For almost three decades, service companies dominated the Indian information technology industry. Outsourcing was a unique model where Indian IT firms delivered services - mostly overseas - in huge volumes at low prices. N.R. Narayana Murthy promoted Infosys and Azim Premji's Wipro were the doyens of the era. But even during that period, starting from the 1980s, there were people who wanted to do something different - start IT firms which would conceive, create and sell products. One such company was Tally, an accounting software firm started in 1986 by S.S. Goenka. Many more followed.
But while IT services took off, products limped along. Infosys, which started in 1981, today makes $7 billion but Tally barely crossed $100 million in 2012/13. IT experts started believing that India was not a place for products. Even today, services account for about 98 per cent of the $100-billion Indian IT industry. IT products, on the other hand, make only $2.2 billion, according to IT industry body Nasscom.
But there is distinct improvement. Of the 3,000-odd product companies that have set up shop in India since 1990, 500 did so last year. The new product companies include Aurus Networks, which makes education software, and Emart Solutions which develops e-commerce platforms. And there are thousands of IT products from games and music apps on smartphones and tablets to enterprise applications such as enterprise resource planning (ERP) now coming out of India.
In the last two years, at least two Indian product companies have been valued at a billion dollars - mobile advertising company InMobi in 2011 and office web application firm Zoho in 2012. Chennai-based Zoho has a turnover of over $100 million. It has a portfolio of 30 products and big international customers such as Lenovo, Sony and Pixar.
Mobile and mobility-related applications have only fuelled the growth of small product companies in India. India already has the second-largest application developers' base after the US. But the breakthrough will be in the area of enterprise products which still has a small base. "Services improved the market and made it the research centre," says Zoho's chief evangelist Raju Vegesna. "In the pre-Internet era, it took a lot of resources to build a product company, but now it takes only two people to build one."
For a long time, IT products were something larger enterprises adopted. Increasingly smaller companies are also getting hooked. While global giants such as SAP and Oracle continue to focus on large enterprises, Indian companies such as Ramco, CRMnext and Zoho are finding their feet in the small and medium businesses segment. With cloud computing, most products are delivered according to client requirements. "For the first time software-as-a-service can be delivered at multiple price points and that is becoming a huge opportunity for the product guys," says Sharad Sharma, founder of IT product body iSpirit.
Ramco CEO Virender Aggarwal says his was the first ERP solutions company which offered services on the cloud, but initially he did not have any takers. "We never had an edge ... the problem is branding and marketing, and SAP has deep pockets," he says. But with cloud-based solutions taking off, Aggarwal can position himself in international markets as well. Ramco has already grabbed15 clients in the US and some others in the UK and Australia. Product companies want to attract global buyers as average realisation on the cloud model is three times outside India, says Aggarwal.
Selling to global customers also allows product companies to scale more easily as the clients have a presence in multiple countries. Nucleus Software, a Noida-based banking software company, has about 18 global banks as clients with a presence in 20 countries. It recently deployed software for a large American bank that manages receivables across 18 countries from Singapore. "The products are flexible and can be configured as per the corporate house's needs and gives added capabilities to use over the Internet," says R.P. Singh, President and Head of global delivery at Nucleus Software.
But product companies are not ignoring the Indian market. Noida-based CRMnext offers customer relationship management (CRM) solutions to several customers such as HDFC Bank. It started with a small contract in 2007 but today handles 25 million customers. It has helped HDFC improve its leads-to-conversion ratio from 25 per cent to 32 per cent and 70 per cent of HDFC's workforce is using the solution today. The domestic market doubled last year to $600 million. "HDFC wanted us to reduce transaction cost and provide a single platform of execution across all centres and people," says Nishant Singh, CEO of CRMnext.
Despite the recent successes, industry observers agree, it is still early days. Sharma says until 2014 iSpirit will focus on incubation of more start-ups and eventually look at making them more profitable. He says India has overtaken Israel, on which the famous book Start-up Nation was based, in terms of the number of product start-ups. "But Israeli start-ups are still generating more revenue," he says.