OPD: The Wave gets Higher

Date:   Monday , August 20, 2007

These days, when CEOs of tech companies the world over get “Jack Welched”, they no longer limit their thoughts to establishing their firm’s own facility i.e. a “captive center” in a low-cost location like India. Rather, they veer towards a phrase fast gaining prominence in the realm of business strategists: outsourced product development.

Outsourced Product Development or OPD refers to a model whereby a company outsources its product development functions to a third party vendor. The rising incidence of the practice among tech companies, mature and startups, has spawned companies like Symphony Services, Pramati Technologies, Persistent Systems, and Aditi Technologies. Many others that are in the traditional IT services space, like Tavant, have made OPD their primary focus area.

Market on the move
As per NASSCOM -McKinsey analysis, the OPD services space, currently valued at $3 billion, is set to touch $8-11 billion by 2008. OPD as a service line took shape around 2003, and over time, the kind of work moving to India has undergone a sea-change. While even three years ago all the product development work outsourced to India was non-critical—in the sphere of importing an application from one platform to another, today, Indian players and their work drive the product release dates and product lifecycles.

“At present,” says Ajay Kela, Chief Operating Officer and Managing Director, Symphony Services—the leader in the OPD space, “only 10 to 15 percent of the product development in large MNCs is offshored to their captives and OPD services firms together, whereas 40 to 50 percent of it is offshoreable.” He believes that a major chunk of this offshoreable component will land in OPD services payers’ lap, since most captive centers today work in partnership with third party vendors.

This line of thought is substantiated by the recent Forrestor research titled “Shattering The Offshore Captive Center Myth”, which points out that more than 60 percent of captive centers struggle with escalating attrition and costs, and around 60 to 70 percent of them follow the exit route through partnering with vendors or providers of various capacities. In fact, in the failure of captives, Kela of Symphony sees an opportunity. “Most executives who set up these captive centers get disillusioned after a year of their functioning, owing to various reasons and return back to their earlier location. Acquisition of such headless captives forms a part of our strategy.”

Pradeep Singh, Founder and CEO, Aditi Technologies vouches against acquiring such captives and says, “In them, you have demoralized teams, which could create a negative vibe in our company if they come on board.”

Customer and competition
With regard to OPD services, Indian players seem to be the only ones competing for the customer’s pie. “Talk of one large OPD services firm internationally,” demands Sarvesh Mahesh, President and CEO Tavant Technologies. From the client’s point of view, India’s proven offshore model and the domain skill the engineers here have acquired while working in corporate IT are clinchers. Also, some firms like Mahesh’s follow an approach whereby they facilitate a meeting of the client and the techies slated to work on a particular product development project in order to win a deal.

Moreover, notes Kela, some venture capital (VC) firms are pushing the idea of outsourcing product development in companies they fund. “To them it makes sense, since the portfolio of companies they fund could all set shop under the roof of a single OPD player, thus removing the necessity to fund high-end infrastructure for each of them.” This helps the VC firm cut investment costs and thus reduce risks by a big margin.

“The fact that close to 100 percent of the product development in a startup is outsourceable also helps us win new customers,” he says. For them, roping in services of a firm like Symphony means access to engineers seasoned in releasing products in a time bound cost-effective manner, rather than them having to go through the painful cycle of recruiting and training talent. Winning startups as customers augurs well for the vendors as it gives them a relationship they can leverage to win larger deals when the client strikes it big.

In this context, an idea of how important startups are as customers can be gained from Pramati’s practice of offering its services to the former at much lower rates than usual. This they do in lieu of an equity stake in the company, which they encash when it gets acquired or goes public. Another option they offer is a change in the rates once the company receives funding. Through the hiked rates, they make up for the discount given early on.

In the OPD ranks
Sundararajan notes that 80 to 85 percent of Persistent’s ranks are filled with computer science graduates with at least three plus years of experience. Domain knowledge and a high technical caliber are a must for those seeking entry into the product development space. Since Indian IT has traditionally been driven by IT services, most OPD firms rely on returnees with considerable product development experience to fill the executive levels and drive the product development mantra into the junior engineers.

Those employed in product development firms, working on end- products often for brand names like Yahoo, Google, or AutoDesk have a high feeling. It may be noted that many foreign nationals who have spent 15-18 years in product development abroad are looking to shift base to India, since this is where the emergent market is. “I am surrounded by Europeans (at the Symphony Bangalore center),” states Kela.

However, with the OPD industry in India poised to grow, without any real competition from other locations like China and Phillipines, unlike in the case of IT services, shortage of talent seems to be the biggest challenge for the players in this space. Says Jay Pullur, CEO, Pramati Technologies, “The résumé oriented approach is the biggest threat.” He refers to Indian techies’ tendency to focus their energies on résumé building—trying to incorporate as many projects as possible in their résumé than spending a couple of years consistently in one domain.

Notwithstanding the fact that Russia appears to be the preferred OPD destination among MNCs in case of some high-end jobs, as some industry insiders say, there will be no dearth in product development opportunities coming to India. The challenge before the players here lies in turning software development round its head. “It is still an art” notes Kela, citing for example, among others, the most recent Windows Vista. “It is eccentric, like a work of art only connoisseurs (in this case software professionals) embrace it right away. There is a need to convert software development into a science,” he stresses. With the Indian IT traditionally having been focused on processes, the possibility looks within reach.