Software service companies graduating to making products?

By June 22, 2015

Unilog, with its office in Bangalore and a coding centre in Mysore, was a typical software services firm till the Lehman Brothers collapse in 2008 dented the cost cushion such companies enjoyed. Pricing had to drop and margins took a hit, but Unilog’s CEO Suchit Bachalli still found that a run-of-the-mill services contract offered very little in terms of innovation.
Unilog changed its strategy that same year when it transformed into a product company. The firm’s flagship product today helps global businesses like healthcare equipment manufacturer Thermo Fisher Scientific and mining group Xstrata take hundreds of thousands of products online and manage the entire ‘click-tocash’ process. Another product helps companies keep a close watch on the competitive landscape in real time.
Its clients, like power firm AES Corporation and electrical equipment distributor Mayer Electric, are in Western markets, a difficult place to compete for a technology product firm from India. However, Unilog is not alone anymore. There has been a subtle shift in India’s technology subtext in the past few years that has largely gone unnoticed.

THE SHIFT
Services are slowly losing sheen due to factors internal and external and at the same time, a slew of home-grown product firms are making their mark. Competitive advantage is hard to sustain in pure services, writes Forrester in its April report on software innovation, forcing firms to look at products instead. “Competitors in other geographies can easily learn how to emulate success within a generation” when it comes to services, it says.
From Zoho, which has crossed $100 million in top-line revenues, to Ramco, which bagged ten clients for its aviation software suite last year, there is an unmistakable swagger: a desire to succeed and change the mindset from coding to creating. Innovation, a focused (read: niche) approach and competing in global markets (in specific domains though) are driving these firms which span the tech landscape. “Product companies and startups are the next growth engine,” says Krishnakumar Natarajan, managing director of MindTree and chairman of Nasscom, which has now set up a wing to push the cause of Indian product firms.

THE DRIVERS
Innovation that delivers value and solves business needs is key. Explains Ranjan Tayal, senior vice president, business consulting of Ramco Systems: “With the typical outsourcing space becoming competitive, the focus on product has gained prominence and the innovation has started to get noticed. The changing economic climate has necessitated an even stronger alignment between information technology and business objective.”
“There is definitely a positive trend towards encouraging more innovation and experimentation compared to how we were in 1990s,” says Sujai Karampuri, CEO of Sloka Telecom, which provides WiMax solutions for licensed products.
Forrester found that Indian innovators are deploying intellectual property in the form of assets, platforms, and highly skilled people to deliver high value and disruptive innovation to clients. Manish Bahl, Forrester’s research vicepresident and country manager, says this is based “…on a combination of factors, from willingness to listen to the voice of the customer through methods like crowdsourcing for innovative ideas to shaping a culture that tolerates failure”.
Innovation apart, product companies can be more productive in terms of revenue per employee than service firms. And when a company is focused on productivity, it strives for better products, better user experience and better support. It raises the bar to compete better with global players.
But where is the customer? India’s domestic market for IT products is way smaller than America’s. In 2012-13, Indian software products notched up around $2.2 billion in revenue, of which 70% came from the overseas markets. So, the target is global – North America the biggest market – and product firms are pushing ahead with right quality and know-how.
“In this new internet age, product companies have to build for the global market. The expectation gap between the global and local market is actually shrinking. You can see that a majority of next generation start-ups in India are focused on the global market,” says Hyther Nizam, vice-president, product management at Zoho. Zoho competes with CRM and Cloud Computing To Grow Your Business – Salesforce.com, offering CRM and other SaaS services at significantly lower price points.
Ramco’s Aviation Suite — a niche offering in the MRO space — has been quite successful in the developed markets like the US and Europe. Druva has created a market leadership position globally for its endpoint backup solution. Today, the company has moved headquarter to Silicon Valley, and has raised multiple rounds of venture capital. Revenues have crossed $15 million.