Dataquest : PACKAGED SOFTWARE: Well Packed, Well Sold

Drivers pressed the speed button, and the packaged software express moved on to the fast track, registering a healthy growth of 44% bringing in Rs 3,305 crore. The fuel also came from the need to reduce complexity and address market challenges on a real-time basis, as Indian companies started to rely more on IT to get faster and better information about their businesses. Compliance with emerging standards like Basel II and Sarbanes Oxley, and increased competition completed the 'need' ecosystem, forcing companies across the board to adopt integrated intelligence platforms. This was good news for enterprise application players where market realignment and consolidation also changed dynamics; even though just a bit.

The ERP wagon is still powered by SAP, but there seems to be a new leader, going by the world-wide trends in the SCM and HCM markets: Oracle.

The company's combined market share with PeopleSoft, by license revenues in the Asia-Pacific region, has grown to 12.6% but SAP sits comfortable with 18.1%. In the BI space, SAS ran into big brother Microsoft, who reported around 150% growth in BI revenues, counted mostly as part of its database revenue. It was party time at the Big Blue too-with over 3000 SMB customers in India, IBM saw excellent update on its Express portfolio with 217% growth in the number of SWG Express clients in FY 2004-05.

The packaged software industry ended the year with revenues of Rs 3,305 crore, a growth of 44% over the previous year

All packaged software vendors now have a strong SMB focus in India

Compliance issues, particularly with emerging standards like Basel II and Sarbanes Oxley, were major drivers

Government starts to open up-seeing deployment of sophisticated applications

Source: DQ Top 20, 2005

• The Top Players

The money flowed from almost all the verticals, with some significant traction in the government sector. The banking and insurance sector remained the packaged software club's bread and butter, with the bulk of investment going towards software systems that improve user productivity and customer service. The telecom vertical also contributed; software investments here mirroring the need for value-added services around a fast growing subscriber base. Even as large enterprises raked in the moolah, most players had a significant SMB agenda.

Demand and Supply
The increased adoption of packaged applications was visible both at the large and small organization level. People have realized this to be a part of the cost of doing their business, things which they need to run their business more effectively and slowly get linked up to the global supply chain. From the trends perspective, this is increasingly becoming important-the Indian enterprise is not just looking at India as the market. They are thus moving towards vendors who promise long-term operating comfort, an integrated platform, industry-specific software and best practices. The other demand was value-creation. Today's value-creation is largely around innovation-how much a company can innovate to keep its customer interested. So, the focus was on packaged applications that help in this innovation cycle. Risk management and cost reduction were the other drivers, the latter being mostly true for the smaller companies.

Current market trends in the SMB space is moving towards clients wanting to buy industry aligned solutions, preferably from local solution providers. Vendors have attempted to address this in different capacities. IBM's core strategy in Asia Pacific, for example, is to 'go-to-market' with business partners to deliver complete solutions addressing its clients' priorities such as RFID applications for retailers, or enterprise resource planning in manufacturing or supply chain, and inventory management in wholesale distribution. With the explosion in storage and PC proliferation in organizations, the need for Enterprise Management Suite and Messaging products is on the rise.

Vertical Talk
New avenues lit up, but the windfall was mostly from the governments in FY 2004-05. Governments are looking to an open computing approach to speed the integration of multiple computing systems across bureaucratic boundaries, and also to respond to the unprecedented challenge of integrating multiple systems across agencies to ensure that critical information can be shared in a timely manner. IBM and Microsoft witnessed an increased interest, both at the Centre and the state level, to drive e-governance, at times based on Open Source and Open Standards technologies. Microsoft reported good growth helped by large buying from departments like Posts and Defense. E-gov projects like Bhoomi in Karnataka began to take off as well.

Bolder applications moved into newer platforms in the manufacturing space, a vertical that is beginning to see deployment of sophisticated applications-supply chain, BI and business forecast tools-at least in large manufacturing set ups. Oracle started working with companies like LG Electronics, a big name in the national manufacturing arena. A lot of investments were also noticed in the metal space, riding on the steel industry's good patch. Another market that partially opened up and is likely to grow fast this year, was the travel and transportation industry. Relative IT penetration in terms of packaged application is still low as of now, but vendors are enthused by hectic activity in this vertical, particularly in the Airlines segment. Also a surprise is the services market. Professional service organizations like BPO firms and ITeS companies, who are closely linked to the global supply chain, have really taken the lead in adapting to packaged software. An example is Microsoft's market for productivity suite, where this vertical emerged as its biggest driver.

Software Pals
Oracle did well to grow its application business by about 50% in FY 2004-05. It consolidated its position in the dairy, jewelry and paper industry while further strengthening its place as a CRM player. UTI Bank, a long-standing Oracle customer, went live on Oracle CRM last fiscal. Tata Teleserivces, also an existing user of Oracle CRM, embarked on an expansion of its CRM project. The company further penetrated into the financial services industry, where it already has substantial market share. The mid-market, which forms a potential growth area for most ERP and CRM players, continued to be the company's focus area, with about 40% of the new application customers buying Oracle's mid-market offering-the Oracle E-Business Suite Special Edition. Smaller organizations here looked at the basic systems to be brought in place.

Large organizations mostly have ERP in place; the demand was therefore for business information warehouse, BI out of transaction data, Supply Chain Management and CRM. Last year also saw the first Oracle clinical (D&O Clinical Research Organization) implementation, a data management solution that allows companies to standardize and control data definitions and data usage across a global operation.

Micro Effect: Microsoft led the way with a growth of 30%

Most of the biggies did well last year, with Microsoft leading the way with revenues of around Rs 1,100 crore, as compared to Rs 853 crore in FY 2003-04, a growth of 30%. The company has not made much money from the consumer markets just as yet (the segment contributed 5% to its revenues). But this is an area where hardware is still growing faster than software. Microsoft found big growth in the banking and financial vertical, which grew two to three times. There was substantial growth in education too with fixed deployments happening in the schools of Gujarat, Punjab, Delhi as also the North-East.

In the banking and government sectors, the predominantly selling software was the server OS database. This is the company's fastest growing segment, the second fastest being the productivity suite. With companies deploying new applications at a much more rapid pace, the server software growth has registered a much faster growth than the desktop infrastructure. Implementation of core-banking rollouts by institutions like the Bank of Baroda and Bank of India, reinstated the fact that public sector banks are now moving from a very de-centralized to a centralized infrastructure-something that is also driving Microsoft revenues. Its productivity suit grew 25%, the server growth being around 35-40%.

The uptake for ISA servers for managing network and security was close to 200% but it still remains a very small business for the company. For every Windows server Microsoft sells, many of these servers are attached, enhancing and making the infrastructure a lot more sophisticated. This 'value-add' is about 2-3% of Microsoft's revenues in India as against 12% in the US-demonstrating how nascent the market is. Similarly, the BizTalk server for application integration saw a 200% growth, but again has a small base. The personal software market would refuse to grow but there is a silver lining. Derived products like gaming are showing huge growth-at about 150% a year. Though not a growth driver per se, the market for it is fast maturing.

Linux matured last year, as was visible in the 35% market share it claims in servers. Microsoft says it has not seen significant adoption of Linux on the desktop (less than 10% share). The reason why actual deployment of Linux was low was largely because customers look at the desktop and productivity tools (like Office) together. The perception is (Microsoft claims to have research to corroborate) that there are compatibility issues with desktop tools like Star Office, and common tasks take significantly longer for users to perform on Linux than on Windows. This translates directly to a significantly higher cost of ownership for Linux and reduced productivity for employees.

Rival SAP, with around 54% market share in ERP and 21% in the CRM space, added 120 new customers in FY 2004-05, 75 of those in SMB. It grew a phenomenal 70% year-on-year on license revenue with big wins in the old playground of manufacturing. Till about FY 2003-04, an area of concern for the company was the BFSI segment where it had little penetration. It started to get some traction there with General Insurance Corporation (GIC) implementing its re-insurance package and Tata Finance implementing leasing and assets management, among others.

In the Asia Pacific region, SAP's total software revenue growth for SMB nearly doubled in FY 2004-05, with an average of three customers each working day of the year. SAP signed nearly 200 new mySAP customers and 400 SAP Business One customers in the region, taking the total SMB customer count to nearly 1,000. India has about 330 of these and is among SAP's top three emerging markets, globally, in this segment-the company expects its growth to be about two times faster than the market.

Ramco's mid-market ERP-Ramco e.Applications-also saw healthy adoption across 15 industry verticals. In India, the product has an installed base of 450, and over 80% of its existing customers are using it. More than 50% of its installed customer base falls in this segment. The primary challenge for Ramco, which enjoys close to 10% market share in India, has been in effectively reaching out to the potential opportunities across the country. This is now being handled by putting an ecosystem of accredited partners who would identify potential opportunities, sell and implement the products and solutions, and also offer support services. In terms of revenues from the ERP segment, it has grown by 25% in FY 2004-05 as compared to the previous year. The company's revenue from the BI segment has grown by over 80% during the same period.

SAS, which lost out to Microsoft in BI but was ranked the leader in the Enterprise Intelligence Platform market in India by an international marketing consulting and training firm recently has shown strong growth in the analytics space. It launched SAS Financial Intelligence, an advanced portfolio of software solutions that helps organizations achieve more predictive and timely results from their finance functions during the year.

Happy Times
Other packaged software players like Tally, Adobe and IBM had a good year too. Tally closed the last financial year with a turnover of Rs 225 crore plus; growing from 150,000 legal customers to 600,000. Most of the growth, it is said, came from sales of Tally 7.2 in the last two-three months-partly because of VAT. Tally is fast foraying into the large enterprise space-it was always consciously positioned in the SME market-besides expanding outside the country and exploring opportunities in education. While Adobe registered a 20% growth in India, the latter's 'Express' offerings, which is a portfolio of programs designed and priced specifically for medium businesses, began to see substantial traction. New SMB clients in IBM's software group worldwide tripled in 2004. A-PAC followed a similar trend with 16,000 SMB software clients. In the last quarter of the year, around 200 clients from the region purchased Express.

A key driver of IBM's success has been its approach to channel 'enablement'-more than 3,500 IBM business partners have been enabled to build and sell Express-based solutions through the IBM Virtual Innovation Center. Local Independent Software Vendors and Systems Integrators have driven the traction in India, to a large extent. While the intent was to position Express products with the SMB, many customers, the company says, end up looking at higher offerings as their requirements dictate the same. Among the giant's software brands, Rational emerged as one of its faster growing brands in India in FY 2004-05. Last year, IBM had moved some of the development tools from WebSphere into the Rational brand. One of the main reasons IBM decided to acquire Rational was to fill out and complement what it was building, regarding an integrated development environment. As a major brand, Rational helped it to establish and maintain mind-share and market leadership around software development, which is why moving the tools made sense.

Amongst the verticals, apart from the government sector, IBM witnessed growth across Banking & Insurance, Telecom and SW/ITeS. SW Services looked at investment in development tools, primarily to address the base of customers outside the country, deploying applications on open standard/IBM based technologies, while IT enabled services looked at IT Infrastructure management tools, to improve internal service availability standards.

Going ahead, the growth achieved is likely to continue till at least the current fiscal, and with the markets saturating for large enterprises, all vendors will scramble for the SMB pie, for market expansion. There could be some surprise traction in large enterprises too, vendors predict-they all have an enterprise solution but in the long run, these organizations will realize that a standard off-the-shelf product or a pure ground-up developed solution doesn't meet business objectives. This is due to the fact that both these approaches have some inherent drawbacks. For example, a packaged product would address the best business practices but not the unique practices, and a customer built solution would cater to the latter but not the former. More interesting times could just be ahead.

Goutam Das in Bangalore