Vendor Accent

The next big opportunity

Software Product Development is going to be the next big thing. By Arun Sundar

As per NASSCOM’s predictions, India’s software and services exports are expected to grow by 33 percent to more than $31 billion in the Indian fiscal year 2006-’07, benefiting from a boom in offshore outsourcing. The Indian software industry has grown from a mere US $ 150 million in 1991-92. No other Indian industry has performed so well against the global competition. It has rather been a dream run for this industry in which employment is likely to reach 1.6 million by March 31, up from 1.28 million in the previous year, according to Nasscom. A report released by McKinsey & Co. and Nasscom has forecast that the country’s outsourcing industry can grow at an annual rate of over 25 percent to generate export revenue of about $60 billion by 2010. This dream run has been facilitated by some top outsourcing companies like Tata Consultancy Services Ltd., Infosys Technologies Ltd and Wipro Ltd.

This industry has been immensely successful in the last four decades. An analysis and comparison of the top five drivers of the industry and the global players makes the picture clearer.

The top five players in the Indian IT Industry are Tata Consultancy Services Ltd, Infosys Technologies Ltd, Wipro Ltd, Satyam Computer Services and HCL Technologies. TCS, the largest Indian IT company which is into consulting, services and business-process outsourcing started its operations in the year 1968. TCS as a matter of fact is seven years older than even Microsoft (estd:1975) and nine years older than Oracle(estd:1977).Many of the top Indian companies commenced operations then like HCL(1976), WIPRO(1980), INFOSYS(1981). But there is a quantum difference now in terms of revenues and reach. The reasons for this has been the primary concentration of the Indian big houses on application software development and implementation unlike the above mentioned big corporations like Microsoft or Oracle. This paper analyses the reasons behind this, the current scenario of the Indian houses on these lines, capability, challenges and future.

There are a multitude of reasons why these Indian big houses did not move into product development. The India at the time of the early days of these companies was totally different from the India now and from the West then. Product development basically involves R&D and Investments. Innovation and R&D are investment intensive and involve a huge amount of risk. The IT corporate houses at the time were like any other industry risk averse as they could not afford to. Even companies like HCL which developed the first indigenous micro-computer at the same time as Apple and three years before IBM’s PC has not taken it much forward. There can be multiple reasons associated with this like absence of Venture capitalists, an absence of Industrial revolution phase which trigger innovations, unfavourable conditions for entrepreneurial risk-taking, lack of Government funding, lack of legacy in innovation. Things have changed. Indian companies have built the necessary knowledge and brand equity to go forward and get a major chunk of the software product development space.

Though many Indian companies are into product development like business accounting software by TCS, Flexcube by iFlex and Finacle by Infosys, Indian companies have less than a one percent share in the software product market. The reason for this being Indian companies primarily focusing on software services due to better risk-reward metrics. Over the last decade, there have been a few focused Indian product development companies, however due to limited market reach and low acceptability of a Made in India brand, the interest of Indian IT companies to venture into the product domain has

been fairly low. NASSCOM-McKinsey study estimates the product and technology services to grow to $8 to 11 billion by 2008. NASSCOM has formed a special Product forum that aims to catalyze and address various issues and concerns of companies operating or intending to operate in this segment. There are approximately 300 companies in this space.

The software product development space is indeed the most attractive space that Indian IT companies should be looking at next for long term sustenance of the high margin growth. It has its own set of challenges and risks that are to be accounted for including:

Greater Investment: The investment required for the market research, development and marketing of software products on a global scale are far higher than that in the application software development space. Microsoft invests close to 20 percent of its revenues on new product development which runs to billions of dollars. For the financial year ending 2005 Microsoft invested 16 percent of its total revenues which amounts to $6.18 billion.

Higher risk: Unlike in the Application software development space where the contract with the customer is executed before the development, product development banks completely on the success of the speculated market potential based on the market research that is done prior to the product development. The returns are not assured here. Moreover product development might take a lot more time and chances are that the industry requirements might change during that time period.

Greater complexity: Here the products are developed in a ‘one solution for all’ paradigm with limited amount of customization allowed. This makes it imperative for a thorough study of the requirements which results in a greater complexity of design.

Need for more branding: The brand of the product vendor is excessively important for the clients, especially considering the fact that the clients were never involved in the development phase of the product unlike in the case of Application software development. This makes it imperative for the companies to invest more in their branding.

Need for domain expertise: The domain expertise required for a product development in a particular vertical is very high as the product is expected to cater to the specific requirements of the vertical. This makes it imperative for the companies to invest more in getting more domain experts and building domain expertise.

Higher level of marketing: Marketing costs involved re also higher as the product has to be marketed to all the prospective clients who are generally the players in the industry for which the product is developed for.

In spite of all these risks and challenges the returns are tremendous in this area. The advantages include:

• Global opportunity: Most of the Application software development work done by the Indian IT companies is done for the US and UK corporate houses. Product development provides a global opportunity for the Indian IT companies to cater for all the players in the vertical irrespective of their location.
• Intellectual Property: The products that are developed are licensed and not sold. These products are the Intellectual property of the company that develops it.
• Value based pricing and higher returns: The pricing in the application software follows certain practices like LOC of number of man-hours. In the case of Products value-based pricing approaches can be followed which can drastically improve the returns based on the quality of the product and the value it adds to the customer.
• Sustainable advantage: The returns are sustainable as the licenses get renewed if the products are found good and even additional capabilities can be added based on the client’s requirements. In traditional Application development there is a chance that the enhancements are done by the in-house IT team or another company which does not happen here giving this a sustainable advantage.

The core requirements and business model required to develop software products significantly varies compared to the software services sector. Developing software products needs market research, domain and technical expertise, quality, marketing and commercialisation and support.

Product development can concentrate on two lines – one is the much generalised product space like Operating Systems and the other one more confined to verticals or industries. Indian IT companies should be looking at the second one as the first one requires more brand equity as well as marketing and commercialisation expenses.

Analysis of general market characteristics should lead to information about the market such as definition, size, trends, and market segmentation. This analysis is needed to help develop and maintain marketing strategies for product software and overall business strategies. Customer analysis is needed to predict behaviour and create demand forecasts for product software. It is also necessary in the development of new products to help select the most profitable choice. To analyse customers, aspects such as the current trends in the domain and expectations should be studied. An understanding of the broader environment where the product is going to be used is also imperative as integration issues can be a bottle neck in the buying decision by the customer. Besides basing behaviour on software only, customers also look at many other factors such as manuals, add-ons, and training courses to make purchase decisions. All of these factors need to be studied and understood before arriving at the decision on the product to be developed. This calls for sufficient global exposure and presence and massive investments in market research.

The global presence of Indian IT companies and the varied verticals to which they have been servicing can be made use of in identifying the right market and requirements of the same for a software product.

McKinsey argues that the approach of software product companies differs in two ways. First, these companies should have a higher level of market-oriented focus on customers, using market research and follow-up support to ensure that users will like and adopt a new product because they find that it meets their needs. Second, the companies sell to highly competitive markets, so they must keep their costs in line. This boils down to two things:

A very clear idea even about the most subtle requirements of the customers is imperative Cost can be an important differentiator The top Indian companies have presence in multiple countries and have been servicing these markets for quite long in varied verticals. This gives them a better idea of the current market requirements and where it is heading towards. For example the banking vertical is an area where the Indian IT companies have got immense number of clients. These clients have been serviced for quite long, with many of these clients having the same kind of operational requirements. This commonality in requirements can be identified by none other than the companies that cater to multiple clients like the Indian IT companies. This acts as an incentive for the foray into the product development space for the Indian IT companies. Moreover the very basic driver of offshoring which is the low cost of labour also helps in keeping the cost of the product lower than the other global counterparts.

Domain expertise

Domain expertise is one of the key requirements in the area of product development. Lack of domain expertise has been one of the worrying factors in the Application software development area for Indian companies in the early years. Now every big Indian IT companies give lot of thrust n hiring domain experts and have been pro-active in empowering them built more domain expertise through certifications and training. Many companies have been recruiting experts on different domains from India and training them on the same domain from a global perspective. As the industry reaches a maturity stage many Indian IT big houses are moving towards high end IT-Strategy consulting too with the help of these domain experts for foreign multi-nationals. This proven track record in domain expertise which has been built over time and exposure also comes in handy in the foray on the product development space by Indian IT cos.

Indian IT companies have been working across a spectrum of domains for the last four decades. BFSI, Telecom and Hi-Tech continue to account for approximately 60 percent of the pie. Other verticals such manufacturing, retail, transportation, healthcare and utilities are also growing rapidly.

Domain experts are required right from market analysis to development and commercialisation. The rising number of Business Analysts in India with domain expertise also provides an incentive in these lines. The Indian IT companies foraying into this space will have to invest more in domain expertise.

Technical Expertise

This is an area that makes India the preferred destination for any top IT company in the world. Many product development companies have started their operations in India where Indian IT professionals are working on their product development projects. Oracle and SAP set up product development subsidiaries in India way back, at a time when India headquartered enterprises were beginning to get noticed for outsourced IT services. Nearly all of SAP’s BW product development and much of NetWeaver resides in India. PeopleSoft has accelerated deployment of Research and Development (R&D) and support resources in India. Moreover there has been a trend where many product development companies in the West have outsourced their product development projects to Indian IT companies which cover all the activities in the product development lifecycle from the architecture to development, testing, and release of the product. Some companies, such as Kana, have taken an extreme view and have sent all R&D to India. Venture capitalists require that any startup have a plan and capability to deploy R&D in India. This makes it evident that technical expertise is not an issue for the Indian IT companies to foray into the product development space.

Quality

Unlike application software development one thing that captures more attention is to ensure that the product is error free. A small error in the product can be corrected in the case of Application Software development during the maintenance period, but in the case of software product the error affects all the customers that use the product. The product has to be built right the first time. This is a very precarious situation as the Indian brand in the software product space is yet to make it big.

Indian software companies hold the highest number of Level 4 and 5 Software Engineering Institute-Capability Maturity Model certifications. The quality processes that are already followed in the Application Software development and the process maturity attained over years come in handy.

Marketing and Commercialisation

The marketing and commercialization costs are higher in mass market products like Operating Systems which require enormous brand equity and financial muscle. Products for specific verticals or domains are the better option for the Indian players.

Continuous support

However good the product is, the customers look at the robustness of the company before purchasing licenses. They will be keen only on buying from a company which is stable and will be firm in the long run for maintaining versions, managing release management, supporting ever increasing feature requests, keeping up with technology and competition. Strong customer

support reaps dividends in the form of wider adoption of their products, increased customer satisfaction, and future repurchases or upgrades.

Strategies

The market for the software products can be segregated into the market for general products like Operating systems, specific products like Core Banking Software which are domain specific and the Indian domestic market.

Indian companies are definitely far from reaching a stage where it can come up with an Operating System like Windows or an Oracle Suite, if not technically financially. Currently the market for general products has only huge players like Microsoft and Oracle. No Indian company has yet forayed into this space. An entry to this space requires immense capital and a very high level of brand equity. One strategy for entry to this space could be collaboration among the top Indian players. This helps in garnering more capital and diverse capabilities to compete with the giants in the industry. This can give an added up level of brand equity too.

Many Indian companies as has been mentioned have forayed into the product space for specific domains. This should increase tremendously in the short run itself by capitalising on their strength on verticals Insurance. For example HIPAA compliance is a part of almost all insurance projects that are done by Indian companies. Developing a product for HIPAA compliance will be a good option. Identifying areas like these and coming up with a product could be a good strategy.

The domestic IT market taking off in a big way with revenues already touching $12 billion growing at a rate of 20 percent, opens up another great opportunity with a lesser level of expenditure. The Indian domestic IT market is the fastest growing IT market in the Asia Pacific. This can be a good opportunity for relatively small and medium IT companies. This is a market that needs to be expanded by bringing in more customers especially the Small and Medium Enterprises of the country. This might require an altogether new cost structure and business model. An alternate cost structure could be value-based costing or allowing long term instalments. Business models which allow fractional ownership of transaction processing products or Software as a Service (SAAS) can also be used here which can increase the customer base.

The author is currently a management student at Institute of Management Technology, Ghaziabad and he can be reached at arunsundar17@gmail.com