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Indian Software: Brand conscious - Views on News from Equitymaster
 
 
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  • Nov 27, 2000

    Indian Software: Brand conscious

    Indian software industry has traditionally been project oriented. The client would detail their requirements to the software company, which in turn would develop solutions. The domain or business knowledge would lie with the client and the software company would just put these rules into codes. For example, if a software company had to develop solutions for a bank, the bank would specify their needs to the software company and eventually they would develop solutions. These solutions would be totally customised for the client.

    But, considering the fact that similar businesses have similar requirements, it would make sense if a solution were sold over and over again. Thus, the software company would incur lesser development costs, which it could pass on to its clients. This would mean a win-win situation for both. To put things in perspective, in a software development life cycle, the efforts for analysis and design consumes about 30% and programming about 20% of the total time. The major chunk of the time goes for testing i.e. 50%. Thus, if the same effort were sold twice to different companies, it would mean higher operating margins.

    Today software firms are offering standard products wherein solutions can be purchased of the shelf. By far, many industries have standard requirements especially in verticals like manufacturing and finance. But the motivation for products is not only profitability. Creating a product means creating a brand. The company becomes synonymous with the product like Mircosoft with Windows. Creating products that can be brought off the shelf and could run universally across the globe is no easy task. It takes huge efforts. Therefore, companies with universal products are held at very high end of the software value chain. Once this image is established, the companies can charge a premium for the quality they stand for.

    Indian software companies too have caught on to develop products. Infosys has four products in its portfolio for the banking industry namely Finacle, BankAway, BancsConnect and Payway. Though the contribution of these products as a percentage of sales was just 2% in FY00, in 1HFY01 it has increased to 6.3%.

    Hughes too has been quite aggressive on software product development. The contribution of products as a percentage of sales has been steadily increasing.

    Contribution of products to revenue
    Year FY98 FY99 FY00 H1FY01
    Hughes 5.0% 12.0% 20.0% 29.0%

    VisualSoft is yet another example of a company that is oriented towards products. Products as a percentage of sales accounted for the 34% in FY99 and 49% in FY00.

    All this is an indication of the maturity of the Indian software industry. Over the last two years, the software industry is donning an image of providing quality solutions matched with the best in the world.

    However, there are some negatives associated with product development also. Since they give an image to the company, any stigma associated with the product gets associated with the company.

    In the software sector there are lots of growth opportunities and almost everybody has jumped in due to low entry barriers. But the rule for survival is not different from any other industry; only quality conscious and committed will survive.

     

     

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