The Hindu Business Line : You win, from either end

Indian outsourced product development firms are having the going good - while also facing the prospect of taking over the captive units of global vendors.

Indian outsourced product development (OPD) companies are headed for good times. Even as they continue to win orders on their own as outsourcing booms, they appear to be facing the prospect of taking over the captive units of several global software vendors.

As operational complexities increase, amidst rising attrition and wage costs, several software vendors are seen shutting their captive units in India and handing over the operations to specialist OPD firms.

OPD firms are third-party firms that specialise in developing software products for the vendors. By outsourcing product development to these firms, vendors focus on marketing the products.

The latest to buckle under growing pressure is Pervasive Software Inc, the US-based vendor of data infrastructure software. Pervasive recently decided to shut down its captive centre in Bangalore, citing complexities in managing operations. Instead, Pervasive decided to outsource its product development to long-term partner Aztec Software Ltd.

Indian OPD firms see this as the beginning of a trend wherein a number of small multinational software development firms will either close down or get transferred to their Indian vendors.

"This is the beginning of a trend and the tip of the iceberg," says Amitava Roy, President of Symphony Services' India operations.

Citing A T Kearney's research findings, Roy says "By 2008, captives will account for just 20 per cent of the offshoring market in terms of employment as against 70 per cent at present."

Symphony is also said to be in talks to take over the captive centre of a player in the embedded systems development space.

OPD is considered to be the next big thing in the Indian IT industry. Nasscom estimates that OPD exports will grow from the current $2 billion to over $7 billion by 2010. Over the past several years, software companies set up captive operations in India to tap the cost advantage. However, many could not scale up and do not have the optimum size to realise the savings of doing work offshore in India.

"If you just look at it from the operations point of view, for the two-year start-up period, a typical 100-person development centre, modelled on our survey data, shows that a provider (like Symphony Services), delivers a 37 per cent cost advantage — or $5.7 million — over the establishment of a captive," says Roy. This he attributes to faster ramp-up and quicker time to value, resulting in a faster payback and greater return on investment.

And with continuing process improvements and institutional best practices working in favour of the providers, captives never close the gap, says Roy.

OPD firms in India, says V. Govindrajan, director and CTO of Aztec Software India, are well placed to handle the changing supply-side dynamics such as the issues of hiring and retaining qualified manpower, getting suitable infrastructure, and so on. As a result, companies don't need to worry about all these issues and can confidently focus on their go-to-market plans and internal operations, leaving the headache of software development and the associated work of hiring, creating infrastructure and implementing standards and processes to the OPD vendors, he adds.

`Not everybody's answer'

Forrester's India head, Sudin Apte, says a captive R&D centre is not the universal answer and does not suit all. Citing the several instances of challenged captive centres, Apte says that firms such as BEA and Yahoo!, which started with purely captive facilities, now rely more heavily on third-party vendors. Apte estimates that 30 to 40 per cent of the captives are up for grab in Bangalore alone.

As captives fail to pan out as the universal solution, most firms will build their offshore strategy around a combination of options. Large firms will build a hybrid ecosystem comprising their own captive R&D centres with centres of excellence approach in specific areas, staffing contractors, third party large providers, and specialist outsourcers, Apte says, adding multi-billion dollar companies will take this route. At the same time, the Tier 2 and small product companies will eventually opt for outsourcing.

Back to ODCs

Earlier software firms used to take the BOT (Build Operate Transfer) route while signing deals with OPD firms, which used to set up dedicated development teams, run the operations and eventually transfer the teams. The transferred teams formed the base for the clients' captive development centres.

"BOT was a fashion statement till a few years ago," says Govindrajan, adding almost every client insisted on entering into a BOT model. But the T-factor in the BOT model was never exercised by the clients many a time and wherever it was exercised, the captives couldn't manage the complexities of attrition and wage rises.

But now clients no longer want to enter into the BOT model. "Very few deals are being signed on the BOT model," he adds. As a result, the concept of ODCs (offshore development centres) seems to be back in flavour, says Chetan L.S., General Manager of Aditi Technologies.

vishwa@thehindu.co.in

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