Products in the Midst of Commodities!

Some people who dislike the commodity play (like I do) point to products as the way forward. “Create intellectual property and license it out for others to use”. Clearly, this is much more respectable than capacity leasing.

While this is an attractive move to break away from commoditzation, I personally find it hard to see Indian vendors going down this path.

The software services business model (which I call the capacity leasing business model) is a very successful model in its own right. The software products business model is also an equally successful business model as proven by companies like Microsoft, Oracle, SAP et al. Indian companies have choose to adopt the former business model. If and when it becomes nonviable as future events unfold (e.g. decreasing spread in labor cost between India and the western world), it is more likely that Indian companies will suitably adjust the business model (e.g. revise Indian salaries downwards) than abandon the model altogether.

Even if Indian companies want to switch to a product business model, the differences between the two models is large enough to dissuade them. Let us look at some of these differences:

• To develop products for a customer segment, you need intimate knowledge of that customer segment. In other words, if you want to develop products for the USA and Europe, you need intimate knowledge of the needs of those regions, which Indian vendors lack. They can, of course, develop product for India but that is a different discussion altogether!
• Product development needs innovators. The Indian vendors’ focus on process compliance (ISO and CMMI) is not conducive to creating innovators!
• The differences between a product sale an a capacity sale are differentiated enough to render the sales force on the Indian vendor’s unsuitable for the task of successfully selling products. Also, the marketing effort required for promoting products are a few orders of magnitude greater than the marketing effort required for promoting capacity sales.
• The financial risks associated with products with a large up-front investment which pays back over time is not something that the Indian vendors have an appetite for, used as they are to a “show me the money” business model today!

That said, I must admit that some Indian vendors have ventured with laudable success into the product space:

Of these, only the first (iFlex) attempted to be a pure-play product company and succeeded to the extent of being acquired by Oracle.

The other two hold out an interesting observation.

Both Finacle and BANCS are enterprise-class products that require significant support services  for a successful roll out! This is really a case of services companies taking the concept of outcome-based billing to its logical extreme – “we will customize, commission and roll out our banking solution for you at a fixed price of USD X Million”.

This means Infosys and TCS have a head start over the other Indian vendors in the race to non-linearize their revenue stream, that too in the financial services market which is most likely to be desperate for low-cost but enterprise-class solutions!

May the Force be with them!