Software Product vs Services Startups Date:   Tuesday , May 01, 2012 Founded by four serial entrepreneurs, Pune based InnovizeTech is a new player in India’s emerging software product story. Its patent-pending and award-winning cloud-based solution, Sapience, enables enterprises to achieve significant gains in work output – effortlessly. The founding team’s previous two ventures had successful exits to VERITAS Software (now Symantec Inc.) and Symphony Services Inc. Thereafter they scaled both subsidiaries to high revenue and over 700 employees in 3.5 years each. The IT industry seems to be ascending to the next level in the value chain every 10 years. The 1980s represented investment in the US with migration of talented workforce from India, and the 1990s led to India as a source of IT talent. The years 2000-2009 marked Indian IT’s arrival as the world’s leading provider of services and business process outsourcing. Going by this trend, it can be predicted that the current decade (2010 onwards) will mark the rise of India’s software product business. If India can become the hub of the world’s most successful IT services as well as product companies, it can truly lay claim to being a knowledge superpower. Recent developments are driving the emergence of the local product industry: * A large pool of talented engineers and managers who have worked at global ISVs (Independent Software Vendors) in India and U.S. * The rapid growth of local market and increasing adoption of IT with India-specific requirements especially for consumer facing apps on cellphones * Technology disruptions including the emergence of cloud computing, which make national boundaries irrelevant, and reduce cost of global sales * Flair for innovation and risk-taking amongst a generation that has grown up in post-liberalized India, and availability of funds from successful IT Services entrepreneurs Challenges for a product company Building products requires a mindset, capabilities and an environment, which is very different from delivering services. It takes time to learn the ropes. Market in India is limited, and while IT investment by corporates and individuals is growing, the preference is for recognized vendors. The ecosystem for products is more complex, consisting of engineering teams, product management, marketing, sales, consulting, professional services, distributors, system integrators, resellers and investors. Some of these capabilities or services are not easily available in India, and getting top-notch engineers to work in start-ups is a challenge. However, the two biggest challenges for a product start-up relate to cash and engineering, as described below. Challenge 1:First invest, and then reap The business cycle in a services company starts with sales, and ends with project or product delivery. On the other hand, a product company must first invest in building the solution. Then begins a long and complex business cycle to sell, support and continuously evolve the product. This reversal of sales and engineering sequence has a profound impact on how product organizations get built. Services industry provides manpower to build software apps and products, while the IP belongs to the customer. Outsourcing happens mostly to reduce engineering cost. The client bears the risk and rewards of a successful or failed project or product. The service provider gets paid in stages either on fixed cost or time and material (T&M) basis. The revenue is linked to engineering effort, and covers cost and reasonable profit. The profit is at risk only if the effort was under-estimated on fixed price deals, and even here you could negotiate for more payment. Services companies have many customers, and so their risk is low even if they lose an occasional account. In comparison, products get built because the entrepreneur thinks it has market potential and has the commitment to develop it. Significant investment is required in advance, with no guarantee of returns. Cost of marketing, sales and support can be very high, especially if your customer base is global. Given income levels, it is hard for entrepreneurs to have savings to fund their start-up. Angel and VC investment is still quite low in India. So why build a product? Unlike services, it has the potential to fetch non-linear revenue that eventually is more profitable. This is because a product business creates intellectual property. Once developed, the same solution is sold repeatedly to a large number of buyers. The graph below shows the famed hockey stick revenue model for a product business. A services organization can have positive revenue from day one, and grow very quickly too, but the headcount-centric model will eventually become a drag. Successful product = exponential revenue Challenge 2: Build it right, then sell it to many (and keep repeating) Building a software product is more difficult than doing projects or providing services. With projects, software is developed to meet the exact specifications of the client. The project scope is defined in consultation with the customer, and deployment happens in a controlled environment at client site, with known hardware and software. Support requirements are minimal. Changes to specifications, or defects during development or after deployment, usually have limited financial impact. In T&M contracts, the vendor is paid regularly, based on efforts put in. Hence, changes and delays may in fact, bring in more revenue. Fixed price bids usually account for contingencies like delays. If specifications are changed, the vendor can ask to re-negotiate the price. Quality issues may cause loss of credibility, or at worse project termination and denial of future contracts. A product, in contrast, will be shipped to thousands, or even millions of users. Specifications are based on the seller’s understanding of customer needs. Therefore, the product team must have a deep knowledge of market and domain. Quality has to be outstanding, since the product will be used by a variety of users and on a plethora of platforms and configurations, and not all of it can be anticipated in advance. A post-release defect creates negative publicity and costs lot of money. A patch to fix the problem has to be developed and distributed quickly to the users. For example, Microsoft distributes Windows patches and upgrades frequently in response to defects and vulnerabilities as they shop up. Reputed Cloud Services have faced the ignominy of account details of their users being revealed inadvertently or by hackers. Such snafus can even expose a product company to expensive lawsuits. A product business requires highly structured engineering and organizational discipline. Formal reviews are necessary at every stage (architecture, design, coding) to catch deviations from the requirements. Rigorous testing and quality assurance (test/QA) processes have to be followed to detect defects before product release. Test labs must replicate the myriad deployment environments that users may have. This can become complicated for multi-platform products that support a variety of operating systems (Windows, UNIX, and Linux) and databases. The installation procedure must be highly automated and work flawlessly in all possible system configurations. New versions, patches, and future upgrades must install without any disruption to existing software and data at user sites. A strong support organization (on phone, email or onsite) has to be built. Unlike projects, there is no end date for product engineering. They must continue innovating and releasing new versions with more functionality and advanced features, to stay ahead of competition. Advantage India: Cloud Services and Mobile Apps Luckily for India, there are new technologies and business models that reduce the above challenges faced by traditional on-premise products that are shipped or downloaded via web. One such technology is referred to interchangeably as Cloud Services, Web 2.0 or SaaS (Software as a Service). (Not all SaaS products are truly cloud based but the differences can be ignored for this discussion). SaaS products are usually thin compared to a traditional full-blown enterprise product. Vendors usually adopt an agile methodology, with initial releases that have limited functionality. They add more capabilities or related applications, as the user base increases. SaaS makes application deployment and upgrade simple. Software is hosted at one site (vendor’s own or through a provider). Light applications reduce the cost of development, while controlled deployment limits testing cycles. There is no distribution expense though marketing costs can be high. Deployment charges are proportionate to the increasing base of users. The SaaS model is important for India. Making geography irrelevant, it enables anywhere, anytime apps and services for a flat world. Indian Web 2.0 ventures can now reach out to the world market without the huge cost of sales that enterprise software companies have to bear. They can compete directly against global players. India has a large number of Small and Medium Enterprises (SMEs) who have yet to embrace IT automation. They will benefit from Cloud Services by not having to invest upfront in IT infrastructure (servers, software licenses) and buying subscriptions only as required. Examples of successful Indian products include the Zoho CRM suite, MakeMyTrip.com (travel services), naukri.com (job related portal), shaadi.com (matrimonial related), and even the Indian Railways portal developed by TCS. Similar to Cloud Services, software apps on mobile phones are becoming more common, driven by the explosive growth in usage. Cell phone ownership in India exceeds 500 million, with 10 plus million being added each month, cutting across income barriers. With its ubiquity, mobility and low cost, it is the ideal delivery platform for simple apps (and supporting middleware). The Indian mobile market is unusual in its extensive usage of texting (SMS) and multiplicity of languages. Since the Indian psyche is different, entrepreneurs can build unconventional solutions that reflect local reality for domestic users. The cellphone is rapidly morphing into a highly integrated device, and is poised to become the key accessory for humans to interface with their environment. The vast majority of Indians will skip the PC and directly use an integrated device at work and home. Summary A product start-up is much more difficult than a services business. But it is more exciting and potentially more rewarding. The intersection of new technologies and India’s growth economy has opened a window of opportunity for new firms to leapfrog past existing players with exciting new products. By 2020, India will be known for its all-round IT capabilities – products and services. Reference: 'From Entrepreneurs to Leaders – Building Billion Dollar Software Product Companies from India', Shirish Deodhar, Tata McGraw Hill, 2010.