If technology, finance and marketing are the three pillars on which products rest, Indians mostly never had the vision that all of them might be required to build a superstructure. That spurned off many problems, begetting the anecdote of a country that was the 'graveyard of innovative pilots'; a place where most product companies never survived beyond their first birthday. Hopefully, this is now passé.

Dataquest estimates that there are at least 75 companies that seem to have endured birth pangs with a fair degree of conviction over the last five years. Most of them are still small; very small, with serious growth issues. But the good thing is, product firms have started focusing a lot more on correcting its business models, focus areas, putting money in the right places, investing in the distribution system, fuelling demand by making software affordable and available; reaching out to people and places through inorganic corridors.

Mergers and acquisitions, as in the services space, have also been the real highlight for the product gang in FY 2006. Those who dared bought significant toplines and customers, filling in gaps in its product anthology. i-flex, TCS, Cranes and Subex led the way with the top 10 companies now contributing Rs 2,329 crore, an increase of 25% over FY 2004-05.

There are other revelations none the less. TCS came back into contention with a 30% growth, but also because of its buys. Tally did not participate in this year's survey, but estimates state that it dropped 40% to plummet to number seven from its second position in FY 2005. I-flex's revenue stood at Rs 757 crore. Nucleus grew by 119% to clock revenue of Rs 57 crore and yet, lost out of the Top 10 race by a good Rs 17 crore. 3i Infotech moved up the ladder, as it joined Subex, Infosys and Flextornics to harvest growth rates upwards of 50%.

The local ecosystem continues to remain small, judging by the performance of most companies who still remain heavily skewed towards exports. Generic piracy, which for Tally has come down by 20%, could be one problem. Second could be the fact that Indians have not yet got into the habit of buying software, especially in the consumer segment. But still, lot many of the present lot of product companies did begin with an Indian focus, where there are less marketing challenges than abroad and where some factors, mostly cultural, are in one's favor. 

Infosys, which had more domestic revenues than exports in FY 2005 (128 vs 85), underwent strategic shifts as it focused more on international big ticket customers in FY 2006, thus effecting a reversal of the mix: exports now contribute Rs 218 crore; domestic just Rs 138 crore. Subex's domestic pie halved, so did Cranes'. TCS, with roll outs of its banking product BANCS in over 8000 State Bank of India branches, in what was the world's largest core banking implementation, wins in Allahabad Bank, Bank of Maharashtra, Citibank and ABN Amro, seemed to be the only player, besides Tally, to retain a strong local bias.

Many product companies just missed the Top 10 list. Many grew significantly over the last one year. These include Calsoft (Rs 62 crore), Nucleus (Rs 57 crore), Infrasoft (Rs 25 crore), Newgen (Rs 23 crore), SP Software (Rs 22 crore), Solix (Rs 17 crore), Kale (Rs 16 crore) and Compulink (Rs 10 crore).

Banking Brothers
If i-flex and Infosys showed the way to banking glory in previous years, TCS can now be expected to give the precursors a run with its acquisition of Sydney-based core banking solution vendor FNS in October for Rs 110 crore. Strategically, the acquisition has helped TCS in its goal to be a complete solutions provider for the banking industry. As of today, 8764 branches are powered by FNS BANCS. In addition, TCS has a total branch automation solution, ISBS, which currently has 775 branches running on it.

i-flex, still the undisputed banking product sovereign, is therefore taking notice. To retain its numero uno position, it went on an aggressive acquisition mode, and along with the Oracle arm (the company is front ending some of its deals), will now be an even more interesting company to watch.

During the year, i-flex acquired an operational risk tool suite called ORTOS, a product owned by Capco, an IT consulting firm based in Europe. Together with ORTOS and Reveleus' Risk Analytics, the firm now offers a comprehensive enterprise risk management suite. Reveleus helps banks comply with Basel II requirements. The company already had credit risk and market risk. All the three are essential ingredients of Basel II framework and i-Flex is one of the very few companies that is addressing this comprehensively. In the last quarter, it signed three top tier banks in North America for Reveleus and also crossed 600 customers serviced in 123 countries-a tremendous achievement for an Indian products company.

Secondly, the company has shifted from tier two and three banks to the top tier ones-16 of the top Fortune 50 banks are now its customers. In FY 2006, it added two Fortune 500 and five Fortune Global 500 clients. Wells Fargo and Wachovia are amongst these.

On an average, i-flex is now signing 12 to 14 new customers every quarter, 40% more than what Infy's Finacle does. But even as it closes twice as many deals, i-flex is growing much lesser than Infy. In the last three years, Finacle has grown at CAGR of 66%. During the same period, i-flex, in its product business, grew 24%. But it may not be compromising on the pricing front. That has remained stable and has not moved either way remarkably for the company. Most of its projects are long term, and it signed 36 new banks last year. The impact of these usually comes in different quarters as it delivers and completes the projects. i-flex now has $65 mn worth of license fee in its tank. In the last two-three years, predominantly one-third of the wins have been coming from Europe, which are typically multi-country deployment with a huge cross sell potential-its products revenue approximately increased by around 90% in Europe and by about 35% in the US.

Infosys' strategy of primarily focusing on large banks instead of the footprint strategy, where one goes in for large number of small wins, has paid off as it grew 67%. Out of the 16 deals it closed last year, 8 were in APAC, 7 in EMEA, one in Latin America. Europe, like in i-flex's case, also saw a lot of growth. From a pricing point of view, it was a good year. Infy's deal sizes increased almost four times as compared to FY 2005. In the commodity market (SME) though, things are getting tougher and price realizations are falling. But the expectation is, this is a 10-year wave and it is just the beginning. The current situation being compared to the ERP market of late eighties or the early nineties.

Investments in the Finacle suite continue ($20 mn in the last two years) with efforts currently on in terms of moving the product to a services oriented architecture, adding a lot of functionality for different markets, engaging consultants to benchmark the products amongst a host of other initiatives.

It will be some fight this year in the core banking arena, as TCS makes further inroads into the exports market and Oracle helps i-flex penetrate the conservative North American geography. Not to forget Infy, who already has tremendous service relationships here, once again in the BFSI space.

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