India's Next Step: Commercial Software

First it became a hub for IT services. Now, India stands to become a major force in the software industry, too.

Like a growing number of businesses, Sharebuilder Corp. recently turned to India to help keep its operating costs in check. But the online brokerage didn't send its software development or call center offshore. Instead, it bought inexpensive customer-relationship-management software from Talisma Corp. in Bangalore, saving enough money on the deal to let it use the application to continue to run a call center in the United States.

What's happening at Sharebuilder shifts the debate over whether India's rise is good or bad for U.S. workers and opens a window on the country's emergence as a hub of software startups in its own right. India's revenue from software sales and research and development increased 30% last year to $3 billion, according to the National Association of Software and Service Companies, a trade group for India's IT industry. That's still dwarfed by the country's revenue from IT services--about $13 billion--but the gain is big enough to portend a shakeup in the commercial software market.

"India is almost certain to have a major role as a center of software development," says Vivek Paul, who left his position as vice chairman at one of India's largest IT-services companies, Wipro Ltd., to become a partner at private equity firm Texas Pacific Group, where he'll work closely with its Asian affiliate, Newbridge Capital.

Established software vendors, including IBM, Microsoft, Oracle, and SAP, already tap Indian talent not just to crank out code but to help design and develop commercial offerings. Microsoft has an R&D center in Hyderabad, working on database and messaging technologies, among other projects. And Indian companies such as Newgen Software Technologies Ltd. supply multinationals, including Toshiba, with key applications that run under the hood of their office-imaging products.

Just last week, Oracle revealed plans to spend $316 million to acquire a 41% stake in i-flex Solutions Ltd., a Mumbai banking-software maker owned by Citigroup Venture Capital.

	Polaris is moving "full force" into the United States, Kaushik says. Photo by Erika Larsen/Redux

Increasingly, Indian software entrepreneurs want to put their own companies' names on product labels, at home and abroad, by capitalizing on their country's highly educated and low-cost workforce to build and sell software for everything from back-office programs to customer-facing applications. It could have far-reaching consequences for software prices worldwide. Not only would low development costs let Indian vendors reduce licensing fees, but the competition could force North American and European vendors to adjust their prices downward.

"Prices will inevitably come down, and we will go through another revolution like we had in IT services," predicts Marc Hebert, executive VP of Sierra Atlantic Inc., a Fremont, Calif., company that builds software for North American companies, including Siebel Systems Inc. and Agile Software Corp., from development centers in India.

It's not just the cost structure that makes Indian software companies interesting. Many of the entrepreneurs come from India's IT-services industry, and their development teams bring with them the disciplined Six Sigma and CMM-I approaches to quality management and experience with Web services and hosted applications to the products they develop. It's a mind-set that fits well with the business world's slow march toward more services-oriented, Web-friendly IT architectures.

Sharebuilder chose Talisma's software after what chief operating officer Harold Zeitz describes as an exhaustive search. "We went with the best product at the best price," Zeitz says. Talisma's hosted software costs about $50 per seat a month for 35 call-center workers, and the call-center reporting capabilities are stronger than those that other CRM vendors offer, including Salesforce.com Inc., Zeitz says.

Be prepared for more stories like this. Experience, talent, and ambition are propelling the growth of the Indian software market, with offerings being put forward by IT newcomers and old-timers alike (see story, Up-And-Comers: Companies With Bright Futures).

Polaris Software Lab Ltd., in Chennai, India, shows how Indian companies can parlay industry knowledge gained working for others into products. The 20-year-old company began as an IT-services shop supporting Citibank's global operations, giving it the bona fides to claim a world-class understanding of banking technology. "We weren't just doing legacy support, we were developing brand-new, customer-facing systems for one of the world's biggest banks," senior VP Kartik Kaushik says. Two years ago, Polaris started marketing its business-process software for the financial-services industry.

The company's commercial software customers now include ABN Amro, Lloyd's, UBS, and, yes, Citibank. "Because we had done a lot of contract-development work for Citibank, our understanding of the financial-services market was very mature," Kaushik says.

In 2003, Citibank aggregated all of its Indian technology operations into a subsidiary, called Orbitek, then sold a portion of the unit to Polaris for an undisclosed amount, giving Polaris access to banking-savvy technologists and much of the intellectual property it had developed for Citibank. "Until the sale, we could not take any of Citi's [intellectual property] to outside customers," Kaushik says. "We paid a stiff price for that right, but it's going to be worth it."

Some of the largest companies in India's IT-services industry are taking a similar path. They rake in billions of dollars in support fees from international customers, but there's an upper limit to their rampant growth, and shareholder pressure is driving them into the higher-margin software business. (IBM's gross margins, for example, are 26% for services and 87% for software.) Tata Consultancy Services Ltd. has launched more than a dozen commercial applications, including Tata HMS, an enterprise-resource-planing system for health-care companies.

Paul McDougall is a former editor for InformationWeek. View Full Bio