Moving Indian product story into next orbit

From just $113 million in FY1999-00, the Indian software product industry has grown to $1.64 billion in FY2009-10. The number of companies have grown five-fold from 102 in 1999-00 to 539 in FY2009-10 — not including captive R&D centres. But most of them are small and-medium business units with turnover between Rs 2 crore and Rs 50 crore. What steps can accelerate the growth of Indian software products? I list in the following paragraphs some changes that could be brought in the product ecosystem that may benefit the sector.

The US and Israel’s defence and high-tech industries offer some fresh insights. The US has for long pursued programmes such as 8(A) and HUB Zone to harness the innovative potential of the SMEs for military and economic strength. Federal agencies including the department of defence and NIH set aside 2.8% of their annual research budgets for SMEs and commercialisation of academic research.

Rand Corporation researchers have found the the programme aligned well with its objectives. Our ministry of defence’s new procurement policy says that “prime contractors” should set aside a portion of their business for SMEs. If the policy is strictly implemented, software product firms in the aerospace, machine system automation and controls can reap benefits. The ministry should not only protect public sector navratna companies, but also ensure that private SMEs can benefit from set-offs of global tenders.

E-governance projects often explicitly rule out involvement of local niche software players, even if the company has credible deployments. Qualification criterion like independent revenue (not the company’s total revenue) is a difficult hurdle to cross for many SMEs. How many of us remember that there were 19 enterprise resource planning companies till 2000: the likes of ESS, Ramco, Vishesh, Cressanda, Godrej and 3i Infotech. Today, only three of them have survived.

Domestic software firms have built successful products in documentation management, IT infrastructure, language tools, recognition and payments. Setting aside certain percentage of projects for Indian SME product companies in e-governance projects is a must to encourage local innovation.

Access to institutional finance is yet another area that needs to be addressed. The number of VC and PE investments has grown substantially but the value of these funds are small and their portfolio strategies limits their interest, investment and hence the development of key technologies. Software product entrepreneurs should have easy access to collateral-free funding.

Access to institutional finance for software product companies is limited. The current limit of Rs 1crore needs a relook. IP valuation for collateral is an accepted practice in all developed world and Indian banks must be educated. and encouraged. to adopt the practice. Finally, credible external benchmarking can also help Indian software product companies to fortify their true claims and challenge the competitors.

Easy access to test beds, timely certifications and other collaboration efforts through improved partnership from domestic academic and other research institutions can go a long way in sustaining the efforts of the valiant entrepreneurs.

The author is managing partner, brownE & Mohan