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Follow UsFor the first time ever, DQ estimates revenues of software products from Indian companies and comes up with a surprising figure of around Rs 1,000 cr ($200 mn). Here’s a rundown on these companies, how they stack up, and what their peculiar challenges and successes are about
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In the first-ever exercise of its kind, Dataquest has ranked Indian software companies based on
revenues from products alone. The numbers turned out to be more amazing than we had imagined. Product revenues of the top ten software companies alone (domestic and exports) add up to a good Rs 927 crore. This doesn’t include at least a score of other small companies that are either solely or largely dependent on product sales and
Dataquest estimates of total Indian software product sales is approximately Rs 1,000
crore.
Now the break-up. The top three alone–i-Flex Solutions, Infosys Technologies and Tally–account for Rs 632 crore or about 63% of DQ estimated Indian product revenues. Other names on the list include large companies like TCS with product revenues of Rs 66 crore, Polaris/Orbitech (Rs 60 crore) and much smaller ones like Newgen (Rs 24.51 crore), Kale (Rs 8.49 crore) and ESS (Rs 7.04
crore).
The top three are also the only ones to have crossed the Rs100-crore mark in product sales. Only three other companies (Polaris, TCS and Ramco) have crossed the Rs 50-crore mark.
Where are most of these products sold? About 37% or Rs 357 crore of all product sales by Indian companies came from sales in the domestic market. This is an interesting figure–the total packaged software market in India is Rs1,900 crore with Indian software products accounting for about 8.7% of that market.
This is certainly not large by any standards. But look at it this way–the competition comes from the Oracles and the Microsofts of the world. Also, as per DQ estimates, at about Rs18 crore of domestic business, i-Flex would likely be the 11th largest domestic packaged software company. In fact, the Indian top three would make it to the list of top 10 companies with domestic packaged software sales in the country.
As a percentage of exports though the numbers are not very high at the moment. Against total software exports of Rs 34,970 crore, the percentage of product exports is only about 2%–about Rs 700
crore.
And that really is the Indian software product story few people have really tracked–larger revenues than one would normally have imagined. The other features are that the software product market is extremely weighted towards the top three to five players, with the rest of the sector highly fragmented.
Plus, it has a somewhat decent share in the local market and a miniscule one in exports. And this segment’s own peculiar history and its own peculiar set of challenges.
Products typically mean heavy initial investment. Recovering those monies means that the conversion rate of customers has to
be high, and distance from customers makes that difficult.
The services legacy
Almost all Indian product companies come from a software services background. Given the nature of the software services industry, it means they come from a services export background.
The first fall out–barring a few exceptions, product sales are a relatively small portion of total revenues in most companies. The interesting exceptions are Tally (100% revenues are product or product related), i-Flex (64%), Ramco Systems (67%) and Newgen (76%). In other companies like TCS, Infosys and Polaris, product sales are still anywhere between 1% and 15% of total turnover.
The second fallout–domestic sale of products is about 29% of overall product sales, while the rest is largely accounted for by exports. The exceptions in this case are Tally, which gets 94% of all its product revenues from India; Polaris/Orbitech (90%); Newgen and Infosys (about 47%).
Most others, from large companies like i-Flex Solutions (5% domestic) to small ones like Subex (8%), are still significantly export dependent.
An export orientation for products has a couple of key challenges–completeness, branding and distance from the customer.
One of the major differences between a product sale and a services/project sale is that it’s usually all or nothing. Meaning, the product either meets the customer’s demands or it doesn’t. Unlike in a services scenario where the project can be eternally redesigned to suit the customer, a product cannot. Any product’s key characteristic is its completeness–that also means little or almost no room for fundamental tech specs negotiation.
To be able to provide as complete a product as possible requires a fairly deep understanding of the customer. This, in turn, means fairly intimate access to the customer. A small company sitting in India tends to find that a prohibitively expensive proposition.
Assuming that a complete product is in fact available, then the second key challenge is branding. Larger services players have a fair amount of branding in the services space, but still find it difficult to sell themselves as good product companies. For smaller companies, the challenge is significantly greater. It becomes even more difficult for largely export-oriented companies who often encounter skepticism if their installed base does not include a respectable presence in the domestic market.
Finally, the cost of sale itself. Products typically mean heavy initial investment. Recovering that money requires that conversion rate of customers has to be high, and distances from customers makes that difficult. While services companies may still recover something to a sales dollar by bagging a small project, product companies either have a sale or they don’t.
However, some things are beginning to change.
Looking homeward
Traditionally, Indian software product companies have been diffident about tackling the domestic market on the premise that the local market was neither mature nor did it offer sufficient return on investment. That is, however, changing as the domestic installed base is becoming a significant issue even in overseas sales.
In fact, the two big majors–i-Flex and Infosys–had a clear and very closely matched go-to-market strategy that has been very successful: India–ME and Africa–Europe–finally the US, in that order.
Other companies are beginning to make sense of and adopt similar go-to-market strategies.
Bangalore-based telecom software product company, Subex Systems, realized that carriers in the US and Europe demanded that the company should not only show proof of concept, but demonstrate the product’s ability to handle a 4-5 million subscriber base. For a new product company like Subex to straightaway pitch for such clients was almost impossible. So, Subex went for clients in India, Africa and the Middle East with a subscriber base of 2 lakh customers. It went on adding such customers till larger customers were willing to look at them. Even though the domestic market accounts for barely 10% of Subex’s product revenues of Rs 25.5 crore, the company handles almost all the important carriers in India–BPL Mobile, Bharti Cellular, Escotel, Hutch and Idea Cellular. Today, Subex’s clients have a subscriber base of 6-7 million.
And then there is Tally, an example of a home grown company that is entirely focussed on the domestic market. About 95% of the company’s Rs 100 crore revenue comes from the domestic market. It’s no-nonsense accounting product called TALLY ees 6.0, which is targeted at the SME segment, is a success story that most companies should probably take a really close look at. Today, the product has grown beyond its original charter and an interesting 30% of the company’s total revenues in fiscal 2003 came from large corporate clients. Industry watchers say that there are myriad similar opportunities in niche but largely pervasive areas where small companies can make a big impact. For example, any company focused simply and solely on banking planning and budgeting could give Infosys and i-Flex a run for their money.
The key thing though is the ability to stick in there for the long haul.
The long haul
The product business is a different model altogether and what it requires more than just about anything else is the ability and the will to drown money in the making of a product with no immediate returns. With the knowledge that at the end of that road there may still be no returns to look forward to–the product may be incomplete, ahead of its time or the company might just have got the idea all wrong. It’s a lot to ask of a company and a big reason why only a few venture into this segment.
One of those exceptions is Diwakar Nigam, founder of Delhi-based Newgen Software Technologies. In 1979, Nigam set up Softek Limited that developed products like compilers for Basic, Fortran, Pascal, Cobol and application software like Soft Calc, Softword etc. Softek went out of business with the entry of MNCs like Microsoft and Oracle, which was compounded by rampant piracy. But Nigam learnt from the experience and decided to move away from the basic software business to the solutions business.
In 1992, he set up Newgen Software Technologies, which provides imaging, workflow and image processing solutions for a ‘paperless office’. By 1995, the company had introduced the ‘Newgen Office’, a software oriented imaging solution and it got its first big break when it licensed the solution to Canon for a royalty of $1.9 million. Today, the company makes Rs 24.51 crore from products alone, not a mind-blowing figure but with that little success behind it, the company is now looking at products for the BPO space. Its first few products already have installations at prominent players like Wipro Spectramind, EXL and
TransWorks.
Wanted: A Godfather
With substantial investments and the long period of incubation required, it is tough for upstart product companies to survive. Add to that the Indian VCs’ discomfort with product companies and it is a pretty tough situation to be in.
The cushion has come from services, sometimes by accident and sometimes by design. Infosys managed to invest in Finacle because of its large services revenues. i-Flex looked toward services to be its bread and butter when it was developing Flexcube. Pune-based Kale Consultants has a slew of products for the airline and banking industry that bring in 30% of its revenues. The rest comes from services, which includes outsourcing (that uses the company’s own products) and a managed process services business, both of which are essential to keep the cash register ringing.
There are different opinions, however, on whether the twain should ever mix. Companies like Kale, i-Flex and Infosys have managed to run both the services and the product model. Subash Menon, chief executive officer of Subex, differs and would prefer to hive off the services arm into a different company altogether.
This is an important issue, that is the vastly different business model and work ethos of these two segments. And most companies will find their own particular solution to it. What is more important, however, is a push for the product segment of the kind that the software services sector has got.
Nasscom, for instance, set up a cell to look into the software products segment a while ago. While the organization has been talking about it for a good two years now, product companies say they haven’t seen much of a push from any direction so far. The mere fact that there has been no clear data available on the Indian software products segment to date is a good indication of how much attention these companies have managed to get.
But at about Rs 1,000 crore this is now a segment worth watching out for.
SARITA RANI / TV MAHALINGAM in Bangalore