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T.E. Raja Simhan

Software testing is emerging a ‘tried-and-tested’ market for Indian tech players, offering growth opportunity, both in terms of deal value and scope.

The deal size is getting bigger and companies are being engaged over longer time frames. Gone are the days of projects worth below $100,000 with five or six people involved in the work for a month. Today, companies, including smaller ones, are sitti ng on long-term projects worth $3-4 million each.

Earlier, software testing teams used to be part of the software development. But now, testing has become a major revenue earner for most large firms, contributing 10-15 per cent of revenue, say industry watchers. And testing constitutes nearly 20 per cent of the total software development cost.

The market opportunity for Indian offshore testing companies is seen at around $8 billion by year-end, from $2-3 billion a year ago. Companies such as Polaris, Wipro and HCL have even created centres of excellence. It is estimated that the domestic industry will require around 35,000 professionals every year for the next few years.

But what exactly does software testing involve? Put simply, it is a process used to help identify the correctness, completeness, security, and quality of developed computer software. This may sound simple, but in reality it is not. Specialised people identify the problem, which could be a bug or a glitch in the software, and rectify it.

The complexity of managing applications is growing. As opposed to smaller chunks of testing, clients are looking at outsourcing end-to-end testing responsibility, with partners expected to play a bigger role than earlier.

Also, as companies move from upgrading legacy systems to replacing them, the amount of testing done will increase. And, all these are done at a higher cost, say industry people.

Sanjay Seth, General Manager, Global Alliances and Marketing, Testing Services, Wipro Technologies, says till 2002, software testing was predominantly in the telecom and product engineering sectors, which were IT-driven.

But now, it is across verticals, including banking and airlines, that deal with a large customer base. The applications are mostly Web-based, compared to offline done over telephone and fax a few years ago. And IT applications running in the background require a lot of testing.

Customers are carving out testing from software development and looking at third-party companies, such as Wipro, to save time and cost.

The growth in the number of employees in software testing at Wipro, to around 8,000 from 2,500 three years ago, captures the action in this space.

Wipro is currently involved in several testing-only engagements. “Such deals were unheard of in the last couple of years. The division has grown at a CAGR of 80 per cent over the last five years. In 2006-07, it contributed around 11 per cent of Wipro Technologies’ revenue,” says Seth.

Echoing a similar view, S.R. Ramaswami, Executive vice-president, Polaris Software Lab, says the deal size used to be around $30,000 for a small project, with three-four persons working for a month. The project would be to test a software application or a module.

Today, the annual deal size is $2-3 million. In fact, one multinational company with centres in India was awarded a $300-million deal. “We will see more such deals in future,” he says.

A few years ago, testing was done in-house, then moved to third party, and today, vendors are creating centres of excellence to work with clients on a long-term basis. Polaris has created testing labs in Belfast (for multiple languages); Toronto (product engineering) and Sydney for banking/government. For Polaris, around 12 per cent of revenue comes from testing, says Ramaswami.

While the average deal size has increased by 10 to 15 per cent, the number of large deals has been flat or has come down. The reasons include consolidation in ISVs (independent software vendors), and players such as Oracle, SAP and Microsoft have been buying up companies, says G.H. Rao, Corporate Vice-President, Engineering, R&D Services, HCL Technologies.

Most customers new to offshoring take testing as an entry point for outsourcing, ‘to test the waters.’ The plain vanilla offerings in testing, such as ‘regression testing and manual testing’ are commoditised. A lot of work is moving to China too, especially localisation for Far East Asian languages, he says.

However, there are other niche areas, such as ‘test process consulting, test automation, testing for security, performance and scalability testing’ that are looked upon as an outsourcing opportunity, says Rao.

With more companies adopting a global sourcing strategy and identifying partners in chosen areas of strength, customers engage companies such as Cognizant for larger testing deals, says G Sumithra, Vice-President, Testing Practice, Cognizant.

Large clients view their testing partners as value enhancers. Customers like their partners to take complete ownership of all testing activities, including those that were previously considered out of their scope, such as regulatory and product testing, she says.

Cognizant has grown its testing practice ten-fold in the last three years — from 750 professionals in December 2004 to over 7,500 in December 2007.

Last year alone, its global testing headcount grew by over 2,500 professionals, according to Sumithra.

An increase in deal size is being seen not only by large companies but also smaller ones, especially third-party independent testing companies.

Following the software development pattern, clients are aligning with software testing vendors on a long term. Pure testing services alone will not work, and the future is going to be IP (intellectual property)-driven, says V.N. Mahesh, Executive Director, Maveric Systems.

It is no longer a six-eight people testing deal, but ongoing projects of two-three years of $1-$3 million in size compared to less than $100,000 a couple of years ago. Clients are coming out with four or five releases of their software, and these need to be continuously tested, says Mahesh.

According to Makarand Teje, COO & President, AppLabs, ‘Global 1,000’ customers see ‘testing’ as a shared service model. Deal sizes that were below $1 million per year are migrating to sizes four-five times bigger. The company is closing two-three large deals per quarter, all multi-million dollar ones, he says.

Sectors such as banking, financial services and insurance (BFSI) are leveraging AppLabs’ ‘testing only’ business model, he says.

There is further headroom for growth in terms of deal size — driven by two factors. The first is the larger adoption of the global delivery model, focused on testing from European customers. The second reason is new American customers picking testing as their first area to offshore, since it is perceived as ‘lower risk.’

Asvini Kumar, Founder CEO, Thinksoft Global Services, says as companies move from upgrading legacy systems to replacing them, the amount of testing done has increased. Generally, the deal sizes range between $1 million and $20 million. This compares with almost nothing five years ago.

In the recent past, Thinksoft won deals ranging from $1 to $5 million. Of this, three deals were from $2 million to $3 million. Most of the large orders are in core banking.

The deal sizes will continue to increase and there will be more annual contracts. Large clients have started segregating ‘development and assurance’ while awarding the contracts and there are moves towards improving the testing maturity in their in-house teams, says Kumar.

Partha Iyengar, Head of Research-India, Gartner, says companies involved in (offshore) testing are projecting 100 per cent revenue and resource growth, in terms of the demand for services.

Three kinds of testing services will emerge in the future, he says:

Pure ‘technical testing’ services, which is primarily bringing to bear testing resources to execute ‘technical’ focused testing, in a manual-intensive manner, or, increasingly through the use of testing tools.

Business testing, which is high-end, needs some understanding of the business and domain as well.

Regulatory testing, which is where the testing is focused around ensuring that the new applications being implemented are in conformance with regulatory requirements that the company will be held accountable for.

The need for this often emerges at board level, given the increasing concern around board/CEO exposure to regulatory compliance requirements.

This category of testing will see increasing alliances between the traditional Risk Management/Auditing firms that deal with compliance issues and the Application Service Providers who provide the ‘lower end’ testing knowledge and capability, which the Risk Management firms do not possess and cannot/do not want to acquire.

“The longer term overarching trend will be where enterprises will look to their service providers to assist them with moving from ‘testing quality into their software’ to ‘building quality into their software’.

This will require a holistic look at the client enterprises’ overall software development process/methodology, from a quality assurance perspective,” he says.

raja@thehindu.co.in

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