Indian Software Products: Take-off Ready

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.

Biggies Apart

Also eyeing the BFSI space is Cranes, which went aggressive on an inorganic
strategy. The objective was to reach a scale, a critical size. It went about
with a series of M&As, purchasing toplines, so that it can be perceived as a
more serious player in the scientific and engineering community. In the process,
it de-risked its model by reducing time spent on creating a product scratch up.
It acquired undervalued products, rejuvenated it scratch up, went to pressure
markets, and made them available across the world. The acquisitions-of
Texas-based InventX (which add to Cranes' portfolio a comprehensive suite of
integrated project management applications); of Karna (which gives it a head
start in the banking and financial services vertical); of EMRC (developer of the
NISA suite of products and a pioneer in the field of Computer Aided
Engineering); of Capella (business and reporting product)-besides allowing the
company to enter the enterprise space, will permit it to give solution-based
approach to customers, rather than a tool-box solution.

Among other enterprise players, 3i Infotech's Orion suite of ERP received
acceptance in the Middle East and in North Africa, where it currently is the
third largest vendor in terms of revenue behind SAP and Oracle. Ramco, who is
after the SMB segment, made good in-roads into auto ancillaries, manufacturing,
garments, food and chemicals. In the enterprise segment, it has been focusing on
providing packaged and as well bespoke solutions primarily to the large
corporates, BFSI, government, and the services segment. It has witnessed
significant momentum with solutions delivered using VirtualWorks-its
proprietary process to application platform.

Accounting pin-up Tally is also targeting the ERP space but managed to create
a bit of difficulty for themselves by delaying the launch of two of its most
important announcements-multi-lingual versions and an ERP solution- hinting
that it is not being able to strike the right balance between the pace at which
it is growing and the pace at which it is able to bring in operational
efficiency to meet project timelines. The company moved rapidly from being a 100
people organization to its current strength of almost 1,000.

Number of users went up by 30%, but in terms of pure revenues, Tally did
negative growth as it dropped prices by almost 50%. In the exports market, the
firm's story took off in the Middle East, where it has shown six times the
turnover from what it used to be earlier.

On the market front, Tally's challenge still remains the footprint of
availability-there are approximately 25,000 people who service the small
enterprise market through hardware, software and services. It has been able to
mobilize 4,000 of them so far. It expects to mobilize another 5000 in FY 2007.
The company will, therefore, take two years before it gets the spread and
without this, it will never be able to solve the supply problem.

Supply and finance are also sensitive problems for start-ups, especially
since there is little angel funding available in India. And even if money comes,
there are very few people with the ability to advise start-ups, connect them to
entrepreneurs, with prospective key customers, key employees, with lawyers. In
FY 2006, help came for lucky some from an unexpected source: Microsoft. It
provided innovative companies valuable resources, from exposure to the V-C
community to its technology; and at times, even marketing help. Recently, it got
a bouquet of companies to pitch in for 20-25 minutes before Dan'L Lewin,
corporate vice president, DPE Division, a mouthpiece to the reset of the V-C
community in the Silicon Valley and someone who holds an annual event called the
'VC summit'. India found a window when chairman Ravi Venkatesan went over to
pitch India at the event last year, talking about a number of companies who were
sort of representatives from the country.

Goutam Das

goutamd@cybermedia.co.in