Businessworld-Nasscom Roundtable on India’s future in global software products space.

Participants: Som Mittal, President, NasscomSubash Menon, Founder Chairman, MD & CEO, Subex SystemsBharat Goenka, MD, Tally Sanjay Swamy, CEO, MchekPari Natarajan, CEO, Zinnov Sudhir Sethi, Founder, Chairman & MD, IDG Ventures N Kailashnathan, CIO, Titan

Historically, India has had a chequered history in developing software products and in creating companies that can live and breathe software products. The sparse few that have been formed, have only made a marginal impact in the global arena. Businessworld and Nasscom organised a roundtable in Bangalore to discuss whether India has a future in the global software products space. Excerpts:

Rajeev Dubey: Considering that globally we are moving towards bundling products with services, how justified is this obsession with software products? Subash Menon: Products have a life of their own. Services go around the products. One can’t stand in for the other. You have a delivery model which is SAAS (software as a service). That is what is prompting this question to some extent, But then SAAS is just that, it is a delivery model. You still need a product to deliver SAAS. You can’t have a service being delivered as SAAS. India as a country has to get going on the so called software space, as is understood globally, then you have to have your own products which are expected by the customer.

Rajeev Dubey: But you could also graduate to higher value added business and various other aspects of services. Why do we have to be in products?

Som Mittal: For the nation it is important that we cover up every one of these. I think we cannot exist in the world by just the export model. Today we have $23 billion of domestic market and we can certainly use this as a test bed to develop products which are relevant to India which has similar relevance to developing countries.

Rajeev Dubey: If we must make products because the domestic market provides us the testbed, is that how Tally saw the market when it entered the domestic market? What challenges did it face invading this space? Bharat Goenka: I am a sure believer of the fact that product business consists of only two things – invading and access. Those two challenges were there twenty years ago and continue to remain today. How do you engineer a product if services are not required? We looked at the domestic market for sheer size. We didn’t now how many years it will take us. We are now fairly important in the Middle East. We have started to become important in Africa. But the reality is that the bulk of my organisation in Bangalore still gropes in trying to solve the India problem.

Rajeev: And how did mChek go about developing the product, how did you see the opportunity?

Sanjay Swamy: There are a lot of similarities. Ours is much more of a consumer focus and what we found was that there was a niche for a certain category of products where things that I took for granted are actually not that much of an issue in India and one can complain about it or one can see an opportunity in it. We ended up looking at it as an opportunity. Secondly, if there is one market which is growing faster than in any other part of the world, it is the mobile space. India, especially in mobile and financial services space, is a microcosm of the whole world. You have customers as sophisticated as in the Silicon Valley as well as the first time users as in the remotest parts. You have to serve with a common product the entire gamut of subscribers.

Rajeev: A Nasscom study has found that last year was a bumper year for setting up product companies. Why this sudden interest in products?

Pari Natarajan: There are a number of reasons. We started comparing with other eco-systems like those in Silicon Valley and looked at factors which made them powerful in creating these numbers of product companies. These factors have been termed possible in India for a number of reasons. One, we had multinational companies coming into India and starting to make complete products out of India and starting to file patents out of India. And you have the talent pool who have product capability. Then you have had expats coming back to India and a number of them have built product companies

before. These are experienced people and they are starting companies. They have a domestic market which is very interesting for companies. So, one reason is domestic market. The other reason is in terms of role models. These are companies which have done it before, companies like Mchek and Tally who have been successful and in spite of an environment where eco system was not there.

On top of that, the venture capital industry has come over the last five years, is one which has been funding. Last year, $156 million were spent by venture capitalists in funding product companies.

Rajeev: We must give credit to Mr. Sethi for this.

Sudhir Sethi: I call it the Brownie movement which has been seen in the last two years in terms of what is happening on the entrepreneurial side as far as product is concerned. Two to three years ago, the number of venture investors used to be from financial engineering background. Whereas, in the last three to four years, a lot of industry people have come into the venture world. Many product companies have been funded by people with very deep operating backgrounds who have entered the venture industry. That was a very big thing per se.

Secondly, as a fund out of $50 million we have committed 40 million to products. Interestingly two of them are serial entrepreneurs. We are finding more and more incidence of serial entrepreneurs doing the second or the third attempt at the company and it really doesn’t matter whether the first or the second has been a success or not. The experience itself is worth its weight in gold.

Rajeev: There are no negative points for failure.

Som Mittal: I think in the last three years the economy has boomed here. The demand for IT has all been very high. Stock markets were doing well, the valuations are good. That has encouraged people to take risk as well. And I don’t think even with the current economic situation, everybody who is in product realises that it is not a short term gain. They don’t get moved by the shorter term. The confidence that the industry has achieved, the maturity that is coming is creating opportunities.

Rajeev: The industry was basically waiting for funds.

Pari Natarajan: That is one of the parameters. I think the eco systems of a lot of incubators, MNCs in the market space, a lot of the top 10 or 20 product companies being role models, the venture investors coming in and last but not the least there is an NGO community which has become much more active than what it used to be and with institutions like the venture forums in the country plus there are a lot of NGOs in the market space who actually are not part of the forums but they do investments.

But let me paint the scenario of next 3 to 4 years, how we see it. Last year we saw about $17 billion worth of product VCs investing in the country. It is my estimate that in the next 4-5 years, it will be from $17 billion to $20 billion per year. So as Som was saying, the Indian economy may have gone down from 9 to 7 or 8 per cent, I don’t think that will have a bearing on the produced based VCs coming into the country as long as the regulations and rules are good for that. Interestingly the number was $156 million last year for product companies. Out of the $80 billion in the next 4 to 5 years, we see about a thousand-plus companies coming up who will get funded around $15 million to $20 million each.

Rajeev: They are not necessarily IT companies.

Pari Natarajan: My estimate is they will be software and hardware companies together because we have seen in the last two years about 450 product companies ourselves. It is only us. I am sure we don’t see all of it. So, out of the thousand-plus companies that we have seen, 450 are product companies. So, if I look at those $15 billion to $20 billion being funded, our estimate is that product companies alone (software and hardware) will take up about $15 billion to $20 billion in the next 4 to 5 years out of the $80-odd billion which will be coming into the country. The bigger challenge out of this is that a lot of this capital will have to be domestic capital and not international capital, which is a different discussion altogether.

Som Mittal: Let me add to that. When you look at last year and compare it to the past four years and all that, it would stand out because of that quantum change. And then you may think what was so great about last year. It has nothing to do with last year, in my opinion. This is just a beginning and it would gain momentum as it moves forward. So, let us not view it in

isolation as just last year. Let us view it as a combination of several things and culmination of that.

Bharat Goenka: My understanding from the market is, 7 or 8 years ago, we were an entrepreneur with a certain amount of funds, and a certain amount of access to funds, we tended to start a small service company because it was possible for you to make money in that space. In the last two years it has been completely proven that unless you are a large service company, service industry does not make sense. So, a new entrepreneur has really no option but to start a product company. A new entrepreneur cannot get into a service company and expect to compete with Infosys. You won’t get funded. You have to look at funding, you have to look at customers. So an entrepreneur has no choice. It is more a matter of absence of choice.

Rajeev: That is a very important point. What he is saying is that a majority of new companies being formed are product companies. Your experience?

Sudhir Sethi: There is one more important point. The emergence of the domestic market added a very critical element to this. If you look at just 3 or 4 years ago, for every service company, the first point of contact for a customer used to be international. I still remember in 1998 when I funded, the first businessman customer was outside the country. Today a product company says that my first customer is inside the country. In fact within 6 months of funding one of our companies, we added 4 officers in the company, we added 9 sales people in the country which was unheard of as recent as perhaps a year or year-and-a-half ago. So, domestic market is a very critical market per se. Apart from that, there is a synergy with a market which is next door to it – the Middle East. You don’t have to go to US for making success of a product company. That is a very big thing happening.

Rajeev: In fact I had a question on that. Why is it that product companies that were formed for a long time ignored the domestic market? Maybe I will pose this question to the product companies.

Som Mittal: May I add one more point. Some of the best and the brightest engineers today don’t leave India after doing engineering. That is a very subtle point that has come out. I mean in the 1980s and 1990s and even in the 1970s, always

the trend was to go straight to the US. That is not happening any more. So, whether they are the entrepreneurs or not, entrepreneurs have the confidence that they have these high calibre people on the team. I think that is more important.

Rajeev: The tendency has been that the MNCs as well as domestic companies have traditionally ignored domestic market and there was an opportunity and yet considering that MNCs aren’t heavily into selling in the domestic market, there was an opportunity, but nobody took it. So only now it has been taken.

Som Mittal: I am sure Kailashnathan would have some views as well. There was a time when 70 per cent of the cost of the solution was hardware and we were hugely taxed if it was in dollar terms and people expected as a customer the software and services coming to them, they did not pay for it. That was the culture. I think that culture has changed because the cost of IT has come down, thanks to the government taxation rules as well as the current level of prices. People have started valuing that you pay for the product and you pay for the services. That was the positive side of the market.

The flip side was that if you had a resource and he or she was brilliant, it was much better and more beneficial to somehow find an opportunity to sell it because it got you more value. Because it was long gestation and you had to put so many people. That was the way the market was. I think the need to diversify today, having more balance, has become important.

Rajeev: Would you have bought domestic company’s products?

N. Kailashnathan: Yes, I think we have been buying domestic products also. But one important factor is that you can look at per hour dollar rate versus per hour of rupee rate. The kind of realisation that companies got from exporting, you can’t have sitting in India.

The second thing is, and it is very important, that the Indian companies are not standard. A lot of service needs to go along with the product. The effort required in supporting is much more than just maybe dollar paying it and handing it over. So most Indian software companies have to come with the services in order to sell the product. Some companies realized that and others felt that it was a boom time and you have to put people where there was most realisation actually. That is

also the reason why some companied did not want to look at India at all.

Subash Menon: Raju, I don’t think I fully agree with you. Tally of course is fully focused on domestic market. You look at Subex. Our first customer was in India. Our second customer was in India, third in Africa and fourth in Eastern Europe. So, we have not disregarded and it is not that we did not look at the Indian market. Every Telco in India today is our customer—Airtel or Reliance. So we have focused on Indian market. But when you look at our financiers, you get a feeling and you say that 3 or 4% people are from India and 90% are from overseas and we get a feeling that we are not focused on India. That is not true.

What is happening is, we as an organisation have 200 customers. In India we have five. That way it is only 2.5 per cent of our customer base. The revenue number is also kind of representative of the number of customers. But there is another angle to it. As Som said, traditionally Indian customers have paid very poor value for software. But they don’t pay much, they are not used to paying. Whereas overseas, in Africa for example, I get several times for exactly the same thing. So, although I am equally focused on India, I am very keen on India, when my realisation happens, the dollar number is very small because they are not paying it. Not that I am not focused on India.

Rajeev: He is saying you are not paying in dollars and he was saying you are not offering.

N Kailashnathan: What Som said is true. The entire mentality is that software has always been a very small proportion of the total IT expenditure. Now it is changing in the last few years. Most things have changed after complaints about companies implementing ERP when they have really seen figures in crores for software for the first time.

Som Mittal: Let us not forget one thing. I don’t think I have ever seen that kind of scale in Indian companies as it exists today. It is the world’s largest, it is the best and the whole country getting networked, I think in the last 3 years or 4 years environment has changed where you can take advantage of the investment that you make in IT. I remember we used to move floppies every night and two days later we used to get a report. That was MIS. That is a big, big change, but as you are

discussing this I just wanted to say that we still have some concerns on the software products. And that concern is that the whole world and the government understand the physical product. But when it comes to software product or services, I think the understanding is very poor.

So, today we see the complexity of the seventies. We have got VAT, we have got excise, we have got service tax, FBT, so it seems that we have gone back to the tax regime and we have made it extremely complex. It is a fact that government would be encouraging software products On the one hand we have soft, small companies and then you add the complications of tax regime on them just because the law and the taxation always trail the product. Of course it is our job as Nasscom to agitate using our members help. So this is one area which concerns me at this stage.

Rajeev: Assuming that you are a product company, and we are going to see a lot more products nowadays, how are you going to ensure that Tally doesn’t get copied and sold at a fraction of a price in Nehru Place? Not all the products face the same problem, but yes, in the case of soft products which are directly going to be used by the consumer, this is a big, big issue. How can this be tackled?

Bharat Goenka: The music industry was changed by one man – Gulshan Kumar. Not because the law was changed, not because it was difficult to copy music, nothing changed. All that changed was, it was more convenient to buy music than to pirate it. Today it is more convenient to pirate software than to buy it. Just now we had a forum. The whole hall was full of people from the industry. We asked them by show of hands, how many people know where to buy a legal copy of Maxo office….And a fraction of the hands go up. Where is the possibility of a normal consumer who is buying the software to know it, if the industry doesn’t know where to buy the software? Where will the buyer know where to buy it? That is a problem for the industry only to correct it. The government cannot correct it. The consumer cannot correct it.

Rajeev: So, is affordability the only answer?

Bharat Goenka: Affordability is the least of the problem. India is the largest market for Nokia in the world for its high end. Where does affordability come?

Som Mittal: There is a price solution. When the mobile phones came in, they were offering Rs 16 a minute and the handset cost $2,000, it could not have reached 300 million. So, I think it has also been proven world over and I see you point, ease to buy and affordability, so that there is no incentive for the person to copy it because there is support followed by everything else. There are times when people haven’t priced their products appropriately depending upon markets and you can see it is the distribution pricing which is now being offered in India. Fortunately for us, piracy is coming down. I don’t think it is at the same level as it used to be and clearly we are better than the others. There are many other countries where piracy still continues to be far more rampant than it is here.

Subash Menon: Then it is also physical distribution model of physical products. In many villages, coke is available but clean water is not available. In many villages, shampoo is available in sachets - that is an issue of distribution and pricing put together. So, the software industry with all the technologies which we have available at our doorstep, whether it is SOA or SAAS, or normal product aggressively priced in the market space with aggressive distribution mechanism. So it is no rocket science, it is just reach, reach and reach because there are enough consumers in the market space in India –whether you take Mobile Vas, whether you take security, whether you take business intelligence as such. Those are not day to day common consumer products, but they are volume usage products in a country for billions where the IT usage is now increasing. It may still not be equal to perhaps China. But the volumes in our own context are very good today. There is a very big mover for domestic market to move.

Plus, we have a new model for ad based revenue. So, the consumers don’t have to pay for the software they buy. You get it from advertisements from your small business or large enterprises. So that is again going to have an impact in terms of piracy. And the other one is a SAAS model where you have in terms of affordability, the companies provide you solutions while you pay as you go on a monthly basis. This makes it much easier for them to pay for the product because they are paying as they use it. The transaction based pricing and ad based pricing, all of that will play a role in reducing piracy.

It is here that India will again leapfrog, because everybody in the US buys a copy of MS office as he buys a PC. It doesn’t mean that we have to exactly do the same thing. We can move

to rental model, we can move to software service model. These are more likely to happen here on a larger scale first.

The other thing is, the broadband connectivity in India today is more affordable than it is in the US. You can get for Rs 250 a good BSNL connection. It could certainly get better with reliability, but it is a good start today. So it really makes for a move towards different business models like Ad-based and SAS based.

Som Mittal: In fact, in Nasscom, we have direct exchange office based SAS model already. We don’t have any servers. It is per employee.

Rajeev: How do you explain the herd mentality in getting into this business? Another reason why there has been such a boom in new companies is because everybody wants to do the same thing. There have been times when there were financial services products, then you had mobile guards and then you had mobile payments, and now search and travel related services. If you can make us understand how do you sift companies out of these and figure out which is the company you must invest in?

Pari Natarajan: One is that in the herd mentality we are not alone. Even if you look at Silicon Valley, there was one You Tube. Now there are probably 100 sites replicating to YouTube.

Rajeev: They are usually successful ventures. Barring QB, they have been a remarkable global success. Yet there is a herd mentality and there are companies that are doing all kinds of things and working in categories that you would probably say that we stick to knitting but there is nothing like knitting.

Pari Natarajan: That is a very valid point and that is why some of the programmes from Nasscom, like the mentorship programme, are able to help the companies to look at the idea and say how valid and scalable the idea is. It would help companies to look at the ideas which are scalable, and which would have a real chance of success. You have a very valid point and programmes such as mentorship programme from the venture capital community as well as from the Nasscom would help in guiding entrepreneurs which ideas make sense and if there is a valid ground for the customer in that specification. This is what on the basis of this we have seen what the industry wants to do. Everybody wants to do similar

things. Look at one success story, and everybody wants to replicate it. And that is the model of this industry, and we the venture capital have the responsibility of gleaning through it and select the right company to fund it.

Rajeev: So, that is a tough job, how to sift the grain from the chaff.

Sudhir Sethi: Let me give you an example of what we have seen purely in numbers as far as US is concerned. For every 7 to 8 companies funded by NGOs, one company was funded by venture investors. The reason I am mentioning this is that the basis of the pyramid which comes into the community is far larger in the US when it comes to the venture. So there is this natural phenomenon which is already taking place in the eco system which sees the good company and brings it to the venture investor as the venture capital is putting higher amount. In India, it is the other way round. The NGO community is not that active right now per se. But I don’t see a herd mentality in India by the way. Do we see Mobile Vas as an example of broad space where we see hundreds of companies? The answer is ‘yes’. I think here both God and the devil are in the detail. As to what is the twist in business terms called ‘differentiation’ which is being taken up by each of them and believe me that the is a differentiation. There may be a few which are similar.

So we as investors see around the same sector different business models, different revenue models, different technology implementations, different teams, different set of advisers, different markets being addressed, different levels of capital being deployed and that is where the churn has to be. Our job is to see what is the best mix and hopefully we will go right. But I must tell you we did a study of three venture funds in the emerging market, predominantly in products, and deployed over ten years, 60% of the companies did not give one time the capital deployed. These are hard statistics. So, it is important for us to understand as we go into the product space, unlike the service space, that the incidence of companies not being successful is going to be far higher. So as we see companies growing, in the service sector we have seen companies for ten years, being at certain levels of revenues, of 10 per cent growth per annum, etc. In the product industry, you will find it is equally important to fuel a company and then grow after that with a new venture rather than continue with

the same product which may not succeed at all. That is a very important differentiation which is coming up.

Rajeev: One of the criticism as of now is that people are going for the low earning group and essentially what you can see upfront is what they are going in for. Why is it that companies are not looking at a platform for retail rather than looking at pieces of retail? Does it have to do with our capability and our competence? Does it have to do with our eco system the way it is?

Subash Menon: I think that is the way the product business develops anyway. Most of the product companies are startups. You won’t take them seriously if they go and start saying that they will have a whole platform for retail. That won’t work. You have to start as small and be extremely focused. You start up business in a particular product and when you are successful you go for the adjacent product. At some point in time you offer a seed, you offer a platform. The credibility is extremely weak. Unlike the services business where you can try and test out, okay I give you a hundred thousand rupees contract, you come back and do a good job out of this. That is not the way. They are going to invest a lot of time and effort. Look at this. Our sales cycle is 6 to 8 months. Our replication cycle is 6 to 7 months, by the time you start getting returns, it is another 3 to 4 months. That is the whole time invested by the customer in us. Can they afford to go wrong? They can’t. So the level of diligence is going to be so high that if they have a small element of doubt, they won’t touch it.

Rajeev: I am coming to this question which follows up. I can understand when they say, I am not going to compete, yet you have FINACLE and TCS has its own. Is it that we lack focus in that area, the big companies, the top five companies, lack focus? Is credibility still an issue with TCS or Infosys? Why can’t they develop a completely new platform for let us say retail? If they can capture Reliance at this stage of growth, or the Future group at this stage of growth cycle, you can see what they can achieve 10 years from now.

Som Mittal: I think the world over it has been proven that if you are into adjacent products, you are competing. So Accenture, EDS, none of them have any products. HB has products only in the infrastructure. A company like the IBM for early reasons had some. In fact Microsoft, Oracle, SAP, they don’t have services business. Their services business is to support their

products or to act as catalyst for them. Many hardware producers do not produce chips. If they have the capability, they do it. And those who did sold it off. Digital sold off its chips. HP got rid of its chips. Spark is continuing having got rid of many of its chips. So there is also the issue that if TCS is in a product, I am not justifying their strategy, but if they were in a product then they would not be able to work somebody else’s product.

Rajeev: Then why are half hearted attempts being made. If you are not going to be in that space, you might as well not be there.

Som Mittal: I think it is DNA . Also, on hindsight, organisations and industry follow and aggregation and desegregation cycle. Yesterday the software industry was growing at 50 per cent per annum. Now that engine of growth is difficult to say ‘No” to. Now they are growing at 25 per cent per annum. Globally that engine is also difficult to say ‘No’ to. So at this point perhaps it is a good model to desegregate the product from the main engine and say, grow separately at 100 per cent. What has happened today is that large organizations have not desegregated at all the products on the services side. Wherever there has been some desegregation, I think iflex is a classical example of disaggregation, it has really done well. So in the future by the way if they aggregate again, by that time the critical mass of a finical would be so big that it doesn’t matter which is what IBM is all about today and HP is all about today.

Rajeev: That is an issue every time, every time the sales go down, they start making noises about products, and if the product business is not doing well, they start making noises about services. At this stage India is not going to have a big product of consequence in the world market among the big five which is a shame.

Sanjay: That is not the priority. It is not the business model that they are not there. Let me answer the credibility thing. I don’t think it is as easy as that. In the product business, domain is extremely critical and focus is very critical as well. We have experienced in the past, when we have come up against some very large organizations, we have had successes against them. That is only because the customers saw us living and eating this particular product. That is all the focus that we have, the domain knowledge and the support level and the

mindshare put on the table, was all phenomenal as compared to the competition. I think product business is about all of these and not just, your size is important, because I am good I can go and do whatever I feel. It just doesn’t work that way.

Bharat Goenka: Just one small point. Let me give a dissenting viewpoint here. For several years I have been hearing the statement why can’t successful software companies graduate to software business. You can call the software business equivalent to transportation business. And Maruti is in the transportation business. We can ask, if you are in the transportation business, why can’t you solve my problem of going from Bangalore to Delhi? Ship building is also transportation. The services company can choose to diversify into products and it is not natural graduation into products.

Rajeev: I disagree with both of you. Why this has come about is because of a contradiction. The contradiction is, I am in services, I need to graduate to high value added businesses. And consulting and products are supposedly the highest value added businesses. So if I am not making any headway in consulting, which most of us haven’t, so I might as well try products. The problem is in the contradiction. When you say, I am in services business, you say, I don’t want to look at anything other than the services, this is my business, that is fine. The problem is, when the analysts come to you, then you want to become a high value added company, otherwise you are probably doing the same work that a 50 million dollar company is also doing. It is just more or less the same.

The point I am trying to make again and again is, that there is a contradiction. That contradiction essentially means that if I am to go by what you are saying, we are not going to see any big products from any of these top five. The biggest product for the global market will probably come maybe from Tally or some other company.

Goenka: This is my personal view. Number one, it is not an area of natural progression, but I think they are realizing and will possibly realize that it is not necessary to develop products and delve into the market, there are a number of companies which are global product companies and things are being built. You will find in the next five to ten years the Indian companies will be doing products much more than what they have done today. They are moving fast forward. Today look at what IBM is doing. IBM has already disaggregated the hardware part and

no one has taken notice. That means that they took a conscious decision to get out of hardware. But that phase of growth the Indian companies have not gone through where aggregation is taking place, forget desegregation. So to my mind evolution is going to take place where it is not necessary for them to develop products at all.

Rajeev: They may just acquire….. This is apparently the way forward as per the analyst community. Almost all analysts have said that you can’t remain software services company, you have to graduate to product services.

Subash Menon: The fact is that IBM today has 80,000 people in India and TCS has 100,000 odd or something. Today IBM is aggregating backwards into India, Infosys and Wipro are aggregating forward into the global market space. It is not a one-way street, as the analysts have put it. It is ‘where you are and where you want to be’.

Som Mittal: I am uncomfortable with the discussion. I think there is a value judgement being put. The value judgement is that product is higher than the services. And they would always say that typically PPO is…..

Rajeev: At least the analyst community has always made it that this is the way forward.

Som Mittal: Let me give an example. A services company also does development work as part of the solution. But it is not product because the product means that the services require the least customisation. So they are talking about reusable components. If you have 5 customers, develop once the IP, make some modification and supply. It should mean that the next customer that you supply will have higher value add because he is not paying for it. Similarly when you look at value add, then today the IT companies do not cater to all sorts of deals. They only take up elements of application outsourcing.

But today a company like IBM/EDS take up the whole thing. That is high value add because you are taking a risk which is higher and so the returns of that risk are higher as well. Similarly when people say that BPO is lower end, if you look at the NQM and supply chain process that is being done, you are getting closer and closer to running a very, very complex

operation. So in many ways the analysts or whoever, tend to stagger because each one of them faces enough complexities.

Natarajan: So, it is really a non-linear growth rather than a product or higher value-add. How do we decouple the number of people you have and the revenues you generate? That is the question. One is, okay obviously you are product, you do product, it is fine. The other way is the company innovating. For example, a software multinational product company, they are working with Indian service providers on a revenue share model. The products that are sunset products are completely outsourced where the service provider is taking a risk on the R&D on the product and it is sold in the global market and the revenue is shared along with these companies. That is a model which gives you non-linear because it is up to the company to decide how much they want to spend on the R&D and they share the revenues with the customer. So there are a number of models in terms of the deals you are doing on fixed price. Where IP from the service provider is part of it, that is also increasing. Now, service providers are maturing to get into more penalty and bonus clauses. Again, that is adding non-linear. So, product is one way of getting non-liner revenue and there are multiple ways that they are exploring. So, all of this is going to grow, not just one of that.

Rajeev: Do we agree clearly that the top product is not going to come from the top 5 or at least doesn’t seem like?

Sanjay Swamy: There are a few other things. You earlier alluded to DNA. Ultimately for a new product to come out, you can’t just go and say, Okay, let me see what Subex is doing, I will do the same thing. If you are going to compete on price, you will be crushed as somebody who doesn’t have credibility in that space. So, product company will start in a very disruptive manner. You can’t look at something that is being done and say, I will do the same thing three times better at one-fourth the price, and I will take out three people or two people from the eco system. That is how a product company spots its opportunity and then studies it and says, this is replicable, this is the problem that many people are facing and if I solve it right the first time, then I have an opportunity to get a big share of the market.

But there is a huge risk. There is no guarantee that I am going to succeed. I fundamentally believe that I have some intellectual property on which to build this on. So there is an

element of the intellectual property that is there and traditionally services companies have been told what to do. The customer pays them to do something that the customer has thought of. The goal is not saying, come up with a solution, but here is what we need to have done. So, that DNA culture is something that is not naturally available to these companies because that has not been the focus till date.

Lastly, risk taking is also something, Sudip talked about it, it takes $20 million-25 million to build a software company to a stage where it matures. I think any large services company that is profitable today, for them to take one decision, okay we are going to commit $25 million, is a significant amount of money without any guarantee of return. That is why I feel that it is for the new product companies, it is hard for an established company to do that sort of commitment. I think there are a large number of cases in the US where large product companies have failed to spot opportunities that they developed.

The prime example is that of Xerox where everything was conceived, everything was invented, all the patents were filed and every company except the Xerox made that happen because they were so focused on the photocopy business and even the laser printer business was one where they had partners who came and said, please build a product for us and they kept sending it back to HP people. So again it is not easy for the large established businesses to just say that we hive off and invest in this thing. I think that is the challenge.

Sudhir Sethi: When we see companies being formed, there are a few paradigm shifts which we see always without exception. The product teams are always new and different from existing teams. That is the very fundamental thing. So if the existing companies, new service companies are going to pick out people from the existing services and put them to product, I think from the DNA point of view and mindset point of view it will be very tough because they have been groomed to think in a different way.

The second thing is, when the product comes out, it is a combination of new business model, new technological deployment, new technologies being thought of, new revenue models, new people and new markets and risk capital. All this is in a very entrepreneurial kind of environment which says, “I may not succeed”, whereas the DNA of a service company is,

“I will have to succeed”. So there are these differences which are important and risk is a very big part of it. One has seen a number of innovation programs being run in service companies. They will not, to my mind, I may be wrong and Som and lot of others may be better placed in addressing this, service company innovation programs may lead to better service models, not new products.

Som Mittal: Yes, if we look at large five service companies, unfortunately they are not represented here, they do phenomenal amount of work in product development for other companies. So they do have disciplines and so on. I think it is conscious decision on their part maybe in disrupting the financial matrices or whatever. But I would also say, maybe it is not such a good thing for them to do it because if they get into adjacent competing spaces, they have more to lose than what they gain. If you ask anyone one of them, Can you develop the next TRP? surely you can but then you have to risk the SAP or the Oracle ……

Subhash Menon: It is time for the analysts to stop asking as to why are the service companies not doing this. The question is why should they do it at all? It is not their space, it is not their chosen area.

Rajeev: Why should they see it like that?

Subhash Menon: Some of these are more accidental than by design. If you focus on this, they are outside that. And even when Infosys or TCS does such a small portion of it, it is so very small that you are not aware of it.

Som Mittal: Wipro started as a product company.

Moderator: Just to bring it to the last point of discussion. If we have such interest in products, especially from the entrepreneurship point of view, do we have all the elements in the eco system?

Som Mittal: Many things are in place. There are gaps in the eco system. And they have been identified. Why don’t you mention a few of them and then we can comment.Pari Natarajan: Okay. One of the things in terms of reaching out to global markets is the brand for an Indian product company. That is in certain areas like Telecom we have a good

brand but in other areas we don’t. How do you then build this brand?

The second is what we have seen in terms of the eco system of Silicon Valley etc. is that there are a number of product companies which are common into the funds for venture capital. Right now that number is lower for India. You need to have lot of seed funds for companies. So what do we need to do in terms of improving he seed funding availability in India?

The third is in terms of a specific needs skill set which is available in terms of product management or in terms of running a data program which is available today in the MN companies. How can Indian product companies access those talent. The other one would be for the Indian companies to look at fresh talent that is coming out. A lot of talent which is coming out of colleges is not aware of product business. They don’t understand what is ‘services’ and what is ‘product’. How do you make them understand what is the difference and make them work for product companies.

So these are some of the gaps that we have identified and we can probably talk about how to address them.

Som Mittal: That is the reason we do these kinds of things, so that now we have done that for every area that we have gone into in the past. Specifically, for example, for market access, if it is a small company, it hasn’t taken time to bring a brand as Tally has built its brand over years. So we are finding new market access that we have – for example, we are tying up with all the composite associations across the world because those are service industries who need to provide solutions to their customers and they need to find Indian solutions which are very applicable here and be able to take that. The brand is not of the Indian company, but the brand is of the service provider. So that is one.

Even in India the buyers don’t know how to find. Even we find it difficult to find our own members who have brought the products. So we are now making clusters for example with ACMA, which is the automotive component. We have tied up. The members came from there, our members came, there was discussion about what are the areas that hurt them the most and what solutions do they need and you are not finding a product company to service those. So rather than more wide,

broadcast based selling, it is more focused selling that will help them and obviously if they are successful, we will propagate them. So those are some of the areas we are looking at for working out the market access.

Subhash Menon: You look at the various issues and challenges. We have these challenges and the very fact that we have these challenges indicates that we will have more. Do we have all the eco system built up? Clearly we don’t have. But what we do see is the movement towards having them. So clearly there are more entrepreneurs coming in, there are more investors coming in. That keeps us busy. There are people who are trying to get into it, people who are coming back into the system.

There is great opportunity, no doubt. Do we have all the tools in hand that we need to make use of? I don’t think we have. That is why we are doing analysis and making studies and we are going to fix those gaps. And that is exactly what we are doing.

Rajeev: And from the financing and funding point of view…

Sudhir Sethi: Well, I am very positive because I do believe that we ourselves expect about 250 million from our fund this month and the next month to go into the product companies in the next 4 to 5 years. I talked to my counterparts in the venture industry and I find that the opportunity is similarly being taken up. The key issue is, this is somewhat like, I have been to the prototypes of Airbus 381 and there was the Airbus 380 standing at the end of the runaway with lots of wires inside. That was the Airbus 380 when it first flew at Paris Air Show.

The Nasscom product launch initiative is perhaps like an aircraft prototype about to fly. In some sense it is like a product launch. We have identified the vehicle system, we have identified everything which works, perhaps it is working at 0.8% efficiency all over the place and the net result is that 0.8 x 0.8 becomes 0.64 and not higher than that. These eco systems, to my mind, are in place because we have seen the results of these coming out. Be it we have some company from the Institute of Science, be it a product company from IIT, Kharagpur, be it we have got a company without any institution but with NGO funding plus some the government funding also used to take place. Government had venture fund

much before private equity. It came in from international. SIDBI, the local funds in each state, as such, which are already there. They actually fund companies at 100 thousand dollar level, or 200 thousand dollar level. This is actually there for the last ten years. So there is an eco system which is working perhaps inefficiently. I think with this initiative coming in and lot of discussions and debates are going to happen, more confidence is going to come in in the existing players to say what media will work better.

Som Mittal: Small has its own beauty and small has its own problems. The problem with the small is that this is a young industry. The overall age of the industry is 27, 28. So even if you get the product, the entrepreneurs are young. So I think they need mentoring, handholding and all the blah. We don’t have to learn from each other’s mistakes rather we have to get there early and don’t make that mistake at all. So it is very interesting that a large number of our senior members of the industry, though they themselves are not entrepreneurs, are offering their time and effort to mentor small companies. That is our experiment. Our pilot experiment has been extremely successful.

Rajeev: Have you started clusters?

Som Mittal: Clusters we started a year and half back, mentoring programme has been going on for about the same time. Now we are looking at way and means of scaling it up. Every mentor told me that he/she would get 10 more mentors. Most of us in the industry today will be willing to spend time to coach them. So that is the power of the community besides people who provide formal funds to the organisation. And anyway there is advisory board and mentoring.

Sudhir Sethi: There is one asset that the industry which certainly I would like to mention. The software industry going global, he kind of quality image and the brand it has, is a great platform for software product companies to get launched on a global basis. This platform is unparalleled anywhere in the world and please understand it has been created by the software services industry. So software services industry has been instrumental in taking this very important decision.

Subhash: And this is where the software service industry and product industry can come together and the product industry can ride piggyback on the software service industry and

software service industry will actually act as a SI for small product companies to have the reach and credibility and ability to invest in those markets and provide that reach, credibility and infrastructure support and things like that so that the product companies reach out to the customers. Rajeev: Is it happening anywhere?

Subhash: It has started to happen.

Moderator: Are companies open to doing that?

Subhash: Oh, yes. It is happening in India. But it is a long way to go. Sudhir: One of our companies, IVaz, has arrangement with one of the top five service providers and in the last six months, this small company from Calcutta has got bids of $2 million, which have been given by the large company into the global markets. This small company is ascetic and it is unbelievable that a TCS or a Wipro-like organisation is giving that systemic support.

Subhash: And that is because there is a great opportunity as such in that. In the report we have captured that. We believe that in the next few years this will become a multi-dollar opportunity. That is the kind of opportunity that exists.

Bharat Goenka: During the course of discussion, a score of people came up with small, small issues. The common underlying theme is not of having a product but of being able to find a customer. The ability to find customers in the domestic market is very low

But if you take the full pyramid, for the ability to reach the market, the distribution infrastructure doesn’t exist. And no one is investing in it. And unless people invest in distribution infrastructure, the ability for a small company to become a player beyond his city is not there. In every city you find product companies whop have a sprinkling of customer maybe – maybe from 50 to 200. But the ability to go from 200 to 20,000, the country has the capacity to absorb 2 million customers, but their ability to go from 200 to 20,000 is non-existent. Unless there is some ability for a few players to invest in infrastructure which others can ride on, the problem is going to take some time to get solved. They have been trying to interest Microsoft now for 6 years to invest in. But the level at which we are playing in India, perhaps Microsoft is the only other player which can reach pan-India level. They have been

making the right noises for the last 8 years, but really speaking nothing has happened. So as of today, genuinely at the pan-India level I don’t think anyone else is investing money. It is not possible for a single company like us to create infrastructure.

Som Mittal: There is a spoke there. If you look at how the penetration of PCs has happened in the market place and the small margins that people make on this, the next line for those retailers is to offer Cadabra solutions like yours.

Bharat Goenka: If you take Nasscom, the distribution infrastructure of software, and suppose if I was a software trader, I don’t know where I belong. I don’t know which industry I belong to. Do I belong to the software industry? The answer is ‘No’, I will not be called to a panel like this. I don’t belong to the hardware industry. I won’t be counted in the economy.

Sudhir Sethi: That is the predicament of the leader.

Som Mittal: In a $1.1-billion industry, Tally was right up there. You people have made up the numbers and you are one of the ….But you are quite right, the entire focus is on Nasscom, the domestic focus has just begun. Was it known? So our efforts about where to create market, create our position, were very different. I still don’t think we have licked everything. Still there are perceptions.

Sudhir Sethi: No criticism. I was pointing out when he was asking what are the present problems of the industry.

Som Mittal: We have to ensure that everybody in the eco system becomes a part and starts playing a role. And I don’t see any reason why a company should have a distribution system because Nasscom does not have people who have a distribution system at all. They are a set of small companies. Rajeev, after you have heard all of us, are you convinced?

Rajeev: Yes, I met Subash about 6 months back and I have been studying products. In fact, in all those introductory meetings he was telling me about that. But there are contradictions. What companies say is not what companies do. I am pretty sure that eventually it will come out of a million dollar sized company. There is no conviction in the services companies to do this.

Sudhir Sethi: So you imagine a scenario where in 2015, there will be one, $2-billion or $3-billion companies.

Rajeev: Unfortunately they will sell out.

Sudhir Sethi: I don’t think so.

Rajeev: My belief is that if you give him a billion dollar, he will also offer to sell. Okay, thank you all for coming to this panel and participating in it. It was a fascinating discussion and I hope you enjoyed it. I have.

Speakers: Thank you so much.