Dataquest : Top Stories : Point of Inflection

Point of Inflection

Continued from page: 1

Thursday, May 10, 2007

Little wonder then that more and more entrepreneurs are ready to take a plunge into this evolving industry. Take for instance the numbers given by Deepak Ghaisas, CEO (India Operations) and CFO, i-Flex. He is also the chairman of the Nasscom Product Forum: "According to figures available with us, there are around 346 companies in India that are into product development. Of this around 228 companies have a product offering." Last year, the numbers of product companies were pegged at 250; this translates into quite a substantial increase in numbers.

Ghaisas provides another interesting insight into the numbers. "Close to 60% of these product companies have been started by entrepreneurs, mainly Indians returning from abroad who want to start something of their own," he says.

Services Hangover?
Products is greatly different from services, is a phrase that every player utters at least once during the conversation. Indian companies have been renowned to take a de-risked approach to investment, and services is well suited for it. The product is a high risk and oft times high stakes business, the margins. For failure are pretty low. One has to invest in building a product over a few years and then market it to all and sundry. The RoI cycle can be pretty long.

Inorganic Approach
Subash Menon is a man who should be truly admired for his gumption. An electrical engineering graduate from a university in Durgapur, Menon decided to float a company in 1992, without much help or experience. He had an idea and the urge to make it happen. Subex Systems evolved from being a telecom SI to a product company focused on the telecom space.

Subash Menon, head, Subex Azure

Then last year, Menon decided to go full steam ahead. In a move that surprised many, Subex acquired UK-based Azure Systems for close $140 mn in an all share deal. At that point Subex was worth some $25 mn compared to Azure at some $31 mn. The new entity, Subex Azure, was well suited for the telecom OSS market. But Menon is an ambitious man and recently went in for two more acquisitions in the range of $100 mn. So how does the organic strategy works?

"M&As are an important part of our roadmap and we pursue both organic and inorganic routes to enhance our product portfolio. As a policy, we work on a 4-year roadmap, it clearly states where we want to be in 4 years time and how. The recent acquisitions are based on the plan that we have chalked out for 2010. In the last seven years we have made seven acquisitions amounting around $320 mn in cash and stock. We are also in the process of raising around $200 mn by issuing Global Depositary Receipts (GDRs)," says Menon.

According to Menon, Subex Azure will continue to look at expanding the inorganic way, and is looking for possible buy-outs in three areas, namely revenue maximization, service fulfillment and service assurance. "We have evolved being a fraud management solutions company to being a telecom OSS vendor. Our aims have become bigger and so has our addressable market. We intend to go full steam ahead," says Menon.

Subash Menon, founder chairman, managing director & CEO of Subex Azure sums up the situation succinctly. "The product industry is yet to evolve properly in India. With the focus on export of software services most companies have ignored this segment, and consequently, there are only a few players in this space. Yet none can deny that the opportunity is quite huge and Indian companies need to work at making the best of this emerging industry," he says.

Meanwhile, Amar Chintopanth, executive director & CFO, 3i Infotech seems to be a bit generous towards the services companies. "Over the years, the services giants have created a favorable atmosphere towards India. They must be credited for building brand India. Thus, product companies from India are no more taken as mere rookies anymore and are regarded with a certain amount of respect," he says.

The Indian market is estimated to touch
$7 bn by 2010. Thus, it is a big opportunity for Indian players both in the export as well as the domestic market

The Pot of Gold
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. Thus, it is a big opportunity for Indian players both in the export as well as the domestic market. Unlike the services industry, products players have been known to hone their products in India and other developing nations before taking them to more mature markets globally. This is what i-Flex did in the nineties, 3i Infotech also followed suit, and so did Subex Azure and a host of product companies.

India is also attracting a host of companies who are setting up their development facilities. Take the case of PTC, the company has its largest R&D centre based in Pune. Meanwhile, last year, Nvidia had acquired a small Pune firm, Pace Soft Solutions. At that time, Jen-Hsun Huang, the CEO had said, "We have invested close to $50 mn in India and plan to invest close to $250 mn in the coming years."

Not just BFSI
There has been a bit of an issue with Indian product companies so far. They have been mostly focused in the BFSI space. The reasons are plenty-the 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. Thus, there are a host of companies in this space.

Yet, there have been a few ventures that truly stand out. One of them is Cranes Software that makes statistical analysis tools. It has a unique business model of 'Acquire-Enhance-Expand'. Re-engineering them to add new features and functionalities, and expansion to the global market in itself involves a significant amount of R&D. Newgen is another noteworthy example in the document management space and many other ventures like these.

Pola-rising Market

Jaideep Billa,
CTO, Polaris

Sometime in 2001, Polaris did a reality check. It was established in 1995 and doing reasonably fair for a services company, but Arun Jain, CEO, Polaris, knew that it would not be able to compete with the likes of TCS and Infosys. For all its efforts, it would be tough to break into the big club. It was around this time that Polaris changed tracks. It adopted the Blue Ocean strategy; instead of slogging it out in the highly competitive services domain, why not coast along in the relatively newer space of product development. The company's expertise in the banking domain would also come very handy. But even the banking domain had a few strong players like i-Flex and others. There were quite a few players competing on the plank of technology and cost. Polaris decided to bring its technical expertise on the table, and introduced componentized products based on SOA principles.

"The idea was fairly simple, but complex at the same time. Rather than selling a product, we decided to present a platform to our customers, whereby he or she could pick and choose modules or applications that were required by the business rather than going for a big-bang implementation. We termed it as Non-Disruptive Measured Steps Method or NDMS," says Jaideep Billa, CTO, Polaris Software Lab.

With NDMS, companies were able to migrate from another core-banking platform to the Polaris platform with little or no hassle. And the results were there for all to see. "Today, top 7 banks from the top 25 use our solutions in some way or the other," says Billa. Though Polaris could not be a shining star in the services domain, it certainly emerged as a force to reckon with in the product domain.

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