The Hindu Business Line : Sharing the secret

Software companies are increasingly outsourcing product development to vendors to save on time and focus on branding. They are open to sharing intellectual property (IP), the core of their business, with the vendors. When trust begets trust...

TIMES are changing for software companies, especially the way they go about building their product portfolio.

Increasing cost pressures, changing market dynamics and the need to shorten the time-to-market cycle are some factors forcing many software companies to `share' their intellectual property (IP) with their vendors for outsourcing their product development.

This has given rise to a new wave of outsourcing called offshore product development (OPD), wherein software companies are outsourcing chunks of their product development functions to specialist partners and are making greater efforts towards marketing and branding their products.

The new breed of product development vendors that have emerged in the past few years have also gone a long way in reinforcing the faith of these software companies that their IP, core to their business, will be protected at any cost.

"This is just the beginning of a new era of software product development," says an industry observer. Players in this space feel that offshore product development will be the `next big wave of opportunity' for the Indian IT industry. Though currently India has very few software products in the market to claim as its own, the IT Industry here could probably take comfort from the fact that several specialist firms are slowly beginning to play a critical role in the new product releases, in the middleware and back-end infrastructure and applications of global firms.

Companies that are hooked to the offshore product development concept and getting their new releases done out from India range from the `biggies' of the software world to the latest next-generation start-ups.

"An estimated 400-500 releases a year of various software products are happening from India," says Gowri Shankar Subramanian, CEO of Aspire Systems.

Prominent global software firms leveraging the model include Siebel, Autodesk, BMC Software, Hyperion and Mimosa Systems, among others. However, high customer-confidentiality clauses prevent the vendors from disclosing their clientele.

The new breed of offshore product development service providers include Symphony Services, Aztec, Aspire Systems, and Persistent Systems.

Several big IT services providers such as TCS, Wipro Technologies, Infosys Technologies and HCL Technologies operate in this space but have restricted their exposure as part of their de-risking strategy. However, it's the smaller offshore product development service specialists that have been more vocal in talking and creating awareness about this concept that has gained momentum over the past three years.

Key drivers

In the nineties, India attracted the interest of global product giants such as Microsoft, Oracle, SAP and Cisco, among others, who set up their captive research and development bases in the country mainly to leverage the talent. Subsequently a host of other software firms also set up their captive bases here.

The technology meltdown at the beginning of this decade did create a dire situation for software firms, when the prices of both products and services dropped in the backdrop of a slowdown in demand. Moreover, these firms were forced to grapple with increased competition even as the cost of developing newer products grew.

"This is forcing a lot of product companies to keep their development expenses under control by outsourcing," says Ajay Kela, president of Symphony Services. Plus, the market dynamics are changing pretty quickly, wherein companies are forced to cut short their time-to-market cycle, which drives them to look at outsourcing.

"Three years ago, it was a challenge to tell the software companies `we can work with you in creating the next-generation products'," says Kela. However, things have changed dramatically. Software companies, which were hesitant earlier to give up the `Crown Jewels', that is their R&D, to partners, fearing that will lose control, are no longer plagued by insecurity. This is primarily because of the assurances that the offshore product development vendors are offering them, he says.

"We are convincing the software firms to shift their engineering offshore and focus primarily on the market and on building their brand," Kela says.

Venture capitalists are also seen, to some extent, driving the offshore product development concept. VCs, while funding ventures are, of late, insisting that the start-up has the development back-end in countries like India.

"Though the early stage VCs are seen missing in action in India, the fact that the country has already proved that high-end software products could be built up here adds up to our advantage," says Kela, adding it is only a matter of time before the early stage VCs land up here.

Says V. Govindrajan, chief technology officer of Aztec, "What we are developing for software firms is their core IP as opposed to, say, GM, P&G or Ford, where generally companies work with the IT division. That is only an enabler of their core business. They do not have as much reluctance in outsourcing that."

"Typically," Govindrajan says, "enterprise outsourcing is ahead of this kind of R&D outsourcing.

A software company has to give up its IP. In view of all this, product outsourcing took some more time to come into the mainstream compared to the enterprise level. We have been doing this with selected companies." Software product development will go the same way as that of hardware manufacturing, when companies like IBM, among others, started outsourcing a few decades ago, paving the way for the emergence of contract manufacturing giants such as Flextronics.

"We believe a similar transition will happen eventually in the development world wherein software product companies will limit themselves to defining the specifications and focus on branding and marketing," Subramanian says.The next five years will see India emerging as a hub for building products, declares Kela, adding offshore product development firms are seeing good momentum in business. "The entire eco-system is being created here."

Emerging trends

While the large software vendors are running their captive product development operations in India successfully, the `small captives' are finding it difficult to manage their scale and operations here and keeping their team motivated, says Anand Deshpande, managing director of the Pune-based Persistent Systems Pvt Ltd.

"Many a medium and small captive is seen battling issues such as man-management and attrition, among others," says Deshpande, adding "somewhere, their focus on developing products did start going awry, which forced several of them to look to specialist outsourced software product developers for help."

A captive R&D unit, in order to have an impact on the company's profit and loss account, will need to reach a certain scale. For small and medium enterprises (SMEs), a captive centre of about 100 people will hardly have any impact, says Kela. "If they fail to reach a critical mass, they fail."

The inability to scale up has seen many companies wind up their development operations and outsource to the specialist. "We have seen a few of the technology start-ups winding up their operations and outsource," says Govindrajan of Aztec.

This is where offshore product development firms build up parallel operations to captives and subsequently take over their operations. Symphony and Aztec seem to have done this but are hesitant to talk about their clients, citing non-disclosure agreements. "We haven't taken over any assets of such captive firms," says Deshpande, adding he expects this trend to start happening soon, over the next 12-15 months.

Mimosa Systems Inc, a provider of data management solutions that unify archiving, data protection and disaster recovery, has been a client of Symphony. "We partnered with Symphony Services `from day one' because they provided us with product development expertise and rapid access to a large pool of highly qualified engineers. Speed and scalability are critical for us, so setting up a captive didn't make sense. We also wanted to minimise any distraction from our primary business objective — bringing a quality product to market quickly and cost-effectively," says T.M. Ravi, CEO, Mimosa Systems.

"Working with Symphony, we have been able to achieve the productivity benefits of a follow-the-sun model which was key to bringing our first product to market within 15-16 months," Ravi says.

Challenges

The key challenges for offshore product development firms include finding the right talent with a background in building products even while gearing up to provide the entire lifecycle of product development solutions. Companies have been adding capabilities in a bid to emerge full product lifecycle providers. Aztec's acquisition of Disha Technologies, a testing firm, last year was a step in that direction.

"There is a shortage of product development engineers at the middle level," says Persistent's Deshpande. Though the less experienced engineers are being groomed and trained as an ongoing exercise, these companies feel it could take some time before they attain maturity. As a result, Persistent has been eyeing Indian engineers relocating from the US, especially with product development experience, says Deshpande. Protecting the vendors' IP is certainly an issue that these companies face. Vendors will not outsource until they are sure that their IP will be protected and they will get the right kind of talent, offshore model, says Govindrajan, adding offshore product development firms are taking adequate measures to protect the IPs.

Threats

For high-value software product development services, today India is by far the premier choice for outsourcing. "We don't see this changing in the near-term planning horizon. But we do anticipate global demand for these services will continue to grow and consistent with globalisation patterns, this demand will be met by providers in multiple low-cost locations," says Kela.

Offshore product development vendors see threats emerging from China and other destinations such as Vietnam, Russia and Canada. "China, the pre-eminent offshore manufacturing location, is well-positioned for the future," says Kela.

Today, China is several years behind India in the maturity of its software industry and lacks English-speaking skills and the management talent necessary to effectively manage complex offshore development tasks. However, the large labour force and a concerted effort by the Chinese Government to jump-start their software industry, indicates that China could be another significant destination for software development in the future, says Kela.

Impact of global consolidation

Oracle recently announced that it was acquiring CRM vendor Siebel. This sort of a consolidation could impact the offshore product development vendors.

Says Kela "We fully expect to see more consolidation in the commercial software industry and this is driven by global competition. What this means for us is that we will continue to evolve our product development, service and support offerings and engagement models to better serve the complex needs and relationships that make up the ecosystems around some of the master brands in the market."

"We have the product development lifecycle expertise and service and support skills to assist both the players with great scale who determine much of the solution stack and act as `distributors', as well as the smaller, more focused, vertical and domain players. In both cases, the critical need is to increase global reach and scale while reducing R&D spend and speeding up time to market. We can be very effective partners here," says Kela. "The same global competitive forces that favour scale for ISVs (independent software vendors) today apply to offshore software product development providers tomorrow. So we do expect to see some level of consolidation here as well," Kela says.

Size of the pie

According to a Nasscom report, up until the year 2003, Indian software product development companies had been able to capture a meagre 0.2 per cent of the $180-billion global software product market.

Nasscom also predicts that the Indian product development market is estimated to grow to $8-11 billion by 2008 as global sourcing will no longer be an optional strategy for the product companies by 2007-08. As offshore outsourcing gets accepted as a key strategy to stay competitive in the globalised economy, the production cycle for technology-centred products will require global resources and global delivery, says the report.

Picture by Bijoy Ghosh

vishwa@thehindu.co.in

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