Point of Inflection

Sometime in 1991, Rajesh Hukku convinced Citigroup, where he used to work, to
invest close to $400,000 in a software venture of a different kind. Rather than
create application or software for foreign clients, he convinced them to make
the product. After years at it, his company, i-flex, launched a solution for the
banking industry, namely Flexcube, making the wait worth it.

Though there were a lot of issues and teething troubles, Hukku persisted and
the product was a resounding success, and found customers across the globe. In
fact, the company became so hot that Oracle decided to buy a 44% stake of the
same in 2005. A year and more later, Oracle increased its share and is now the
majority stockholder in the company with close to 83% stake.

I-flex in many ways is the poster boy of the Indian software product space.
Undoubtedly, it was the first successful pure-play product company born out of
Indian shores, and has enthused the whole breed of Indian entrepreneurs to
venture out in the product space. So, while the Indian software services and BPO
companies have been battling the demons of a US economic meltdown and dollar
depreciation, product companies have been growing at a decent pace, building up
scale for the future. And are all set to become a force to reckon with in the
coming days.

The Rule of Ten

According to market estimates, the global software product market is pegged
at $350 bn and the Indian market is estimated to touch $7 bn by 2010. In FY 08
itself, the overall Indian software product market was pegged at around Rs 7,300
crore, or $1.8 bn. It is estimated that there are over 400 companies that are
into customized product development in India, of which around 275 have some form
of a shrink-wrapped product offering. Nevertheless, the country still lacks true
packaged software players like Microsoft, Oracle, or SAP.

Even though a lot many new product companies have sprung up, the industry
segment is still dominated by a handful of players like i-flex, Teledata (a
relatively new company), 3i Infotech, TCS, Infosys, and others. The top 10
companies in the space generated revenue of around Rs 5,700 crore, accounting
for approximately 80% of the total revenue. Also, the revenue of these top
companies has grown by over 60% from the previous year.

Though this dominance by a few companies might not seem all that positive for
the segment, it is very symptomatic of the way the business runs. Unlike the
service sector, where the RoI is clearly defined and the gestation cycle is
pretty small, product companies have to invest heavily into R&D, and the
gestation cycle runs into years. Not only this, marketing and packaging are a
completely new set of challenges faced by budding entrepreneurs. In this
scenario, size and geographic spread (as enjoyed by these big companies) are
quite beneficial. Thus, companies like i-flex, 3i Infotech, and Subex that have
acquired certain size, are able to grow at a rate higher than that of the
market.

However, the interesting thing to note here is that the companies that have
grown by over 50% in the last year (3i Infotech, Subex, and Cranes) have all
employed innovative strategies to grow their market share. So, while 3i Infotech
continues to provide financial solutions to clients in Europe and the Middle
East, it has steadily increased its focus on the domestic space, especially in
the e-governance sphere.

Meanwhile, both Subex and Cranes have gone in for vertical specific
solutions. Subex has created an identity for itself in the telecom space,
boasting of major telco clients across the globe. While Cranes, specializing in
the high-end statistical and analytical space, has taken the inorganic approach
during the year by acquiring Engineering Technology Associates (ETA), a tier-1
vendor to the top three US car manufacturers. Verticalization seems to be the
mantra for success, as barring 3i Infotech (who is into ERP), none of the
leading players has horizontal product offerings.

Teledata makes a grand entry directly at #2, based on sale of its energy and utility products. Geodesic also enters the Top 10 club at #9. The overall growth of the Top 10 club, vis--vis last year has been by a healthy 52%. From last years top 10 there are two companies missing: Aricent is no more an Indian company because of its acquisition by KKR, and Sequoia Capital; Ramco exited the club, due to its growth over stymied dependence on its flagship ERP product and the absence of any other horizontal offerings

Another interesting trend has been the domestic focus by these top tier
companies. Earlier, players used to treat India as a testing ground for their
products, honed products in India and other developing nations before taking
them to the other mature global markets. This is what i-flex did in the 90s, 3i
Infotech also followed suit, and so did Subex Azure and a host of other product
companies.

But now, there has been a realization that the domestic market can be quite
lucrative considering the expansion that is taking place. 3i Infotech has been
working closely with various state governments, like Goa, Karnataka, Haryana,
etc. Cranes has produced a statistical model that is used by psephologists to
conduct surveys before state and union elections.

Subex is another company exploring the domestic telecom scene. Thus, the
single biggest factor that separates the high-growth product companies from the
low growth companies is a specialized vertical focus and also a buildup in the
domestic market. Meanwhile, Geodesic, the creators of Mundu Radio, continued to
build products and solutions around the VoIP and social networking scene.

Even a traditional offshore player like Polaris is majorly foraying into the
domestic market, its IntellectSuite wins included ICICI, HDFC, Kotak, and Axis
Bank. But while all the export centric countries are looking at the domestic
market, the original big daddy of the space, Tally, seems to have lost steam.
A few years back, Tally was an undisputed king among SMEs and SMBs in India,
with its flagship accounting product Tally. All that changed with global giants
like Oracle and SAP looking and wooing the SMB sector, Tally has taken a major
body blow, its revenue grew by some 18%, completely inadequate considering the
boom in the local markets.

In Love with BFSI

Over the years, there has been a bit of an issue with Indian product
companies. They have been mostly focused in the BFSI space. The reasons are
plentythe immense success of products like Flexcube and Finnacle could have
spawned a whole generation of me-too players.

Also the fact that till sometime back, the only Indian sector that was able
to provide business was the banking sector and that banks have always been at
the forefront of the technology curve and more open to outsourcing than any
other segment, resulted in a lot of companies that focused completely on the
space. It so happens that at the start, product companies tried to walk down the
same path taken by services companies. But this is changing, albeit slowly. In
the present, there are a lot of product companies that are focusing on
completely new verticals or niche segments. For instance, the #2 player in the
product space, Teledata, has products and solutions for the education, energy,
and telecom sector.

While the Top 10 product companies accounted for around 80% of the overall revenue, there are a host of aspirants who could soon be entering the Top 10 club in the days to comeNucleus, Financial Technologies, KLG, Bartronics, and of course, Ramco

Even for companies that are in the financial space, there has been a
realization and a need to differentiate and spread to newer markets. So, Nucleus
Software, who missed out entry into the Top 10 club by a whisker, is rapidly
expanding its operations in the Middle East and Africa. It has clients like Reem
Finance, an Abu Dhabi-based NBFC, Bank of Philippine Islands, Tanzanias Bank M,
FamilyCredit (part of Societe Generale Consumer Finance), and India-based Bussan
Auto Finance.

The Next Ten

While last year was a great year from the product companies perspective and
the winners were really the big firms such as Teledata, 3i Infotech, Subex,
Cranes, etc. But the heartening part is that like the biggies, high market
growth came from players such as Geodesic, Geometric, Nucleus, Newgen, Aftek,
and other companies that are often labeled as small players. Most of these
players mapped the strategies employed by the biggies in the segment, though
with slight variations. Thus, the companies are looking for niche products
rather than a homogenized one, and looking to spread at emerging and domestic
markets.

One of the most prominent of these tier-2 players was Financial Technologies
that found place for its online trading product ODIN, and its mobile payment
solution Atom. While another company, Bartronics won quite a few accolades for
its biometric and automatic identification and data capture AIDC-based
solutions. Infrasoft in the meantime continued to find clients for its Islamic
Banking and anti-money laundering solutions resulting in a steady income.

Much like the case for the top ten, even here there are a few leaders who
continue to grow at rates much higher than the market growth, while quite a few
can be termed as laggards.

Services Mindset?

It is not only the dedicated players that are eyeing this segment, so are
the big ones like TCS and Infosys. TCS, after its acquisition of FNS has been
relatively active in the core-banking space. Though, it has not really been
worth too much in terms of revenue for the company, as TCS is getting much money
from servicing clients, it does not seem to be too keen on the products game.

Infosys, like TCS, also seems to be going easy with its product portfolio.
Its banking solution, Finacle, enjoys quite a good installed base in the
industry and yet its contribution to the overall revenue is not something to
sing about (approximately 4% of Infosys total revenue).

More or less it is at most an issue of mindset, it is quite hard for a TCS,
Wipro, or Infosys to break the shackles and succeed in a new domain. Also,
managing a product through its complete lifecycle is a completely different
challenge than billing a customer by man-hours. While these companies may be
good at IP creation, what they lack is the proverbial fire in the belly. Thus,
as long as the services industry is going great guns, the big players will
continue to remain marginal players, which is evident from the fact that they
have grown the product revenue by less than 15% over the last year.

Funding Issues

One of the biggest grouse of Indian entrepreneurs who want to start a
venture in this space is that of funding. While some of the established players,
with proven track records may get investments for growth, there are not many
angel investors in the market ready to plough their money behind a new project.
Thus, most of the entrepreneurs have to run from pillar-to-post to get adequate
funding and often pool in the money from their own pockets. While investors and
VCs were behind the boom in the Silicon Valley in the US, there is a severe
paucity of people who will fund such ventures in India.

The scenario has changed a bit over the last year and experts are of the
opinion that if the product is unique and has sustainable advantage VCs are
funding even in these markets. For instance, Cindrel, a unique product company
based out of Chennai, Newgen Software systems, one of successful product company
has seen investment from HSBC and SAP. Global players like Siemens, Microsoft,
and Oracle are keenly evaluating the product space and segments such as retail,
government, micro lending and other segments.

A Need for Lobbying?

Most of the industry players complain about how the government has done
nothing for the industry at large. By imposing excise duty on packaged software
in the last-to-last budget, the domestic market has been badly hit. Also a lot
many players crib about that even though the segment creates a lot of IP for
India, there is little or no recognition from the government. The only tax
breaks that product companies can aspire for are much the same for all the IT
industry.

Even Nasscom hasnt been spared. Over the years, the trade organization has
played a very proactive role in promoting and presenting before the world the
BPO and services strength of the country, while completely ignoring product
companies. Though, it has indeed created a product forum, but it hasnt been
that effective so far.

But that all could change in the coming year, next month, Nasscom is coming
out with a major study on the Indian software products markets, analyzing the
challenges and laying down a strategy for the future. Past President Kiran
Karnik was very much keen to showcase the product companies and hopefully the
current incumbent will continue on the same vision and lead.

In the Year to Come

Thus, the trickle that started with Hukku in 1991 has become a tide in 2008.
In the year to come the industry will break the $2 bn barrier and hopefully
there will be a lot more innovative companies that will come out of India. But
the road is not all that smooth, the challenges that face the bigger BPO and
services cousin, namely global economic slowdown and a fluctuating currency,
could well have a negative impact on the domestic companies as well. Hopefully,
the churn would not be as bad, as most of the players have already diversified
into quite a few emerging geographies, rather than putting all their eggs in a
single basket.

This year, Nasscom also has decided to actively promote the industry through
means of various seminars, etc thus, there will be a lot of action in this
space. Not surprisingly, at the onset of 2008, DQ had come out with a list of 8
companies to watch out for, of them 4 are product companies and present in the
list above, namely, Cranes, Connectgaia (KLG System), Financial Technologies,
and Geodesic.

When will be there a Google from India? is a question that is frequently
asked at numerous seminars and conferences. While there might not be a Google
like venture just yet from India, but if things go as plan, it is simply a
matter of time before an innovative company would capture global attention.
Indeed, the software product story has barely begun; it is at a point of
inflection, ready to zoom upwards.

Shashwat DC

shashwatc@cybermedia.co.in