[This is an article I wrote for next issue of BusinessGyan magazine].
Global market for information technology (IT) software products and services including information technology enabled services (ITES) was $ 1.2 Trillion in Year 2007 and grew at about 7%. IT and ITES revenue share of India including exports and domestic market was $ 52 Billion which is 4.3%. Now, consider this: 98% of exports from India is services and only 2% is products; whereas globally, this ratio is 28% and 72%. Thus, out of an approx. market potential of $ 864 Billion, India is addressing just about $ 1 Billion as of now in IT products.
India arguably has one of the largest talent pool of engineers and technologists (churning out more than 300,000 engineers every year). India also has a vibrant entrepreneurial culture. Over the last 3-4 years, there has been plenty of venture capital and private equity available for talented entrepreneurs with interesting business ideas and models.
Experts have predicted for many years now that India has the potential to produce some world beating companies in IT products. Why are we not seeing any mega success stories in IT products? What is lacking?
One of the primary reasons for this is that, over the last 15 to 18 years, the entire IT industry in India has grown based on “Services Mindset” as against a “Product Mindset”. All the leaders in the IT industry, especially the ones with a lot of experience, have a complete “Services Mindset” wired into their brains and it is difficult to get out of this mindset.
What is “Services Mindset” and what is “Product Mindset”? There are many factors to differentiate between the two, but the simplest way to describe the services mindset is “the business of doing what is told by the customer, and do it well”. The product mindset is “to figure out what the customers want without them saying this directly, and then create products that the customers like”.
There is a significant difference between the two approaches.
Some of the key aspects of a services business are:
Customers define the requirements. If the requirements are not clear, right questions need to be asked to elicit clear definition
Strong delivery mechanisms consisting of mature systems and processes. Delivery approach and processes are geared towards checking with the customers at every step, getting sign-offs, communicating early and clearly, testing as per client defined metrics, etc.
Marketing function is focused towards macro areas of targeted industries and not functional areas; don’t need a large marketing function and marketing budget
Strong program management, customer management, crisis management functions
Multiple high quality touch points with customer organizations
Dedicated Relationship Managers
Extremely good fire-fighting capabilities when engagements or relationships go sour
Lower capital requirements since there is cash inflow immediately when the services projects start
Some of the key aspects of a products company are:
A product company needs to develop a keen sense of what the customers want in future by analyzing trends in technology, industry, domain and business processes, and by understanding the gaps in customers’ needs
Needs to have an effective product marketing and product strategy function that understands the customer pain points, domain, processes, and clearly defines the product requirements
A product addresses a large number of customers (whereas in services, the project requirements address mainly one customer)
There has to be a very good synchronous communication between product marketing team and engineering team. Engineering needs to be able to take a “marketing requirements documents” and translate them into software requirements documents (whereas in services, the customers pretty much provide the software requirements documents)
A product company has to take a thought leadership in technology trends, usability, optimization of business processes as well as in industry and domain understanding
The product quality function has to be able to define the quality requirements of the product like functional aspects, performance, scalability, maintainability, etc., and then execute on these quality requirements
Has to have a strong support function
Larger budget for marketing and sales is required
Larger capital requirements in order to build, market and sell the products; a much longer power to stay in business is necessary since the gestation period of product sales can be very high
Can achieve larger profitability
Coming back to India based products companies, there aren’t many big successes because of the services mindset of professionals with 15-20 years experience, lack of exposure to the global markets from the marketing and sales standpoint, and because of lack of capital in the past. Investors and entrepreneurs found it easy to build services businesses to create value. Now, there is no longer any value to be created in services.
The younger generation of entrepreneurs have an opportunity and the right environment to achieve something here. There are many factors that are coming together to create these opportunities. Some of them are follows:
Many multi-nationals have setup product development centers in India where they have started complete product development and support, and, as a result, there is now a much wider and deeper understanding of how products are built and marketed
Many young entrepreneurs have no exposure to services business
There is a huge availability of venture capital and private equity investments. Most of the funds now have IT product businesses as one of their focus areas
There is a significant and rapidly growing market for IT products in India which was not the case a few years back. Many startups are focusing in Indian market first so that they can learn, mature the products and even get some good revenue traction. Entire businesses can now be built just for Indian markets – this was not possible a few years back
There is a clear move for IT software products to “on demand” or “software as a service (saas)” offerings. This trend is creating new opportunities for many startups as the larger more established players take time to change their strategies. Similarly, there are other trends that is creating exciting opportunities like mobile and telecom VAS products, security products, BPM in SMB sector, etc. etc.
I am very optimistic and looking forward to some interesting success stories in the next few years.