Manish Goel, who heads the $1 billion Network Appliance's technology operations in India, has a huge list of "things to do". After 12 years of operating out of the US, his firm has decided to set up its first offshore technology centre. And that too in Bangalore. By next month, Goel has to begin staffing the centre, where the data storage major plans to invest Rs 50-75 crore and employ about 200 people. These are pretty big numbers when you consider the fact that the company's total engineering operations consist of just 550 people. Says Goel, "Our global product line will (now) come out of India. From core development to sustenance to evolutionary development, we will take ownership of the full product cycle."
Network Appliance is just one of the 453 companies already occupying the software product development space in India. While there's no denying that India has emerged as a leading global software services hub, the truth is that several companies are also doing cutting-edge R&D work related to product development (while software services essentially entails programming to meet a specific client's needs, software products are "solutions in a box" that can be sold to potentially thousands of clients, or, if you're Microsoft Word, to millions of customers). In the last five years, the latter's number has grown nearly fivefold. Says a software analyst, "Low-end processes got outsourced to India because they were low on risk but high on cost in the US. But now India is moving up the value chain and MNCs are architecturing products out of India."
Sample some more facts. Of the country's total annual software exports of $10 billion, products contribute 15 per cent. Product development has already attracted foreign investment of $300 million and employs around 30,000 people today. And the potential is huge. According to a Nasscom-McKinsey study, the global $180 billion market for software products is expected to grow at an annual rate of 18 per cent; of course, India's share at present is a mere 0.2 per cent. The study adds that product companies in India could employ at least 1,50,000 people by 2008.
If the numbers aren't enough to convince you that India has also become a product development centre, here are some individual examples. A third of all Oracle products are developed out of India, and Texas Instruments, the first real MNC to move its development work to India, has designed sophisticated chips in its Bangalore centre. Adobe's Indian centre already boasts of five patents including the Palm Pilot version of Acrobat Reader. Finally Novell with its development outfit in Hyderabad plans to have over 20 per cent of its R&D done out of India in the next two or three years.
Well, most companies which have established strong product bases in India were among the initial bunch of foreigners who came in the early '90s: Oracle, Microsoft and sap Labs (Texas Instruments arrived in the early '80s). Of course, for them a major impulse to opt for India as an offshore destination was lower costs. But factors like availability of skilled manpower and political stability too were key. Says Martin Prinz, joint MD of sap Labs, India, which plans to up its manpower strength by 200 this year, "What India brings to the table is talent and a cost advantage." India comes cheaper by 50 to 60 per cent even after taking into consideration communications and training costs.
But the real push has come only in the last five years as Indian firms have entered the segment. Today, save some 50 MNCs, all companies are Indian. Even the MNCs have expanded their Indian centres recently. Says Sunil Mehta, vice president, Nasscom, "Initially, the MNCs tested the waters and found that there was talent available here. In an economy as large as ours, all kinds of activities are needed from top to bottom and it is good to see all segments of the industry moving." So now, "made in India" is as acceptable as "made by Indians" in the software arena.
While Indian firms like i-flex, Talisma and Suntech have patented products for global markets, other smaller ones are making products for the home market. Says an i-flex spokesperson, "Homegrown companies are moving up the value chain." Eleven years ago when i-flex was formed, there was a choice between doing low-end work or high-end mission-critical work, and they chose the latter. Today, it's known for its flagship banking product Flexcube, the youngest product to clock 100 customers in four-and-a-half years.
Others like Talisma walked into product development by chance. A few years ago, its services company, Aditi Technologies, found it was having trouble keeping track of its customers. So a software tool to record customer histories was developed and named Talisma. Immediately, a new company was floated to sell the product, which has seen five versions in the past three years.
Traditionally, Indian firms have always found it tough to tread the development path. This is because product development is fraught with high risk of failure. Even to succeed, huge investment is needed to market the products. So, while it makes sense for MNCs to offshore their product facilities to India, none of the large Indian software firms have flirted with products. Services giants like Infosys and Wipro have only made modest beginnings. For instance, Wipro is experimenting with spinning off a number of its telecom-related products into separate divisions. The idea being that profits from services could finance the more risky product development.
In the end, it's only the small, the brave and the "foolish" risk-takers who go for products. And more are joining the tribe every day. Probably that's why experts are already talking of a demand-supply manpower mismatch. Typically, engineers with only IT backgrounds get jobs and, in specific areas like chip designing, a shortfall is already being felt.
However, that's not perceived to be a problem at all. The good news is that the Indian software industry is making the critical transition—from services to products. For, unlike services, where cost arbitrage plays an important role and other low-cost bases (like China) can wean away business, product development is more stable, once one cracks the market. And as long as your products are good, one can keep competition away. More than that, it makes the Indian entrepreneur a patent holder, a distinction which, until recently, was only applicable to MNCs.