India has made its mark as a leader in the IT Services and IT Enabled Services (ITeS) businesses. To maintain this leadership and to effectively face competition from developing countries, Indian companies clearly need to innovate and create its own intellectual property. One area that has the maximum potential for Indian companies to leap frog is the product development business for IT.

Realising the importance of product development, the IT industry body, NASSCOM created a seperate forum for product development and held its first Product Conclave in Bangalore last week. Here industry stalwarts shared their thoughts, discussed challenges and opportunities, technological aspects and even had sessions where budding entrepreneures could interact with venture capitalists. NASSCOM has also instituted a special ‘Product Business Guidance Panel’ to guide entrepreneurs and organisations on various aspects of setting up and running a software product company.

Small beginning

India already has around 300 companies across the country who have developed products. Besides, there are a large number of multinationals have set up centres in India for the development of their global products.

Microsoft and IBM are two major examples in this field. Then there are many Indians who have worked abroad in IT companies, returning home with ambitious plans to develop IT products. Yet the Indian product development business is miniscule at around $1 billion (Rs 4000 crore) compared to software services and ITeS business of $40 billion (Rs 160,000 crore).

As the size of the global products market is to the tune of $250-300 billion, it is just an indication of the market potential for Indian companies. NASSCOM forecasts that India can reach $15 billion in revenues from products by 2015 creating one million plus jobs by 2010.

Currently some of the software giants like TCS, Infosys and Wipro have several products in the field of banking, finance and insurance. TCS, for example, earned Rs 600 crore in revenue in 2006-07 from products accounting for 3.2 per cent of its global turnover. Infosys’ core banking product Finacle along with other products got the company Rs 538 crore in 2006-07 or 3.9 per cent of its turnover. Then there are pure play product companies like Subex Azure and i-Flex Solutions, earning Rs 239 crore and Rs 1096 crore in net revenue in 2006-07.

“Taking a cue from countries like Ireland, Israel, the UK and Singapore - strong emerging software development markets, we need to ensure adequate government support and create an ecosystem for growth of this segment,” says Subash Menon, Managing Director & CEO, Subex Azure and Chairman of NASSCOM’s Product Forum.

For any product development business the first step is to ask a question, identify the problem and then clearly define it. “There is no need to invest in heavy R&D, you just need about eight talented people to see a problem and develop the solution,” says Sabeer Bhatia, Co-founder of Hotmail.com.

Product development

As developed countries begin to saturate the potential for developing nations opens up. As the market becomes RIPE (Retail, IT on demand, Pharmaceuticals and Entertainment) in India, a number of product companies will rooster out across all verticals, paving the way with both organic as well as inorganic growth. The spectrum for product development is wide. “In the entertainment industry devices are growing smaller day-by-day. Having music, video, TV, internet on mobile devices such as PDA, mobile phones, laptops and even at homes as a lifestyle, is a great area to explore,”  says Atul Chitnis, Senior Vice President (Product Technologies and Strategy), Geodesic Information Systems. Of course, like software services, India has a major cost advantage in product development. An US-based company can make products for $200,000 while an Indian firm can try the same thing at $20,000. At one-tenth the price, this can be a major innovation for the local market, informs Sharad Sharma, CEO, Yahoo! India R&D.

Agrees Mr Menon of Subex  “For an India-based product company, the cost per person per year is $45,000 as against $120,000 for a US based company. Indian companies can invest the cost advantage to develop superior and better products than foreign companies.” 

One area to target is to open up defence related technology work for local companies. The opening of defense related work would expand the number of promising markets beyond telecom, financial and pharmaceutical verticals and the SMB sector. Consumer spending is at an all-time high attracting significant investment in manufacturing, aviation, hospitality, healthcare and life sciences, BFSI and textiles and even waste management business can be looked into.Citing the economic benefits of product development, Samir Palnitkar, Vice President, Engineering, Airtight Networks says, “The country Israel was an undeveloped desert, but realised the potential of products development early on.

Today acknowledged as a global leader in software, bio-technology, telecom, networking and defense equipment, with a population of 7 million, the country boasts of an annual per capita GDP of $26,000,"

Favourable conditions

Today technology such as open source solutions is supporting growth of product development for feature-rich products. Storage space available on a pay-as-you-go basis, reducing the cost hardware investments. Similarly, funding is not a constraint for an idea with a good potential. Over 80 per cent of companies in India are self-funded by friends and family, but now many are attracting the VC funding. IDG Ventures, a VC fund, for example, is planning to invest 40 per cent of their fund in Indian product companies. “We focus on the depth of the solution and the domain expertise,” mentions Sudhir Sethi, Vice Chairman and Managing Director, IDG Ventures India.

Today most VC firms are betting on the software products (business intelligence, 3D technology, digital security), life-sciences (medical electronics), internet-related products, gaming, wireless networks, telecom and mobility industry. 

Another activity is the incubating cells wherein newer technologies get the initial support. Professor Ashok Jhunjhunwala of IIT Chennai, has created a centre of excellence in wireless technology with a group of 16 faculty members. The centre has incubated 14 companies that employ 1500 engineers and have a combined revenue of more than Rs 1000 crore.

Customer confidence

Majority of the large organisations feel that Indian product vendors do not understand the systems and functions of customers. The products are competitively priced but they give about 50 per cent fit to the business processes. Also these products are not scalable, their upgrade modules are missing giving rise to legacy systems. Another concern is the hidden costs that make the Total Cost of Ownership (TCO) a major financial investment. 

Arvind Kathpalia, Group Head Operations, Technology & Finance, Kotak Mahindra says, “An average foreign bank has 345 automation processes while an average Indian bank has 150 automation process. This is an area where much work needs to be done. For instance in our growing credit cards business we do not have an Indian product that can scale and we have to seek overseas vendors.”

An important part of product development lies in the intellectual property that a company owns. Though number of patent filings have increased fourfold in the last five years, in absolute terms it is low. Nasscom expects patent filings to increase significantly as major revisions are made to the country’s patent laws in 2005.

As as more IT companies move up the value chain and focus on developing software products and embedded software for new consumer electronic devices, this will give rise to standardisation which is required for growth. In the end when a product development  ecosystem is in place, assistance from the Government can be sought out.