India powers up its ‘Software Product’ potential, Introduces National Policy on Software Products (NPSP)

This is an exciting occasion for our indigenous software industry as India’s National Policy on Software Product gets rolled out. This policy offers the perfect framework to bring together the industry, academia and the government to help realise the vision of India as a dominant player in the global software product market.

For ease of reference, let us summarise some of the major things that the policy focuses on

  • Single Window Platform to facilitate issues of the software companies
  • specific tax regime for software products by distinguishing  them from software services via HS code
  • enabling Indian software product companies to set off tax against R&D  credits on the accrual basis
  • creation of a Software Product Development fund of INR 5000 crores to invest in Indian software product companies
  • grant in aid of  INR 500 Crores to support research and innovation on software products
  • encouragement to innovation via 20 Grant Challenges focusing on Education, Healthcare & Agriculture thus further enabling software products to solve societal challenges
  • enabling participation of Indian software companies in the govt. e-marketplace to improve access to opportunities in the domestic market
  • developing a framework for Indian software product companies in government procurement.
  • special focus  on Indian software product companies in international trade development programmes
  • encouraging software product development across a wide set of industries by developing software product clusters around existing industry concentrations such as in automobile, manufacturing, textiles etc.
  • nurturing the software product start-up ecosystem
  • building a sustainable talent pipeline through skilling and training programmes
  • encouraging entrepreneurship and employment generation in tier II cities
  • creating governing bodies and raising funds to enable scaling of native software product companies.

There is good cause for cheer here. The policy offers to address many of the needs of the Software Product Ecosystem. For the first time, HS codes or Harmonised Codes will be assigned to Indian software product companies that will facilitate a clear distinction from ‘Software Services’ facilitating availing of any benefits accruing under the ‘Make in India’ programme. In addition, this will enable Indian software product companies to participate in govt contracts through registration on GeM (Govt. eMarketplace).

Considering that we remain a net importer of software products at present, steps such as the inclusion of Indian software products in foreign aid programmes, setting up of specialised software product incubators in other geographies and promoting our software product capabilities through international exhibitions definitely show intent in the right direction. With a commitment to develop 10000 software product start-ups, with 1000 of them in tier II cities, technology entrepreneurs building IP driven product companies can now look forward to infrastructural and funding support. The policy also aims to go beyond metro-centric development with a commitment to develop tech clusters around existing industry concentrations, enable skilling and drive employment in non-metros and tier II cities while actively encouraging Indian software companies to solve native problems.  

This policy could not have been possible without the vision of the Honourable Minister Shri Ravi Shankar Prasad, and continuous engagement and discussions with Shri Ajay Prakash Sawhney, Rajeev Kumar and Ajai Kumar Garg from MEITY and their team.

We have seen software companies solving native problems do exceptionally well, just look at what Paytm has been able to achieve while driving digital payments in India. There is now an understanding ‘Make in India’ can help us bridge the digital divide given that Indian entrepreneurs have a greater understanding of local issues and the challenges that are unique to us.

Setting up bodies such as the National Software Products Mission in a tripartite arrangement with the industry, academia and govt. to enable creation and monitoring of schemes beneficial to native software product companies is another much-needed step that will create a forum distinct to our software product companies and help give them a strong voice.

We would like to thank Lalitesh Katragadda, Vishnu Dusad, Sharad Sharma, Rishikesha T Krishnan, Bharat Goenka, T.V. Mohandas Pai, Arvind Gupta for their diligent efforts on the continuous dialogue and inputs for the policy.

While launching the policy is a great start, its implementation is what we all will have our eyes on. Now is the moment of action. We all look forward to fast-tracking of the various proposed measures under this policy for the benefits to start showing!

References

J​ANUARY​ 15, 2019​ – ​https://tech.economictimes.indiatimes.com/news/internet/india-needs-to-win-the-software-products-race/67533374

DECEMBER 8, 2016​ – ​https://pn.ispirt.in/what-to-expect-from-draft-national-policy-on-software-products/

NOVEMBER 13, 2016​ – ​https://pn.ispirt.in/national-software-policy-2-0-needed/

MAY 10, 2016​ – ​https://pn.ispirt.in/taxation-and-digital-economy/

APRIL 29, 2016​ – ​https://pn.ispirt.in/saas-the-product-advantage-and-need/

JULY 16, 2014​ – ​https://pn.ispirt.in/government-recognizes-the-software-product-industry/

DECEMBER 11, 2013​ – ​https://pn.ispirt.in/three-waves-of-indian-software/

JULY 16, 2013​ – ​https://pn.ispirt.in/smbs-and-indian-software-product-industry-intertwined-fortunes/

JULY 4, 2013​ – ​https://pn.ispirt.in/8-truths-why-it-services-organizations-cannot-do-software-products/

Building Ecosystems, Not Just Products

When you analyze successful consumer and small business products, they succeed as a part of eco-systems and not just stand-alone products.

Consumers and small businesses don’t buy products, the engage in an ecosystem. Facebook is an ecosystem. It is a network of users, groups, businesses and advertisers. Email is an ecosystem, smartphones are an ecosystem, even computers are an ecosystem.

This is a very important question for people who are building technology products. What ecosystem do you belong to?

An ecosystem is a closed group of users or apps with a large number of connections. Once you identify your ecosystem, it is easy to find if your app has a demand. It is also easy to promote your app in an ecosystem, and crossing the chasm from early adopters to mature users is much easier.

Photo: Abhishek Singh

But this only works if you are not looking to be a dominant player in an ecosystem. For example, if you want to make a Facebook app and not a new Facebook.

If you are working on a product that will be the dominating part of an ecosystem, then you have to build your ecosystem. For example if you are planning to disrupt the ecosystem of a popular accounting application like Tally, you have to build a new ecosystem that has all the elements of the Tally ecosystem.

This is worth saying again, you have to build an ecosystem and not just a product.

It is easy to see why Tally is so popular. Accountants know it already. There are training institutes all over the country that teach Tally. There is a ready pool of people you can hire who already know Tally. It has a wide number of “partners” that can help you setup and configure Tally and there are a wide number of plugins available for Tally.

So if a new business has to select an accounting system in India, it is most likely Tally. For the United States, its probably Quickbooks and so on.

So how do you build your own ecosystem?

First, its important to identify the problem you are trying to solve. An ecosystem has at least an order-of-magnitude higher scope than just a product. Second, its extremely hard, time-consuming and resource intensive.

An ecosystem has so many parts that it is crazy to understand just the scope of it.

  1. The Product itself: With the features, user interface, technology stack etc.
  2. Ways to use the product: installers, cloud, virtual machines, docker, vagrant.
  3. Users: Potential users, trial users, paid users, free users, young users, old users, business owners, managers, system administrators.
  4. Contributors: Translators, enthusiasts, evangelists, helpers.
  5. Developers: Core team, bug reporters, third party developers, customization specialists etc.
  6. Service Providers: Consultants, developers, trainers, testers.
  7. Training resources: Videos, manuals, forum, articles.
  8. Developer Tools: Collaboration, continuous integration, platforms, libraries, documentation, videos etc.
  9. Promotion Tools: Website, blogs, case studies, social media accounts, advertising, PR.
  10. New user on-boarding: Domain specific features, defaults, setup.
  11. Localization: Translations, accounting, statutory rules, service regulation.
  12. Roadmap: Feature requests, technology shifts, strategy.
  13. Maintenance tools: Monitoring, releases, upgrades, deployment.
  14. Communication: Support, Email, Forum, Chat.
  15. Events: Demos, meet-ups, conferences, talks.

When you start thinking about all these factors, it is almost impossible to think and come up with a plan. You have chunk each factor one at a time and try and make some progress. This may seem hard, but there is no other way of doing it.

Core Values

I think to build an ecosystem, you must have a deep motivation on why your ecosystem is better than the existing one and why various stakeholders will switch from their ecosystem to yours.

Merely a better product will not do. Dvorak is a better keyboard layout than QWERTY, but the costs of unlearning QWERTY to Dvorak are very high, hence users and manufacturers are all locked in to the QWERTY ecosystem. The product and or ecosystem has to offer a lot more for users to switch and they must be complete.

Dvorak Keyboard Layout (photo: TypeMatrix)

Products are hard enough. If you are clear on your core values and stick to them, and have loads of patience, only then you should attempt to build ecosystems. Otherwise, its better to work within another ecosystem.

Taxation and “Digital Economy”

Background

There two precursor blogs recently published to this new article on taxation of digital economy, which are helpful in understanding the context for Software product industry in general and especially for SaaS.

  1. ‘SaaS’ – the product advantage and need
  2. ‘SaaS’ – indirect tax issues in India

Here is a brief overview.

The first blog, made a case for SaaS industry to be a formidable part of the Indian Software product industry (iSPI).

The second blog, explored the problems of double and confused indirect taxation, GST and its implications, applying a product definition as different from service and need for a clear distinction between a ‘product’ and ‘service’ or ‘digital goods’ and ‘digital service’.

This third blog is based on excerpt from representations and notes pursued with the Ministry of finance in last few months, as a solution to the problems in a larger sphere i.e. the emerging “Digital Economy”.

The Tax system if fragmented

The taxation on ‘intangible’ goods and services has been marred with double taxation, confusion, and litigations. The biggest cause of this broken tax system is that tax authorities have been giving piecemeal approach to the taxation in this sector.

Until December 2006, there was no indirect tax by central Govt. on Software. In 2006, excise duty was levied on Software and until 2008, there was only excise duty + VAT (even VAT was exempted till such date in many states) payable on Software. In 2008, Software came under the purview of service tax and for a long time until February 2010, a large number of Software product companies paid both excise duty and service tax, plus the VAT in states. This continued until the pronouncement of notification No. 2/10 No. 17/2010-Service Tax Dt. 27th February 2010, which exempted Software product companies from payment of service tax, if the excise duty or customs duty was already paid on same.

An example problem (on Service tax +VAT) of this fragmented tax system, for Software product industry, has been illustrated in previous blog, ‘SaaS’ – indirect tax issues in India.

Similarly on direct tax front, the finance act 2012 subjected income from sale of Software as “Royalty Income”, and therefore subject to TDS of 10% on every sale. A book is traded as a product (a tangible good), whereas the contents are copyrighted. So a buyer buys the book and not the copyright. Similarly in the case of a software product, the buyer buys the product and not the copyright. However, the tax treatment is as if the buyer has purchased the copyright.

In a period between 2006 to 2012, the Software product industry has been subjected to many such bottlenecks. The tax authorities acted in a piecemeal basis, to first apply a tax to increase the tax net and then had to make course correction through several patchwork notifications in multiple steps, resulting in to a fragmented tax system.

The cause of this piecemeal approach has been that Software product (being ‘intangible’ product) is not recognized and treated at par with other products. We have proposed that defining ‘digital goods’ and ‘digital services’ clearly may solve the problem.

Let us understand, why there is a focus needed on ‘digital’ and why the ‘goods’ parlance is needed.

Digital economy is about digital goods and digital services

India has rightly embarked on a path for “Digital India” in line with world economies in transforming to a “Digital Economy”. The move, in 2015 budget towards a ‘near cashless’ has been boosted with UPI launch, which will further significantly contribute to the transformation in to digital economy.

The ‘digital economy’ will be overwhelmed with ‘Intangibles’ i.e. ‘digital goods’ and ‘digital services’. Software, may not just be standalone computer program. It may work with either data, audio or video products. Similarly the audio, video, data and document products may have a software product running them. Hence Software product, sounds, images, data, and documents or combinations of them may exist as a ‘digital product/goods’.

Recognizing the tradability in ‘digital goods’ is one the most important need of a ‘digital economy’. The volume of such trade will be huge in future as the digital economy is unleashed. Anderson said, “Software is eating the world”. IoT is a reality now.

All this pointing to, a ‘digital economy’, that will be overwhelmed with trade of not only ‘digital goods’ and ‘digital services’, but also the trade of ‘right to use’ or ‘transfer of right to use’ just as there is ‘deemed sales’ or ‘transfer of right to use’ of tangible goods.

All these reflect the pervasiveness of digital in future economies, as well as inseparable pervasiveness of Software products in the digital world. The buzz word is now ‘digital’, end-to-end.

Why Digital?

Since a digital economy will be about a converged digital world where Software products will also be inseparably pervasive, taxation issues of Software product industry should be dealt in a unified ‘digital economy’ domain, where ‘digital goods’ and ‘digital services’ will be the produced and supplied.

If tax authorities just focus on Software, it will again create another patchwork and will not provide long term solution, for the evolution that is happening with greater velocity now. Focusing on ‘digital’ will provide strategic solution to the problem at policy formulation level. And hence, the issues of the Software product industry can be dealt with by clearly defining “Digital Goods” and “Digital Services” in the tax system.

Digital goods and service definition

It has been already illustrated in ‘SaaS’ – indirect tax issues in India the COG-TRIP test can be used to identify a Software products as different from Software service. However, in order to align with existing Indian legal system and the evolving international practices, following definitions (based Digital Goods and services Tax Fairness Act[1], a bill pending in USA) at structural level has been proposed.

These proposed definitions are just the guiding factors that can be used as a starting point by the Government of Indian in this direction.

DIGITAL GOOD – The term “digital good” means any software or other good that is delivered or transferred electronically, including sounds, images, data, facts, or combinations thereof, stored and maintained in digital format, where such good is the true object of the transaction, rather than the activity or service performed to create such good.

DIGITAL SERVICE – The term “digital service” means any service that is provided electronically, including the provision of remote access to or use of a digital good.

For purpose of above definitions, the term

(i) “Digital Goods” means “Goods” as defined in 366(12) of the Constitution

(ii) “Digital service” means a “service” and that which is not a “Digital Good”

(iii) “Delivered or transferred electronically” means the delivery or transfer by means other than tangible storage media, and

(iv) “Provided electronically” means the provision remotely via electronic means

(v) “Software” is a representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment. And, “Software Product” is a standardised set of such software bundled together as a single program or a Module that directs computer’s processor to perform specific operations, exhibiting the properties of an intangible good that can be traded.

Explanatory Note:

In legal parlance, the ‘goods’ exhibit the following properties:

iSPIRT has proposed a COG-TRIP test[2] for identifying it as Software products. The same definition overlaps with the following legally tenable definition and explanation on detailed attributes.

  1. Durability (perpetual or time bound)
  2. Countability – traded commodity can be counted as number of pieces, number of licenses used, number of users etc.
  3. Identifiability – identified as a standardised product
  4. Movability and storage. Can be delivered and stored and accounted as an inventory
  5. Ownership of the right to use
  6. Produced/Reproduced through a process
  7. Marketable/Tradable or can be marketed and sold using standard marked price (except when volume discounts, bid pricing and market promotion offers are applicable).

‘Goods’ as distinguished from services that are consumed either instantly or within very short period of time or continually coinciding with the activity of provision of service.

‘Digital goods’ exhibit all these properties plus the property of being stored and maintained digitally.

This definition of ‘digital goods’ will also imply, that their sales and purchase will be governed by same laws as for “Goods” in the constitution and various acts thereof. Hence just as ‘Goods’ are subject of ‘sales’ under article 366(29A) so will be ‘digital goods’. It is important in the context of ‘ease of doing business’ in trade of ‘digital goods’ and removing the present confusion on taxation in trade of ‘digital goods’.

The ‘right to use’ as a deemed sales of digital goods to be used or consumed at future instance(s) can also be delivered or transferred digitally. It can be a PIN or a Password or a combination of biometric and password to allow access to digital goods.

In digital economies, many a times ‘digital goods’ are stored on a remote server or maintained digitally on a remote location by a producer or its agents/dealers/distributors for use or access by clients and users.

An act of use or remote access of ‘digital goods’ by using the access PIN or password acquired in advance through a trade or commerce transaction in ‘right to use’ of such ‘digital goods’ shall be an act of trade or commerce in ‘digital goods’ and not of ‘digital service’.

Recommendations made

Following recommendations were made:

  1. Definition be introduced through a bill/finance act in future.
  2. Also a clarity be inserted that, ‘digital goods’ will mean “goods” for all purpose, including ‘tax on the sale or purchase of goods’ as defined in Article 366(29A) which also includes the ‘transfer of right to use digital goods’.
  3. Both indirect tax (in future) GST and Income tax Act, should to refer to the same definition for purpose of ‘digital goods’ and ‘digital service’.
  4. Need for a Tariff code (HS Code) for ‘digital goods’.

The future lies with recognition of ‘digital goods’ as an international standard and WTO involvement in the accepting these principles.

In the interim, India can adopt a workable solution.

At present, all that is not covered under HS Code classification as given below (mostly software/digital goods downloaded online or SaaS Software) is treated as a service, despite the fact that packaged software and SaaS is the same whether traded on a media or online as a medium.

HS Code Item Description
4907 00 30 Documents of title conveying the right to use Information Technology software
4911 99 10 Hard copy (printed) of computer software (PUK Card)
8523 80 20 Information technology software on Media

Source: DGFT HS Code Database and CBEC

A HS code classification for following categories can be issued using the last 2 digits (first 6 Digits being defined under international system) Or Until a global harmonious classification emerges a codes may be defined under chapter 98/99.

Following category of definition will solve the issues of Digital Goods

(i) Pre-packaged software (Software Product) downloads

(ii) Software Product supplied as S-a-a-S model

(iii) Sale of ‘right to use’ digital goods

(iv) Digital Goods other than Pre-packaged Software

Some countries have created a HS code under 98/99 for Downloaded Software e.g. China has a code under 980300 for Computer software, not including software hardware or integrated in products. Similarly some countries are using 9916 as a code for pre-packaged software.

Conclusion

The above proposal of definition and the measures in recommendations can solve the issues faced by the industry, help in ‘ease of doing business’, lubricate trade, ensure neutrality and fair practices as well as provide the much needed level playing field.

The proposal does not create any loop holes in system as it does not recommend the change in the tax regime. It merely recommends the changes desired to accommodate the rise of digital economy.

The Software product industry can be the biggest beneficiary of this and members in Software product industry should take up this concept with Govt. of India with full force to help in rise of India as a Product Nation.

References

[1] Digital Goods and services Tax Fairness Act, USA, https://www.congress.gov/bill/113th-congress/senate-bill/1364/text

[2] A framework developed by iSPIRT, under leadership of Shri. Bharat Goenka of Tally Solutions

DNA mysteries of Products and Services

It has been an interesting coincidence on the last few occasions in different discussions and industry forums I participated in, they have attracted a good amount of the classic “Products and Services” in IT deliberation. As such, this is not a new debate. It is common to see patrons from the products world root for it by generating IP and for the services gurus illustrate how they are able to tailor deliveries as per customer need to make good revenues.

In the various roles that I have been involved in be it front line sales, to working with target customers, to addressing markets through the channel, or driving product management for products of different types right from enterprise to small and medium businesses that are deployed on-premise or delivered as a service; I have realized it is more than “this versus that”. At the face of it, running “product or services” businesses largely seem to be two different ball-games. They do have different DNAs. However, in addition to the different focuses that are essential on some aspects; these also involve some common influences that need to be capitalized upon. And no, it doesn’t end there. An important element of success viz the customer expectation is undergoing an interesting shift. A customer increasingly expects…a solution! They are neither looking for a product or a service in isolation, but instead for a solution that delights and delivers timely value. In this post, we will explore the characteristic differences—the DNA differences between IT products and services; and some common factors that have a bearing on the business opportunities and performance.

The landscape—A holistic view

Let us start with a holistic look at some key characteristics of what constitutes a product and a service. The marketplace typically includes an offerings continuum. At one of the two ends are pure-play products and at the other pure-play services with combinations in between. It can be illustrated as below:

Offerings ContinuumThe DNA differences—A closer look

If we take a deeper look and closely evaluate this in context of IT products and services, around which this post is primarily focused, it involves some common influences, but with distinctly different DNAs to run both businesses. The evaluation of key indicators across these businesses includes consideration for common factors, but with different approaches. For instance, both product and service type of offerings involve evaluation and use of technology, assets and resource planning, cultural bearings and so on.  A comparison of DNA differences for some key indicators is included below:

Product-Services-DNACommon influences—A quick digest

As we can see, there are some distinct DNA differences. For instance, meeting a market need versus single customer requirement; transactional approach versus relationship driven, internally focused culture and processes versus tailored to customer. At the same time, aspects like technology, people, and processes are the common influences that can either enable or inhibit effectiveness in either model. They serve both as an opportunity and a challenge! The previous section has covered how the approaches vary across indicators. Let us now briefly assess the common aspects that can greatly influence outcomes.

  • Technology: Technological advancements are constant. With every technological paradigm shift, right from main-frames to distributed systems to the cloud, with the change in technology capabilities available, businesses have looked at methods to leverage these for maximum benefits. So for a provider, irrespective of the nature of business, they have to constantly find ways to stay abreast of technological advancements to be in a position to lead the market or advise a customer with right solutions. For instance, if we take a look at one of the hottest shifts around SMAC (social, mobile, analytics and cloud), it is not prudent for either product or services companies to ignore those. Products need to evolve to cater changing customer preferences, interaction methods and deployment models. This is not just limited to product companies. These shifts need service companies to ensure their offerings weave these in to truly to ensure customer delight in-line with newer preferences.
  • People: One of the most significant contributors to the success of any business is the people assets they have. Knowledgeable, motivated, productive and enlightened workforce is needed for runnnig both products or services successfully. Ensuring the workforce it kept current with the market and technology demands and on the soft side ensuring they’re productive is of paramount importance. This of course is an obvious one. But going wrong with this could have the entire game go south even if all else is right.
  • Process: Processes are a great tool any company can have through which preferred frameworks can be pressed into action for a more consistent and repeatable outcome. These could be applied to internal focused activities like training and development, knowledge sharing, documented development methodologies (e.g. Agile, etc.), sales methodologies and so forth. Processes can help with managing OpEx for both frameworks. Similarly, they’re applicable even to external focused aspects like processes to demonstrate thoroughness of approach, for compliance and so forth. How far to adapt really depends on appetite and culture; which varies from company to company.
  • Success factors:  While the measuring metrics might differ across lines of business, it is a fact that there is no better way to walk towards success than to be driven by results that ensure customer success and delight. This is an essential metric to keep track of that cannot be overriden or ignored in either business.

Looking at all of above, one can think of products and services as two separate circles having distinct DNA differences with some overlap of common influences. All of these put together, put organisations in a position to meet the need of tomorrow. Let’s take a look at an illustration that highlights these put together:

Product&ServicesThe Ultimate structure—Solutions shift

At the same time, given the economic challenges, the markets becoming buyer markets, general shifts in buying patterns, need to respond to businesses faster, and need to demonstrate value and return on investments (ROI), the focus is increasingly on the “customer” than just a product or a service that is up for offering. Customers today carefully evaluate every penny being spent. They expect to realize value from investments faster. Customers are tired of siloed approaches either by just having a product deployed and not having a working solution, or having a solution frame-work, but the underlying products not being stitched to deliver the value the customer expects from the investments made. Gone are the days where companies could deploy a product and take months or even years to tweak it to customer need. Or suggest a service without having their own skin in the game when it boils down to technology or products involved.  Customers today expect product companies to not just deploy a product, but to provide a working solution tailored for their needs. Customers today expect services companies to have the required levels of expertize, coordination and relationships with involved products and technology stacks, to effectively tailormake a solution to meet their needs faster. They do not expect the ball to be dropped in either of the cases to have prolonged deliveries. Customers today are looking for working solutions. Customers today are looking for faster realization of value. Customers today are looking for a positive experience to respond better to business needs rather than being tied up with large IT projects. They need to be delighted—truly!

The shift is really towards using products and services together effectively to deliver effective solutions. Irrespective of their primary DNA, every company will need to evaluate how they can work out the entire DNA strand to have a solutions structure!

The new shift focus

Piracy and freemium killed the Indian software buyer

Nobody in India buys software.

If the above sentence draws your attention, read on! If you are based out of India, think of the last time you bought software (yes packaged products). Now think of all your friends and guess when they bought software. Now, here’s the clincher, “When was the last time you bought software made in India?”. 99% of the people, irrespective of their socio-economic status will respond in the negative. lr-processed-0399

Product evangelists will now talk about the cloud/SaaS and the subscription economy, and how it is the great leveler when it comes to software products. As an entrepreneur selling a SaaS software in India, let me be the first to tell you that it is really hard work. Most entrepreneurs have told me that the Indian customer is price sensitive, I say, a majority of them are insensitive. Now don’t get me wrong. I don’t wish to rant. I am trying to catalog and present reasons why selling SaaS software is hard. Here’s what I think it is:

Let’s talk a little bit about the Indian software market

In the last two decades, India has seen two revolutions which helped create a large software market. Firstly, the economic deregulation in the 90s which enabled a steady growth of the economy, disposable income and import of technology. Secondly, the telecom, and subsequently the PC and mobile revolution that has created a (supposedly) large software consumption market. PCs, Laptops and tablets are now commonplace in Urban and Semi-urban India and the latest numbers indicate 15 Million broadband and about 100 Million mobile internet users. A look at these gargantuan numbers and you might begin to assume a large consumption market, but to give you a sense of reality, let me ask you the same question one of my mentors asked me – “Name 5 large Indian software product brands selling in the Indian market”

Enterprise software is probably your best bet

If you are selling software, the enterprise market is probably your best bet. Bharat Goenka, co-founder of Tally solutions, said that “In developed economies, SMBs act like enterprises and in emerging economies, SMBs act like consumers“[2]. Many of our customers are SMBs who are looking to use technology to grow some component of their business. And most of the times, we don’t deal with the company, but with empowered employees. The ones who have a budget at their disposal and are forward looking in their outlook. What we found was that the same stigma that existed in the 70s and 80s in the US software markets exists in the Indian SME customers of today. A lot of them look at software as something that will displace them in the organization and are extremely defensive in the matters of adoption. But we all know how that worked out in the US and UK markets and I am hoping India follows a similar trend.

Oh wow! I never knew you could do this

A lot of people we have met have been genuinely surprised at what our product does. It’s tough to manage these customers because we spend a lot of our acquisition time on sensitizing them about the problem before we present the solution. Even if you are doing something radically new, it is easier to bucket yourself into a genre that is popular and accepted. For example, we are a customer conversations player, but it helps if we refer to ourselves as a Social CRM or a marketing insights product. Ignorance about a genre of products has a big pitfall – customers don’t know how much to pay for the solution. This is really tricky because it usually leads to a customer deliberating on paying for the solution.

“But we can do this for free on Google”

Freemium is both a good and bad thing. Almost every customer of ours expects a free trial for a few days. In the products eco-system it’s become a norm,  but a lot of productized service companies I know have been asked for a free trial on bespoke software. Most users don’t understand the price they are paying when using services like Google or Facebook and usually expect the same when we tell them about our “use on the browser” service. Usually this means we have to get into a lengthy explanation about  why our product costs so much. The best experience I have had was when a customer, who understood the online advertising economy, asked us if he could use an ad supported model of our service for free!

Freemium might be a viable option early on but when looking at growth and scale, I don’t believe freemium is a sustainable economic model. It is a marketing tactic at best!

“muHive crack codes”

One morning, while peering through our website analytics, we were surprised to find a search keyword “muHive crack codes” in the list. This was a good and a bad thing: good because some customer actually found our service good enough to look for a cracked edition, and bad because we knew this customer wouldn’t pay. And yes, if it’s crack worthy, then it is probably good software – that’s the Indian psyche. Industry estimates put the total value of pirated software used in India to be upwards of $50 Billion[3]. Why won’t we pay for software? That’s a long post in itself, but to be brief: piracy was not controlled in the early days of the PC revolution and hence the assumption that software is free. Also, cost of software has always been calculated based on the affordability and costs in developed markets. To illustrate my point, I will end this section with a question – If Microsoft Windows were to cost Rs 1000 instead of $149 (Rs 9000) would the piracy numbers be different?

The pricing slope

Researchers put the Indian middle class at earning $10/day or roughly $300/month. To give you an estimate of why this matters, the urban poverty line stands at $14/month – yes, a month. The Indian middle class is about 100 million people and $300 per month usually supports 2 to 3 people on an average. Now when you think in these terms, you can imagine what the cost of ownership of a $149 software sounds like. Add the fact that software is a non-tangible artifact and you understand why Indian customers are extremely cautious when it comes to software purchases.

Even with enterprise customers, your pricing strategy has to be “just right”. And you have to account for discounts. A majority of the Indian customers we meet ask for some form of special pricing. Now, this might not be a trait which is unique to the Indian market, but understanding the cultural and economic context of the demographic becomes very essential when it comes to pricing. Marketers talk about using tricks like prepaid accounts (India has a large prepaid mobile subscriber base), daily subscription and data based pricing but all of them have the underlying assumption that the customer is willing to pay and understands the cost of the solution.

In conclusion

All these are what we have found to be the issues with selling software in India. Even though we have good answers to some of the questions our customers pose, in my opinion, it will still take a long time for the Indian software buyer to evolve and for good product companies to make a mark. Rather than end on a dismal note, I will now list down what actually seems to be working for us, and also some insights from other producteers.

– Customer don’t mind paying for bundled software. Hardware, especially mobiles and tablets might actually help in software sales.

– Customers will pay for immediate utility. What someone referred to as “First order business” solutions; meaning something that can make them more money instantly. Example: Email and SMS marketing solutions. Customers don’t mind paying for advertising and reach.

– Customers usually pay when they feel they are missing out on revenue or an opportunity. A loss averse technique to selling is what we have seen work best.

References:

 

 

Sustaining India’s IT Exports Growth: Why Products are the Way?

Going by its 12th five year plan projections, the Indian government expects that the IT/ITES exports from the country would reach $130 billion by FY 2016-17, up from $69 billion in FY 2011-12. That is a CAGR of 13.6%.

How realistic is it?
The Planning Commission’s (it  has got those figures from IT ministry which in turn would have consulted with the industry before suggesting it) projection is obviously based on the past trends. Between 2002-07, IT exports from India grew by a CAGR of 32.6%. In the next five years, between 2007-12, the IT exports registered a CAGR of 17.2%. Purely going by those number, a 13.6% growth does not seem too unrealistic for the period 2012-17.

But that does not give the real picture. While the government has its own five-year plan periods, and all its numbers are synchronized to those blocks of periods, the industries do not necessarily work that way, least of it, an exports industry.

Indian IT services exports industry had its distinctive growth periods. The period between 2003-04 to 2007-08, was the high growth period when, on an average, the exports grew 30% year on year, growing by a whopping 37.2% in 2004-05. Of course, the industry was much smaller.

The new phase began in 2008-09. From that year onwards, the industry has grown between 5-19%. In short, the growth of FY 2007-08, which belonged to another era, skews the figure for the five year period that the government has taken—2007-08 to  2011-12. A better idea, hence, would be to compare with the CAGR of the four year period 2008-09, which was 14.2%.

On a much bigger scale, is is possible to replicate that kind of growth, with business as usual. The current year growth is not likely to be more than 10-11%, considering that the top companies have grown by 9% in the first nine months. If the first year of the block shows a growth of 10%, it will be panglossian to believe that the exports will grow by 13.6% in the five year period.

That is, if we go on doing business as usual. The 12th Plan document also does not mention any new initiatives in this area that would make one hopeful, unlike in case of semiconductor and electronic design segments, where a lot of new initiatives are listed.

So, how do we sustain the growth? It is difficult to believe that changing a tax structure here or duty structure there for IT/ITES exports would help the industry grow. We need to look at comppletely new areas/new dynamics to make the industry growth accelerate.

I believe engineering services and software products are two such areas which have potential to drive the next phase of growth for Indian IT. Here are the reasons why I bet on these two

  1. Both these areas are not really completely new areas for Indian IT. There are some leve of action already and the world has noticed the ability of Indians in both these areas
  2. The opportunity and scope available to expand is immense. Hence, the growth will be sustainable for some time
  3. There are passionate people and organizations trying to furher the cause of both these segments.

With a little help from government in terms of incentives and promotion, these two segments, I believe, can drive the growth for the industry in the medium term.

This year’s budget could be a great beginning. The government could well begin by announcing some concrete incentives for encouraging creation of software products from India. Here are some of the ideas that are worth exploring (in the area of software products).

  • Creating direct tax incentives for companies engaged in creating software products
  • Incentivizing government department, agencies and private companies in India to buy made-in-India products through a mix of fiscal and non-fiscal incentives
  • Creating product-only SEZs
  • Instituting awards and honors for software products made in India
  • Encouraging software companies to create products for solving e-governnce problems in the country
  • Creating a comprehensive policy statement to encourage creation of Intellectual Property in computing/information sciences in India 

Why aren’t more developers creating serious Mobile App Products?

Mobile Apps

These are the times, when every third person that you meet in Technology world has an idea for an App. It could be every alternate person if you’re hanging out in geeky groups or among heavy Smartphone users.

The Industry trends suggest a phenomenal surge as well. According to Gartner, Mobile Apps Store downloads worldwide for the year 2012 will surpass 45.6 billion. Out of these, nearly 90% are free Apps, while out of the rest of 5 billion downloads majority (90% again) cost less than $3 per download. This trend has a strong growth curve for the next five years. (See Table 1. Mobile App Store Downloads, courtesy: Gartner) 

Another report suggests that 78% of US mobile App Companies are small businesses (based on the Apple and Android App Stores based research). The typical apps that dominate this market are games, education, productivity, and business.

Mobile App Store Downloads - Gartner 2012

This comes as no surprise. There is a huge divide between the Enterprise Mobility (dominated by the Enterprise Architecture, existing platforms and mobility extensions to the platforms that ensure business continuity) and End-User (Consumer) Mobile Apps dominated by the App Stores supported Small and Mid-size App Development Companies. The barriers to entry in the Smart phone Apps Market seem pretty low with the supporting ecosystem from Apple, Amazon, Google, and Telecom carriers.

However, let’s get back to the fact that majority of these Apps “do not” generate direct revenue.

While the entry seems without barriers, there are multiple hurdles on the race track:

1. Developers need to focus on the User Experience. The smartphone apps pick-up is highly skewed toward Apps that offer a good user experience even for minimal functionality. After the initial success, the App makers end up adding functionality for sustained interest, but the User Experience tops. It’s difficult to focus on UX while still trying to do everything right at the underlying architecture level for long term.

2. Marketing is important. Getting the early eyeballs is key for the App developers. Any serious App needs an immediate initial take-off, and among the things that they need to do to make it happen is to market the App beforehand and to get the authoritative reviews in place.

3. Initial Take-off is just the first hurdle. App needs to be able to handle traffic bursts, it needs scale with increased traction, support virality & social connects inherently, and also build an effective User ecosystem. None of these may seem like the core functional features of the App, but are most critical for the broad-based success.

4. The Freemium model is very popular, but it can kill the business if the marginal costs are not sustainable. The paradox of the Free model is that unless the 10% paid users are able to pay for your 100% costs, every additional user takes you closer to the grave. With this come in two questions – how do you keep the infrastructural costs low, and how do you build additional revenue models around the app.

  • IaaS can solve some of the infrastructural headache, but doesn’t provide you with the other functional layers that every App needs. You need to still build them. PaaS providers provide the scalable platform for building Apps, but you still need to build some of the functional features such as Gaming Rooms support, Messaging, User Authentication & authorization models, and so on. Mobile developers are still doing a lot of repetitive work across the smartphone Apps that can be consolidated into a framework.
  • Supporting the additional revenue models require integration with external Ad-services, Payment systems and more importantly the bandwidth to deal with this even more fragmented set of agencies.

5. The End-point device platforms are fragmented and getting even more so. A typical model for App developers is to develop an Android App, iOS App or a Windows App and then support the other platforms as they go along. However, keeping up with these multiple platforms is only getting more and more difficult with the speed with which Apple, Microsoft, and Google keep rolling out the OS. There’s tremendous pressure to release the App within the 1-3 days window of the release of the underlying platform.

Hence, while there are millions of people developing smartphone Apps as we speak, there are only a fraction that get built at serious level, and even smaller fraction that gets built for sustainable business success.

And considering these hurdles, the arrival of the Backend-as-a-Service (BaaS) is a blessing for the App Developers. Forrster’s Michael Facemire refers to them as “The New Lightweight Middleware”. He goes ahead and lists out some of the basic tenets of what makes a Mobile Backend as a Service, but I see this list evolving as the vendors offer more and more functionality to the customers leading to en ecosystem.

And the term “ecosystem” is going to be the key. That’s because a successful mobile App doesn’t stop at the user starting the app, using the app, and leaving the app. A successful App creates an ecosystem for the viral growth, user engagement, social functionality, in-built broad-based connectivity for multi-user interactions, and more importantly the ability for cross-platform usage. In a Gaming scenario, the user interactions and the relevant immediate feedbacks are paramount. Most successful apps build an ecosystem. Instagram, 4Square, Pinterest are the common household examples today.

ShepHertz App42 Cloud API is complete backend as service to help app developers develop, buid and deploy their app on the cloud.While Michael lists out the usual suspects in his post, most of them in the Silicon Valley, there is a very interesting player in Shephertz’s App42 platform, right here in India. The ecosystem approach that they have taken seems pretty much what may be required for serious app developers that need a robust backend provided as a service, so that they can focus on the app functionality, user experience, and more importantly the marketing aspects of the App.

Now why, still, aren’t more and more developers building even more serious mobile App products? Why shouldn’t they be? I think, they will!

Introducing #alpha: Showcase For Your Product Or Startup At The #NAMA Conference

We’re pleased to announce #alpha, a product and startup showcase at our flagship conference #NAMA, being held on October 10th 2012, at The Westin in Gurgaon.

While #NAMA is largely going to be about in depth conversations about the digital industry in India and the road ahead, in a 20 minute Q&A format (and 10 minutes for an audience Q&A), we also want some fresh (and great) products and fresh business ideasto be showcased.

Why #alpha

With #alpha, we want to achieve two things – try and dispel the notion that India is not a market with great products or one for innovation, and that innovation happens only in startups.

It needs to be unique, fresh and interesting – the alpha product or alpha startup (and alpha as in top-of-the-gene-pool, not half-done-readying-for-beta). Brownie points if you choose #alpha as the platform to announce/launch your product or announce you business.

So whether you’re a startup or a large company, if you’ve build a great product that you think will wow #NAMA attendees and MediaNama readers, we’ll give you the opportunity to showcase the product. If you’re a startup with a fresh and interesting business idea and and you want to announce your launch, we’ll give you the platform.

You can fill out the form for #alpha at http://nama.cc/alphaform.

The last date for submission is 19th of September 2012.

Please be as detailed as possible and sincere about what are the features of the product. We’ll need to see the product (see a demo, see screenshots) and speak with you before taking a decision on featuring the product at #alpha. If you’re selected – and the decision is very subjective – we will need to be involved to curate your short talk as well.

Indian Software Startups Similar to Excitement of Late-90s Silicon Valley

Editor’s note: Sharad Sharma and M.R. Rangaswami are co-hosts of the NASSCOM Product Conclave 2011 (November 8-10, 2011), a must-attend event for software product startups. Now in its eighth year, more than 1,200 delegates from 600+ companies are expected to attend. Sharma and Rangaswami share with SandHill readers their insights on what’s happening in this dynamic market – and why U.S. buyers and software execs should keep the Indian startups on their radar screen.

One of the keynote speakers at the NASSCOM Product Conclave a couple of years back was Guy Kawasaki. In his recently published his book, “Enchantment,” he wrote that our Conclave was one of the most interesting that he had attended in the last few years because of the energy at the conference. And the energy this year is already really high. That’s because, in some respects, the Indian software products industry today is where Silicon Valley was in the 1997-98 time frame.

The Valley then was in a different era of entrepreneurship. There was enormous excitement about where the future of the world was headed and the role that the Valley could play in that. India is somewhat like that in the context of what’s happening now and the role that its software products industry can play in the economic future of India and the rest of the world. It’s a very exciting time.

Original Post at Sandhill.com