Indian Software Products: No More Standalone

In 2001-02, when software import was exempted from customs and
excise duty, it literally killed the home-grown software products market. Almost
30 companies disappeared in 2002-03. While the policies benefited the software
services industry, it killed the product story. Years down the line there hasnt
been much change in the policies or incentives, but the Made in India
story refused to die down.

In FY 07, the market took a leap in the direction of
accelerated growth as three companiesTCS, Polaris, and Subex Azureamong
the top 10 Indian software product vendorsmanaged over 100% product revenue
growth as compared to none among the last years top 10. The trend doesnt
stop here: many companies including i-flex, 3i Infotech, Cranes and, Tally
bettered their FY 06 performance. Sniffing new global and vertical market
opportunities, Indian software product players are not just learning to survive
but also thrive. Oracles acquisition of i-flex stands testimony to the global
acknowledgement of the Indian software product strength.

Product Landscape

The product development industry in India has the potential of generating
revenues to the tune of $7 bn and creating 1 mn jobs by 2010, according to a
report by IIM Bangalore. And, if industry experts are to be believed, this
estimation is not way off the mark.

The Indian software products landscape is dotted by three types
of players, who have different set of reasons behind getting into this area:
Larger services firms like TCS and Infosys see products as a means to satisfy
twin objectives of improving margins and getting deeper into a client
relationship. Services have by and large remained as a labor arbitrage game,
with revenues having a direct relationship with number of people. Though Indian
firms have improved the productivity and processes, products on the other hand
are IP-led and hence revenues are not a simple multiple of manpower cost. With
margins under pressure due to rising wages and a stronger rupee, products are
being looked at as an effective way of bettering margins.

The next tier and new players see products (or IP-led play, as
it is often called) as their differentiation from the labor-intensive services
game, which already has established big names. Companies like 3i Infotech and
Ramco are examples of this category.

Then there are the vertical-focused players who see products as
a very natural extension of their services, or vice versa. This segment accounts
for some of the most well-known product names such as i-flex, Polaris, and Subex
Azure.

In fact, most of the products meant for global markets are
largely vertical applications. That is natural to come out of a services
destination like India. Core banking ranks top among areas where Indian products
have been globally successful. In fact, in addition to well-known names like
Flexcube, Finacle, and IntellecT, products from smaller companies like Infrasoft
and CashTech have made their presence felt.

Of late, even telecom is seeing a slew of Indian products, led
by companies like Aricent, Tech Mahindra and SubexAzure. It is no surprise that
BFSI and telecom also happen to be two of the top three verticals for Indian
services firms.

The debate half a decade back about services versus products is
becoming increasingly irrelevant with most services companies getting into
products and vice versa.

The Warriors

There are around 300 product players in India that have applications,
technology products, and embedded software products. These players have reached
the stage where they can survive independently. The top 10 companies together
touched Rs 3,777 crore, up from Rs 2,330 crore in FY 06, a 62% growth.

TCS made a 133% jump as its revenues spiraled from Rs 257 crore
in FY 06 to Rs 600 in FY 07: the acquisition of Australian banking
platform vendor, Financial Network Services (FNS) seems to have worked. Central
Bank of India and Bank of Maharashtra were its key customer wins for the Core
Banking System in FY 07. It launched a strategic business unit, TCS Financial
Solutions, to consolidate its suite of financial products.

Another big name, Infosys, more or less maintained last years
growth momentum in the products business. From Rs 356 crore in FY 06 to Rs
538 crore in FY 07, the companys product business grew at 51%. Its core
banking product, Finacle registered a key win with a large nationalized bank in
India to power the banks front- and back-office operations. Finacle also won
new clients in the Middle East, Latin and North America.

But it is comeback kid Polaris that ultimately stole the show,
growing a whopping 148% in FY 07 from 37% the previous fiscalwith revenues
of Rs 184 crore. This, to a large extent, was due to the stabilization of
Polaris Intellect suite (the Orbi suite was re-branded as Intellect in 2004)
and its accelerated acceptance.

There was, however, little to shake i-flexs dominance in the
banking products space. It led at Rs 1,096 crore, a 45% growth in FY 07 as
compared to 29% the previous fiscal.

Subex Azure, another of the over 100% growth companies, basked
in the glory of several successes in the EMEA (Europe, Middle East, and Africa)
region this year apart from the business strength that the Azure acquisition
added. The company touched Rs 239 crore in revenues, up from Rs 117 crore in FY
06, growing at 104%. Some of the customer wins during the year included MCel
in Mozambique, Bahamas Telecom Company in Bahamas, and Cell C in South Africa.

The Next Frontier

Then there is the next level of companies like Newgen, Infrasoft, Aftek,
Kale Consultants, California Software, KLG Systel, Compulink, Elitecore, and SP
Software that may not have grabbed a big share of the market but most definitely
have made it into mind share. This is followed by yet another layer of
companies, which could be the next wave of mind share grabbers.

Beyond the top 10 players, companies continued the three-digit
growth momentum. Both Nucleus and Newgen more than doubled their growth. Nucleus
product revenues in FY 07 stood at Rs 119 crore, up from Rs 57 crore in FY
06, a growth of 109%. The company had been working toward positioning itself
as a product expert in the banking domain for the last few years. This paid off
in FY 07: Nucleus bagged 22 new product orders for implementing 74 modules of
FinnOne suite and other products. Newgens revenues registered a huge 178%
growth, up from Rs 23 crore in FY 06 to Rs 64 crore in FY 07. Apart from a
strong show in traditional markets of the US and UK, the company strengthened
its position in the exports market by partnering with SinoSoft and Yindusoft in
China. Some of the major deals are from the Abu Dhabi Commercial bank, Mashreq
bank, Bank of America, Yes Bank, General Insurance Corporation (GIC) of India,
ICICI Lombard, ABN AMRO, Equinox, Central Depository Securities, Kuoni Travels,
and Bank of Baroda.

Ambitious, for Sure

FY 07 has been testimony to the growing ambition of Indian software
product companies. They certainly have not shied away from taking the inorganic
route. Take for instance 3i Infotech, which went on an acquisition spree in FY
07. Of the total nine acquisitions made during the year, six were in the
products space. Cranes Software too maintained the inorganic growth momentum
acquiring Dunn Solutions Group, Tilak AutoTech, Ariel, Analytix Systems, Caravel
Info Systems and Proland Software Solutions. Subex and Azure, on the other hand,
merged to form Subex Azure. Later, toward the end of FY 07 it acquired Canada
based Syndesis, thus strengthening its position in the telecom OSS space. These
inorganic growth ambitions were not restricted to big companies alone. Among
smaller players, Infrasoft acquired UKs M Consultinggrabbing a total of 25
new accounts in FY 07.

Expanding Footprint

The exports stronghold continued as the market accounted for almost 80% of
the Indian product revenues. While the US and UK continue to be major markets,
the Middle East and Africa are among the newer ones.

In terms of verticals, BFSI has been the mainstay so far.
However, the Indian software product industry is now beginning to find success
beyond this vertical in areas like telecom, aeronautics, geographical
information systems (GIS), etc. We are now also seeing products on healthcare,
small ERPs coming from smaller companies. One is also going to see niche
applications on Basel II and analytics being developed.

At a higher level, global vision, strategy, and execution are
the key elements required to move this industry forward. Factors like
understanding market needs, productizing these needs, ability to harness the
right talent for delivery, sales and marketing play a very important role in the
success of software product companies.

In order to successfully develop and market software products,
Indian companies also need to understand their customers business and
business environments. Companies should select and focus on a vertical and
develop deep domain expertise in it.

Shipra Malhotra


shipram@cybermedia.co.in