Is Indian Business Ready for a Brave New World of Tough Corporate Governance?

Is Indian Business Ready for a Brave New World of Tough Corporate Governance?
knowledge@wharton article

As global business interest in India keeps growing, so does the expectation that Indian companies must play -- and be seen to play -- by rules that are clear to international investors. Demands have long been heard for greater transparency in the way Indian companies do business. Now, matters are about to come to a head. Ready or not, India's public companies must meet a January 1, 2006, deadline to comply with sweeping new corporate governance standards.

The reforms, ordained by the Securities and Exchange Board of India (SEBI), are laid out in amendments to Clause 49 of the companies' listing agreement with Indian stock exchanges, a section that pertains to corporate governance. Among the requirements: More independent directors on boards and audit committees; a code of conduct for board members; a larger role for the audit committee; mandatory risk assessments and certification by the chief executive officer and chief financial officer of the effectiveness of internal accounting controls.
Sound familiar? The reason is that many of these rules have been inspired by the Sarbanes-Oxley Act that was passed in the U.S. three years ago in response to governance scandals involving Enron and other companies. While U.S. executives have tended to grumble about the regulatory burden that Sarbanes-Oxley imposes on their companies, India's governance gurus have viewed the law as a promising template for their reforms.

Many Indian companies have been phasing in the requirements through 2005. Predictably, with the deadline looming large, some companies say they are not ready yet. Virtually all the laggards are large "public sector units" -- companies such as Bharat Petroleum and Steel Authority of India that are partially government-owned -- according to a recent tally by The Hindu group of publications. Among their concerns is an apparent dearth of candidates qualified to be independent members of their boards. That reason -- or excuse -- is unlikely to buy them more time. SEBI chairman Meleveetil Damodaran has warned in public remarks that there will be no extension of the deadline, and no exceptions from compliance for any company.

Tough New Rules

What's behind this hard-charging resolve to bring corporate governance in India in line with the latest world standards? Clearly, the demands of increasingly global capital markets provide part of the answer. In addition, though, the resolve also reflects a shrewd recognition by Indian corporate leaders that greater transparency is in their self-interest, say two Wharton management professors, Michael Useem and Harbir Singh, and Govind Iyer, the India representative of the board consultancy and executive search firm, Egon Zehnder International. The three, along with management professor Jitendra V. Singh, are scheduled to be part of a Wharton executive education program in Mumbai, India, on Jan. 4, 2006, that aims to prepare Indian directors for the new era they are about to enter.

"With the internationalization of equity investing, corporate governance reform comes along like day follows night," says Useem. Western institutional investors such as CalPERS, the giant California state pension fund, are being drawn to India as longstanding Indian restrictions on foreign capital are being lifted and investment returns in India's fast-growing economy appear attractive, Useem says. But these investors also are insisting on the same rigorous governance regimes they have campaigned for in their home countries.

"They can bring pressure to bear on company leaderships by selling stock, by supporting raiders, and by using the press to stigmatize poorly run or poorly performing companies. Big investors are not shy about telling directors to oust top management or face a proxy struggle to bring in a new board," Useem adds, noting that the rewards for good governance have been revealed in several U.S. studies. "Companies with better governance show higher market valuation and better year-over-year results and are better able to withstand crises and setbacks."

Governance at Godrej

That is a scenario familiar to Adi Godrej, chairman and managing director of Godrej Consumer Products, one of India's largest manufacturers of personal care products such as soaps. The company has been an early and enthusiastic adopter of governance reforms, including independent directors. Six of the eight members of its board of directors are independent of the management. All four of its audit committee members are independent. Both are better ratios of independent to "executive" members than required under the new Clause 49. Other requirements, including the creation of a risk-management regime and certification of financial controls by top officers, are being put in place by a consultant, Godrej says.

"Our strong emphasis on corporate governance has helped us get high ratings on both corporate governance and shareholder value creation," Godrej adds, citing ratings given by the Investment Information and Credit Rating Agency of India. "I also feel that the markets have recognized and rewarded our pioneering corporate governance initiatives."
His company also expects a lot from its independent directors. Board memberships at Godrej and in a growing number of Indian companies, especially globally ambitious information-technology pioneers such as Infosys Technologies, are not given out as sinecures for industrialist friends of the CEO, bankers and retired generals. Board meetings at Godrej Consumer Products last for at least half a day and the company also organizes a two-day strategic meeting once a year.

"Independent directors are supposed to provide tremendous value to the company's performance. We compensate them well and expect them to spend quality time with the company," Godrej says. Infosys pays its directors one of the highest annual retainers in India -- nearly $45,000 a year. In return, it demands a lot of its directors, including requiring them to participate in a peer review and an annual self-assessment of their contributions to the company.

Such reviews of board members' performance are a growing trend worldwide, says Iyer of Egon Zehnder, a firm with a decade of experience in India recruiting and training directors for top domestic and multinational companies. "There is no point just hiring independents. They need to use their independence and knowledge to add value." To that end, directors need to improve their interpersonal behavior even as they leverage their individual strengths. Iyer notes, however, that the demand for directors with financial savvy may be off the mark. "It's more important to know what questions to ask, and a doctor or a marketing guy could ask good questions" as well as an accountant.

Godrej points out that most Indian public companies are working diligently toward implementing the revised Clause 49 by January 1. They are being helped by the Confederation of Indian Industry, a corporate association whose governance council is headed by Godrej. "Once the revised Clause 49 is implemented, we feel Indian companies will meet most sensible standards of corporate governance," he adds, expressing concerns about the high costs being borne by U.S. companies for implementing the more extensive provisions of Sarbanes-Oxley.
Harbir Singh says that one key area in which Indian companies generally lag the best international standards is in "the amount of disclosure of strategies and priorities" to shareholders. He attributes that to a corporate culture in which Indian chief executives have greater longevity and therefore wield more influence than their Western counterparts. A shorter tenure, or at least the fear of it, encourages more accountability. Singh also cites the
relative lack of influence exerted by institutional shareholders. There just aren't that many yet.

Family Business Practices

One corporate-cultural idiosyncrasy in India is that a large proportion of Indian public companies, including Godrej, are family dominated. That can make for corporate governance calamities, as witnessed most recently in a bitter and unusually public falling out between the two Ambani brothers -- Mukesh and Anil -- over control of the Reliance conglomerate built by their father, Dhirubhai. Other shareholders watched as the two finally broke up the business empire, which had previously been India's largest business group.

Iyer believes that CEOs and other top leaders at India's family controlled firms will have to get with the program or pay the price. "In the end, their companies' share performance is dependent on their empowering the board. If not, their companies' value won't grow," he says.
But family dominance can also be a source of strength for the company, Singh points out. Management teams in these companies are likely to have closer relationships with the main equity holders in the family, and "that provides less of an agency problem in which management and shareholders have divergent interests," he says. Adding the disclosure requirements from the American context would be a good blend, he says. "Corporate governance is really about making management more accountable to shareholders. If management's actions are not geared to the interests of shareholders, then they must be held accountable. In the Indian context, there are many stakeholders, but the problem is how to align their interests with those of shareholders. One powerful incentive for that seems to be the growing desire of Indian companies to get access to global capital markets by gaining listings on international stock exchanges."

Useem says "there is a kind of emergent world standard" of governance. While there are national peculiarities, such as combining the chairman and CEO functions in one person in the U.S., "there is a basic notion worldwide for good transparency; reliable reporting of financials and risks, and boards that have the independence and strength of purpose to be able to do all this."

Developing strong governance standards means helping directors appreciate what board practices "make for good governance and great performance," he says. "What kind of relationships do they need to develop with senior management? What contacts should they have with big investors? Should they never speak directly to investors or should they have a dialogue?" When carefully done, with the collaboration of senior management, director-investor contacts can be helpful, Useem says. Then there are the seemingly mundane but critically important skills directors, especially those on the audit or compensation committees, need to have: How to read financial statements and know the principles of incentive-based compensation.

Search for Independent Directors

And what about that alleged shortage of candidates for independent directorships? Under the new Clause 49, one-third of the board must be composed of independent members if the chairman of the board is not also an executive of the company, and half of the board membership must be independent if the chairman is an executive. According to rough estimates, just the top 500 listed companies, with an average of nine members on their boards, will need to find 2,500 new board members. They would qualify as independent only if they have no material financial relationship with the company and were not employed by the company in the previous three years.

Godrej says he is not concerned about the lack of qualified people to fill the post of independent directors. A website has been set up to recruit independent directors. The effort has been sponsored jointly by the Bombay Stock Exchange, the National Stock Exchange and the Confederation of Indian Industry. It already has identified about 3,000 candidates, Godrej says, and "more are being listed each week."When all is said and done, Singh says, Indian companies will have to identify their own system of corporate governance, one that is appropriate to the Indian context and takes into account the merits of their history and their experience. "They don't necessarily need to imitate everything in the U.S."

Winning the Indian consumer - McKinsey article

Winning the Indian consumer
Multinationals that successfully adapt their products to India's largely untapped market will have the advantage.
V. T. Bharadwaj, Gautam M. Swaroop, and Ireena Vittal
2005 Special Edition: Fulfilling India's promise

India's growing market for consumer goods, already in the top ten (Exhibit 1), could reach $400 billion by 2010—making it one of the five largest in the world. Add the fact that during the next few decades India will likely surpass China as the world's most populous country, and it is clear that multinational consumer goods companies seeking faster growth must begin to focus on the subcontinent.

Multinationals in the grocery, durable-goods, and packaged-goods sectors have been entering India since 1991, when restrictions on foreign investment were relaxed. Some companies have adopted a specialty-player strategy, catering to a small segment of "global Indians" and marketing products much as they would be marketed to any such customer around the world. These companies concentrate on a few big cities. Their business model is low risk and easily rolled out, can often be sustained initially through imports, and requires a limited distribution network. Although businesses of this kind can be profitable, their sales volumes are typically modest and will grow only as fast as the segment does. In many ways, this strategy misses the point of entering a market as large as India.

By contrast, other multinationals have targeted "aspiring India"—the much bigger and faster-growing middle-income segment—with an eye to making the country a core market. In some cases, these companies have won substantial shares in product segments ranging from breakfast cereals to washing machines to cars (Exhibit 2). With this market-shaping strategy, a company can achieve scale and create a strong position that should allow it to reap even bigger benefits in the future. But it is also a challenging route, and some companies have stumbled, confounded by attempts to make money in a geographically immense market of consumers who demand high value at low prices.
In our work with multinationals, we have found two keys to serving India's giant middle segment successfully. First, the winners have worked hard to understand its needs and the country's rapidly changing consumer goods landscape. That knowledge was critical to informing the next step: tailoring products and pricing to the budgets and tastes of these consumers.

A new consumer generation
Since 1990 India's economy has grown, on average, by 5.7 percent a year. Its per capita income has nearly doubled in real terms since liberalization, reaching $543 in 2004. But these numbers don't tell the whole story of the Indian consumer goods market. In fact, there are several Indias, each moving at a different pace.

Looking at the pyramid
An estimated 1.2 million affluent households sit atop the Indian income and consumption pyramid. This is "global India"—only a third as large as the comparable segment in China but expanding by more than 20 percent a year. These households buy branded products, vacation abroad, own a number of cars and television sets, and generally behave like their counterparts in developed markets. Moreover, they are largely concentrated in the top eight cities. This segment may be worthwhile for manufacturers of high-end products such as perfume, haute-couture apparel, and luxury cars, but it is far too small for most consumer goods companies to make India a key market.
At the bottom of the pyramid are the large but poor segments. "Struggling India" comprises more than 110 million households earning $1,500 to $4,000 a year—$7,500 to $20,000, adjusted for purchasing-power parity (PPP)—and "destitute India" comprises 40 million households that are poorer still. For the most part, people in these segments will be able to afford only basic necessities for some time to come.
The real drivers of the growing consumer goods market occupy the center section of the pyramid, among India's 40 million middle-income households, which purchase more than just the basics (Exhibit 3). In this "aspiring India," a typical family comprises five people, lives in a city, and has an educated head of household who is an employee or a small-business owner earning $4,000 to $10,000 ($20,000 to $45,000, adjusted for PPP). Such a family often lives in a small apartment, has a bank account, and owns a television, a refrigerator, and a motorcycle or small car. This new consumer group, growing by about 10 percent a year, is expected to comprise 65 million households by 2010. Its emergence is signaled, for example, by passenger car sales of $5 billion in 2004, more than twice the level of sales five years earlier. The growth in mobile telephony has been even more extraordinary: in excess of 55,000,000 Indians are subscribers, up from 300,000 in 1996.


Young and eager to consume
We can use our recent work in the apparel, durable-goods, financial-services, media, and telecom sectors to paint a profile of this consumer group. For starters, India's consumers are young: 70 percent of the country's citizens are below the age of 36, and half of those are under 18 years of age. These people are deeply rooted in Indian culture and traditions yet connected to and curious about the outside world. Their incomes may be growing, but their budgets are still limited. Together, these characteristics have big implications for the product categories and brands they select.
Such consumers focus on the right housing (that is, housing with access to power and water) and on food, health, and hygiene products. While people in this middle-income segment still spend about half their budgets on the basics, that amount is falling every year, leaving more money for other areas of consumption. This demographic is the new battleground for companies and brands alike.
Beyond basic needs, households make their children's future a clear priority; education is seen as a passport to a better tomorrow. To gain a winning edge, parents spend much money and effort securing the right schools and tutoring for their children and invest in nutrition, computer games, and books. As a result, several categories of products—from protein powders to educational toys—have enjoyed rapid growth.
With basic needs satisfied and the future looked after, these consumers will consider product categories representing the good life—perhaps a new color TV or a new motorcycle after 4 years (compared with the earlier 12 years) or a simple statement such as serving guests Coke instead of the traditional lime juice. Unlike older generations, with their memories of wars with Pakistan and slow economic growth, young Indians have been raised in the postliberalization era of fast growth and underlying optimism and are thus more confident about the future. One way this attitude manifests itself is borrowing to buy big-ticket items; as a group, such consumers are challenging the myth that Indians are averse to credit.
What's on the mind of young Indian consumers as they shop? Price and value for money are certainly important considerations. What of brands? Indians, with more than 200 television channels offering a window to the world, know of and value global brands but are unlikely to pay a premium for them. On the contrary, these consumers increasingly demand brands that are relevant to their own experience and reflect local preferences. One successful effort to fuse local and global tastes is MTV India, where local language and music account for 80 percent of the programming. Not surprisingly, Indian young people love it.

Tailoring the business model to India
Knowing what makes consumers tick is a vital first step. To capture their hearts and wallets—profitably—companies must use that knowledge to tailor the business model to local conditions.
Offer value at the right price
For several years, a leading multinational attempted to sell global brands in India at global prices. The company bet that the country's consumers would move in a premium direction because of their technological sophistication. It also decided to restrict its distribution presence, assuming that the brands were strong enough to attract consumers. These assumption turned out to be wrong. After 15 years, the company had only a marginal 4 percent share of the market and was clearly missing the boat. It then tailored its products and production methods to Indian market conditions and cut its prices by 65 percent. It is now rebuilding its distribution network and in general has begun to adapt its offerings more systematically to the needs (and wallets) of Indian consumers. The results are already visible: 12 months after the change in strategy, sales are increasing by double digits.
Consider also the fortunes of Lifebuoy (Unilever's biggest soap brand in India), whose sales declined by 10 percent a month for 18 months in a row through early 2000. Unilever improved the quality and perfume of the product, stressed its health and hygiene benefits for children, and raised its price by 20 percent. The resulting 15 percent annual growth for such a mature brand has surprised the market by showing that it is possible to charge higher prices if a product offers the right value.
Similarly, Nokia India (Nokia's Indian subsidiary) successfully introduced a customized version of the 1100 model mobile phone. The new version is equipped with features such as a dust-resistant keypad, an antislip grip, and a built-in flashlight (a particular favorite among the country's hundreds of thousands of truck drivers, who use it during stops along India's poorly lit highways). Samsung washing machines include memory backup to compensate for India's frequent power outages and a special rinse cycle for saris to prevent them from becoming twisted and knotted. What's more, the company's microwave ovens can cook Indian menus with a single touch. In addition to offering explicit value, such features help multinationals show Indian consumers that "we understand you and your world; we are the brand for you."
Getting the price right is just as important. Although the incomes of Indian consumers are growing, they still have many competing pulls on their modest budgets. Winning companies thus have learned the importance of affordability. Take the Indian mobile-telecommunications market—the fastest growing in the world—which has 55 million customers. Mobile telephony is also cheaper in India than it is anywhere else; steep and continual price cuts have led to rates of five cents a minute. In only 8 years, the market has reached a level of penetration that took television sets 25 years to achieve.
Successful companies have reduced the consumer's cost of entry into product categories by providing payment options such as financing, pay-per-use, and community ownership. In segments as diverse as motorcycles, durable goods, and apparel, for example, companies have representatives from banks and other financial institutions in stores to process loans in just a few hours. Game console brands are considering pay-per-use formats, including prepaid cards. Along with PC makers, they are also studying ideas for community ownership (at schools, for instance) as a way to drive penetration and consumption.
Affordability also has a bearing on price points for everyday products, sometimes in a paradoxical way. The shampoo market, for example, was revolutionized by ten-milliliter sachets, priced under five cents each. In ten years, the shampoo-buying share of India's population increased to 45 percent, from 18 percent, and such sachets drove almost all of this growth despite their premium price per unit of volume. These products succeeded because consumers who could not afford to spend 20 to 30 times more on a bottle of shampoo can now opt for single-serve portions.

Educate the consumer
Adapting a product and its price to a specific market sometimes does not suffice to create demand, however. Several Indian product markets are in the early stages of development, and winning in them will require patience and investment. The beauty care market, for example, is now worth only an estimated $60 million, and market penetration is below 5 percent, even among urban women. Similarly, less than 2 percent of all homes have air conditioners, and just 1.2 percent of India's people hold credit cards.
The barriers to building these markets are not only the limited awareness and availability of brands and products but also a lack of knowledge about what they do. To educate consumers, in the 1990s a manufacturer advertised the benefits of the washing machine—"It washes, it rinses, it even dries your clothes; in just a few minutes, you are ready for the show"—and used housewives to demonstrate the product in their homes. One multinational is currently advertising air conditioners as a way to purify air and thus to maintain a healthier home environment.
To expand the beauty market, a winning company would not only launch a cosmetics line and build a brand but perhaps also create a "beauty academy" to train hundreds of young women. These students could then set up their own salons, first to teach customers the art of makeup and then, over time, to sell them cosmetics. One implication is that winning companies will need patience, since the market will emerge in stages. The good news is that the market shaper often has big advantages, both in brand recognition and in the insights required to stay ahead of the competition.

Design to cost
In a market where demand exists, selling an appealing product at the right price is not extremely difficult. But how do multinational consumer goods companies in India make a profit at prices consumers can afford? Instead of setting a target profit and adjusting the price accordingly, a winner calculates the price required to create demand, determines the desired profit margin, and then designs a business model in which cost equals price less profit. It then uses several levers to construct a business model with the right cost structure.
A leading multinational, for example, recently changed the formulation of a product to reflect local usage patterns and, as a result, reduced its cost and price by about 40 percent. Similarly, motorcycle companies in India redesign bikes to sacrifice speed for mileage and sell these models, at very low prices, to millions of Indians who otherwise couldn't afford them. Indeed, our work with clients suggests that the design-to-cost approach can shave as much as 30 percent off a product's cost without any deterioration in the consumer experience, since this approach usually reflects the trade-offs local consumers themselves make between performance and price. Both sides ultimately benefit: a better price utility equation for the customer and a better cost margin sweet spot for the company.
Winners also improve their cost position in other ways—for instance, by using Indian contract manufacturers, which typically have lower labor and production costs as well as lower overheads. They then manage their products' quality by placing their own quality teams in these contract units. If companies set up their own plants, they keep capital-spending costs at Indian levels, usually 60 percent of those in developed markets, because of the lower cost of machinery and the more sparing use of automation. They also establish or acquire regional plants, which are better suited to a geographically diffuse market with high freight costs, rather than large-scale world-class plants.

Getting distribution right
Reaching India's consumers cost effectively is a challenge because of the sheer size of the country and its fragmented distribution and retailing networks; some 12 million mom-and-pop stores, for example, have long dominated Indian retailing. Companies that can solve this problem will have a competitive advantage. If, as expected, the government permits foreign direct investment in retailing, consumer goods companies should have greater opportunities to sell products in the modern formats they understand. The traditional network of local retailers, however, will remain important for years, even if modern retailing continues to grow at the current rate of 25 percent a year. With about 5 percent of the total market, modern retailing has a lot of room to expand.
As some companies have demonstrated, the key to distributing products successfully in India is to rely on a third-party network, since building one takes too long and is ultimately more expensive. Unilever, for instance, has achieved national reach through more than 20 distribution centers, run by third-party agents, that transport and store its goods. These centers serve in excess of 7,000 distributors, which use salespeople trained by Unilever to work with more than eight million retailers. Our experience suggests that setting up the right go-to-market strategy (including distribution, rollout, and methods and places for integrating third parties) has a significant—4 to 5 percentage point—impact on net margins, as the costs of direct distribution are 4 to 5 percent higher than those of the third-party approach. Direct distribution also delays the network's rollout, so it takes companies longer to achieve scale and a national footprint.
One company that does well in India, LG Electronics, succeeded thanks to its access to customers in smaller towns (see "Premium marketing to the masses: An interview with LG Electronics India's managing director"). LG created a national sales network of existing small electronics and consumer-durable-goods outlets, built a few flagship stores of its own in large towns, established service centers in several cities, and encouraged local entrepreneurs to set up stores in smaller towns to serve sizable rural populations that had lacked access to such shops.
The modernization of India's retailing sector will complicate life for consumer goods companies, which must not only go on building and leveraging their far-flung small-store networks but also adopt key-account-management skills from the developed world and other countries where modern retailing has moved ahead. To complicate matters further, local retailers are aggressively launching store brands, and Indian consumers don't differentiate between them and brand-name products from big consumer goods companies, according to our research. Clearly, the growth of modern retailing will be a boon for Indian customers. But to maximize the Indian opportunity, big consumer goods companies must learn to manage a widespread distribution network as well as to navigate the modern retailing sector.
India will be a critical growth market for many multinational consumer goods companies. But several distinct Indias now coexist. Global players must define which of them to target—the biggest opportunity is the rapidly growing middle class—and then design the right business model. While the journey will not be easy, the reward will be a share of the world's last big untapped consumer market.

About the Authors
V. T. Bharadwaj is a consultant and Ireena Vittal is a principal in McKinsey's Mumbai office; Gautam Swaroop is a consultant in the Delhi office.

Subroto Bagchi - "Defining Success" - address to IIM Bangalore

Address by Subroto Bagchi, Chief Operating Officer, MindTree Consulting to the Class of 2006 at the Indian Institute of Management, Bangalore on defining success.
July 2nd 2004

I was the last child of a small-time government servant, in a family of five brothers. My earliest memory of my father is as that of a District Employment Officer in Koraput, Orissa. It was and remains as back of beyond as you can imagine. There was no electricity, no primary school nearby and water did not flow out of a tap. As a result, I did not go to school until the age of eight; I was home-schooled. My father used to get transferred every year. The family belongings fit into the back of a jeep - so the family moved from place to place and, without any trouble, my Mother would set up an establishment and get us going.

Raised by a widow who had come as a refugee from the then East Bengal, she was a matriculate when she married my Father. My parents set the foundation of my life and the value system, which makes me what I am today and largely, defines what success means to me today. As District Employment Officer, my father was given a jeep by the government. There was no garage in the Office, so the jeep was parked in our house. My father refused to use it to commute to the office. He told us that the jeep is an expensive resource given by the government - he reiterated to us that it was not 'his jeep' but the government's jeep. Insisting that he would use it only to tour the interiors, he would walk to his office on normal days. He also made sure that we never sat in the government jeep - we could sit in it only when it was stationary. That was our early childhood lesson in governance - a lesson that corporate managers learn the hard way, some never do.

The driver of the jeep was treated with respect due to any other member of my Father's office. As small children, we were taught not to call him by his name. We had to use the suffix 'dada' whenever we were to refer to him in public or private. When I grew up to own a car and a driver by the name of Raju was appointed - I repeated the lesson to my two small daughters. They have, as a result, grown up to call Raju, 'Raju Uncle' - very different from many of their friends who refer to their family drivers as 'my driver'. When I hear that term from a school- or college-going person, I cringe. To me, the lesson was significant - you treat small people with more respect than how you treat big people. It is more important to respect your subordinates than your superiors.

Our day used to start with the family huddling around my Mother's chulha - an earthen fire place she would build at each place of posting where she would cook for the family. There was no gas, nor electrical stoves. The morning routine started with tea. As the brew was served, Father would ask us to read aloud the editorial page of The Statesman's 'muffosil' edition - delivered one day late. We did not understand much of what we were reading. But the ritual was meant for us to know that the world was larger than Koraput district and the English I speak today, despite having studied in an Oriya medium school, has to do with that routine. After reading the newspaper aloud, we were told to fold it neatly. Father taught us a simple lesson.

He used to say, "You should leave your newspaper and your toilet, the way you expect to find it". That lesson was about showing consideration to others. Business begins and ends with that simple precept.

Being small children, we were always enamored with advertisements in the newspaper for transistor radios - we did not have one. We saw other people having radios in their homes and each time there was an advertisement of Philips, Murphy or Bush radios, we would ask Father when we could get one. Each time, my Father would reply that we did not need one because he already had five radios - alluding to his five sons. We also did not have a house of our own and would occasionally ask Father as to when, like others, we would live in our own house. He would give a similar reply, "We do not need a house of our own. I already own five houses". His replies did not gladden our hearts in that instant. Nonetheless, we learnt that it is important not to measure personal success and sense of well being through material possessions.

Government houses seldom came with fences. Mother and I collected twigs and built a small fence. After lunch, my Mother would never sleep. She would take her kitchen utensils and with those she and I would dig the rocky, white ant infested surrounding. We planted flowering bushes. The white ants destroyed them. My mother brought ash from her chulha and mixed it in the earth and we planted the seedlings all over again. This time, they bloomed. At that time, my father's transfer order came. A few neighbors told my mother why she was taking so much pain to beautify a government house, why she was planting seeds that would only benefit the next occupant. My mother replied that it did not matter to her that she would not see the flowers in full bloom. She said, "I have to create a bloom in a desert and whenever I am given a new place, I must leave it more beautiful than w hat I had inherited". That was my first lesson in success. It is not about what you create for yourself, it is what you leave behind that defines success.

My mother began developing a cataract in her eyes when I was very small. At that time, the eldest among my brothers got a teaching job at the University in Bhubaneswar and had to prepare for the civil services examination. So, it was decided that my Mother would move to cook for him and, as her appendage, I had to move too. For the first time in my life, I saw electricity in homes and water coming out of a tap. It was around 1965 and the country was going to war with Pakistan. My mother was having problems reading and in any case, being Bengali, she did not know the Oriya script. So, in addition to my daily chores, my job was to read her the local newspaper - end to end. That created in me a sense of connectedness with a larger world. I began taking interest in many different things. While reading out news about the war, I felt that I was fighting the war myself. She and I discussed the daily news and built a bond with the larger universe. In it, we became part of a larger reality. Till date, I measure my success in terms of that sense of larger connectedness.

Meanwhile, the war raged and India was fighting on both fronts. Lal Bahadur Shastri, the then PrimeMinster, coined the term "Jai Jawan, Jai Kishan" and galvanized the nation in to patriotic fervor. Other than reading out the newspaper to my mother, I had no clue about how I could be part of the action. So, after reading her the newspaper, every day I would land up near the University's water tank, which served the community. I would spend hours under it, imagining that there could be spies who would come to poison the water and I had to watch for them. I would daydream about catching one and how the next day, I would be featured in the newspaper. Unfortunately for me, the spies at war ignored the sleepy town of Bhubaneswar and I never got a chance to catch one in action. Yet, that act unlocked my imagination. Imagination is everything. If we can imagine a future, we can create it, if we can create that future, others will live in it. That is the essence of success. Over the next few years, my mother's eyesight dimmed but in me she created a larger vision, a vision with which I continue to see the world and, I sense, through my eyes, she was seeing too. As the next few years unfolded, her vision deteriorated and she was operated for cataract. I remember, when she returned after her operation and she saw my face clearly for the first time, she was astonished. She said, "Oh my God, I did not know you were so fair". I remain mighty pleased with that adulation even till date. Within weeks of getting her sight back, she developed a corneal ulcer and, overnight, became blind in both eyes. That was 1969. She died in 2002. In all those 32 years of living with blindness, she never complained about her fate even once. Curious to know what she saw with blind eyes, I asked her once if she sees darkness. She replied, "No, I do not see darkness. I only see light even with my eyes closed". Until she was eighty years of age, she did her morning yoga everyday, swept her own room and washed her own clothes. To me, success is about the sense of independence; it is about not seeing the world but seeing the light.

Over the many intervening years, I grew up, studied, joined the industry and began to carve my life's own journey. I began my life as a clerk in a government office, went on to become a Management Trainee with the DCM group and eventually found my life's calling with the IT industry when fourth generation computers came to India in 1981. Life took me places - I worked with outstanding people, challenging assignments and traveled all over the world.

In 1992, while I was posted in the US, I learnt that my father, living a retired life with my eldest brother, had suffered a third degree burn injury and was admitted in the Safdanbrjung Hospital in Delhi. I flew back to attend to him - he remained for a few days in critical stage, bandaged from neck to toe. The Safdarjung Hospital is a cockroach infested, dirty, inhuman place. The overworked, under-resourced sisters in the burn ward are both victims and perpetrators of dehumanized life at its worst. One morning, while attending to my Father, I realized that the blood bottle was empty and fearing that air would go into his vein, I asked the attending nurse to change it. She bluntly told me to do it myself.

In that horrible theater of death, I was in pain and frustration and anger. Finally when she relented and came, my Father opened his eyes and murmured to her, "Why have you not gone home yet?" Here was a man on his deathbed but more concerned about the overworked nurse than his own state. I was stunned at his stoic self. There I learnt that there is no limit to how concerned you can be for another human being and what is the limit of inclusion you can create. My father died the next day.

He was a man whose success was defined by his principles, his frugality, his universalism and his sense of inclusion. Above all, he taught me that success is your ability to rise above your discomfort, whatever may be your current state. You can, if you want, raise your consciousness above your immediate surroundings. Success is not about building material comforts - the transistor that he never could buy or the house that he never owned. His success was about the legacy he left, the memetic continuity of his ideals that grew beyond the smallness of a ill-paid, unrecognized government servant's world.

My father was a fervent believer in the British Raj. He sincerely doubted the capability of the post-independence Indian political parties to govern the country. To him, the lowering of the Union Jack was a sad event. My Mother was the exact opposite.

When Subhash Bose quit the Indian National Congress and came to Dacca, my mother, then a schoolgirl, garlanded him. She learnt to spin khadi and joined an underground movement that trained her in using daggers and swords. Consequently, our household saw diversity in the political outlook of the two. On major issues concerning the world, the Old Man and the Old Lady had differing opinions.

In them, we learnt the power of disagreements, of dialogue and the essence of living with diversity in thinking. Success is not about the ability to create a definitive dogmatic end state; it is about the unfolding of thought processes, of dialogue and continuum.

Two years back, at the age of eighty-two, Mother had a paralytic stroke and was lying in a government hospital in Bhubaneswar. I flew down from the US where I was serving my second stint, to see her. I spent two weeks with her in the hospital as she remained in a paralytic state. She was neither getting better nor moving on. Eventually I had to return to work. While leaving her behind, I kissed her face. In that paralytic state and a garbled voice, she said, "Why are you kissing me, go kiss the world." Her river was nearing its journey, at the confluence of life and death, this woman who came to India as a refugee, raised by a widowed Mother, no more educated than high school, married to an anonymous government servant whose last salary was Three Hundred Rupees, robbed of her eyesight by fate and crowned by adversity - was telling me to go and kiss the world!

Success to me is about Vision. It is the ability to rise above the immediacy of pain. It is about imagination. It is about sensitivity to small people. It is about building inclusion. It is about connectedness to larger world existence. It is about personal tenacity. It is about giving back more to life than you take out of it. It is about creating extra-ordinary success with ordinary lives.

Thank you very much; I wish you good luck and Godspeed. Go, kiss the world.

Confessions of an Aspiring Venture Capitalist

Confessions of an Aspiring Venture Capitalist

Knowledge@Wharton collaborated with The Economic Times Intelligence Group in Mumbai, India, on this special report on R&D in India.




In 1999, when Vivek Paul left his job as the global head of GE Medical Systems to join Wipro, the Bangalore-based IT services firm had about $150 million in revenues. By the time he stepped down last month as Wipro's CEO and vice chairman, the company's revenues had increased to $1.4 billion. Now Paul is changing gears to become a partner with the San Francisco-based investment firm Texas Pacific Group. Paul, who will specialize in IT and life sciences at TPG, spoke with Ravi Aron, a professor of operations and information management at Wharton, and to Knowledge@Wharton about what it takes to succeed in the fast-changing pharmaceuticals market, and why he thinks India lags behind when it comes to innovation despite the country's proliferation of PhDs.


Aron: I'd like to lead with a generic question. Given that you have a very technical background with GE and with Wipro, and you've got the grime of IT on your fingers -- you know it backwards and forwards -- what made you suddenly switch to life sciences?


Paul: Well, first of all it's not just life sciences -- in fact I'm going to be a general partner in two funds. One is a technology fund, which will keep that IT grime under my fingernails; and the second is the life sciences fund. I will be doing life sciences on top of what I'm doing right now. But initially, many people shared that confusion, that I was switching from IT to life sciences. I think the opportunity is very strong in both areas.


Aron: Could you tell us about the nature of the stuff you'll be backing?


Paul: Well, first of all I should caution you that my knowledge of this space is abysmally poor, considering that I've just committed the rest of my career to that. But the reality is that in some sense I have an idea at a higher level as to what to do; but I could not today give you specifics of the deals I'll do.


However, I see two very interesting trends in the pharmaceutical industry. On the one hand, there's the fact that the traditional pharmaceutical small molecule game is coming to an end. Now you have more big molecules that are more customized. So they actually have a different impact on different kinds of profiles of people. So you realize that you need a whole different game in terms of how you define those molecules, and how they tie to imaging agents, in a way that you never had to do so closely before. That creates opportunities in imaging agents and opportunities in developing and defining new molecules.


The next issue is that you have the manufacture of these large molecules, which is a very different process [from manufacturing small molecules]. It's much more difficult to mass produce these. In some sense you've got to "cook" them in vats rather than make them in gigantic factories. And there is a higher labor and knowledge intensity with regard to the way the manufacturing process works. If you fold the proteins or molecules the wrong way, the critical effect is completely different. That also creates opportunities for the manufacture of these large molecules, particularly in places like India. As a result of that combination, what used to be a very vertically integrated industry, the pharmaceutical industry, now lends itself to a more horizontal format. It's just like computers -- which created a whole new opportunity for a new industry to be unleashed. And then on the device side, you've got continuous improvement from people who are developing new devices that can do more and more. I think that is another area -- devices -- that I can play with.


Aron: Some of this leads into the R&D area. The componentization of the pharmaceutical industry is beginning, just as it happened with semiconductors, which became flattened and horizontal. When we spoke with companies like Shantha Biotechnics [a Hyderabad-based biotech firm that makes recombinant DNA products] two years ago, they were looking at three different phases in the small molecule area. They said that formulation advances by trial and error; it's not a customized solution, so if you are looking for something for color blindness, it would generally work for color blindness or not at all. So they looked at formulation, synthesis and manufacturing. They said in the synthesis stage, work is very labor intensive because there are hundreds of trials and errors that have to be made, and India would be a natural place to do that because it's easy to find the resumes you need in a short time there. In the large molecule era, you just pointed out that some of these things are very labor intensive -- the structure of the molecule can get denatured if it falls the wrong way. Do you think there's an R&D place for India in the large-molecule era, starting with the labor-intensive processes? What's the difference?


Paul: As you see the shift in the pharmaceutical space, the challenge for India in terms of doing more of the design of these larger molecules will be the shortage of expertise and the lack of an entrepreneurial ecosystem. And it's a big bet. If you look at the number of biotech companies that went to launch "killer" drugs, there aren't many that have been successful. As someone who is providing the capital to this crowd, you might feel like you'd be better off putting your money on a roulette wheel.


Aron: So you're saying the risk is very high.


Paul: Absolutely. And I think because of that, India lends itself to lower risk, and more processed activities, rather than taking a gamble on those kinds of investments. I don't think that you have the entrepreneurial instinct in that ecosystem that can make the stuff come out.


Aron: In the absence of such an entrepreneurial ecosystem, would funds such as yours be looking to incubate businesses in India?


Paul: I talked about the fact that pharmaceuticals are being pushed in two directions, but I just focused on one. The second is generics and the ability to operate in an environment where drugs are going off patent in record numbers. So if you look at the opportunities to play in India, I think they're in the process area rather than in innovation. Now that doesn't mean that you can say "never"; of course there will be anomalies. But I think the play will be more along the lines of: Can we create a mega-generics pharmaceutical company that can have both the production capability, the cost position, and give them the branding so they're readily accepted? There's a lot of stuff you can build out of India. Then you have all the other stuff like contract research outsourcing, and clinical process outsourcing - that's also interesting.


Aron: When you say you see opportunities in the process space in India, do you expect formulation R&D to occur in the U.S. or advanced economies like Germany and the U.K. and that manufacturing and production will take place in India?


Paul: That's right. Of course I'm generalizing, so by definition I'm wrong. But largely speaking, that's what I would say.


Knowledge@Wharton: Where do you see opportunities in India, on the IT side and the life sciences side? And where do you think India's competitive advantage might lie compared with other countries?


Paul: It goes back to the abundant supply of trained labor. That doesn't necessarily mean just cost. It means cost, process and availability. So I don't think that at this moment in time [the question is] "how do you build the manufacturing of a pharmaceutical" or "how do you do the clinical process." Are there ways for you to do more of the generics side? Are there derivative drugs that you can develop? People are finding that you can create drug cocktails, and come up with a different kind of an outcome versus an individual drug you can make somewhere else. Those are very interesting areas.


Aron: Wipro, which you did so much to grow over the past five years, has been doing a lot of captive R&D for other companies. Do you see that as something that can be replicated by other companies? Is there a profitable and robust revenue stream in India for such services?


Paul: If you look at the service business, absolutely. But if you look at that service business as leading to innovation and product outcomes, the answer is absolutely not. Frankly, I feel that when people work in a service business like ours, it's almost like we give them a lobotomy. I don't think -- and I hope I'm wrong -- you will see a single successful product startup coming out of people who were working at Wipro or any other similar companies. You'll find that innovation comes from people who worked for Intel India; they'll go off and come up with a new chip. Or someone at Cisco India will come up with a new router. Why that is, God knows. But I truly believe that there is some sort of inadvertent lobotomy that we give people.


Aron: So you believe that some sort of self-selection is taking place? That those bright people who are risk-averse, who want to be very good at process detail, those are the folks who will come and join service businesses? And those who have an appetite for risk, who are willing to look at messy, ambiguous situations, will go off and try to do R&D?


Paul: I don't know. I just have that observation. I have not spent any time thinking about what the root cause might be. But there it is.


Aron: Where do you see high-end R&D opportunities in general? For instance, there's a lot of R&D being done in China, in Ireland and in Finland by American companies. Do you see those kinds of captive R&D centers coming up, or better still, ones that give R&D projects to a third party and say "I want you to come up with a new circuit board for my cell phone?" Do you think that kind of thing could happen?


Paul: It's already happening. The stuff that's been done in India is staggering in terms of range and depth. I don't think that anyone can say that the work we're doing is trivial. But the work we're doing is under somebody else's direction. Let me put it this way: For an engineer, there's a big difference between discovering something, versus discovering something that you know somebody else says can be done. That difference is the difference between the service business and the products business. In the service business, what you're doing is great stuff, but it is in some sense something that someone else told you to do.


Aron: Let's talk about doing something under someone else's direction, after someone says, "This can be done, do something better for me." That mindset works in the services business, but to succeed in products you have to go off and discover the possibilities. Is that correct?


Paul: Yes, and there's a second quality I didn't mention: Knowing what you want, or what the market wants, versus being told what to do.


Aron: Given that none of the Indian technology companies have market proximity, other than the Indian market, they don't know what people in the U.K. or California want. In the absence of market proximity, can they be anything other than supply-chain feeders?


Paul: Having market proximity is not necessarily a requirement for doing product development. For example, the U.S. can develop products that serve China. And the Chinese market, you might argue, is unique. Having said that, I think that Indian companies lack that will, or sometimes that will gets drained out of you when somebody's telling you what to do.


Aron: But U.S. companies that are developing products for the Chinese markets usually have a Chinese presence. Motorola has a Chinese presence and so do companies like Sony, and Nokia, and Ericsson. They own those customer relationships. Off the top of your head, can you think of two or three areas in India where there may be R&D opportunities even if India does not own the customer relationship?


Paul: I really don't know yet. I've lived in the service world so far, and I'm just entering the other side. I'll get a good feel for that once I meet entrepreneurs.


Knowledge@Wharton: Based on your experience, are there any lessons to be learned by Western companies that want to outsource R&D to India; and for Indian companies that want to get into R&D?

Paul: Well, it's tough to get into it now. The opportunity that existed five or six years ago is closed, and the costs of entry have gone up dramatically. Also, the big spots are taken and it's very difficult to unseat those companies. So unless you're going to play in a particular niche where you have a specific advantage, being a platform outsourcing provider in this market is a very tough spot to be in. Also, you have to think through what value your corporation adds. A service business is really individuals working for someone else. Why would a customer pay any markup to the salaries of the people that he or she is applying? So unless you have a very clear view of your corporation's value added, you have no entitlement to an enterprise value.


Knowledge@Wharton: Is there a tie-in between more liberal economic policies in India and an increase in intellectual capital? When economic policies have been liberalized, the auto and other industries have boomed. Is it just a matter of time until this occurs in IT and other areas?


Paul: I think it's the opposite way. The political leaders in India have not been leaders. Instead, they have been led by the social consensus. The social consensus when India first liberalized was forced because India was bankrupt. The "dream team" that has been in place for the past 12 months has basically done nothing, relative to the expectations. They will go up to the line that they feel the social consensus in India will allow. IT and certain other industries created a wave of optimism and confidence in the country -- even though they represented less than 1% of the population of India. But it created confidence for all of India, and the social consensus about opening up the market increased. The politicians, ever so shy about getting out ahead of anybody, were happy to follow that trail. If we spread that optimism across more areas, then the pace of change might increase.


Aron: At the lowest level, the foot soldier in IT happens to be somebody with an engineering degree: he's a programmer. But the foot soldier in coal manufacturing or in chemicals is a blue-collar or factory worker. Typically these are unionized workers who are more resistant to change. Could that be why the service industry is liberalized and the factory industry is not?


Paul: First, I think that the service industry was able to take flight because it did not carry the weight of the existing regulations that the manufacturing industry faced. But to the extent there is the ability for other markets to open up and therefore to create more employment, that will happen. But there is still skilled and unskilled labor. So even if your labor costs a fraction of that in developed markets, if you're not applying lean manufacturing techniques you will more than offset your cost advantage. It's not just "brainless" blue-collar workers who are working for you -- they have to be adept at some pretty advanced skills.


Knowledge@Wharton: You spoke about the inability of the Indian leadership to go beyond the social consensus. If the task of leadership is to define a vision and then find ways to attract constituents toward that goal, what accounts for this leadership failure?


Paul: Politics.


Aron: France, and to a lesser extent, Italy and Spain also face this situation. Is that inherent to democracy?



Paul: The reality is that it has been that way for a long time. Now you have the occasional oddball like JFK and the moon shot -- he wanted to do what was right -- and George Bush, who invaded Iraq because he wanted to do what he thought was right. But generally, politics has been bad for democracy. Even outside democracies, why are dictatorships cautious about what they force on the population? You can't go too far beyond the social consensus before someone says, "Hack his head off and get a new dictator."


Aron: Your point about social consensus is well made. But looking at successful multinationals, many of the big players are already in India. Do you think that they will get more entrenched, or will their activities go to a plateau and basically level off?


Paul: The question is whether optimism leads to success. At a U.S.-India Council session in Washington, D.C., [GE CEO] Jeff Immelt was a speaker and he said, "Every time we bet on the Indian market, we failed. But I'm willing to place that bet again." Sometimes just the willingness to place the bet itself is good. It can be a positive, self-fulfilling prophecy. But investments based on such expectations can also evaporate rapidly.


Aron: But if you consider a huge company like Citibank -- pretty much every bet it's made on India has paid off. Perhaps the optimistic, 240-million-strong middle class in India is an attractive market?

Paul: I don't know why Citi would be successful when GE is not. But the problem isn't that GE can't sell to the middle class. The problem is that sales to India don't merit a visit from GE's chairman.


Knowledge@Wharton: Returning to R&D, I wonder if you would care to predict what future scenarios might come to exist.


Paul: I think you will see more employment through company-owned subsidiaries in India as opposed to service companies. You're going to see the kind of work that's being done there is as good as anywhere else in the world. And you're going to see entrepreneurial spin-offs come more from company-owned centers than from service providers. As a couple of industries take flight, they will encourage others to take flight.


Knowledge@Wharton: Who's waiting in the hangars?


Paul: I think the next wave will be from retail finance and logistics. That's in the domestic market, and I think it's critical for India to grow the domestic market.


Aron: The Indian diaspora [in the U.S.] is at least 1.6 million strong. In the last 20 years it's essentially been skilled people like you who have come here and become senior executives with a lot of decision-making ability in many companies. Do you think that could have an impact on the willingness to start and fund enterprises in India?

Paul: People are doing that, but the notion of an enterprise in India is questionable. What do you call a Silicon Valley company that has two people in the U.S. and 12 in India? Is it an Indian company or a U.S. company? The Indian diaspora is already in some ways investing in India, but not in the classic, "incorporate an entity in India and hire people" way. Instead, it's more like, "Boy, in my next startup in the [Silicon] Valley, I'll make sure I have an India piece." If I am going to set up something for India, I'm going to put it in a tax haven. A lot of that is going on, but it's difficult to measure and track.


Aron: There are 20 million Indians abroad in the U.K., the U.S. and parts of Europe and Africa, and many are very wealthy. But they tend to go where the opportunity is, rather than try to create opportunity in India.

Paul: That's true. As a venture capitalist I'd like to be in India, but I'd be failing my job if I pushed India even if it's not the best opportunity.


Aron: Why is the venture capital scene in India so low key?


Paul: It's because of a lack of innovation. The service companies are a desert. It's only now that you're beginning to see some ideas emerge. But venture capital is starting to get pretty active in areas like business process outsourcing, and public equity kind of plays. But if you look at classic private equity, which involves restructuring the balance sheet, particularly for public companies the regulatory environment is very, very difficult. It can take two years for a company to go from public to private. So that has been a bit of a hurdle. But my sense is that there will be increasing amounts of venture capital coming into India. The stronghold that the lalajee [the traditional moneylender] has had, that you can't do anything unless the lalajee gives you money, will go away. Money will be available.

Human Capital: Can India Bridge the Knowledge Gaps Needed for Research?

Human Capital: Can India Bridge the Knowledge Gaps Needed for Research?
Knowledge@Wharton collaborated with The Economic Times Intelligence Group in Mumbai, India, on this special report on R&D in India.

The rapid growth in the market for outsourced research services from India destined for the U.S. and Europe is beginning to expose weak links in the chain. Depending on the nature of the research being outsourced, Indian companies are preparing for the next level of growth by bridging gaps in skills across the organization with investments in training and development.


At one end of the spectrum are easily transferable, cookie-cutter skill sets in data collection and reporting formats. At the other are high-end research programs that involve extremely sensitive and closely guarded insights into corporate business strategies. Softer skills that involve communication, business culture and general professional standards also form part of the equation, separate from concerns about general business hygiene that keeps such work on the right side of business ethics.


Although these issues cut across all industry groups, pharmaceutical research is perhaps one of the most sensitive and involves concerns at every link in the value chain. Using life sciences as the broad backdrop, Knowledge@Wharton spoke with research organizations, academics and businesses on either side of the outsourced services industry to understand how they are getting their arms around bridging the knowledge gaps.


The picture that emerges is one of a growing desire among companies in the U.S. to conduct sophisticated research projects in India. To be sure, this thinking is guided not just by issues of wage arbitrage, but also by Indian research and engineering education, the availability of large talent pools, and perhaps most significantly for the pharmaceutical industry, the relatively easy access to participants in clinical trials. American and European firms also feel more emboldened by the recent reforms in India's patent regime that bring protection of intellectual property closer to their standards.


The sheer numbers of India's talent force make a compelling case for outsourcing R&D to India. India has some 22 million graduates, including 6 million science graduates, 1.2 million with engineering degrees and 600,000 doctors, according to data compiled by The Economic Times Intelligence Group, the National Association of Software and Service Companies (Nasscom) and other industry sources. That population is growing rapidly, with nearly 2.5 million graduates added in 2004 alone, including 25,000 doctors and nearly 600,000 science graduates and post-graduates. By way of comparison, China had more than 2 million students graduating from its universities in 2003. That included 600,000 in engineering, 200,000 in science and 100,000 in medicine.


Evalueserve, an outsourcing firm in Chappaqua, N.Y., has offices in India and Europe; its clients include several prominent pharmaceutical companies. Alok Aggarwal, its chairman, explains why India is a hot destination for pharmaceutical research. He estimates the cost of creating a new drug can be as high as $900 million, of which between $350 million and $500 million is what it takes for a "new chemical entity" to pass through all the stages of clinical trials and reach the market.

"Research indicates that conducting drug-related studies in India can lower drug discovery costs by as much as 10%," he says, attributing that in large part to rapid enrolment volumes (of participants in trials) and shortened enrolment timelines.


"Each time we start a study we train our clinical investigators to ensure compliance with protocol and ethical standards," says Betsy Raymond, assistant director of media relations at Pfizer Global Research and Development, which is headquartered in New London, Conn. Pfizer has a 100-member captive operation in Mumbai that manages and analyzes data gathered from clinical trials. Apart from the clinical investigators who conduct the trials -- typically physicians -- the company also works to "educate and aid" others such as medical personnel, health authorities and even local leaders with technical knowledge and the requisite infrastructure.


Search for Talent

Louis Kacyn, the Chicago-based managing partner of the global life sciences practice at executive search firm Egon Zehnder, visited India three months ago and met with executives at pharmaceutical companies. He says his company has been retained by quite a few U.S. and European clients who want to hire talent in India. He found "huge opportunities" for conducting clinical trials in India, given the cost advantages and the large supply of physicians and people to participate in trials.


Kacyn doesn't worry too much about gaps in skills in India. "Middlemen such as Quintiles and other contract research organizations have been growing, and they will take care of skills issues and provide a relatively safe passage for companies that outsource," he says. Quintiles, based in Research Triangle Park, N.C., is arguably the largest contract research firm specializing in clinical trials. Its eight-year-old Indian operation, with offices in Mumbai, Bangalore and Ahmedabad, has so far conducted more than 100 clinical trials at 700 sites involving 15,000 patients.


That expanding market opens up new opportunities for training and education of Indian researchers, scientists, managers and others. An immediate market is for programs specific to the pharmaceutical industry, such as compliance with U.S. Food and Drug Administration regulations and "current good manufacturing practices."

Demand is expanding across industry groups to include programs to bring Indian managers up to speed with their western counterparts on business culture, professional standards and work ethics.


A case in point: the Wharton School's Aresty Institute of Executive Education, which aims to "engage individuals and companies in partnerships that transcend the classroom," and which has become increasingly active in India. It launched its first program in India on June 30, and is planning to ramp up quickly around the country. The Institute has been getting requests for training and orientation programs from private and public sector companies, and state governments that want to position specific cities to compete with business centers such as Shanghai.


India's top private sector companies rate high on management skills, notes Jonathan Spector, vice dean of Executive Education at Wharton, who has made India and China his highest priorities for international programs. "Senior executives at some of the leading companies in India are every bit as good as their counterparts anywhere in the world in terms of sophistication, knowledge of management, functional skills, strategic perspective and vision," he says. "The biggest challenge is simply increasing the number of people who are globally sophisticated general managers. It's a numbers game." Spector says in that respect, India is dealing with a fundamentally different challenge than the one China faces. "There are many more role models at the top of Indian companies than there are at Chinese companies, although there are some in China," he says, adding that this represents "a huge and significant advantage" for India.


Ken Johnson, a director of executive programs at Wharton, also picked up positive vibes about India at a series of programs his unit recently organized in China and India with participation from U.S. companies and their suppliers of outsourced services. "There was comfort and recognition that there is a sophisticated set of controls already built into place in India," he says. Sandhya Karpe, an associate director at Wharton Executive Education who works closely with Indian firms, has found a growing willingness to invest in building knowledge and skills. "In our conversations with CEOs in India, we have found they are willing to put large groups of executives through programs to move them forward quickly, as opposed to just sending individuals to our programs," she says.


Learning Management Systems

Standardized educational and training packages are also available off the shelf, such as learning management systems, or LMS, from companies like two in California --SumTotal of Mountain View and Saba of Redwood Shores. Claire Schooley, a senior industry analyst at Forrester Research in San Francisco who specializes in training and education, says LMS packages are strongly recommended by the big consulting houses "because they focus on learning management over a long period of time."


Pharmaceutical companies that use LMS for skills development in their research programs are able to match requirements of individual researchers with courses or programs that take them to the next level. LMS then tracks each individual's training -- both in classrooms and online -- to help human resource departments get a big-picture, organization-wide assessment of the area, magnitude and location of skills gaps and the progress being achieved in bridging those. "LMS is heavily used in online learning of compliance and regulatory issues within the pharmaceutical industry, because the message is consistent," says Schooley, referring to standards enforced by the U.S. Food and Drug Administration in its drug approval processes.


A high degree of standardization in regulations and procedures at the U.S. FDA or its Japanese and European counterparts makes it easier for many aspects of pharmaceutical research to be outsourced to locations like India, says Laura Ramos, vice president at Forrester Research in Cambridge, Mass. "In each of the three areas of pharmaceutical outsourcing -- manufacturing, clinical trials and drug development -- most of the issues boil down to audit," she says. "Companies need to be able to document what their systems do and prove that the systems do them consistently within a certain margin of error, and they need to perform audits whenever called upon to do so by the regulator.


"You start with a template and then move forward," Ramos adds. "From that perspective, it may be advantageous for a pharmaceutical company to use outsourced work, as compared to an automotive manufacturer or an engineering company," she says. "The procedures are written down and they are auditable and you know who is supposed to be doing what and how that work is to be measured."


In ensuring all that, pharmaceutical and biotech companies involved in outsourcing research are incorporating detailed clauses into their contracts. "They are setting up integrated metrics within the outsourcing relationship with clear deadlines, standards for accuracy and database lock (where the data cannot be reopened after it is finalized)," says Ellen Julian, research director at Life Science Insights, which is part of market intelligence company IDC in Framingham, Mass. "There are hundreds and thousands of line items that are agreed upon, involving lawyers and procurement specialists, and all that takes time." Julian says moves are currently underway to create industry-wide, standardized agreements.


Bothered by BLOB

Ravi Aron, a professor of operations management at Wharton who has been researching trends in business process outsourcing, makes a distinction between standardized procedural and verification work in pharmaceutical research and that which focuses on drug discovery. "Over the last 18 months or so, a new concern has emerged over what I call BLOB -- or business line objectives," he says. "Concerns about BLOB far outweigh those about the loss of research data. Companies don't want their competitors to know what their business trajectory is."


Pharmaceutical firms that outsource research grapple with a host of concerns that are common across several industry groups. These include the misuse of "residual knowledge" about a company's market strategy or best practices that an analyst gains during a project. "It is a concern that can be mitigated," says Aggarwal of Evalueserve. He says large investment banking companies have long dealt with these concerns by requiring researchers to be "quarantined" after sensitive projects, which means they cannot work with rival companies for a limited period of time.


Aggarwal says earlier concerns about protection of intellectual property in India have diminished significantly after the Indian government introduced patent protection reforms earlier this year. Through a presidential ordinance in January that was ratified four months later by the Indian parliament, the laws now allow applicants to obtain patent protection on almost every aspect of drug development, from molecules and microorganisms to processes.


In the final analysis, companies are not dealing with skills in the conventional sense; it has more to do with knowledge, says Peter Cappelli, a professor of management and director of Wharton's Center for Human Resources. "It's about tacit knowledge; it's 'how we do things at our company,'" he says. He points out that the loss of tacit knowledge has for long been a concern with companies that restructure and lay off employees. "Outsourcing to India is so much cheaper that companies are tempted to think about doing it without worrying about tacit knowledge," he says. "That could be a real problem."


How do companies deal with that problem? "There isn't an easy way to pass along tacit knowledge, unless companies are very good at formalizing some of this and writing it down," says Cappelli. Alternatives could include not to outsource but for companies to run captive centers in countries like India. "There are various degrees to which you can be at arm's length with respect to this," he says. "The less tangible the work you are doing, most people believe, the more closely you should hold it inside your own company."

"In the End, R&D Has to Get Products to Market"

In the End, R&D Has to Get Products to Market

Knowledge@Wharton collaborated with The Economic Times Intelligence Group in Mumbai, India, on this special report on R&D in India


Ramesh Emani, president of Wipro Technologies' Product Engineering Services business unit in Bangalore, has seen India become an information technology powerhouse in nearly two decades at Wipro. Now the country is moving up the value chain toward research and development services to create new products that will be launched globally. Although it's early in the race, Emani and Wipro Technologies, a unit of Wipro, one of India's top IT services companies, are likely to play a big role as global companies move R&D to India. Knowledge@Wharton spoke with Emani about trends in R&D, competition from China and the management of offshore research facilities.


Knowledge@Wharton: You work across a lot of different domains -- automobiles, consumer electronics, telecom, medical devices, and so on. Within this wide range, what would you regard as Wipro's most significant R&D projects in the recent past?


Emani: In the telecom industry, we have been working in two areas. One is in the field of training with large product portfolios for our customers. Because our customers are able to transfer the engineering to us, we feel they are able to keep their products alive. Otherwise, they may have not been able to maintain or run these products profitably given the price erosion and other challenges to their costs. The second category is developing new concepts such as the whole new voice over IP (Internet Protocol) infrastructure and software as well as new DSL (digital subscriber line) products. We're also working with many semiconductor companies.


Knowledge@Wharton: Wipro did a survey in March about the global sourcing of R&D which found that 13% of the respondents were extremely satisfied and getting more value than expected. That's exactly the same percentage as those who thought it was extremely disappointing. Could you comment on what's going on and the challenges you encounter?


Emani: First, let me make a general comment on outsourcing. If you consider customer satisfaction with outsourcing in general, whether it is IT or R&D, you'll find the same percentages. The main reason is there are companies that are extremely active managing their own operations, and sometimes it's not easy to transfer those to a new company and new set of people who may not get the whole process. It all comes back to us not having the context for what they were doing, and their not sharing what they do in the development of products. It's a lack of communication and context and a lot of changes in the process that create these challenges. Sometimes you have to make a number of dynamic changes within an organization.


Knowledge@Wharton: Have you put any processes in place to overcome these problems?


Emani: Absolutely. If you ask me about the No. 1 challenge we face, it revolves around change control -- how well we are able to manage a change so that we work proactively with the customer. In the R&D context you have a lot of changes. The second aspect is program management -- how we synchronize what we're doing with what the customer expects. That is important because many times we don't do an entire piece of development. We do one piece while the other pieces are done in the U.S. or in Europe. How do we bring all that together? There are processes for continuation control, change control, testing and handoffs. We have focused a lot on that. It comes down to communication and how you share information on the product and other things.


Knowledge@Wharton: Are there more challenges to offshoring R&D compared with outsourcing business processes or maintaining legacy applications? R&D takes time and it's not like you can just hand it over. Is there an immediate payoff?


Emani: My answer is yes and no. Many R&D processes are just like any other IT system or outsourcing processes. I don't think they are any different from other outsourcing arrangements. There are a lot of processes making sure the system works well, and many of them are based on standards. The real core is having good knowledge about the market, the people and the domain and setting standards. We have to make sure we work well with the customer in terms of architecture and high-level designs.


Knowledge@Wharton: How would you describe your R&D activities? Do you handle full products or more basic research to support other labs?


Emani: I wouldn't focus on the "R" (research) that much. What we do is more of the "D" (development). There are very few firms that only do the research. When it comes to development, we do what is necessary to make it work. We're doing designs using the latest software and new technologies. That's especially the case in telecom and information technology.


Knowledge@Wharton: A lot of Western firms have built their own R&D centers in India. Do you regard them as competitors or as customers?


Emani: There's a distinction between offshoring and outsourcing. A lot of companies view them as one and the same because it's work that is going to India. What we tell the customer is totally different. In offshoring, you're just trying to create a low cost center to reduce R&D costs. With outsourcing you're handing off development to someone that may have better processes and be more efficient than you are. You're also trying to get dynamic in terms of ramping up and down resources to meet the market. We don't see those India centers as competition. We work with them. A lot of the India centers work really closely with us.


Knowledge@Wharton: When it comes to R&D where would you put offshoring --Intel building a center in Bangalore -- vs. outsourcing? Are they at different stages?


Emani: There are different areas where I'd say the Indian centers of Western firms are very advanced and others where we are more advanced. I'm not sure you can compare the two. Texas Instruments has been in India since 1987 or 1988. They have a lot of knowledge. There are many smaller companies that think they can set up here and make it work well. But I'm not sure they can attract the best talent.


Knowledge@Wharton: The companies doing R&D the most in India seem to be the information technology, bioscience and pharmaceutical firms. Why?


Emani: If you look at R&D in businesses such as electronics or IT, it is clearly an offshoot of what has been happening. These industries have had a lot of experience with doing work offshore, and that is now being extended to R&D. Many universities have Indians in R&D in the other industries you mentioned. Companies work with so many people of Indian origin that they find it easier to come here and work with Indian companies.


Knowledge@Wharton: What's driving companies in the U.S. and Europe to move R&D to India? Could you name the three main reasons?


Emani: The first reason is to speed up the pace of production. As product cycles shrink, companies are under pressure to launch products faster. There's a need to work and deliver results rapidly. Some of our clients want to cut their product cycle time by half. The second reason is cost. As the prices of products decline, and companies seek to sustain affordable prices, lower R&D costs become important. The third reason is the availability of talent with competence and research skills.


Knowledge@Wharton: Do you see the same factors at work in the kind of R&D work that is moving to China? Is there a difference?


Emani: My customers tell me that India has an advantage in terms of IT production, the English language and ability to work with people and things like that. IT skills and English are the key reasons people come here.


Knowledge@Wharton: Compared with China, how much is the risk to intellectual property an issue in India?


Emani: No customer has ever told us they had intellectual property issues in India, but they have mentioned those concerns exist in China.


Knowledge@Wharton: You said that India's advantage in R&D lies in IT experience and knowledge of English. What happens in a generation when the Chinese speak English just as well?


Emani: English has developed in India over the past 100 years. It takes time to build such skills. China may be able to converse in English, but to say it can reach the level of India, I don't see this happening that quickly.


Knowledge@Wharton: In the U.S. moving R&D to India or offshore can be a touchy subject. What are the political realities you have to face when dealing with customers?


Emani: Many of the companies we deal with are global. Even if they are not, their markets are global. So we don't face the political reaction. Our customers are global, and they have to do work on a global basis. They are worried about it, but there is no hesitation. They say they are global companies, and there is no choice in this.


Knowledge@Wharton: If a company is moving R&D to India, whether it's sourced or outsourced, what does it have to do internally to make it work?


Emani: Make sure you are actively involved and engaged. Our best customers are the ones who work closely with us, who travel to India regularly and have strong metrics and processes. Don't think you can do it once and go, particularly with R&D, which is a continuing activity. If a company is not actively engaged it shouldn't outsource.


Knowledge@Wharton: What's the best way for a company to measure its returns on outsourcing R&D to India?


Emani: In the end, R&D has to get products to market. How many products can India get to the market and at what price and what quality? All three parameters are important.


Knowledge@Wharton: Where India is concerned, what's the market? Is it India or the world market? In China, R&D is focused almost entirely on adapting products for the Chinese market. Is that the case in India?


Emani: That's one of the distinguishing factors of R&D in India compared with China. We do some work for the Indian market, but mostly the products we work on are for the global market. In the telecom industry, some projects focus on applications for the Indian market. But normally that is not the case. Customers don't come to us only to focus on the Indian market.


Knowledge@Wharton: In China, R&D is used to certify suppliers and make sure they comply with company standards. Is that an issue in India?


Emani: In India, we don't work with local standards. There is nothing such as India standards so that isn't a concern. We don't have that issue since India standards are global standards.


Knowledge@Wharton: You said talent is a major reason why R&D has been moving to India. How is India shaping up in the war for R&D talent? Is there still a price advantage or is it disappearing?


Emani: Yes, there is an advantage, although in the last two years fears have emerged that the price advantage might disappear. But we have such a huge gap globally that I'm not worried about it. We also work long hours in India and we focus on quality. All that enhances productivity.

Contract Research for Global Firms Creates Hotspots for IT, Telecom and Biotech

Contract Research for Global Firms Creates Hotspots for IT, Telecom and Biotech
Knowledge@Wharton collaborated with The Economic Times Intelligence Group in Mumbai, India, on this special report on R&D in India.


Multinational companies (MNCs) seriously began to explore India's potential as a research destination more than a decade ago. In the late 1980s and early 1990s, some MNCs set up research labs in India. However, this early wave largely consisted of what is sometimes called "insourcing" -- MNCs opened research labs to serve their own local manufacturing operations.


These early efforts at R&D were prompted by the need to "localize" products. Many MNCs have manufacturing operations in India - driven partly by India's economic policies, which require local manufacture, and also by the fact that the Indian market is large enough to warrant local operations. On-site R&D to tweak products to local needs was the next logical step. Companies like Hindustan Lever, for example, a subsidiary of Unilever, established a research center to cater to local needs. In the early 1990s, some MNCs started setting up operations in India to cater to international markets. This trend has accelerated in the last five years.


The next logical question was, if you can insource, why not outsource? Research outsourcing, in principle, is not very different from any other business process outsourcing. A Frost and Sullivan study on Indian R&D points out that there are various models of contract research -- joint research, collaborative research and complete outsourcing. Joint research is when more than one entity works together; collaborative research is when a group of scientists work together representing diverse disciplines; complete outsourcing is when one entity undertakes research on behalf of another.


Encouraged by India's success in the "generic transaction processing" model of outsourcing, local Indian companies are now eyeing opportunities in research outsourcing. Some technology companies have already built sizeable contract research businesses; and in engineering, pharmaceuticals and biotech, there are signs of an outsourcing model emerging. While the market's overall size is still small, signs are that growth could explode in the future.


Advantage in India


Why outsource R&D to companies in India? More importantly, why outsource R&D at all? R&D, it appears, may no longer be the sacred cow that it once was, something companies would never share with other companies.


As Henry Chesbrough, author of Open Innovation: The New Imperative for Creating and Profiting from Technology, points out, companies increasingly are rethinking the ways in which they generate ideas and bring them to market. He contrasts Cisco with Lucent. Cisco has consistently sought to harness ideas from outside, while Lucent has tried to follow its age-old, self-reliant, from-the-ground-up research philosophy. Cisco -- with fewer resources -- has kept up with or surpassed competitors on innovation. There is a lesson in these kinds of examples, writes Chesbrough. Closed innovation may not be the right way any more.


The other big spender on R&D, the life sciences sector, is beginning to outsource as well. A UBS Warburg study found that of the $30 billion that the U.S. pharmaceutical industry invested in R&D in 2001, around 20% to 25% was spent on outsourcing. Big pharmaceutical companies in the U.S. and Europe are under immense pressure to cut R&D costs, which have ballooned to almost unmanageable levels. The Tufts Center for the Study of Drug Development estimated the cost of successfully getting a drug to market was around US$897 million in 2003. There is a growing feeling that this needs to be brought down.


An Economist Intelligence Unit (EIU) global survey in September 2004 found that companies are redistributing their product innovation setup across the globe. Some 70% of companies surveyed employed R&D people overseas. Fifty-two percent reported that increasing overseas R&D spending was a priority. Among likely centers for overseas investment, 39% of respondents cited China, 29% the U.S., followed by India at 28%. India is likely to be a large recipient of global R&D expenditures going forward. The EIU calls India an R&D "hotspot."


While much of the R&D coming India's way may remain "insourced", some of the investment is likely to be towards contract research. India already has a thriving business process outsourcing industry; this may help sell research process outsourcing.


Why does India rank close to China and the U.S. in terms attractiveness as an R&D center? EIU defines an R&D hotspot as: a place where companies can tap into existing networks of scientific and technical expertise; which has good links to academic research facilities; and provides an environment where innovation is supported and easy to commercialize. India has many of these qualities.


The EIU document notes, "India became a software hub in the 1990s. As a large Asian country where English is spoken, wages are modest and Western education is available, India has quickly grown as an R&D powerhouse." The cost advantage of having a large pool of inexpensive, English-speaking workers is a big part of India's attractiveness. The possible cost savings figures are quite arresting. For example, in the pharmaceutical sector, where the high cost of R&D is becoming a big issue in the west, companies claim India can offer substantial cost benefits.


"Getting research done from India would offer 30% to 50% cost savings," says Dr Swati Piramal, director of Nicholas Piramal, a leading Indian pharmaceutical company. A spokesperson for Ranbaxy, India's largest pharma company, is even more optimistic. "Cost of innovation in India is 1/5th or 1/7th of what it will be in Europe," he says.


The available talent is abundant and - at least some of it - of good quality. India has fairly decent educational institutes like the Indian Institutes of Technology, the Indian Institutes of Science, and regional engineering colleges. Also, there is a large network of government research labs. "India is richly endowed with research depth," says KV Subramaniam, senior executive vice president of Reliance Life Sciences. "There are [also] many Indian scientists working abroad willing to come to India to lead research teams."


Emerging Hotspots


Bala Manian, a consultant, believes that India can offer considerable skills and expertise in the area of life sciences: biotechnology and pharmaceuticals. Engineering, telecom-related areas like VLSI (very large scale integration chips), and embedded technologies are other potential areas of growth.


It is the technology sector -- IT and telecom -- which has the best results to show in outsourced R&D. India's leading technology companies -- Tata Consultancy Services, Wipro, Infosys, HCL Technologies -- and emerging companies like Ittiam and Sasken are beginning to build sustainable contract R&D businesses. Wipro, India's second-largest IT company, claims to be the largest "true" third-party R&D services provider in the world, with revenues of more than $270 million. A company document says Wipro works with nine of the top ten telecom equipment providers and with leading technology product companies.


Within the technology sector, semiconductor design or design of chips is an area where multinationals came to India a long time ago, and it remains a growth area for R&D outsourcing. India has 70 to 100 VLSI companies, with more than 5,000 engineers providing semiconductor design services according to C. P. Ravi Kumar, secretary, VLSI Society of India. Many big semiconductor companies, including Texas Instruments, National Semiconductors, Intel, Analog Devices, ST Microelectronics, Cadence, Synopsys, and Motorola have established research facilities in India, some of them in the early 1990s.


Indian IT companies such as Wipro and TCS have considerable numbers of engineers working in the areas of VLSI design and embedded systems. Applied Materials is the world's largest supplier of products and services to the global semiconductor industry. To support customers around the world, Applied Materials employs approximately 13,000 people. Interestingly, Applied Materials operates out of Bangalore, India as well.


While VLSI involves only the design of chips, the scope of embedded systems is much broader, involving chip design, software, signal processing and operating systems. Ittiam Systems, established in 2001, is actively engaged in developing digital signal processing based products. All of them are available as off the shelf components. Its research focus is in Wireline, Wireless, Speech and Audio systems. Ittiam systems counts Sony, Phillips, Nokia, Texas Instruments, Intel, Silicon Labs and ST Microelectronics among its customers. Sasken is an embedded telecom solutions company that helps businesses across the telecom value chain accelerate product development life cycles. Some of the global Fortune 500 customers like Nortel, Nokia, Motorola etc. are Sasken customers.


Indian companies have recently focused a lot on R&D in the pharmaceutical sector. Many companies now spend 8% or more of revenues on research. Many pharma companies are now actively targeting international companies for contract research and manufacturing (CRAM) deals. Medicinal chemistry, custom synthesis, and clinical studies are some areas in which Indian firms are pitching and winning new business. While current results from outsourced R&D in the pharma sector may be less than what technology companies have registered, this sector is poised for growth.


Ranbaxy, India's largest pharmaceutical company, has two ongoing collaborative research programs. An anti-malarial molecule, Rbx 11160, is being developed in collaboration with Medicines for Malaria Venture (MMV), Geneva. A collaborative research program with GlaxoSmithKline plc (GSK) is also doing well. The Nicholas Piramal company runs a clinical research division and also does contract synthesis. This involves lead optimization of compounds prepared in very minute amounts. Other large companies like Zydus Cadilla and Dr Reddy's all have either active programs or intentions in the area of CRAMs.


CRAMs are a vital area for some medium-sized pharma companies. For example, Shasun Chemicals and Drugs, an $80 million company, calls itself an "integrated research and manufacturing solutions provider." Divi's Laboratories, a similar sized pharmaceutical company, has been associated with innovative multinational companies for contract research and custom synthesis.


Besides these pharma firms, which are also into selling formulations and bulk drugs, there are specialized contract research organizations (CROs) in the pharma sector, which do just that-outsourced research. Some are international CROs, like Quintiles which came to India in 1997. It has facilities in Mumbai, Ahmedabad and Bangalore, with close to 900 people. It expects to double the number of workers in India by 2010.


Bullish on Biotech

Apart from pharmaceutical companies, a great deal of opportunity exists for biotech companies. Most biotech companies are built on a contract or collaborative research model. Syngene, a subsidiary of India's top biotech company Biocon, carries out contract research for drug discovery. A key customer for Syngene is Novartis, with which it has a three-year agreement to carry out research projects to support new drug discovery and development, primarily in the early stages and involving small molecules in the areas of oncology and cardiovascular disease.


Avesthagen, a recent startup headed by Viloo Morawala Patel, is trying to do something similar. Avesthagen calls itself an RPO - a research process outsourcing company. Its model is collaborative; it wants to share the intellectual property rights. Avesthagen is into agro research and medical research of plants and this covers the entire gamut of biotechnology - genomics, proteomics, sequencing, and metabolics.


Biocon's wholly owned subsidiary, Clingene, carries out clinical research. This could involve determining bioavailability and bio-equivalence of drug substitutes or the effectiveness of a new drug, as well as patient recruitment, preparing clinical databases, conducting clinical trials and so on. Estimates of clinical research opportunities for India run as high as US$1 billion by 2008.


Reliance Life Sciences does contract clinical research and chemistry and biology research. Reliance has 60 people working in contract clinical research services. Reliance is into research in biology and chemistry related contract services.


Engineering services are another outsourcing hotspot. Chemtex, for example, established in 1947 by ex-Dupont employees as Rayon Consultants and now a Mitsubishi subsidiary, has been providing engineering services (designing chemical plants) outside of India for the past three decades. B. B. Darak, VP-engineering, concedes that there is sometimes apprehension about quality and timeliness of delivery of engineering services out of India.


ICB, another engineering services company in the area of designing and commissioning plants, has increased its head count from 150 to 800 since it was taken over in 1996 by Technimont of Italy, with most work being done for its principal in Italy. Vignani is an engineering company that is trying to move up the chain, offering value engineering by adding innovation.


India's IT companies may be looking at targeting the engineering services area as well. For instance TCS is discussing a research initiative with an automotive major. The R&D work will be carried out at the Pune-based Tata Research Development and Design Centre. The U.S.-based software firm Amdocs is also planning to set up a high-end research and development center in Pune and plans to employ 400 people which could increase to 1,000 soon for doing high-end work. Infosys Technologies is planning to set up a research and development facility in Pune.


Indian academic institutions are looking at tapping global research opportunities, some of this for academic institutions abroad. While industrial research often has immediate application, research at academic institutions usually takes a long-term view, often involving change in technology rather than just the use of it, says Professor Chandorkar, IIT Bombay. Professor Khilar, dean of research & development, IIT Bombay, says that around 50 to 70 members of the faculty are involved in research for foreign organizations and universities. Areas include nanotechnology, computer science, and various avenues of molecular biology, structural engineering and product design. Apart from key universities, big corporations such as Boeing, Honeywell, Microsoft, Sun, Hitachi, Intel, UNDP, and IBM outsource research to IIT.


Has the critical mass been reached for India to become an R&D hub? It certainly appears that the country is close, if not already there.