurial contest for generating IP-led products and services.



Rudramuni B

Executive Director & Head, Dell India R&D

In the current ecosystem of rapidly changing technologies and business models, it is imperative to forge partnerships with subject matter experts. Therefore, collaborative innovation is the mantra to quickly produce creative solutions. The collaboration can be with peer organisations inside the enterprise or with partners outside of the corporate world or customers. Being in India, subsidiaries should look for opportunities to collaborate locally and regionalize the worldwide partnership for better efficiency and faster results. Such collaborative platforms will enable subsidiaries to identify niche values/features and result in regionalization of solutions, depending on the collective knowledge of the customer base.

IP through acquisition

Indian IT-BPM organisations have focused on acquisitions for adding scale and size, acquiring IP portfolios, expanding to new geographies, gaining domain expertise and for leveraging established global delivery models1. M&A has been one of the driving forces of IP-led growth for global majors and this is an area which Indian firms aggressively need to pursue for non linear growth in the product space. In recent years, firms have started taking the inorganic route to add IP-led technological capabilities, increase their product portfolios and enhance cloud offerings in India2. Nearly 50 per cent of the respondents to the survey conducted by KPMG in India, identified IP as a primary driver for the acquisitions led by their organisations in the recent past. Inorganic IP acquisition in India is happening at various maturity levels of the IP roadmap.

Acquisition of knowledge – Through outsourcing source code components, buying parts of IP or acquiring small scale organisations for their expertise on knowledge of specific IP creation.Examples:1. TCS’ acquisition of Computational Research Laboratories

in 2012 – To acquire knowledge and expertise in high performance computing applications and cloud services3

2. Facebook’s acquisition of Little Eye in 2014 – Facebook has bought Bangalore based mobile technology start up Little Eye Labs that develops software to improve the performance of applications running on Android mobile phones4

Acquisition of products – Buying products with licensing contracts and acquiring small to medium scale organisations targeting unique products.Examples:1. Flipkart’s buy of WeRead in 2010 – Flipkart acquired

social book discovery tool, WeRead to create a social recommendation platform for buyers in the market5

2. Persistent Systems acquired rCloud in 2012 – The company acquired 'rCloud', an innovative cloud platform business from privately held Doyenz, Inc. Doyenz's rCloud, a business continuity cloud platform, provides backup and disaster recovery for physical and virtual servers on the cloud6.

Acquisition of companies – Acquiring organisations with scale, expertise and portfolio of products.Examples:1. TCS acquisition of TKS-Teknosoft in 2006 – Tata Consultancy

Services expanded their product portfolio by acquiring rights of Quartz and ownership of Alpha and the e-portfolio of TKS-Teknosoft7

2. Mphasis acquisition of Digital Risk in 2012 – Mphasis acquiresd US based data analytics firm Digital Risk to leverage their expertise and analytics based platform products8

IP collaboration

With increase in digitization and convergence of technologies leading the innovation, organisations are moving from 'work in isolation' model to a 'collaborative model' to meet customer demand. IP is being generated collaboratively between various players within the IP ecosystem. Participants in collaboration ensure that both parties’ rights and assets are protected and benefits clearly defined. There exists a mutual ownership out of the collaborated product/ IP. Benefits (tangible/ intangible) are clearly identified for all the parties involved. Clear rules are established for protection and ownership of IP in the event of end of the partnership. Some of the collaborative models that are prevalent in India are further discussed.

3 “TCS to buy start up ‘Computational Research Labs’ for $34 million”, http://articles.economictimes.indiatimes.com/2012-08-16/news/33233170_1_n-chandrasekaran-tcs-ceo-and-md-hpc, accessed 20 January, 20143

4 “Facebook taps India start-up scene with acquisition of Little Eye”, http://www.ft.com/intl/cms/s/0/b4ced03e-7824-11e3-a148-00144feabdc0.html#axzz2qsBaU8VQ, accessed 20 January, 2014

5 “Flipkart Buys Social Book Discovery Tool WeRead”, http://www.vccircle.com/news/technology/2010/12/22/flipkart-buys-social-book-discovery-tool-weread, Accessed 20 January, 2014

6 “Persistent Systems Acquires Innovative Cloud Platform Business from Doyenz, Inc.”, http://www.persistentsys.com/NewsEvents/PressReleaseDetails/tabid/236/Default.aspx?IDPressRelease=105, accessed 20 January, 2014

7 “TCS acquires swiss firm TKS Teknosoft”, http://www.financialexpress.com/news/tcs-acquires-swiss-firm-tksteknosoft/182435, accessed 20 January, 2014

8 “IT firm MphasiS acquires US-based company Digital Risk for $200 million”, http://articles.economictimes.indiatimes.com/2012-12-03/news/35568787_1_ganesh-ayyar-mphasis-digital-risk, accessed 20 January, 2014

1 Non-linear models – Driving the next phase of growth for the Indian IT industry , KPMG, 2011

2 “The IT-BPM Sector in India - Strategic Review 2013”, NASSCOM, February 2013



Rise of innovation 'Clusters'

A 'Cluster Model' is a successful collaboration between various entities of the IP ecosystem with each contributing to the growth of the cluster as a whole. Technology innovation occurs though collaboration between the stakeholders such as industry, national laboratories, academia, government, technology start-ups and entrepreneurs to meet the rapid changes in customer demand9. Examples ranging from Silicon Valley to Bangalore based ICT cluster and clusters from automotive industry in Pune have already proven the benefits of such model.

Rise of start ups in the collaborative environment

Technology start-ups are a recent development with significant growth in the last decade. There is increasing support for entrepreneurs with good technology ideas and products. Recently technology incubators have come up in cities such as Bangalore, Hyderabad, Pune and Delhi. These incubators, both private and government, provide equipped facilities and advisory support to technology startups. Indian service providers are creating funds to invest in SMAC based start-

ups to come up with collaborative innovations as well. There is also a strong angel investor network in the country, which is actively supporting these start-ups. It's difficult to find a reasonably accurate estimate of startups in India. But of the 4,000 applications that NASSCOM received recently from startups, for angel funding and acceleration under its 10,000 Startups initiative, the highest (23 per cent) was from Bangalore, followed by NCR Delhi (20 per cent).10

Silicon Valley Bengaluru – IT-BPM Pune – Automotive

Highly evolved investment ecosystem. R&D and innovation labs for start ups

Abundant investment ecosystem for technical start ups in IT-BPM

Plug & Play infrastructure facilities for product development, prototyping & testing

Mature landscape of software organisations ranging from startups to established global leaders

Large software development players to highest number of tech start ups in India in this cluster

Suitable for Tier 2 & Tier 3 organisations looking for readymade infrastructure

Access to high quality of talent both from market and educational institutions

Access to software development talent highly suitable for product focused organisations

Talent availability owing to the presence of automotive majors

Access to research collaborations with educational institutions

Case study: Rise of cluster model

9 “Global R&D Summit 2013 – Destination India”, Battele India & FICCI, 2013

10 “Startups rise and shine in Bangalore”, http://articles.timesofindia.indiatimes.com/2013-09-05/software-services/41800721_1_startup-

genome-venture-capital-funding-entrepreneurial-culture; accessed 9 January, 2014.



Collaborations with educational ecosystem

Significant respondents of the survey conducted by KPMG in India for this report, agree that there is an increasing trend in the industry of IP generation through collaborations with educational institutions. Another new development is the growth of start-ups from academic institutes and associated incubation centers. The rise is attributed to the funding opportunities available for technology start-ups from the government, angel investors, international grants and other sources, and with employment rules permitting faculty to formally participate in spin-off companies.

The following are few areas where industry is collaborating with educational institutions to generate IP:

• Collaborative research with professors and research assistants of eminent colleges and universities

• Develop incubation centers in educational institutions to tap potential ideas and to facilitate collaborative research with industries and also to provide a platform for reaching out to funding agencies

• Skill development to churn out 'ready to hire' resources for IP focused industry in the future

Case study: The Indian Institute of Technology Madras (IITM)

Case study: TCS COINTM

The Indian Institute of Technology Madras (IITM) Business Park in Chennai is a classic example of how industry and educational institutions collaborate to promote R&D based tech start ups. Corporate clients such as TCS, Cognizant, Amada, NMS networks etc. have availed R&D services from start ups/ incubates of the research park. The incubates not only have the access to industry best mentorship, they also have access to plug & play facilities in the park, abundant talent for internships from the IITM campus and guidance of eminent professors who are experts in the field of latest technology research. Some of these start ups have been started by the professors of the institute with research expertise in latest technologies.

TCS Co-innovation Network (COINTM) connects cutting edge research and technology across educational institutions with customers. There are currently 10 academic alliances and 22 emerging technology partners as part of COINTM. The company’s research scholar program sponsors 111 PhD researchers from 31 educational institutions across the country.




IP management

03

Indian IT-BPM leaders have been asked to identify the significant challenges for managing IP in their organisations by KPMG in India. Skill set availability and talent management along with issues with legal ecosystem and lack of opportunity identification came out as the top challenges for managing IP within organisations.

Top challenges of IP management for Indian IT-BPM organisations



83%Lack of opportunity identification

Issue with legal eco system

Lack of product development mindset

Fear of disruptive technologies

Lack of innovation culture

Issues with IP promotion

Skill/Talent management

58%58%

42%

17%17%

17%


Rudramuni B

Executive Director & Head, Dell India R&D

Moving up the value chain through IP creation and the ownership to deliver are essential for Indian subsidiaries. The endeavor to strategize and create the talent pool of technologists as well as managerial talent is upon the leadership in the organisation. Achievements of creativity are not always the result of chance, but of a thoughtfully designed team. The involvement of leaders is crucial to create the culture of innovation through a well-established framework thereby helping team members pursue ideas to a logical closure. There is nothing more satisfying to an idea author than to see the definite closure of an idea, whether it gets implemented or not. The leadership plays a key role in establishing the framework, team chemistry, tools, visibility and rewards mechanisms.

Managing strategy

Centralized IP management

Organisations are increasingly adopting centralized IP management with associated leadership to manage of IP. A centralized setup reduces communication gap across various teams associated with IP management and protection such as R&D, legal team, analytics, testing, financial tracking and helps in close governance of service providers. The centralized team excels in strong governance and ownership and in defining overall IP strategy and clear budgets. Centralized IP management provides extensive information for product development, sales & marketing, financial planning and for an organisation’s leadership.

Case study: CognizantCognizant has established an IP Center of Excellence which is focused towards harvesting, protecting and ensuring ROI from the organisation’s IP for them and their customers. The IP COE evaluates various proprietary IP assets that germinate across the organisation and ensure to detect and protect the ones that enable their customers to compete better in their markets and has long term business impact for the company. Cognizant also established Emerging Business Accelerators (EBA), with a mindset of Venture Capital ecosystem. Each business unit under EBA is thus a ‘Venture’ and the business head is titled a ‘Venture Leader’. The funds set aside for EBA are being managed as a venture fund with teams focusing on agility and high appetite for risk.



Offensive and defensive IP strategy

Organisations are adopting a mix of offensive and defensive strategy for IP management through monitoring competitive patent portfolios. The offensive strategy focuses on identification of opportunities and new technology pursuits by the competition and incorporating them into their own IP agenda resulting in maintaining the competitive advantage by organisations. A defensive strategy on the other hand focuses on identifying potential infringements at an early stage resulting in effective design around strategies or reprioritisation of IP objectives. This could potentially result in less number of litigation issues in the future for the organisations.

TCS adopted a non linear growth model to leverage innovation and intellectual property through the following strategy.

Managing Strategy: R&D investments in TCS are along three segments and time horizons to focus on products, platforms and solutions • Derivative innovation – Improving the current offerings to customers• Platform innovation – Preparing the customers for the near future• Disruptive innovation – Enabling radical changes to the customers’ work methods

and business methods

Managing Culture: TCS’ research framework is designed to drive innovation from various sources creating a multi variant IP culture• Invention – Creation of IP assets in the areas of domain and technology• Co-Innovation – Creation of ideas, concepts and IP through collaboration with

educational ecosystem in the country• Innovation – Conversion of new ideas into useful, tangible IP

Case study: TCS

Managing talent

One of the critical factors that is responsible for India’s position as a leading player in the global sourcing scenario is its sheer output of highly qualified technical talent pool. Compared to other markets, India has maintained its dominant position as a leading country for churning out ‘ready to hire’ talent pool. In line with current and future business needs, organisations are focusing on development of the right skill set for penetration into the IP space. Along with communication and soft skills, the industry is providing training to build expertise across multiple and specialized domains and adopt newer technologies leveraging SMAC.

Our respondents to the IP survey highlighted that managing talent is one of the biggest challenges the IP development in an organisation faces. The areas of concern for the product companies include:

1. Lack of software development skill – Even though India has significant talent pool, most of them are services oriented and software development for products requires a different mindset

2. Lack of product development skills – Organisations reported that finding the right people for leading product development initiatives have become increasingly difficult in India. Talent with experience in the end to end lifecycle of products is the need of the hour

• Direct employment of a work force close to 3 million

• Additionally there are about 4.74 million annual graduates of which 36 per cent is ‘ready to hire’ talent pool

• High requirement for software development skill set and product mindset

Skill set availability in India

Source: “The IT-BPM Sector in India - Strategic Review 2013”, NASSCOM, February 2013


1296 1407

879917

601640

2,776

2,964

FY2012 FY2013E

IT-BPM Domestic

BPM Exports

IT Exports


Managing performance

Continuous performance management

IP of an organisation is measured and continuously monitored with respect to costs, budgets and value generated. The performance based measuring of IP is helping organisations monitor the success rate of IP and channel funds accordingly. The following are some of the measurement parameters which are helping organisations achieve the strategic objectives of IP.

Managing protection – State of IP protection in India

Softwares, per se, are intangibles and not protected by patents but are protected by copyrights as applicable to literary and aesthetic works in India. A software seller would typically assign some of his rights in the form of a license. The rights assigned would be very clear in their scope, indicating to the purchase the actions he/she is permitted to perform in relation to the software. A computer program is therefore dealt as an intangible asset and the law and practice in relation to literary works would apply to computer programs. Few countries are contemplating patent type protection even in the case of computer software copyright, which also allows a larger period of protection than the patent law allows2.

Practical application of computer related innovation is patentable. Though softwares, per se, are not patentable, specific software products that have a useful practical application are patentable, like software used in devices like pacemakers. If a program can make a system work faster or efficiently, then it is eligible for patenting. Only the following claims having a practical application in the technological arts is statutory, and hence patentable.• Ideas and systems • Methods, algorithms and functions in software products• Editing functions, user-interface features, compiling

techniques• OS functions• Program algorithms

While the copyright laws are clear in India with respect to products in software, the literal and non-literal parts of the program, author’s rights and rights of ‘fair use’ particularly under license agreements are yet to be precisely defined by the courts. On the other hand, software and services based methodologies are eligible for patent protection provided it is not software per se. When can a product transcend this per se and become eligible for patent protection is not clear in the absence of judicial exposition or any guidelines in this regard. Trade secret protection is similarly a limited choice in the absence of any clear legislation defining the extent and scope of protection.

Internal disclosure management

Organisations are committed to fair disclosure based on applicable laws and regulations. Disclosure-related matters are handled in accordance with well laid out codes and guidelines1. The basic values that are inculcated in the culture of organisations include:• A disclosure process ensuring transparency, timeliness,

fairness, continuity, and confidentiality• An IP review committee comprising technical, business and

legal representatives• Periodic reviews to discuss employee disclosures on a

regular basis• Short listing the important disclosures and transferring

them for further review

Measurement of IP

Strategic Objectives Measurement Parameters

Measuring relevance and value

• Revenue delivered• Return on investment• Total contract value• Revenue per employee

Measuring market share and relevancy of offerings

• Number of clients• Number of strategic acquisitions• Average deal size and multiple

proposals

Measuring talent • Strategic talent recruitment• Attrition rate

Measuring future ready potential

• Future roadmap• New ideas development lead time

Continuous performance management framework

Source: “The IT-BPM Sector in India - Strategic Review 2013”, NASSCOM, February 2013

1 “Protecting Innovation: What emerging businesses should know”, iRunway, 2013

2 “IP Protection of Software & Software Contracts in India: A legal Quagmire”, S. K. Verma, 2012



India Patent Office recently released draft guidelines on computer-related innovation. The rules, the first ever for software applications in the country, mandate each new software to be 'machine-specific' and packaged with 'new hardware' to qualify for a license3. This could significantly impact the software industry if the condition of hardware novelty is also mandated along with novelty requirement in software. In the absence of a patent protection for a computer program stored on a media, the inventor has no protection against an infringer who copies the computer program

invention and distributes it on a computer-readable media in the market, since such an infringer would not directly infringe either system or method claims. For this reason, in almost all major jurisdictions like the US, the EU, Japan, Australia, Korea, etc., patent protection is extended to computer-readable media claims. By extending the protection to computer-readable media claims, patent protection can become more relevant to the way computer program is actually commercialised and infringed4.

Current state and future state of IP protection in Indian IT-BPM industry

Current State of IP Protection in Indian IT-BPM Industry Future State of IP Protection in Indian IT-BPM Industry

3 “New patenting norms may put India software innovation into sleep mode”, http://www.business-standard.com/article/companies/new-patenting-norms-may-put-india-s-software-innovation-into-sleep-mode-113122400024_1.html, accessed 18 January, 2014

4 “Feedback on draft guidelines for examination of computer related inventions (CRI)”, NASSCOM, 2013

Farid Kazani

Group CFO and Finance Director, Mastek Limited

There is an intrinsic need for better promotion policies for R&D in India to promote innovation and to shift the focus to product based development. Government of India, NASSCOM and industry should collaborate to mature Indian IT-BPM industry as a destination for innovation. First step in this direction would be to recognise software products as tangible intellectual property similar to other industries. There are ample examples that can be leveraged from other countries which promote R&D through various incentives.



Satisfied with current

IP Protection laws

Not satisfied with current

IP protection laws

No view point

8%

31%

62%

Expecting better protection

laws in the future

No changes

expected

No view point

77%

15%

8%


Avaneesh Dubey

Senior Vice President, SAP

Intellectual Property is increasingly the biggest asset that businesses own. This intangible asset is the key strategic differentiator for business worldwide. Though Indian companies are increasingly realizing the importance of intellectual property, a lot more is desired. While India was 14th on the list countries based on number of patents applications in recent years, there were only around 15,000 filings from India in contrast to more than 400,000 each by US, China and Japan.

IP is common place in the products. Indian startups have been building products that have started making an impact globally. Many businesses view patents as a tool to safeguard the inventions from imitators, but it can be a strategic asset. Recent M&A transactions have attached huge valuations to IP owner by the company.

IT-BPM services industry grew without a strategic focus on owning IP. The way forward, however, would be to have IP driven high-value services.

While IP is becoming vital in most industries, there is also a trend towards open sourcing of IT platforms. Historically IP was the defense mechanism against copying. But many companies are now going open-source in order to increase adoption of platforms and for crowd-sourcing of the end-user applications. So far India is a beneficiary of this trend as many small and large companies are able to make innovative products that run on these platforms. Going forward, India will have to be contributor to the open-source movement.

Indian companies will necessarily need to build innovative strategies around IP - how much to open source and how much to protect.



IP commercialisation

04

Commercialisation of IP derives the economic realizations out of the IP in terms of revenue, cost savings and intangible benefits such as productivity improvement. Commercialisation typically has the following activities1.

Valuation of IP

• Evaluation and assessment of commercial potential• Market research and due diligence

Monetization of IP

• Business development (sales & marketing)• License management (negotiation to administration)• Handover to revenue streams

Financial management of IP

• Tax management of IP• Transfer pricing management of IP

1 “Strategy for Identification and Commercialisation of Intellectual Property”, University of Johannesburg, 2013



Evaluation of commercial potential

Different approaches of IP valuation are used by organisations to evaluate the commercial potential. Generally, these approaches are divided in two categories: the quantitative and qualitative valuation. While the quantitative approach relies on numerical and measurable data with the purpose to calculate the economic value of the intellectual property, the qualitative approach is focused on the analysis of the characteristics (such as the legal strength of the patent) and uses of the intellectual property2

Selecting the right method

Selecting the valuation method to use in a given situation is complex. Several factors are considered in the procedure, such as the type of intellectual property at stake, the level of development of the technology as well as the purpose of the valuation. There are some situations where certain methods are more likely to be used, even though in theory all methods may be applied. In the table below you can see examples of scenarios where methods are more likely to be used.

Method Methodology When/ Why? Advantages Disadvantages

Cost Based • The cost approach considers reproduction or replacement cost as an indicator of value, and therefore estimates value on the basis of the cost to recreate the asset.

• However, by nature, it may be difficult to delimit the cost associated with re-producing an intellectual property right.

• Valuation of an asset in the early stages of development

• Cases where there is no market revenue data

• Accounting and tax purposes

• Simplicity in application

• Information gathered easily since most of it is in the accounting sheets

• Difficult to isolate the costs related to the intellectual property assets from the other research costs

• The economic benefits associated with the assets are not taken into account

Market Based

• The market approach estimates the fair value of an asset based on market prices in actual transactions and on asking prices for assets currently available for sale.

• Intangible assets are often unique in nature, and it may be difficult to obtain public information on comparable assets.

• Valuation for internal purposes

• Valuation for IP transactions

• Valuation in litigation situations

• Trade mark valuation

• Accuracy, since it is close to market reality

• Objectivity can be achieved

• Difficult to gather comparable or similar data, since transactions are often confidential

Income Based

• The income approach is a valuation technique by which fair value is estimated based upon the cash flows that the asset can be expected to generate over its remaining useful life.

• Commonly, IP rights are valued using one of the following techniques derived from the income approach:

– Relief from royalty

– Excess earnings

– Incremental cash flow method

• Valuation for fund raising

• Valuation for product potential

• Analytical and hence closer to reality

• Helpful for final decision making

• Difficult to use in high risk sectors

• Subjective assumptions have to be made

Qualitative Method

• Valuation in this method is performed through the analysis of different indicators with the purpose of rating the intellectual property right, i.e. of determining its importance.

• The indicators cover all the aspects that can impact the value of an intellectual property asset, covering legal aspects, the technology level of the innovation, market details and company organisation.

• Valuation of idea potential

• Internal management decision making

• Simplicity in using the model

• Subjective and reality can be deviant from the prediction based on parameters

2 “FACT Sheet – Intellectual Property Valuation”, European IPR Helpdesk, 2013

Valuation methods of intellectual property

Source: “FACT Sheet – Intellectual Property Valuation”, European IPR Helpdesk, 2013



Commercialisation & monetization strategies

IP generation and commercialisation impacts the top line and bottom line of the organisation in different ways. A fundamental consideration of any IP strategy is to always balance any investments; short-term gain against any potential long-term pain with regard to the company's business goals. The end strategy of product commercialisation usually depends on the nature of the objective organisations have to offset the investments in the bottom line, and also to derive maximum revenues out of the top line.

For example, a common strategy is signing an exclusive licensing agreement to the company’s core patents in order to secure a royalty stream. But a licensee which does not prioritize promoting and exploiting the licensed IP could become a liability. This could in turn prevent the company from moving forward with other more productive partnerships. An alternative solution is a licensing agreement that clearly accounts for the above situation. Though there is an ultimate end goal of monetization, various tactics are followed in achieving this strategic goal.

The following are the key monetization strategies employed by the Indian IT-BPM organisations to achieve a specific set of objectives ranging from freedom to operate to control of product and market.

Commercial impact of IP on top and bottom lines of organisations

Cost impact on Bottom line

Revenue impact on top line

Monetization strategies of IP



Monetization strategy

Objectives

Licensing – In • Freedom to Operate• Reduced R&D Costs and reduced

time to market

Licensing – Out • Effective monetization• Control of product and market

Purchase • Freedom to operate• Reduced R&D costs and reduced

time to market

Spin off product as separate business

• Break from the services mindset• Driving innovation culture• Complete focus on product

monetization

Patent pooling • Reduced time to market• Increase market share and market

influence

Joint venture • Reduced time to market• Driving future monetization trends


Marketing & LogisticsAssociated Services Sales

Investments in creatproduct development Royalties

Product Sales


Spin off product as a separate business

The mindset and operating model to run a Product Company differs significantly from that of a service company. While some Indian Players have successfully developed products out of their software offerings, most players wanting to set foot in this space are struggling.

Organisations that are serious about entering the product business are considering the strategy to spin off their product division as a loosely held subsidiary. The aim of the subsidiary is to operate independently without the pressure of quarterly results, ability to acquire other companies, manage their own funding and growth and finally the ability to monetize the products independent of their parent company. Once the unit is mature, post incubation and after achieving sufficient scale, the parent company can take a call on either keeping it separate or merging it back with the parent unit.

In a spin off, stakeholders get better information about the business unit because it issues separate financial statements. This is particularly useful when a company's traditional line of business differs from the separated business unit. With separate financial disclosure, investors are better equipped to gauge the value of the subsidiary. Other benefits include creating an ideation culture for product development mindset; reducing internal competition for corporate funds and freedom to operate. However subsidiary’s costs should be kept in check along with a success measurement framework to monitor the performance of innovation at the subsidiary.

Examples:

Plumbr spin off from Nortal - Founded in Estonia in 2011 as a spin-off of Nortal, Plumbr develops software to automatically understand how an application should behave by detecting anomalies in its memory usage patterns. Eschewing endless data and graphics, Plumbr tells customers exactly what they need to fix, helping predict and avoid software failures3

Precise spin off from Symantec – After going through a series of acquisitions and mergers by Veritas and Symantec, Precise software was spun off from Symantec to manage Application Performance Management (APM) software product development, marketing, sales, and product management4.

Gram spin off from HP – HP announced in 2012, a spin off Gram to concentrate on software, user experience, cloud, engineering, and partnering in the area of web based OS5.

Genie’s spin off from Google – Google X developed Genie, a technology platform to assist construction industry projected to save 30-50 per cent in prevailing construction costs and shorten the time from the start of planning to market by 30-60 per cent. With the completion of the first development stage and creation of the prototype, Google decided to spinoff Genie from Google X, and to pursue its development as a separate company, Vannevar Technology Inc., which is registered in Delaware6.

Financial management

Increasing relevance of transfer pricing in commercialisation of IP

There are no specific methods prescribed under the Indian transfer pricing legislation in respect of valuation of IP. However, reference maybe drawn to the suggestions made by the OECD for evaluating intangibles in its discussion draft. Generally, an income-based method is preferred to a cost based method for valuing an intangible / IP. For group entities, returns should be allocated as per risk and functions assumed by the entities for development of the IP. Several circulars have been issued that have defined and differentiated between contract R&D and entrepreneurial R&D for purpose of assessments.

CP Gurnani

Managing Director and Chief Executive Officer, Tech Mahindra

To create an organisational culture of innovation, enable the organisation to be perceived as an innovative organisation by all stakeholders and enable new revenue streams through innovation

3 “Nortal spin off plumbr raises 1m seed round”, http://www.nortal.com/about-us/press/nortal-spin-off-plumbr-raises-1m-seed-round, accessed on 25 January, 2014

4 “Symantec to Sell Application Performance Management Business to Vector Capital”, http://www.symantec.com/about/news/release/article.jsp?prid=20080117_01, accessed on 25 January, 2014

5 “HP spins off Web Os business rebranding it as Gram”, http://news.cnet.com/8301-1035_3-57494236-94/hp-spins-off-webos-business-rebranding-it-as-gram/, accessed on 25 January, 2014

6 “Google’s secret project to revolutionize AEC software industry”, http://architosh.com/2013/10/googles-secret-project-to-revolutionize-aec-software-industry/, accessed on 25 January, 2014



Way forward – Empowering India’s IP ecosystem

05

Intellectual Property ecosystem – Way forward

As Indian product companies come of age and grow, there is a need for the ecosystem to evolve. Government institutions, industry bodies and academia are key enablers in the IP ecosystem and they would be required to collaborate for the next phase of growth in the product domain.



Ecosystem Key Imperatives

Service providers

• Focus on developing innovation based culture through bottom up approach, spin offs and leveraging domain knowledge

• Increase penetration in the SMAC technologies

Start ups • Focus on technologies in SMAC which would require lower investments• Seek guidance from VCs/ PE funding agencies• Leverage incubation centers and mentorship from industry bodies• Keep sales and marketing costs under check

Government • Improve promotion of R&D in India through rationalization of tax & transfer pricing laws

• Enhance protection of IP through robust IP management system• Enforce protection of IP through enhanced security laws• Benchmark with and take examples from leading global practices

Funding agencies

• Change the perception of risk and move to experimenting with disruptive technologies

• Set realistic expectations and provide guidance throughout the roadmap

Academia • Improve collaborations with industry • Focus on developing innovation based skill set among students• Provide mentoring programs for startup CEOs and founders

Market • Increase adoption of disruptive technologies and hybrid models• Leverage convergence of technologies to derive maximum value out of the support

function

IP ecosystem – Way forward

Source: : Innovation transforming the growth landscape Report, KPMG in India, 2014

N Chandrasekaran

Chief Executive Officer and Managing Director, TATA Consultancy Services

Innovation, collaboration and convergence will drive the next wave of growth in the IT-BPM industry. For India to remain on its growth trajectory and continue to play an important role, the entire ecosystem needs to focus and reprioritize on these lines. While the government, academia and NASSCOM have shown significant commitment, the industry needs to come together and address the issue of creating integrated ecosystems which support the next generation of technologies and drive the cultural shift from a predominantly services industry to the one that is driven by the creation of Intellectual Property.



Service providers

Focus on developing innovation culture

Organisations should focus on developing an innovation mind set to tackle the global product market and to increase penetration into new technologies and services. This can be achieved through the following effective practices.

Drive bottom up culture of innovation

For employing a successful bottom up culture of innovation in organisations, the following platforms should be built to help ensure the longevity and continuity of the ideas thus generated. Crowd sourcing is a typical example which leverages such platforms and the same can be achieved in an organisation through enterprise social collaboration.

Spin off product as a separate business

Spinning of product as a separate business could help organisations to focus on innovation based culture within the spin offs. Accesses to funding and autonomy from parent organisations usually provide freedom to operate and innovate.

• Cultural conflicts leading to silos

• Negative impact to financials during spin off incubation

• No external funding access

• Increase focus on product based innovation

• Improved culture of innovation

• No impact on organisation financials till spin off matures

• Better valuation of organisation

• Funding access to spin offs

Platforms to drive bottom up culture of innovation

Benefits of product spin offs to large services based organisations




Objective: Capture ideas from various sources within and outside the organisation

• Ideation Portals• Ideation Competitions• Crowd Sourcing• Enterprise Social

Collaboration

Objective: Incubation of ideas to form a robust IP roadmap for generation

• Idea review platform• Feedback & Mentoring• Enterprise Social

Collaboration

Objective: Incubation of ideas to form a robust IP roadmap for generation

• Monetary rewards• Performance rewards• Career growth opportunities

Idea sharing

Large integrated organisations Organisations with Product Spin Offs

Review & Mentoring Rewarding


Leverage domain specific capabilities

Service providers in India have long established their dominance over the services market through their deep knowledge of client’s domain specific processes and requirements. This expertise should be leveraged in developing process and product related IP to meet customer demand. Software products and services thus developed would assist not only in increasing the scale and size of organisations but also would leverage domain expertise to address targeted groups effectively requiring less customization. Focussing on developing products by leveraging their domain expertise can lead to better services and new products with high success rate.

Increase penetration in the SMAC space

Going forward, technology vendors should seek to work closely with their customers to stay abreast of the latest technological developments, and come up with solutions that can take advantage of SMAC. They should seek to use customer input more diligently while innovating / developing solutions and products. The emphasis should be on tapping inputs from various channels, mediums and devices and using these as critical inputs for new solutions and incremental innovations. The following could be the dominating trends going forward in SMAC space.

• Changing customer landscape and the opportunities in SMAC are shaping the IP ecosystem

• The convergence of social media, mobility, analytics and cloud (SMAC) would drive the next generation of innovations

• Innovation will become a bottom-up process or an industry wide Crowd sourcing process, with customer input driving innovation. Bottom up process would be empowered by SMAC and Enterprise Social Collaboration

Technology vendors would need to change the way they are structured to deal with SMAC. They need to create an entrepreneurial culture, along with next-generation delivery and pricing models that would work in realizing the maximum potential from SMAC. They would also need to look at an inorganic strategy to add to their capabilities in some of these areas. This would also have the added advantage of brining in talent that will act as a force of disruption in these organisations1.

Mahesh Venkateswaran

Executive Vice President, Cognizant Technology Solutions

Gary Matuszak

Global Chair, Technology, Media and Telecommunications, KPMG

Each of Social, Mobile, Analytics and Cloud is a venture with a special focus on non-linear growth initiatives and product under SMAC areas. The SMAC industry is predominantly a pull market growing at 9 per cent CAGR and by 2015, when it transforms to push market; it is expected to grow at 32 per cent CAGR. We are already witnessing a surge in interest from our customers and prospects in the areas of SMAC, with Mobility and Analytics leading the fray.

Continuing innovations in the SMAC space, and the interplay of these technologies, is enabling new business models that take advantage of economies of scale, provide virtual access to supply chains, and allow physical products to operate in the cloud and have access via mobile devices. The power of these technologies will continue to fuel innovation in coming years and drive disruption in many industries.

1 The SMAC Code – Embracing new technologies for future business, KPMG in India, 2013



Startups

Focus on emerging categories of technology such as SMAC (Social Networking, Mobile applications, Analytics, Cloud) online gaming etc., which are unchartered territory in order to ride the next wave of growth

Seek capital and guidance from VC/PE funds. There is a need for mature investment eco system in the market with clear demarcation of responsibilities and with enough exposure into the business lines. There should exist platforms where organisations can reach out to VC/ PE funds with ideas and for guidance on extracting the commercial value out of an idea.

Leverage incubation centers and industry bodies providing mentorship. Several state and national governments established incubation labs across India in collaboration with educational institutions and industry. These incubation centers also provide a place for exposure to the market and funding companies.

Keep sales & marketing and customer acquisition costs under check. Key primary thing to focus on is the financials of the venture. Track of ideas, product development, incubation, sales and marketing can help them to make realistic budgets and not overspill the costs. This approach provides more confidence to funds to invest in the startup.

Government

While the Indian legal system has a strong bend toward protecting and promoting IP for the Indian IT-BPM industry, we feel that the following expectations from industry can be further addressed post thorough consideration. Indian government can contribute to creating an IP focused IT-BPM industry in India through better promotion, protection and enforcement.

Promotion – Rationalize fiscal policiesGiven the pivotal role of IP generation/ commercialisation in achieving the next level of growth for the IT BPM industry, there should exist conductive fiscal policies to encourage such activities. Fiscal incentives, whether based on location or nature of R&D activities or any other aspect of IP generation, needs to be broad based so as to cover the entire breadth of the industry.

• The scope of ‘scientific research’ under the current direct tax law which is eligible for weighted tax deduction for R&D expenditure needs to be expanded to extend the benefits to the IT-BPM industry. It should extend to research activities towards creating new processes or improving existing processes as well.

• Expenses incurred on product-based R&D are currently eligible for weighted tax deductions under the Indian income-tax laws, only if such R&D is used for manufacture of products in India. The scope of this provision needs to be widened to include R&D activities utilized in rendering of services for tax break.

• Adoption of global best practices in fiscal policies to incentivize IP generation and commercialisation to project India as the global IP hub.

Protection – Create a protective environment for innovation and growth

• Reasonable turn-around time for examination and grant of patents so that the process fits within the technology obsolescence window. This can be achieved through two possible ways: – Capacity building to achieve scale and size along with infrastructure upgrade

– Outsourcing of patent examinations to competent third parties (Example: Singapore outsources its patent examinations to other IPOs of the world and the outsourced examination is based on Singapore patent law and regulations2)

• Introducing laws regulating trade secrets to encourage healthy and ethical IP environment. This would curb unfair practices like information stealing, undue competition between employers to staff trading & switching, unjust bargaining, and so on.

Enforcement – Promote IP security through stringent enforcement

• Current range of IP enforcement mechanism can be reviewed in light of new class of threats emerging due to technology advancements – distributed exposure of IP assets over cloud (this is a policy issue globally and solution to enforcement of such territorial rights should be made clear through collaboration between global patent offices), question as to applicability of jurisdiction, attacks on IP repositories.

• Points that can be looked into the area of IP crime are: adequacy of existing civil and criminal sanctions, its proportion to the harm caused, dispute resolution and alternate resolution systems, policing priorities including their workload and lack of resources.

Leverage examples from global best practicesGovernment should undertake a benchmark study on leading global practices for R&D related fiscal incentives and leverage the current policies in India. Some of the leading practices from countries focusing on innovation are reported below.

2 “Challenges and options in substantive patent examination”, WIPO, 30 January, 2013, page no. 20

Leading practices in IP promotion


Country Leading Practices

Israel

• IP developed in both software & hardware will come under

R&D tax benefits

• Software inventions can be patented once proven to have real

world benefits

United

Kingdom

• The R&D incentive for large companies is an enhanced

deduction of 130 per cent and whereas it is 225 per cent for

SMEs of qualifying spend

• Capital expenditure on R&D attracts a first year allowance of

100% on the qualifying expenditure and a 10 per cent taxable

credit is available for qualifying expenditure.

Australia

• 45 per cent refundable tax offset to eligible R&D entities with

a turnover of less than Australian Dollar 20 Million.

• R&D tax concession is available for software organisations as

well in respect to both core and supporting R&D



Way forward for funding agencies

Change the perception of riskPost recent global economic crisis, the funding ecosystem comprising of venture capitals, private equities and angel investors have become more and more risk averse. The perception of risk has gone up and investors need to relook at the software start up industry in a fresh light. Even though the agencies are industry agnostic and would invest in value adding businesses irrespective of the industry, they are mostly involved in late stage/ growth stage of organisation development. To foster and bolster the growth of technology start-ups in the country, PE/VC firms would proactively need to be involved in identifying the early-stage technology startups and nurture them for better returns and should consider technology as an asset that can offset risk. This strategy could also give rise to opportunity tapping at an early stage but definitely comes with a calculated risk.

Set realistic expectations and provide guidanceInvestors should focus on establishing realistic expectations from the organisations they are planning to invest/ invested in. A regular guidance mechanism combined with mentoring through industry collaborations would help organisations pick up the pace investors expect out of them. This could be achieved through regular meetings with organisations and understand their bottlenecks and provide contacts for guidance from the right industry leaders. Guidance can also be in the form of investors involving in recruitment of the right talent for the organisational challenges. Apart from developing the ecosystem to create and grow start-ups, creating an exit ecosystem is critical for sustainability of early stage investments in India.

Way forward for academia

Improve collaborations with industryJoint efforts by industry and academia would help ensure that there is sufficiently skilled manpower to drive the software story into its next phase of growth. Industry participation on a continual basis is vital for relevant curriculum design and focus areas for research. Accordingly, academia should reach out to industry for guidance on curriculum formation and also collaborative research with industry’s R&D. Similarly, companies should also develop teams who can interact in the highly specialized domains and work in translating the technology developed into viable commercial projects. Further, academia-industry interactions through forums would help in reducing the demand-supply gap and address the issue of ‘quality’ of talent. Industry players should also come forth and provide support and funding for research initiatives, especially in areas that are relevant to their business. They should be willing to depute people to educational institutions as much as support internship and fellowship programs for Indian students and academic institutions.

Focus on developing R&D oriented skill setsAcademia plays an active role in the software ecosystem by providing the talent pool which forms the backbone of software industry. Skill shortage is the single most disabling factor in the industry today, impeding the innovation cycle and causing a slower adoption to nonlinear growth among providers. The academia needs to complement industry efforts by introducing more project and research oriented concepts in their curriculum. There should be platforms for mentorship and awarding for projects leading to IP generation have proved beneficial to a large set of consumers. The shift from traditional class room training to industry oriented training would enhance the practicality of solutions to the students.

Way forward for customers

Increase adoption of disruptive technologiesClients would need to have an open mindset with respect to the changing realities in the marketplace. They would need to be more receptive in the adoption of new technologies like cloud, mobility, platforms, etc. Investments in adoption of these technologies at early stage can help draw the long-term benefits in their growth story. Clients would need to look at their erstwhile vendors as strategic 'partners' and advisors who can play an integral part in their growth story. Close collaboration between the two would be key to determining success in the large transformational initiatives that can be undertaken by clients in the near future – especially with the new technologies and service delivery frameworks.

Partner with vendors on convergence of platforms/ technologiesConvergence of technologies could be the next wave of innovation in the industry. Integrated/ converged technology platforms could help break silos in organisations and can increase the benefits by a significant factor compared to a combined benefits of standalone technologies. The changes we would witness during this transformation would not be evolutionary. It could have impact on every aspect of the service model – right from the solution to the mode of delivery and pricing. This would require the clients and their technology partners to work very closely, as it is impossible for the technology provider or the client to single handedly bring about a change of this magnitude.



About KPMG in India

06

KPMG in India, a professional services firm, is the Indian member firm of KPMG International and was established in September 1993. Our professionals leverage the global network of firms, providing detailed knowledge of local laws, regulations, markets and competition. KPMG in India provides services to over 4,500 international and national clients, in India. KPMG has offices across India in Delhi, Chandigarh, Ahmedabad, Mumbai, Pune, Chennai, Bangalore, Kochi, Hyderabad and Kolkata. The Indian firm has access to more than 7,000 Indian and expatriate professionals, many of whom are internationally trained. We strive to provide rapid, performance-based, industry-focused and technology-enabled services, which reflect a shared knowledge of global and local industries and our experience of the Indian business environment.

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 155 countries and have 155,000 people working in member firms around the world.

Our Audit practice endeavors to provide robust and risk based audit services that address our firms’ clients’ strategic priorities and business processes.

KPMG’s Tax services are designed to reflect the unique needs and objectives of each client, whether we are dealing with the tax aspects of a cross-border acquisition or developing and helping to implement a global transfer pricing strategy. In practical terms that means, KPMG firms’ work with their clients to assist them in achieving effective tax compliance and managing tax risks, while helping to control costs.

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About NASSCOM

07

NASSCOM is the premier trade body of the IT-BPM industries in India. It is a global trade body with more than 1400 members, which includes both Indian and multinational companies that have a presence in India. NASSCOM’s member companies are in the business of IT services, BPM, Engineering design, products, internet and e-commerce and animation and gaming. NASSCOM’s membership base constitutes over 95 per cent of the industry revenues in India and employs over 2.5 million professionals.



Acknowledgement

This document has been released at the “India Leadership Forum 2014” organized by NASSCOM. The report would

not have been possible without the commitment and contribution of the following individuals:

Concept and direction

Pradeep Udhas – KPMG in India

Viral Thakker – KPMG in India

Akhilesh Tuteja – KPMG in India

K K Raman – KPMG in India

Naveen Aggarwal – KPMG in India

KPMG in India report development team

Saurabh Mathur, Samrat Jain, Shireen Khan, Aditya Shangloo, Ravi Darbha, Varun Jain



kpmg.com/in

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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Innovation

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Capitalising IP in Indian IT-BPM

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NASSCOM Contacts:

Achyuta GhoshHead-Research T: +91 11 2301 0199 E: [email protected]

KPMG in India contacts:

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