Just for want of a local ecosystem, a Microsoft or an Oracle is too much to ask. But there is a rainbow on the horizon, as the charge of India's light (product) brigade gathers steam in the face of utmost adversity. The result is a 36% growth in revenues of product companies, over last year, from Rs 1,400 crore in FY 2003-04 to Rs 1,900 crore in the last fiscal-a growth inspired by new sign ups, larger deal sizes and gradual shift of business from emerging markets to more advanced economies.

All said and done, there are a few surprises in the Top 10 list, starting with accounting software major Tally beating Infosys for the second position. Fuelled by strong growth of 125% in the domestic market, Tally jumped to Rs 229 crore from the previous year's tally of Rs 105 crore. Considering a fall of 19% in the total product revenues of Infy in FY 2003-04, there was good news here too: investments of about $10 mn, which went into enhancing the Finacle product suit, ensured a substantial growth of 58%, with revenues growing to Rs 213 crore in FY 2004-05. Infy, like Tally, saw robust growth of 100% in the domestic sector.

Other surprise packages were Cranes and 3i Infotech, earlier known as ICICI Infotech. While Cranes grew 47% to Rs 134 crore, 3i notched up revenues of Rs 129 crore-growing at 95% over the previous year-to seize the fifth place, ahead of Ramco and Polaris.

Polaris grew at 22%, but dropped down the list, as Ramco grew by 65% to post Rs 124 crore as against Rs 75 crore in FY 2003-04. The position of the brigade's captain remains undisputed though; and it looks like it would continue to remain the same at least this year. i-flex just grew at around 19% but earned revenues of Rs 587 crore. At the beginning of FY 2004-05, it had a tank size of $50m, partly because it had created data models that allow banks to comply with Basel II requirements, and increasingly due to the fact that in FY 2004-05 it had started to focus on areas such as risk management. This was a year when they significantly transitioned into new territories like Europe and also saw a change in their product's adoption pattern-a shift from tier IV and III banks to tier II and I institutions-a good foundation for the future.

Other vital statistics from FY 2004-05 remain constant with exports still driving growth and the scales remaining largely skewed towards the top five players who comprise 68% of total sector revenues.

Healthy Home
The story of domestic growth in the product space would essentially be a tale of Tally and Infosys; but growing from Rs 13 to 30 crore makes 3i Infotech the only other company to have crossed the 100% growth mark over the previous fiscal year. Reduction of licensing costs, for both its single and multi-user versions, helped Tally immensely. But most of its growth in FY 2004-05 came because of VAT-compliant accounting, inventory and reporting solution, Tally 7.2. There have been capacity changes, as the company geared up to service the large enterprise space-a significant change considering the company was always positioned in the SME market. Tally also continued with its battle against piracy, while employing the theory of the power of affordability and the power of availability: it had successfully engaged over 25,000 resellers across the country to create demand and generate the need for Tally 7.2.

Infosys for one, believes, in all fairness, that there is nothing like a domestic and export market today, as people are benchmarking with the best in the world. But the 100% growth in the local market-from Rs 64 crore in FY 2003-04 to Rs 128 crore in FY 2004-05-tells a story of its own. The Finacle suite of products have been offered as a total value proposition to customers since it now includes other solutions like e-banking and CRM. A common reference for the company in the domestic market had been the Punjab National Bank, which has 1200 branches running on Infy's solution. Now, there is a second-in FY 2004-05, it implemented the Finacle suite in 12 countries, in just 11 months, for SBI.

Rival, i-flex, has an extensive exports focus, but still managed to grow its domestic product revenues by 37%, from Rs 30 crore in FY 2003-04 to Rs 41 crore last year. It did come under some kind of pricing pressure as in most of the public sector banks, the lowest bidder wins. Whatever growth came was because of its focus on pricing policy based on market sensitivity and competition pricing. But its average license fees went up from just under $1 mn per deal in FY 2003-04 to $1.3 mn in FY 2004-05.

Comfortable Abroad
3i Infotech, Ramco and Subex, at growth rates of 88%, 77% and 67% respectively, continued to feast on exports. Cranes grew its exports by 38% to touch Rs 124 crores. The one to take away most of the pie though was the usual suspect, i-flex, which pocketed revenues of Rs 546 crore; the earnings being well balanced in terms of geographical spread. Europe and APAC contributed 21% each and about 45% of its revenues came from North America, generally considered a tough and large market to crack, especially for banking product companies. But the company has made good inroads, signing up a leading corporation in the US, which would now use Flexcube as a core banking platform worldwide-in about 37 countries. But i-flex also realizes that getting all top tier banks in the continent to replace its entire legacy solution is a near impossibility, considering risk factors and a traditional conservative stance. What they would probably do is replace some part of their solution, for example, overhauling the lending business. i-flex has, in fact, done exactly that, selling Flexcube to Citibank in North America for their sophisticated commercial lending and loan syndication operation. For the smaller community banks or the credit unions, who don't usually buy a license and look for service providers, the company's strategy is to tie up with one of these players and host its solutions like an on-demand model, much like what IBM does.

Apart from Europe, where it has seen significant wins last year, i-flex has seen a lot of traction in Central and Eastern Europe, and Russia. It has now identified specific geographies, which will develop over three to five years, typically the BRIC countries.

A brighter aspect was that smaller companies like Subex also made inroads into Europe, the Middle East and Africa-52% of its export revenues of Rs 57 crore came from these regions. North America contributed 34% and APAC 14%. One of the highlights was the fact that it managed to sell a new concept-RevMax, which is an integrated platform of two products-about 9% of its product revenue came from here. The company's average contract size went up from about $700,000 to $875,000 per contract and the two acquisitions that Subex managed to conclude, one of them being Alcatel's, contributed to 15-20% of the company's overall profitability.

Chennai-based Polaris also grew its product revenues, from Rs 97 crore in FY 2003-04 to Rs 118 crore in FY 2004-05. Its confidence in the product business remains intact, given the increased news flow and visibility. It is ramping up marketing efforts on products as well.

Hurdles Muddle
We would have had more companies cropping up in the product space, but for the adversities that dominate the Indian landscape. Worse, potential start-ups have little idea as to the counter methodologies. For any product to develop, a local ecosystem that enables product companies to rapidly sell and deploy is needed. Products, companies have realized, are not a creation issue. There are questions of marketing; questions of scaling up. The scaling up requires the local market to be open and the local market is an extremely small market-a $4 bn market. So, Indian companies have to invest more and more into marketing products abroad. i-flex, for example, invests 13.5% of its revenue on branding. A services company, on the other hand, would typically spend about 5-7%. "A second thing is the kind of specialization required. Some have started off as service companies and built products based on that experience. But you need to decide ground up which is the area you want to specialize in, and then seed that knowledge within the organization. The challenge is to stay focused and that requires conviction, commitment and support," says NRK Raman, COO of i-flex Solutions.

Senior VP and business head, Finacle, Girish G Vaidya agrees. If domain, technical, sales, marketing and support expertise is what a product needs-India perhaps lacks in the domain and marketing expertise. "But getting the domain expertise today is not that difficult. There are many Indians who have worked in different domains abroad and may want to come back. If you are willing to pay the price, you can get domain experts from anywhere," he suggests. Sales and marketing expertise can also be built since Indians have good marketing expertise in the Services side. It's just a question of time.

But as Subash Menon, CEO of Subex points out, the country's equity in software products is a challenge. "When we try to sell in other countries, the first question asked is what do we know about products? We start with a negative equity there. That's the biggest challenge. And then to sell overseas, you need local manpower by way of sa les and support. To attract good talent on that front is also difficult. There is absolutely no confidence on the customer side as well as on the employee side," he tells.

Subex's solution: acquisition. "Even with expensive branding and marketing overseas, one may or may not have a good brand. The two acquisitions Subex made really changed things dramatically. We straightaway got customers and because we acquired the fraud management system of Alcatel, it gave us a lot of international price," he says. Potential employees noticed the company and started viewing it as a significant player in the space. It is an important model perhaps others can also look at.

Another problem area for Indian start-ups is the different levels of risk capital and there isn't enough risk capital to fund products because one in 10 could do well; not to talk of multiple levels of financing. "There is no guarantee of return on investments. It may not work for reasons beyond your control. You may be ahead of the times; you may have over engineered the product; you may not have positioned it correctly; you may have priced it wrongly; you may not have a good support strategy in place; you may not have a good implementation strategy in place," explains Vaidya.

Problems and challenges noted, Indian bravehearts don't really see a reason why the growth achieved last year cannot be sustained in future. Subex has given a guidance of its products growing by 50%, both in top and bottom lines. Yet another banking and financial services sector player, Nucleus, which generated around Rs 26 crore in product revenues in FY 2004-05, says it is optimistic on its product business and foresees an immense demand in the global market-its flagship product FinnOne has got a significant ranking amongst world's top 10 core banking solutions as per a report released by the International Banking Systems, UK-and client wins in FY 2004-05 will mean products being implemented in 21 countries. With such international exposure, there might be little negative equity in a few years from now.

Goutam Das