Outsourced product development firms see no impact of rising rupee

Rupee appreciation and a possible slowdown of the US economy, is hardly having an impact on the growth of the outsourced product development (OPD) firms in India. They provide product engineering services to global software firms.

Apart from hedging to negate the impact of Re-appreciation on their margins, most OPD firms are adopting multiple ways like increasing the billing rates and going in for bigger customers to offset the impact of Rupee appreciation. In terms of business from the US, OPD companies are witnessing a strong rise in the number of new customers.

"On an average, we are adding 4-5 customers every quarter, and now even relatively larger ones. In many cases, our clients are open to any increase in costs, considering the problems we are facing due to the Rupee-rise. Customers are also approaching us for certain specialised areas like product globalisation, product migration and test automation," said Gowri Shankar Subramanian, CEO of Chennai-based Aspire Systems.

Pune-headquartered Persistent Systems, which derives about 85 per cent of its revenues from the US, says the company was focusing on getting new accounts which can fetch larger revenues for the company, apart from raising their billing rates of the existing accounts.

"For the coming years, we would like to focus more on growth, both in existing accounts and add new accounts with larger deal values. We are also looking at rate revisions with all our older clients," said Anand Deshpande, CMD, Persistent Systems.

Besides, the company would also be focusing on de-risking the business by reaching out more to markets in Europe and APAC. "We would also be bidding for larger domestic deals, which include defence tenders," added Deshpande.

The focus is towards securing larger and quality clients, said analysts, and this will provide OPD firms with a platform to earn steady revenues in the days to come.

Aztecsoft, which provides outsourced product development services to global firms, has also announced that it is going in for fewer but higher quality clients, who would offer higher quality revenue to the company for a steady growth, on a quarter-on-quarter basis.

"The challenge in product engineering is that when there are smaller clients, they grow initially and then their growth slows down and in most cases they die, by definition. Moving ahead, you will see a smaller number of clients' addition, but higher quality clients," said Samir Bodas, CEO, Aztecsoft.

Aztecsoft is facing a slowdown during the last few quarters due to the transfer of an offshore delivery centre to Dendrite, one of its key clients. Aztecsoft has over 87 active clients today, and the top 10 clients contribute to about 85 per cent to the company's total revenue.

Unlike the enterprise IT, the product development space globally is quite lucrative in many sense. Industry sources say that even a product company of the size of $50 million in revenue, on an average spends $10 million on R&D and prefer to outsource 30 per cent of the total works to offshore locations.

However, in enterprise IT, the companies spend about 2-3 per cent of their total revenue on IT, over half of which goes into infrastructure.

"If a billion dollar revenue company in enterprise IT space, spends $20-40 million on IT, just about $4-6 million of that goes to development. Presuming that they outsource about 20-40 per cent of their product development, a billion dollar company may only be a $2 million per year customer, whereas a $50 million software product company can be a $3 million per year customer," said Pradeep Singh, Founder, CEO of Aditi Technologies.

According to Singh, unlike enterprise IT, there is often a chemistry mismatch as a billion dollar company in revenue terms would like to outsource to a billion dollar vendor, whereas in the product space, this is just the reverse.

"Software product companies usually do not want to do business with vendors who are very large. Consequently, what we are seeing is that this category is just exploding with newer clients," he adds.

Most OPD firms who have large operations in India are busy expanding their base in India, more than onsite locations. Aztecsoft has already announced opening a new SEZ facility in Bangalore which can accommodate about 2,000 people. The new facility would be in addition to the 1,200 seats in Bangalore and the recently-started 2,000-seat campus in Hinjewadi, Pune.

Aditi Technologies has also announced doubling its offshore headcount to 1,000 by March next year. This will take the company's offshore onsite ration to 1:3 as against 1:2 earlier.

"This is happening because of our ability to grow the confidence here, and because of better understanding with our customers who are ready to allow us to take works offshore," concludes Singh.