'Billion dollar companies can emerge in Outsource Product Development space' - Interview

Source : Sify.com

 Link : http://sify.com/finance/it-bpo/fullstory.php?id=13915488 

 After developing software applications to enhance back-offices of several organisations across the globe, Indian IT firms are now turning their attention towards product development outsourcing. One such firm, Aspire Systems is a fast-growing outsourced product development firm focused on helping software companies create products for the next generation. Aspire’s product development team operates from the offshore innovation centre in Chennai and their offices in the United States. Aspire’s niche focus has enabled it to record an annual growth of over 150 pc for the past two years. Aspire facilitates rapid time-to-market at lower development costs by providing comprehensive services in the areas of product development, advancement, testing, implementation and maintenance.

CEO Gowri Shankar Subramanian has been a key architect of Aspire Systems. He is currently driving Aspire to change the way software product companies do product development. Gowri has nearly 10 years of experience in the software industry, with expertise in the areas of software product engineering, software product marketing and support, and software development. Gowri has a Bachelor's in Mechanical Engineering from Pondicherry University and a Master's in Industrial Engineering from Texas A&M University. His papers have been published in the International Journal of Production Research and Institute of Industrial Engineering Conference Proceedings. Gowri shares his views on Outsourced Product Development (OPD), and the market scenario with this correspondent.

What are the challenges that the outsourced product development space faces today?

One of the key issues facing the OPD industry is the question of IP security. One primary reason customers think twice about outsourcing is that they have to share their bread and butter (the code-base of the product) with another company. To mitigate this concern, the industry will have to continually work towards evolving fool-proof IP security measures, both from a technology and from a regulatory standpoint.

A second vital issue is convincing product companies that product development is not their core activity and is best outsourced to an expert. Today, product companies still think of product development as their core activity and outsource only certain portions of it. The OPD industry must work together to change this mindset and get product companies to think otherwise. If we can do this, we will create huge positive implications for India and the world. Lastly the availability of skilled product development professionals. In the short-term, the industry is already addressing this issue through extensive training, on-the-job grooming, and associating junior engineers with mentors who guide and teach them the nuances of product development.

From a long-term perspective, we require some significant changes in our education system to inculcate a 'perfect-engineering mindset' in our people. The industry and institutions have to work together to form new curricula and innovative methods of teaching, instead of relying on mechanical and rote learning, as is the case now.

What is the attrition level in this space, what steps are being taken to counter the same?

There are no specific statistics on attrition levels in this space, but the challenge of product development work is much higher than standard IT services work. This contributes to lower attrition in this space and we find this to be true in our case.

Could you tell us the geographical markets and their share in percentage towards outsourced product development in India?

The largest portion of the business comes from the US as it has the highest number of product companies in the world. US companies are also open to try out new models of development to increase the speed of innovation. So, a high percentage of the OPD business currently comes from the US, though there are no statistics available at this time.

According to a Nasscom-McKinsey report, the global market for outsourced product development is set to grow to a whopping $8-11 billion by 2008. What is going to be India's share in this market? Who are the competitors to India?

NASSCOM has projected $8-$11 billion as India's share of the products and technology services market in 2008. The overall market potential is much greater and is in the range of $9 billion even now. This is calculated as follows: 
Revenues of software product companies worldwide -- $180 billion / year 
Average R&D spend of software product companies -- 20-22% of revenues 
Total R&D spend -- $36 billion (20% of $180 billion) 
Outsourced R&D spend (assuming a low of 25%) -- $9 billion (25% of $36 billion)

Currently, software product companies hire a number of contractors just to manage various aspects of product development. Hence, a good portion (25-30%) of the R&D budget is actually outsourced. The rest of the R&D spend is primarily spent on their in-house engineers, equipment, etc.

Obviously, the potential for OPD is significant and ever growing, specifically considering the fact that new software product companies emerge continuously. In our opinion, there is room for billion-dollar companies to emerge just by focusing on the OPD space. Competition to India can come from Russia and countries in Eastern Europe and China. All of these countries have excellent educational systems that produce good engineers and scientists and these countries can pose a potential threat to India.

What are the domains that require outsourced product development? What are the domains that Aspire Systems caters to? Can you share details in percentage on contribution from different domains towards Aspire's revenue stream?

At Aspire, we do not have a specific domain focus. The focus is more technology-driven as our customers provide the domain/vertical expertise. All of our customers are innovative product companies who are attempting to advance the state-of-the-art in their own domains. Hence, it is important that they provide us the domain perspective while we focus on the technology aspects. We have developed products in a number of domains from India -- healthcare, supply chain and logistics, industrial automation, consumer electronics, etc. The common thread between all these products is the high-level of technology expertise required to build and test them.

Aspire is reportedly planning to expand operations in Chennai. What is the source of funding for this expansion? What is the progress on the expansion front?

We are expanding operations in Chennai. In fact, we have recently moved to our own facility called the 'Global Innovation Centre' in the Siruseri IT Park. Phase I of the facility has been constructed at a cost of Rs 10 crore with a seating capacity for 275 people. We are currently constructing Phase II and this will bring our total capacity to 500 seats by the end of the year. The eventual plan and remaining phases will take us to 1200 people at the Siruseri IT park. The funding for the expansion comes from internal accruals and bank loans with each contributing 50 pc of the expansion funds.

In an earlier interview, you had mentioned that most of the IP for products developed by Aspire belongs to the client. So, does Aspire get any royalty payment for this on a sustained basis? Or is it a one-time payment for IP?

We do not get any royalty payments for the IP. It is a one-time payment based on the efforts we undertake for product development.

Do you think you should be holding the rights to IP yourself rather than let the clients have them?

Our customers come up with the product concept, the product vision, product positioning, and many other activities that are required to create a successful product. What we provide is the technical capacity to realise the product vision. Since the concept belongs to the customer, it is only logical that the IP also belongs to the customer.

Given your expertise in OPD, are you planning to develop products on your own, for which you can hold the IP? If yes, can you share the details regarding the product and the markets you're planning to tap with the same?

Creating and marketing products is an entirely different business model. While we have the potential to build our own products, it is very important for a successful business to stay focused and execute the core strategy. From that perspective, we have chosen to concentrate on outsourced product development since the market opportunity is huge and we have a leadership position in defining this sector.

According to you, product development consists of several sub-segments including product enhancement, reengineering and migration, testing, implementation, maintenance and product support. So, which segment contributes maximum revenue to Aspire at the moment and why?

Our product enhancement segment contributes the maximum revenues as the highest demand from customers is to enhance successful products.

Most of your clients seem to be based in US. How far has the slowdown in US economy impacted your revenues? And when are you planning to look at other markets?

Currently, the US economy seems to be doing well, though the growth is not robust. The earlier slowdown in the US economy helped us because companies were looking to do more with less. We were able to help our customers increase the efficiency of their product development budget by releasing more versions at a faster pace. So, we provided a direct value proposition to our customers even during the slowdown. We are planning to look at other markets as we move forward, primarily Europe to begin with. We already have some customers in the UK. European product companies can benefit from OPD services just as much as US companies can, but the decision cycles in Europe are much longer.

How do you buffer your revenues against the forex volatility?

We have forward cover on our export income to buffer against forex volatility, though this offers only short-term protection (6 months or so). We are also planning to convert some of our rupee loans for our facility into forex loans since we have a natural hedge due to our income being in dollars.

Is there a ranking of Indian companies specialising in OPD at the moment in terms of revenues?

At this time, we are not aware of any rankings of OPD companies in India.