IT firms look for bigger bite of outsourcing pie

That a major chunk of revenue for the IT industry comes from outsourcing by US companies is well known. This is set to grow even bigger with the emerging trend that is being witnessed in the industry. This could make revenues from service-based exports look like peanuts in comparison.

Taking advantage of the positive image the Indian IT sector has built up over the years, IT firms are lobbying with US software vendors, to outsource creation of entire products to them.

"Currently, just around 5 to 10 per cent of outsourced product development (OPD) involves creating an entire product here in India. But trends indicate that over the next five years, an Indian partner developing an entire product will become the norm. The US company can then concentrate on things such as marketing and customer feedback . From the current 3 per cent of our total software exports contributed by such outsourced products, we will see this segment become an equal competitor to exports of both branded products and IT services," says Gawri Shankar Subramanian, CEO of Chennai-based Aspire Systems.

The companies, which moved towards the practically non-existent product outsourcing category in the late 90s, are now reaping rich rewards. Annual revenue growth rates for most of the top 10 companies are in the range of 50 to 150 per cent for the last two years.

Though comprising a miniscule Rs 2,000 crore out of the nearly Rs 76,000 crore expected to be earned by software exports from the country this year, the segment has been doubling its revenues for the last three years.

Bangalore-based Aztec Software, one of the biggest 'pureplay' OPD companies, has seen its quarterly revenues rising at an average of around 25 per cent quarter-on-quarter for the last two years. The company, which had a turnover of just around Rs 75 crore in 2004, is likely to post Rs 165 crore profits this year, a jump of around 120 per cent.

Says Ajay Vij, vice-president, business development, with Aditi Technologies, Aztec's competitor from Bangalore: "Though we have been in the business for almost a decade, it is in the last three years that we have seen accelerated growth. The company has grown by around 45 per cent during this time."

What is driving these firms is the huge potential for growth. They point out that out of the $40 billion (Rs 180,000 crore) that product companies in the US are supposed to have spent on software development this year, India has barely scratched the surface by attracting just around Rs 2,000 crore.

"I would be surprised if we have tapped even a fifth of our potential customers," says Denis John, MD of Cochin-based Cordinant Technologies. "There are around 2,500 companies which own various software products in the US market and the biggest challenge now is to get them to trust us with their product-codes," says John, who was on one of his proselytising missions aimed at converting the reluctant American companies.

"Though the need to cut down on time-to-market is a factor forcing software vendors to outsource at least part of their product to be developed abroad, the bigger challenge is convincing them that their intellectual property will not be misused," he said. "The change is very much on," he adds. Playing big

Currently only 5-10% of outsourced product development (OPD) involves creating an entire product here

Annual revenue growth rates for most of the top 10 OPD firms are in the range of 50-150% for the last 2 years