I recently happened to get into separate discussions with two senior executives about the domestic software market. One heads the Indian captive of a US-based software multinational company (MNC) and the other, an Indian software services firm. I asked both the same question: “Why doesn’t your company build a software product for the Indian market? The person who was gung-ho about the demand for the package software in India was the captive head of the MNC! India is the fastest growing IT market in the world, at a rate of 33%, according to a recent Forrester report. And the segment with the most potential for growth is software products—a market currently less than $2 billion.
Software sold through a licence for a fee as in the case of Tally or SAP or Microsoft office is called a software product, unlike software services, which involve customized software. The estimated spend on software products in India is 6-8% of the country’s total IT spend. This figure is the lowest compared with any other region in the world—it ranges from 13% to 28% in other regions. And in India, the share of software products in the total spending on software and services, at 20%, is half that in China and Brazil. This shows tremendous headroom for growth. What is needed is affordable solutions designed with a deep understanding of the Indian customer.
This will trigger the massive latent demand for high-quality, affordable software products. Markets get expanded when low- cost solutions are made available. Reliance Mobile expanded the market for mobile phones, Deccan for domestic airlines and the Tata Nano will now do so for small cars. New trends in software in the last few years—open source software such as Linux, MySQL, Apache— have made it easier to build and sell software at a lower cost. Successes such as Salesforce.com have proven that SaaS (Software as a Service) is a viable model to sell software as a low, monthly subscription rather than charge businesses a high one-time licence fee.
The SaaS market globally is now close to $5 billion. It is clear that a multi-billion-dollar opportunity is ready to be tapped in this area. Who are the players who will best harness this opportunity? The traditional software services companies, big or small, will not, and cannot, come up with products for the Indian market. It requires a different level of focus, environment and commitment and the current services business model will not enable that.We have had successes such as i-flex, Infosys (Finnacle), and Subex but these examples are few and far in between. These are products created for global markets and they are not affordable solutions which can “trigger” the expansion of the domestic market.
According to a Nasscom 2006 estimate, the number of Indian companies engaged in product development is 175. A large majority of these are focused on the global markets, though—and are developing products for the US/Europe markets. But some of these companies, which have a holistic perspective and are not ignoring the Indian market, could be well positioned to take the lead here. A surprise entrant in this sector could be the Indian captives of global software companies—more than 200 of these are engaged in software product design work today. They understand what it takes to build a software product, know how to sell it, and being closer home, have the insights and better understanding of this market.
A focus on the domestic software market is being adopted as a core strategy by a small number of these captives. This strategy gives them access to emerging markets, which have higher growth and lower cost of sales. It also helps them get a better control of their destiny as they transition from cost centres to profit centres. I-flex, one of the product success stories, was, after all, born from the captive IT arm of Citibank.The next Tally-like success would probably come from the stables of an Indian captive of an MNC.
(Anirudh Joshi works out of Seattle, US, for a Bangalore-based technology company. These are his personal views. Comment at otherviews@livemint.com)
