New interest in software products

THE 2005 STORY

Sasken, Ittiam, Pramati, Subex, Tejas Networks and the like are a select breed of Indian companies infusing a whiff of newness in a space dominated by software and BPO services.

The Indian software industry is now waking up to the potential of software product business. This is manifest in the number of such businesses being set up. The heightened activity being witnessed now, coupled with the unique advantages for Indian software product companies, will ensure the success of a large number in the coming years, feel industry watchers.

Over the years Indian companies have made a foray into software product development but have been able to capture only a meagre 0.2 per cent of the $180 billion global market for products. Now, as the Indian IT industry matures and there emerges the need to look at innovations to sustain high margin growth, the need to look at product development space more aggressively is being realised.

According to a recent study conducted jointly by IIM-Bangalore and Nasscom, revenue potential of India's software products is as high as $7 billion by 2010, a near 10-fold rise from current levels. Export of software products, including development services, accounted for $710 million FY 2004, up from $560 million in FY 2003.

Said Subash Menon, CEO, Subex Systems: "I believe India will have several globally successful software product companies in the next four-five years. The ecosystem required to make India successful in the software product space is just beginning to happen. Investment needs to be promoted by changing the regulatory framework and offering attractive incentives. Research grants should be provided to promote innovation."

Strong domain knowledge and global exposure provides a good stepping stone for Indian IT companies to look at developing software products. This was not being done till now since Indian companies primarily focussed on software services due to better risk-reward metrics.

Said a spokesperson for Nasscom, which is toiling hard to bring out product innovations in India: "The global software product market unleashes a multitude of opportunities to embark on a new journey with a reinvigorated sense of purpose to be bellweather of the industry. The Indian software and services industry's strong value proposition, low development costs, large development skill pool, mature quality control systems, proven offshore model and growing domain skills continue to hold India in good stead in the product development space."

In products, opportunities are available to Indian players in custom applications, embedded software, development and delivery of specialised components, offshore product development, product acquisition and enhancement and development of shrink-wrapped products.

The key drivers for growth of the market has been the changing business environment, competitive pressures and declining margins and profitability of western software companies. This has led to the emergence of India as a destination for R&D outsourcing and product development.

"Western companies are now seeing the benefits of having their R&D done out of India. The year 2005 saw the rise of offshore product development (OPD) players due to the need for more specialised skills across the product development lifecycle. The experience and expertise in running operations and processes are on a par with the rigours of commercial software product release across the world," said Ajay Kela, presdient, Symphony Services India.

The outlook for 2006 in the OPD space is also expected to be bright. Said Gordon Brooks, president and CEO Symphony Services, "In 2006, US and European software stocks will continue to increasingly be evaluated based on profit and growth not the 'new, new thing'."

Software companies must fully embrace the transformational potential of product development lifecycle outsourcing and recapture services revenue at healthy margins.

"Service providers leveraging global talent and economies will be recognised as full collaborative R&D partners on the world stage and India will continue to be the preferred destination for outsourcing product R&D," he added.

However, the funding issues remain the Achilles' heel of this sector. Said Asif Khader, co-founder, Cranes Software: "Funding has been the largest constraint to growth for the Indian software products firms. Given the higher capital requirement in the segment vis-a-vis services, several Indian software products companies have been forced to look inward to finance their growth."

He feels this should now change, given the industrywide initiative to enhance the global visibility of the Indian software products sector. Increased availability of capital is expected to enable the sector to realise its immense potential and gain market share to deliver significant growth over the next few years."