The innovators

While Indian software remains largely service-driven, a few bright sparks of innovation are brightening the industry's reputation and outlook, says Vinutha V

India’s much ballyhooed software exports industry commands about 2 percent of the overall global IT services market valued at $450 billion by IDC. While focussing on low-end IT services has proved lucrative for Indian houses, it isn’t enough if India Software Inc is to get more than a marginal share in global IT spending. Against this background, the efforts of a number of small and mid-sized companies that are creating intellectual property (IP) is laudable.

Many routes, one destination

For software product companies, the route to selling IP can be either through IP licencing or the product route.

The innovators have chosen both. Take Subex Systems. The company developed a product in the niche domain of fraud management for telcos, then chose to sell the complete packaged product instead of adopting an IP licencing model. Explains Subash Menon, president and chief executive officer of Subex, “Our team’s experience in products led us to opt for this model.” Many GSM mobile telephony players use the company’s software. Globally, it is second to Hewlett-Packard.

Or take the case of Pramati Technologies, one of the first Asian companies to launch Java-based application servers. Says Jay Raghavendra Pullur, founder and chief executive officer of Pramati, “We launched Java-based application servers as there was a need for cost-effective servers that required less maintenance but were scalable.”

Most mid-sized Indian organisations have realised the need for creating IP. Says Shashank Patkar, chief financial officer of Geometric Software Solutions, “It’s very important to have product lines as it is one of our key differentiators. Moreover, software products command higher margins.”

Starting out

As the software services business becomes largely volume-driven with large vendors grabbing huge deals, small and mid-sized companies have no option but to go in for IP creation. Companies that stuck to their guns and went ahead with identifying trends before other companies caught on are succeeding in the market.

As Pullur of Pramati puts it, “We found our potential in the mid-market, and quickly brought out server software for addressing it.” As with any start-up, bagging the first reference customer was a challenge. Pramati’s first client was ICICI Bank. After the first reference client, Pramati managed to sew up a string of customer wins. Currently, it has close to 370 product installations across the globe.

Getting funded is also a bugbear. While venture capitalists love to invest in safe ventures such as BPOs, a product play in a new category is considered to be risky. Subex overcame this hurdle by going in for an IPO in 1999. Post-IPO, the company went on an acquisitions spree in Canada and the US.

Volume game

Our team’s experience led us to opt for a product model Subash Menon President & CEO Subex	Margins are high in the IP licencing model Rajiv Mody Chairman & CEO Sasken

Another option that has proved popular with Indian innovators is the IP licencing model. It lets organisations take a middle path between pure services and full-fledged software products. The IP in question could be software embedded in digital devices such as MP3 players, mobile phones or digital cameras. This model lets organisations earn royalties from device manufacturers for each device that is sold incorporating the technology. However, though only a few Indian firms have adopted an IP business model, some of India’s biggest players (Wipro, HCL Technologies) as well as specialists (MindTree and Ittiam Systems) follow it.

While most Indian firms have a mix of product, pure services and IP-led services, some such as Ittiam have bet the shop on IP licencing. Srini Rajam, chairman and CEO of the company tells why, “IP licencing leverages the best of India’s technical talent both in quality and quantity. If the revenue scales along with the amount of IP created, then a company can earn a fair profit.” Rajam says that this model is ideal for small companies as the investment is fully focussed on a relatively small team (rather than on large operations) that is prolific in developing technologies. “Unlike the product business, licencing IP does not require huge investments in manufacturing, sales, marketing and distribution.”

By contrast, Sasken follows a model wherein the company offers a combination of IP software components and consulting services. It licences IP in the areas of wireless modems and 3G. Says Rajiv Mody, chairman and chief executive officer of the company, “In the IP licencing model, margins are high. It’s a high-barrier field as once you enter you are unlikely to be displaced by a competitor.” This is especially true in segments like mobile phones where the volumes are considerable.

IP pays off

IP licencing opens up royalty streams for a longer time. Companies can accrue the benefits of technology within 3-5 years, depending on the technology. Although IP licencing is a long-haul game, organisations that stay focussed have the potential to be much bigger than traditional mid-sized software exports players who focus on services. Says G Venkatesh, chief strategist and chief technology officer of Sasken, “We picked products that were high in volume such as DSL modems and mobile phones to get a reasonable amount of royalties.”

Ittiam identified product categories that helped it garner royalties. Says Rajam, “We realised that entertainment was going to be huge. This led us to create IP that could be embedded in high-demand products such as digital cameras, videophones and set-top boxes.”

Facing reality

Software product development and an IP-based model come with unique challenges and risks. That’s why most companies prefer to take the easy way out and concentrate their efforts on software services as these have a shorter gestation period and result in a quick return on investment. In India, few companies have a successful IP-led practice. The domain experience in IP creation in India is still in the range of 10-12 years, while countries such as Japan and Korea have 50-60 years experience in creating IP. Getting hold of skilled manpower is tougher for product companies as their staff needs to be in the same domain for a longer period. Finally, when it comes to convincing customers, both domestic and overseas ones, selling Indian innovations isn’t easy. That said, the ‘Made In India’ tag is beginning to be recognised favourably in IP creation and licencing although India’s fame as a low-cost hub for software services is hampering matters. Another limiting factor is the lack of global presence. Understanding the needs of clients requires a presence in the market in which the client operates. Most Indian firms do not have the resources to operate at a global level.

Indian firms are branching into new territories—be it i-flex in core banking, Ramco in ERP, Talisma in CRM, Newgen in document management or Subex in telecom fraud management. India does not have product players that command the clout of a SAP or Oracle, but the seed has been planted. Let us hope that the tribe of innovators will flourish, help Indian software increase its share of the global market, and ward off competition from East Europe and China.

vinutha@expresscomputeronline.com