Over the last few years, software as a service has disrupted the traditional enterprise software industry for most business applications, including accounting, collaboration, customer relationship management, enterprise resource planning, invoicing, human resource management, content management and service desk management.
For those who are unfamiliar with the term, software as a service is a delivery model in which software is provided as a service to users without requiring them to install or maintain it. The software and its associated data are centrally hosted (usually in the cloud) and users typically access the application via a standard web browser.
Even if you're unfamiliar with this model, you'll be interested in the revenues. According to a Gartner Group estimate, global sales in 2010 reached $9 Billion (up 15.7% from 2009), and are projected to increase to $10.7 billion in 2011. Gartner also estimates that these software applications, which accounted for a little more than 10% of the total enterprise software market last year, will represent at least 16% of worldwide software sales by 2014.
There are many successful examples of large companies that provide this service – Salesforce, Google (Google Apps) and Savvis. There is only one large Indian company on this list: Zoho, which offers a suite of business, productivity and collaboration applications.
Zoho is a great example of a software as a service company that was bootstrapped in India and now competes in a global market with corporations like Google and Microsoft. So, can investors and venture capitalists expect more companies like Zoho to emerge in India?
The biggest endeavor so far appears to be Tata Consultancy System's hybrid offering for India's small and medium enterprise market. There are also a number of smaller companies that are developing such products for various vertical markets such as collaboration and accounting. Most of these companies are targeting India's enterprise market as it is easier for them to acquire local customers than to spend significant amounts on online marketing to attract global customers. That said, there are some key challenges that these providers face:
•Ubiquitous broadband connectivity is still a long way away in India.
•The lack of knowledge and questions about security and ownership of data need to be addressed.
•The lack of appropriate, trusted billing and payment methods.
In a global context, there are some additional hurdles for an Indian company to compete globally, and Zoho's success may prove to be an exception, rather than the rule.
Software as a service providers fundamentally are a software product company – only the delivery model differs. For the moment at least, the Indian IT industry is just not competitive in the software products space, although this is gradually changing. U.S. companies already use Indian outsourcing companies to build their product and most of the small- to mid-sized software service providers turn to online marketing for customer acquisition, which means the cost remains the same whether the company is based in India or the U.S.
Despite this, I do see tremendous opportunities for Indian IT companies to compete in the global market by building on their inherent strength – services.
In the current scenario, it would be interesting for venture capitalists to see how entrepreneurs package and provide the software as a service model in business process outsourcing and outsourced services such as software quality assurance and testing or data migration.
This would be a relatively easy transition for Indian IT companies, enabling them to offer unique and niche services which – at least initially – would not face competition from U.S. rivals since many of these companies already outsource those tasks to India.
Instead of differentiating by employing 'manpower', Indian service providers could automate BPO and other services and provide them as cloud-based services. This may still require some consulting support, but would result in higher overall margins, reduced customer acquisition costs, and increased customer retention.
By developing differentiated niche services, Indian companies can begin to climb the value-chain of the software as a service eco-system, creating a new wave of opportunities for both venture capitalists and other investors.
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