From piece-work to co-creation

While OPD is still in its infancy, as indicated by the share of R&D spend that the big product companies are allocating to the partner ecosystem, OPD players are reinventing themselves more as co-creators of a product rather than as a mere offshore destination for product development. By Venkatesh Ganesh

According to NASSCOM estimates, the Outsourced Product Development (OPD) industry in India grew by 30% to reach $8 billion in 2010. Another report by Nasscom and Booz Allen Hamilton reveals that the outsourced engineering and design segment is set to touch $40 billion by 2020.

Also, small and medium ISVs are emerging as a huge market in traditionally untapped geographies and are one of the key growth drivers for OPD vendors. The economic rationale of OPD is plain—cost arbitrage. With costs increasing in-house for product companies, the best alternative has been to outsource a huge chunk of design to other companies. According to various estimates, OPD work when outsourced, reduces costs in the range of 60-75%.

Changing nature of work

According to the OPD players, the nature of work undertaken by them has changed from what it used to be. “When we started out, ISVs would outsource associated work such as performance benchmarking or technical documentation. Now, they are outsourcing full product lifecycle offerings,” said Nitin Kulkarni, COO, Persistent Systems. Sumonta Mazumder, General Manager – Marketing & Business Development, Product Engineering Services, Wipro Technologies, agreed, “As one of the early entrants in outsourced product development, Wipro has spearheaded the evolution of the outsourced product development landscape, from maintenance projects to collaborative innovation projects. Today, we participate in formulating a shared product vision with many of our customers.”

Geometric Ltd., where the Godrej group holds a stake, has been one of the earlier players in this market. It began offering OPD services to ISVs in the engineering applications (PLM/ CAD/ CAM/ CAE) domain during the early 1990s. According to Nitin Tappe, Vice President and Head, Software Services, Geometric, a lot of the early work that the company did was on existing products where its technical expertise was leveraged to solve complex problems or build new modules and features or to build integration systems with complementing applications.

“The work that we have undertaken in OPD over the last two years reflects the current trends in this sector. We have seen more work coming to us for turnkey development of solutions and products that address the changing user patterns for engineering software. We will be working on developing new age or next generation software solutions and products with well-defined roadmaps over the next few years,” he added.

The new solutions have to be developed keeping in mind the preferences of today’s users including Web 2.0, social application-like interfaces, 3D visualization and advanced graphics performance.

“In the last two years, Symphony has evolved the model, taking on projects which involve complete responsibility for product releases from design to delivery in a T&M or fixed priced mode. We have also undertaken complete responsibility for the QA of certain products in a result-oriented model whereby we provide services against agreed outcomes such as ‘reduction of test cycle’ and ‘reduction of post release defects’,” said Madhusudhan Reddy, Senior Vice President & GM, Enterprise Applications and Technology and Sunil Gupta, Senior Vice President & Head of Service Lines, Symphony Services. The company undertook work from its clients to test devices on all variants of Vista. This was later expanded to encompass Windows XP and 2000.

This kind of work lends a much needed fillip to the OPD sector as a whole and enables companies to take complete ownership of feature sets and, in many cases, the entire product, including releases going directly to the end customers of ISV clients. Symphony has divided its service lines into commercial software and embedded services.

"Increasingly, ISVs, while reengineering their products, are modifying the architecture of the new avatar of that product to suit their market needs and are partnering with OPD companies to deliver it differently" Aniruddha Banerjee Head - Technology Services Business, Sonata Software

According to Aniruddha Banerjee, Head - Technology Services Business, Sonata Software, “Increasingly, ISVs, while reengineering their products, are modifying the architecture of the new avatar of that product to suit their market needs and are partnering with OPD companies to deliver it differently.”

Some players are trying to help companies architect their products in the initial stages of development. “We have been working closely with Web 2.0 companies, who have defined a business model but are looking for scalable and efficient architecture and designs to implement the same,” said Chetan Kohli, VP - Sales - APAC, GlobalLogic India.

Analysts concur. “Earlier, Indian companies were getting non-glamorous parts of OPD such as testing, development or Quality Analysis (QA) work,” averred Karthik Ananth, Director-Market Expansion, Zinnov Management Consulting.

"Indian companies were getting non-glamorous parts of OPD such as testing, development or QA work. Non linear models such as testing as a service, QA as a service etc. will start to emerge" Karthik Ananth Director-Market Expansion, Zinnov Management Consulting

Sumeeta Misra, AM Research, eProbe Research, agreed, “Different kinds of products are being developed. Device drivers for Windows XP, Vista and 7, mobile application development, applications such as hotel management, core banking, SCM, CRM, ERP, HR Solutions, healthcare management solutions, e-commerce and e-business solutions, Intranet and Extranet solutions are a few that are now being developed in India.”

Work has been going on in technologies like .Net, Java and OSS platforms with greater emphasis on RIA, SaaS and mobile applications.

“Keeping up with the change of pace in the last two years has been challenging, especially with new paradigms like Cloud and mobile computing taking center stage,” said Prashant Kr. Singh, Development Manager, Q3 Technologies.

Moving towards a co-creator model

The last two years have seen a convergence of sorts in technology from automotive, consumer electronics and mobile devices to medical gadgets. This has come in handy for Indian companies looking at this as an opportunity to leverage their domain expertise in these areas. “In the automotive in-vehicle entertainment sector, we have helped automotive OEMs integrate smartphone capabilities with in-dash infotainment systems and our telehealth solution is helping medical device companies integrate multiple patient monitoring devices like blood pressure monitors and oxygen meters to upload the pathological details for real-time patient monitoring,” said Mazumder.

Other vertical-centric capabilities developed by Wipro include connected TV, smart energy solutions, plant engineering and customized Cloud engineering solutions.

"Our customers expect us to provide inputs for defining products and it is a change from the earlier days when we only had to understand the customer’s specifications and provide technical solutions" Nitin Tappe Vice President and Head, Software Services, Geometric

Tappe added, “Our customers expect us to provide inputs for defining products and this is a change from the earlier days when we only had to understand the customer’s specifications and provide technical solutions.”

This begs the question as to whether product companies, either behemoths or startups, are looking at OPD companies as extended R&D outfits. According to Mazumder, product companies are demanding vertical solutions and they want the partner to front-end collaborate with the ecosystem players in order to resolve bottlenecks in product engineering. Therefore, a product engineering partner needs to build a collaborative infrastructure and ecosystem through a network of partnerships and alliances.

Banerjee agreed saying, “Product companies talk to us about process consultancy, best practices and there is an increasing delegation of product design and management to OPD vendors.”

Due to this, onsite to offshore ratios are leaning heavily towards offshore, so that the vendors can improve product, process and cost efficiencies, giving greater headroom to driving down costs, he added.

Another interesting change is the adoption of agile software development methodology in new engagements. “Our customers want to incrementally see progress and get feedback from their key users. There is also a wave of technological change across the domains that we focus upon, which means that a significant part of our work is to provide OPD services in these new technologies whether they are from Microsoft or the application platforms from major PLM ISVs,” said Tappe.

According to Kulkarni, agile and rich media technologies are increasingly asked for by customers to enable quicker product upgrades, on-the-fly.

Misra concurred and added that constantly changing business requirements and corporate consolidation required ISVs to be on their feet.

“An increasing emphasis on collaboration and social media is necessitating the adoption of newer technology paradigms,” said Misra.

Another trend that is seeing some traction is that of outcome-based pricing. According to Kulkarni, clients are increasingly preferring this mode of payment and the company gets paid based on the performance of the product in the marketplace. “Non linear models such as testing as a service, QA as a service etc. will start to emerge in the industry,” opined Ananth.

The impact of the Cloud

Cloud computing and virtualization are key drivers for the growth of engineering R&D spend. Industry observers feel that these technologies are expected to continue to grow in importance and are not just a passing fad. “Consumer products companies could be drawn to the Cloud for its ability to expedite service delivery and increase service and infrastructure availability while creating flexibility that allows services to be expanded or contracted as demand changes,” said Mazumder.

ISVs are spending a significant percentage of their R&D budgets on getting their product Cloud-enabled. Microsoft, recently said that it would spend 90% of its R&D budget on the Cloud.

Reddy and Gupta averred that the Cloud was slated to remain one of the hottest technology trends for the next two to three years.

Companies in the OPD space are handling this trend differently. Most are building capabilities in one or more of the top three or four Cloud technologies such as Amazon, Azure, Google Apps Engine and Salesforce.com in order to migrate on-premise software into the Cloud. This gives them quick readiness to address the demands of ISVs.

However, others including Symphony have taken an approach to build consulting and assessment frameworks that work closely with ISVs to understand their business requirements, technical challenges and the risks associated with the Cloud approach and then define a roadmap and strategy based on the outcome of this assessment.

The challenge for OPD companies is to leverage and provide value additions in product engineering services on the Cloud. “All of this requires the ecosystem to retool and retrain their staff in new engineering paradigms across the lifecycle of a product from development and testing to maintenance and support,” said Kulkarni.

Cloud computing has changed the scenario for OPD. Earlier software licenses were sold. “Now software will be sold as a service and the emergence of Cloud applications will have a major implication on the way that OPD players work,” said Kohli. Industry watchers opined that the approach towards application development was bound to change, which would require a higher and more integrated focus on consulting resources to solve software problems. Along with a lot of focus on consulting, Cloud computing is expected to foster the development of applications, which earlier seemed to be impractical. Hence the demand for workforce that is especially skilled on the Cloud platform was bound to increase, felt Kohli. GlobalLogic has started investing in this segment and it is developing the existing workforce to meet the challenges posed by the Cloud.

In Banerjee’s view, there was no tussle between traditional products and Cloud-based products due to the fact that the Cloud extended the reach of the ISV, complementing its existing market reach and the way that a product functionality is delivered to the end-customer.

“To handle this new paradigm of delivery, ISVs are gearing up to provide a rainbow of non-traditional services to remote clients,” he added.

However, others are yet to be convinced about the impact of the Cloud. “While we have seen good progress in Cloud adoption for enterprise applications that are transaction heavy and with limited risks for IP pilferage, the Cloud has not really driven the business for engineering and manufacturing applications,” said Tappe. In its initial proof of concept and pilots, Geometric put test applications on the Cloud like its Babel3D, which is a Cloud-based online 3D file translation service but the progress was restricted due the requirements for graphics processing, visualization of heavy data files and complex algorithmic processing, the performance of which gets affected in the Cloud.

“The challenge for OPD comes in offering QA as a service or testing as a service effectively over an extended period of time,” said Ananth.

However, OPD players insisted that with communication bandwidth improving and significant advances being made in hardware capabilities, the speed of Cloud adoption in engineering and manufacturing applications is bound to improve. Another huge concern area is around security. Since most of the applications that OPD players work on involve the end customer’s critical product and IP, the adoption of private Clouds seems to be the only way out. Software ISVs and service providers would have to enable the adoption of such private Clouds for end users, felt Tappe.

Misra has a different take on the Cloud’s impact. The dependency of larger MNCs to outsource their core product development to larger firms like Wipro, Infosys, HCL, TCS etc. would reduce because of the nature of the Cloud. Anybody, including a new ISV or a niche player, can do the development work using Web-based platforms, he asserted. The consensus amongst players is that both Cloud and traditional products will co-exist and that companies would be involved in product development for the Cloud as well as for specific solutions.

Important verticals

Telecom, automotive, medical devices, aerospace and defense and consumer electronics are some of the dominant verticals in the OPD space. “We are witnessing traction in some verticals like infrastructure and energy and seeing increasing demand for analytical services, embedded software and engineering design services,” said Mazumder.

Agreed Reddy and Gupta. “Retail, healthcare and energy are the vibrant verticals for us today and customers’ wallets are opening up to build new products in these areas.”

These segments also show greater momentum in adopting new technologies in Cloud computing and enterprise mobility in order to create global business models for enterprises and end users, they added.

Demand for enterprise mobility that factors in smart devices and Cloud infrastructure, is driving ISVs to refocus their R&D efforts in this direction. ISVs are looking to go beyond addressing one-time efforts to get products to be mobile and Cloud-enabled. “More importantly, they must also define how the PDLC itself will evolve within their engineering organizations,” felt Reddy and Gupta.

Another key sector that is driving and is set to drive future growth is that of government and public administration. “This vertical has been attracting greater investment in OPD with many national bodies outsourcing their application development and support to OPD companies,” said Kohli.

Apart from the above-mentioned sectors, Banerjee added that travel and hospitality and global supply chain management were hot areas that Sonata was focusing on.

Startups are also looking towards OPD companies to quicken their go-to-market strategy and these organizations typically lack the funds and time required to build a team. This was not the case when the recession hit developed markets towards late 2007. “When the recession started, startups almost froze their OPD spends. Now they are coming back for Cloud, mobility and collaboration technologies,” said Kulkarni.

Even if a startup spends its resources and time on building the first reference architecture or prototype, most struggle to source local bandwidth to build the complete product thereafter. An outsourced product development partner would ensure that the startup doesn’t miss the market window, pointed out Mazumder.

“We have also worked with a few startups to help them build the prototype applications that are needed to win the venture investment for full blown products,” said Tappe. Startups face difficulties in scaling up on software R&D, since VCs are constantly breathing down their neck for revenues. Hence, leveraging OPD could suit their requirements.

Symphony has many instances whereby a startup chose the company to be a part of its product building strategy. Kazeon and Mimosa are two companies where Symphony was engaged from the beginning and it did its bit in building products, which subsequently led to them being acquired by EMC and Iron Mountain respectively.

“While time-to-market is the biggest driver for them, they also want to stretch their dollars to the maximum. Also, startups look for ready-to-deploy domain expertise, product engineering processes expertise, ready-to-use tools and labs and a proven track record to take products from whiteboard to delivery,” said Reddy and Gupta.

In the present scenario, startups are clearly looking for OPD partners that can enable them to build their products entirely on the Cloud that are available on demand and offer flexibility. OPD providers that can bring this capability to startups stand to gain market share.

Startups are under pressure from investors, who are demanding development at a lower cost as well as higher efficiency. “This is primarily the reason as to why they are partnering with OPD vendors capable of offering specialized services. OPD vendors can provide startups with the knowledge and best practices, which cannot be developed with the help of the internal resources,” said Banerjee.

Due to the cost advantages, OPD is a lucrative option for a startup that is looking to launch a product into the market with limited budgets and funds.

According to Singh, there have been several instances of its customers in France, Holland and USA where startup companies have used Q3’s services in OPD.

What the future holds

Ananth pointed out that, in the future, the OPD market could end up being bifurcated into big product companies like EMC or Oracle working with big OPD companies like Wipro, TCS and HCL and smaller product companies working with players like Sonata, GlobalLogic, Symphony Software and others.

According to Mazumder, the future would see Indian product engineering service providers expand into new markets of Europe, Japan as well as emerging markets. “Product engineering service providers could co-invest with product companies in building domain or vertical expertise,” he added.

While ISVs have leveraged offshore captives and will continue to look for cost reduction opportunities through further geographic diversity, many of them are realizing that it is time to focus on reducing engineering costs and to arrest attrition by investing in more sophisticated tooling of the PDLC and also exploiting Cloud infrastructure. “However, this requires significant investments in terms of capital and retraining people. ISVs are going to be interested in outsourcing significant parts of the PDLC to OPD partners who can provide large parts as managed services on private or public Clouds. This trend will drive greater R&D spend with partners while reducing the overall R&D spend for ISVs,” said Reddy and Gupta.

OPD vendors who proactively invested on innovation would witness steady growth, asserted Banerjee.

“In the wake of upcoming technologies like cloud computing, the OPD industry is bound to undergo major consolidation in the years to come,” said Kohli.

Some OPD companies hinted strongly at consolidation, especially considering the current scenario and the after-effects of a recession.

OPD, especially offshoring, has been treated as a cost saving option for years. This can change provided that players step up to the plate.

venkatesh.ganesh@expressindia.com