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More and More, Made in India

Indian companies are no longer mere suppliers of IT services. They're now making top-selling software products under their own brands.

By Shailaja Neelakantan/BANGALORE

Issue cover-dated November 27, 2003

AT 9:30 P.M. on any given weekday, iCode Inc.'s office in Bangalore buzzes with activity. That is not unusual in a city where every other company is a call centre or a provider of information-technology services for multinational clients overseas. What's remarkable is that iCode is neither: It makes its own software products, and its staff are working late to service the 2,500 small-business customers in 40 countries who use iCode's software to manage their accounting, payroll, customer transactions and other functions.

iCode is among a growing number of Indian companies that are now developing and selling original software, instead of just supplying code-writing and other IT services to corporate clients. Until recently, many of the most popular software products from the likes of Microsoft and Oracle were made by Indians labouring in obscurity. But increasingly some of the world's best-selling software products are being made in India by Indian companies.

Their rise is due to a convergence of factors: With the U.S. cutting back on issuing and extending work visas for Indian professionals, many have returned to India equipped with the expertise to develop their own software. Meanwhile, a protectionist backlash against outsourcing is gaining momentum in America and Europe, and competition remains fierce in the offshore IT-services market. Indian companies have already cornered 60% of that market, worth $16 billion a year. But with competitors slashing costs and margins in services shrinking, companies are realizing that the high-margin products business--where Indian companies have only tapped 0.2% of a $180 billion global market--is the way to go.

India's successful IT companies like Infosys, Wipro and Tata Consultancy Services have already developed their own software, but it's only a sideline; most of their revenues come from services. The real "Made in India" companies may have a small services component, but most of their revenues comes from their products, which are comparable to better-established rival products, not low-cost alternatives.

The most successful such company is i-flex solutions, whose Flexcube is the world's best-selling banking software package. Its 160 customers in 74 countries include Citibank, the American Stock Exchange, the International Monetary Fund, Shinsei Bank of Japan, and Development Bank of Singapore. Flexcube beat a banking-software product from leading Swiss maker Temenos to be rated top in 2002 by International Banking Systems, a Britain-based publishing house.

"One of my heroes is [Apple founder] Steve Jobs," says Rajesh Hukku, i-flex's founder and chief executive. "Like he said, 'Think Different' . . . That has been my motto from the start." Hukku created the precursor of Flexcube while he was with a Citibank unit in India that developed software. In 1992 Citibank spun off that unit as Citicorp Information Technology Industries and named Hukku its chief executive. Flexcube was launched in 1997. In early 2000 the company changed its name to i-flex, to distance itself from Citibank, which through its venture-capital arm has a 43.44% investment in i-flex.

Though it provided early funding, Citibank hardly carried the software unit; it was not even among i-flex's first 40 customers. But since then i-flex hasn't stopped growing. In the 12 months to March 3, the company's net profit rose 71% to $37.3 million. And 65% of i-flex's $134 million in sales came from products, which is the way the company likes it. "We aren't even tempted by a big order size if it isn't in our domain," says Hukku.

A handful of other companies are making their way up the software-product ranks. iCode, a purely product company, developed one of the world's first enterprise-resource-planning (ERP) software products for small and medium-sized businesses. ERP software automates the operations of businesses, including accounting, inventory control and e-commerce. The company has been profitable since it started up in 1994, say company officials.

Talisma Corp. makes Web-driven customer-relations-management (CRM) software, which supports customer services, marketing and sales for companies. Talisma officials say the company, which counts Microsoft, Dell and Sony among its customers, grew 70% last year and expects to break even next year. The company also recently announced that its majority shareholder, Oak Investment Partners, would buy outstanding shares in Canada's Pivotal Corp., a leading provider of CRM software for mid-sized enterprises, and intends merging the two companies.

Bangalore-based Subex Systems got into the services business in 1997, but at the same time it decided to develop a telecoms-fraud-management product. Ranger, launched in 2000, helps telecoms carriers curb fraud through innovative subscriber-profiling techniques. Global Crossing and Sprint Local of the U.S. are now among 39 customers in 16 countries.

Services contributed about 70% of Subex's revenues in 2001-02. That went down to 64% in 2002-03. "We expect 44% of the revenues to come from products for the current year, and very soon we will be a 100% products company," says founder and chief executive Subhash Menon, who adds that Subex has been profitable from the start.

Many of these India-based software-products companies are incorporated in the U.S. But because they were founded by Indians and Indians perform all of the product work in India, they are essentially Indian companies They have incorporated in the U.S. to leverage their contacts and to raise venture capital, and many of their top executives commute between the two countries. For instance, at U.S.-incorporated iCode, only 60 of its 350 employees work in the U.S. office; the rest work in Bangalore. "We are not an Indian company or a U.S. company, we are a global company," says iCode founder and chief executive Bijal Mehta, via a videoconference link from his office in Chantilly, Virginia.

Their multinational experience and global perspective has given these pioneers the confidence to break into the software-products business. For years, Indian software companies focused on providing IT services because developing products was risky and time-consuming. "Sure, it's risky, but the product business is one you have to persevere at," says Hukku. "Indians are slowly building up the confidence to do that. In the 1970s we weren't even confident we could write a program. Every generation just gets more and more confident." With this self-assurance, he says, "we have to move up the value chain and this is the time to do it."

Indian professionals who have returned to India from abroad understand corporate software needs, they know which niches are potentially lucrative and they have global contacts. They've also gained exposure to the way multinationals do business from their IT-services experience. For instance, some of Talisma's founders were part of the team that worked on the now ubiquitous Microsoft Explorer. "Being in Microsoft gave us the attitude that we can hit the jackpot with one product," says Talisma's chief technology officer, Anantharaman Iyer. Now, he says, at Talisma "we want to do for India what Sony did for Japan."

That sort of conviction has also helped these entrepreneurs attract venture capital. Intel Capital became a strategic investor in Subex last March. iCode recently said it is getting $8 million in new venture capital that it plans to use to expand its U.S. and international sales-and-marketing efforts.

While the founders of some of these companies have returned from the U.S., their boldest ambition is to take their "Made in India" products right back there, to the heart of the industry. Already beginning to dominate the African, Middle Eastern and East European markets and to some extent the Asian market, these companies see the U.S. market as a gold mine. "We are competing against the likes of Siebel Systems and SAP, it takes guts to do that," says Talisma's Iyer, referring to the top CRM-software makers.

The secret may lie in the better service provided by Indian companies, which are still small and specialize in one or two products. "One of our customers who had switched to a Subex product said that he much preferred it to one of the larger players' products. We were told we are light years ahead of them in support," said Subex CEO Menon, declining to name the competitor. "Because all of us are small companies, our customer support is excellent. An Ericsson or an Alcatel [Subex's competitors] concentrate on so many products that they may not pay equal attention to all of them. We are focused."