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December 24, 2004

The rise of the "product development services" company

Software services are an old story. Product companies - except for a few exceptions - have not taken off (for the usual set of reasons: marketing costs are prohibitive, etc. etc.).

So what's new to write about the Indian software industry? "Product development services", according to a Businessworld article.

What is a product development services company?

Typically, when any company starts to develop a software product, it would have a unique differentiator or core of the product. That core generally accounts for 15 per cent of the development work of the product. This would invariably be developed in-house. But the product would also have a lot of other modules. These are essential, but they are not big differentiators. This is where product development services companies step in - they develop these non-core modules.

Who are the players in this space?
Bangalore-based Symphony Services was among the early players. Then there are Aditi Technologies and Aztec Software (Bangalore), BrickRed (Noida), and Aspire Systems (Chennai).

The article also talks about the 3-year old iSoftTech, a Chennai based company co-founded by Ray Stata (who earlier founded US-based Analog Devices) and IIT-Madras professor Dr. Ashok Jhunjhunwala.

Why would a product company outsource development?

There are several reasons why companies developing products are willing, even keen, to outsource. It helps developers cut the time to market. It also frees up the product development company's management resources to concentrate on the most critical core of the product...

...Software products fail more often than they succeed. Good, and even exceptional products, have failed for lack of financial or marketing muscle. In many cases, new, disruptive technology can make a product obsolete in no time. Even large product companies face huge risks. Start-ups have limited chances of success in full-fledged product development.

What are the various types of engagement models in this space?

So why is this business better than pure vanilla services?

First, margins in the business are much better than in IT services. "Billing rates per engineer per month can be as high as $7,500, compared to the $2,000-$4,500 that services firms make," says (Vijay) Babu (COO of iSoftTech). Sources say billing rates are at least 30 per cent higher than the IT services industry. "The client is ready to pay higher bill rates for predictable high-end product delivery."

More importantly, these companies have the opportunity to do bleeding-edge product development. "It is as if a small company is actually working on a group of products, but without the associated risks," says Babu. There can be no greater turn-on for many hi-tech start-ups. Finally, even one successful product can bring global recognition and a consistent stream of revenues. Product upgrades, new versions, etc., keep product development services companies busy even after the initial launch.

Any success stories to talk about?

US-based Stata Labs, founded by Raymie Stata (Ray Stata's son) had outsourced the entire development of its email software product "Bloomba" to iSoftTech.

Yahoo! recently acquired Stata Labs along with the 20 iSoftTech engineers working for Stata Labs. Yahoo! now plans to use Bloomba to take on Microsoft's Outlook and Google's Gmail.

So why aren't TCS/Wipro/Infosys tapping this opportunity?

This model may not appeal much to the biggies because it is not as scalable as IT services. But for smaller companies, outsourced product development is a terrific learning opportunity.