Reinventing India Software Inc.

More than ever before, India Software Inc. needs innovators who will break away from the pack in these trying times. Pradeep Singh is back in the driver’s seat at Aditi with a brand new model for selling enterprise software. If he pulls it off, India Software Inc. could have a whole new business model, says Prashant L Rao

Aditi’s Pradeep Singh is betting big on his ASP-plus model and he could strike gold if things work according to his plans

Thanks to the global economic downturn and the resultant need to slash costs to survive, sales of enterprise software have been sluggish for the past few years. While this trend is due to a multitude of factors, cost is the significant one because of the huge amounts of money that enterprises have to shell out for purchasing licenses of CRM, ERP or Supply Chain software.

“In the past five years of selling software within the Talisma context, the largest problem we have faced has been that associated with the purchase decision. Specifically with the perceived risk of making a large investment in buying an enterprise software product,” says Pradeep Singh, the founder, chairman and CEO of Aditi Technologies. The problem in enterprise software licensing is that you start with a large amount of software at $2,000-$5,000 per seat. With an average deployment size of 500 seats you are talking $1 million to $2.5 million just in license fees.

“As soon as a CIO is compelled to make that decision he also starts thinking about how he can make the software product fit his business. Companies like to get everything in a deployment because both the vendor and the system integrator leave after the rollout. This leads to the total cost of delivery going up to between $3 million and $20 million. Deployment time also shoots up from three to six months to 12-18-24 months,” Singh goes on to add.

The other problem
After years of enjoying amazing levels of profitability with operating margins running at 30 to 40 percent, Indian software houses are finding billing rates under pressure with large customers beating down rates for repeat orders. In this scenario, something drastic is required to give India Software Inc. a boost—what better than a whole new model that combines India’s famous cost-advantage with an enterprise product strategy in a novel manner.

The answer: Software as a service/subscription

More than ASP
Software as a service, IT on tap, usage-based pricing—these are all familiar terms. The first attempt to offer software as a service was through the ASP model. That attempt failed, as most ASPs tended to be channel partners and not the software vendors themselves. That’s because enterprise software is complex, and often channel partners don’t have sufficient competence to sell and deploy a complete solution.

The ASP model has its advantages, however, particularly when the software vendor runs the ASP partly or wholly. A bank or company adopting this model can do away with the need for maintaining its own data centre. “A bank can spend one-tenth of what a MNC or private bank does and offer the same services,” says Atul Gupta, head-ASP business at i-flex solutions.

Despite the obvious advantages of this model, several factors have been keeping companies away from it. “Two to three years ago we faced the insurmountable problem that nobody wanted to be the first one to go in for ASP,” recollects Gupta. i-flex’s first customer for its ASP offering, Lord Krishna Bank, will only go live in a few weeks from now.

Aditi isn’t the only Indian software company trying the tack of ASP with a twist. Pramati has its own spin on this. Sathya Narayanan, vice president of sales at Pramati says, “We have a licensing model that helps enterprises spread their investment on our products over a time period. Unlike a pure ASP model wherein the customer does not own the license, here the customer does own [the licenses] and also has a predictable cost which can include other services packaged around the product.” Pramati also has an offering aimed at ASPs.

Aditi’s latest gambit
That said, perhaps Pradeep Singh’s latest gambit is the most focused attempt yet to have a ‘more than ASP’, call it an ASP plus, offering. While other players offer ASP as an option, Singh appears serious about making it the predominant source of Aditi’s revenues. His take on software-as-a-service is rather unique—-Aditi’s new model is that it is going to offer customised versions of an enterprise CRM product. It is not an ASP in the strict sense of the word. The software will be installed at the customer’s site just as it is in a conventional CRM deployment.

“Aditi will deploy a skeleton application in three to six months. This lets you (the customer) learn from your usage pattern as to what you really need. As you learn, I deploy enhancements and extensions every quarter until you are comfortable. This is to demonstrate that I have skill in the game. I take the cost of software licenses off the table; you pay on a subscription usage model. Instead of capital expenditure (software licenses account for 75 of any deployment’s cost, excluding hardware) it becomes operating cost. You pay every month and the RoI (return on investment) calculation, in turn, is done every month,” explains Singh.

Aditi Managed Services will maintain a code tree with 50 branches. It will be a completely fresh code base written from scratch. Aditi’s focus will be on large enterprises with 500 to 1,000 users. “It doesn’t make sense to customise software code for 50 users,” explains Singh.

Normally, any enterprise software vendor will make minor tweaks to a product to appease an enterprise customer. But no enterprise software product company in the world today is willing to maintain fifty customised versions of a product. That’s what’s totally new and unique about Singh’s plan. In the case of others, they would have only one code tree for each product version. Aditi plans to have one for each customer. Aditi’s working on the code tree currently, and it should be ready by the end of this year.

“If I charge $2.5 million per year, we will make over 50 percent profit in the first year. [See box below: Software as a service, Indian style] The second year onwards, Aditi will earn 80 percent profit,” claims Singh. Compare this to the existing model for enterprise CRM (say Siebel) where a user company pays $6 million in software license fees ($3,000/seat for 2,000 seats) and $2 million for deployment, and the merits of this model are obvious. Aditi will give its customers the option to pull the plug on a deployment if they aren’t satisfied after the initial rollout. This reduces the risk perceived by the customer, which is the biggest barrier to deals getting signed.

Plus, in the new model, the willingness to do custom work will be much higher than what vendors do in the license software business where they don’t want to do too much customisation.

Will it work?
The straightforward comparison between the existing business model for selling enterprise software ($8 million) vs. Aditi Managed services’ new model ($2.5 million in the initial stage) could sway CIOs into voting with their feet. Still, we must look at the fact that in a conventional CRM deployment, the user company wouldn’t have to re-invest for three years or longer till the next version of that CRM product came along. Whereas, in Aditi’s model it would end up paying $7.5 million over three years, pretty close to the original sum.

What will play in Aditi’s favour will be:

1. Up front costs will be significantly lower.
2. Short lock-in period of a few months vs. several years for a conventional enterprise software roll out.
3. Higher profit margins (largely due to the Indian cost advantage)

Having said that, there are a few factors that could throw a monkey wrench into Aditi’s gears. The first is the rising rupee (or rather the falling dollar). The Indian Rupee has been rising this year and it’s appreciation vis-à-vis the dollar can’t be good for any plan that relies on India’s cost advantage. That said, it’s unlikely that the rupee will rise to the extent that it makes Indian software manpower uncompetitive.

Another factor that could derail Singh’s plan is that enterprises tend to be conservative in buying software. It will take a lot of doing to convince them to buy into a new product and a new business model. The last potential bugbear lies in the fact that Aditi is going to build a new product from scratch! Throwing away an existing code base and starting anew is risky. Very few companies have pulled this off, a notable mention being Singh’s erstwhile employer Microsoft that managed to create a new operating system from scratch (Windows NT). It took Microsoft three iterations to succeed in the server OS business with NT and over a decade to bring NT to the desktop as Windows XP.

To its credit, Aditi has always followed a componentised development model. The company started out creating ActiveX components for Microsoft Internet Explorer. Its experience in creating the Talisma product and in pulling off a successful ‘scrap and rewrite’ exercise in Talisma 2 should stand it in good stead here. Aditi had developed Talisma 1 on Microsoft Access, to make its product scalable for enterprise customers, it re-architected the product from the ground up on Microsoft SQL Server for the second version of Talisma.

One thing is for sure—every Indian software player will be waiting and watching Aditi closely. Aditi has bet the shop on this plan; for an i-flex or Pramati ASP is just a sideline. For Aditi, subscription-based software sales will be the bread and butter. If it works, it’ll be bonanza time for Aditi, and a whole new model that India Software Inc can adopt.