Over the last two decades, the Indian IT industry has been propelled to $64.5 billion in size, primarily because of its success in services. As the services sector recovers from its worst slowdown, there is a renewed interest in the high-risk, high-reward software products, which is projected to grow from $2.5 billion in size at present to $11 billion by 2015. Indian companies, however, are still quite far from developing a blockbuster product like Office and making a mark on the global stage, although that remains the Holy Grail for most. But their big opportunity lies closer home—in the small and medium businesses (SMBs). These were some of the key takeaways from a recent BT-NASSCOM panel discussion. The panellists included Som Mittal, President, NASSCOM; Bharat Goenka, Managing Director, Tally Software; Subash Menon, CEO, Subex; Orna Berry, Chairperson, Prime Sense, and Venture Partner, Gemini Israel Funds; and Pallav Nadhani, CEO, FusionCharts. Rahul Sachitanand, Assistant Editor, Business Today, moderated the discussion.
Why is there a renewed interest in software products?
Goenka: Entrepreneurs typically gravitate towards sectors that have a greater chance of success and until recently that choice was software services. In the last two years, everyone's been talking about the difficulties in the services industry; it's no longer considered the easy industry to operate in. Twenty years ago, everyone started in products and moved to services when the opportunity arose. Now, we're seeing a strong refocus on the products segment. My personal fear is that people will get into business, but degenerate into small niches which are more profitable to operate in.
Menon: There was a renewed focus on products by NASSCOM two years ago and today the number of such companies has grown to over 600. Now, there is a platform for products companies to be seen and heard. We as a country haven't reached the maturity to develop a world-beater, Officelike package from India. We have a long way to go, especially since we have to compete with people who've been at it for several decades.
Pallav, why did you decide to focus on products when services were still in vogue?
Nadhani: It was a case of accidental entrepreneurship since no one was willing to trust a 17-year-old with software services! We started just after the dotcom bust when people were trying new technologies. Also, we quickly realised that in our market—Internet-related products—we could build scale very quickly. Broadband proliferation has allowed us to get 85 per cent of our customer base online: We have 12,000 customers online without having sales offices anywhere globally.
Dr Berry, what lessons can India and Indian products companies take from Silicon Valley and Israel?
Berry: Most of the product development in Israel is exportoriented. Software products have a shorter product cycle than embedded systems, an area where Israel specialises. At the end of the day, both India and Israel have competitive product industries and need to target large global opportunities.
Som, why did NASSCOM decide to refocus on the products market?
Mittal: In the last 2-3 years, several changes have taken place. There is 8-9 per cent growth, local IT usage has increased and connectivity has improved. This has led to many mass market, but low-value applications. Also, trying to develop another database or ERP product has little meaning now since most of these products have become commoditised infrastructure. Today people are developing applications which cost $1 to use, but are used by a million people. What's driving us is new technologies and capabilities; SaaS (Software as a Service) and growing opportunities in the SMB market. Also, it's never too late to foray into products. The real opportunity ahead is in the SMB market because large companies are embedded in their existing technologies and platforms.
Subash, how can an entrepreneur judge if he has a good software product idea?
Menon: The proof of the pudding is in the eating. It's not about whether it's a good product or a bad product. The question is: Do people need your product? That can only be tried out in the market and verified with customer feedback.
Dr Berry, do young entrepreneurs have the patience for this?
Berry: When entrepreneurs have good ideas and there is a lack of funding, they will be patient and do everything to get their product into the market. But when money is flowing around, they focus on getting more funding rather than getting a good product to the market. I was an entrepreneur in the '90s and in early 2000s was involved in the venture capital industry. I didn't see patience. I saw spoilt people and too much money flowing around, and consequently there were lower returns.
Som, can a good services company transition into a good products company?
Mittal: Services and products are two different disciplines. Only very large companies have been able to do both. It requires different skills to run a software products business. Large companies such as Microsoft and IBM can use their services teams to try to evangelise their products.
Goenka: The software industry can be likened to the transportation industry. You have motorcar makers and ship manufacturers. Maruti didn't upgrade itself to make ships simply because it's a more expensive form of transportation. The software industry is also not a form of ladder. Someone has to take a decision to diversify into a new field of software products. But you have to start literally from scratch, like starting a new industry.
Subash, why enter software products if there are so many risks?
Menon: Products is inherently a riskier business. It's a binary sort of a game. You're either successful and grow or you fail and wither away... The airline industry, for example, has been in a bad cycle for a while, but people still get into it. You have to be passionate about your business.
Mittal: Why should there be a value judgment on services versus products? A company like Accenture is purely high-value services and has no products. But the need to scale up in India resulted in non-linear businesses. I think both services and products are required. Products have a longer gestation and are a riskier business.
For someone like Pallav, is services a less risky option?
Nadhani: I agree with Subash. We do products for passion and recognition. In a products company, everyone associated with a product gets recognition. If it's a home run, you're going to make a lot more money from products than you ever can from services.
How does a small company scale up its business from a local to a global level?
Goenka: Management bandwidth is key to the transition. In a market like ours, getting the first 100,000 customers is easy. But if you want to have 100,000 customers in Malaysia, for example, you need to check if you will have access to specialists who can sell your product, undertake minor services and upgrades of your product. If you need to achieve this, you need to have management bandwidth.
Subash, Subex has made several acquisitions for scale and new technologies. How can product companies use this route to expand?
Menon: An acquisition shouldn't be done to supplant organic growth, but to supplement it. We opted for acquisitions to enter an adjacent market or to get a set of customers we had no access to or to enter a new geographic market. No potential American customer, for example, will talk to you unless you can show them clients in the US. Acquisition is also used when business cycles are long and when it takes, say, five years to enter a specific product segment.
Som, are there too few products specialists?
Mittal: Even if you look at services companies, there is huge investment made to make employable. I think over time, you will get modules on product engineering and product management in colleges. I think product companies depend on lateral hires. I also want to add to the aspect of how we accept failure in our society. This aspect is changing. Today, it is becoming more acceptable to say, I started something and I failed.
Bharat, how is Tally nurturing leaders internally to take the company to the next level of growth?
Goenka: As we become successful, there is a tendency to narrow the disciplines in which we operate. If you need to create a presence in a new market or technology, you need to have a wide range of expertise. As a promoter, you need to keep your ego aside and bring in experts on subjects which are not your focus area. Many people have been in the company for 10-15 years and have seen it grow to its current scale. We sometimes have to spend 1-3 months on a customer's premises to understand their operating environment.
Menon: We believe that domain skill is very critical to building technology that could be critical three years from now. We have made eight acquisitions to date and crosspollinated the domain experts across the company. Our CTO, for example, still sits in Canada. Our Product Management Head operates out of Canada, too. We have relied heavily on overseas expertise for domain skills.