Post recession the outsourced product development (OPD) segment is coping with an empty deal pipeline. “We were all faced with a bifurcated market during the worst of the downturn. Most companies were on a spending ‘lock down'”, says Pallab Chatterjee, ex-CEO and presently chairman on the board of Symphony Services.” However, there was a sliver of the market that was willing to make the bold R&D investments necessary to emerge stronger during the recovery. The challenge for OPDs was to find and exploit those opportunities.”
Jim Walsh, Chief Technology Officer, GlobalLogic agrees with Chatterjee. “Companies less than $100 million in annual revenues tended to shrink, and some of the small ones went out of business. So we lost some business in that sector. But in the $100 million category, people saw OPD as a cost saver. So we had more growth there. This growth offset the shrinkage.”
It is precisely to this category, that is, to companies in the $25 -500 million range, that OPD vendors are looking to to lift them out of the downturn. “Large ISVs still represent excellent growth opportunities as they are driving innovation across a number of areas, such as Cloud enablement, SaaS, PLM, etc. That said, the midsized market is extremely compelling to us because this is where some of the most exciting and current technology development (e.g., unified communications) is occurring. So we intend to continue taking advantage of opportunities with larger ISVs while expanding our footprint to include the mid market.”
The mid-market attraction, though, is not a new factor. “Going to the mid-market is only logical– startups are not enough for sustenance, and big companies are already sufficiently penetrated. So it’s basically a very safe strategy to follow,”says Karthik Ananth, Director-Market Expansion, Zinnov Management Consulting.”And it’s not something that companies started doing last year, they have been doing this for the past three years. They took a halt last year as they did not know what would happen to the mid-size market, but now they are following the same strategy again.”
Besides the mid-size market, OPDs are looking to exploit the opportunities provided by companies wanting to refresh their product lines. “Companies wanting to grow in newer markets want to revitalize their product lines so that they can be rapidly deployed and configured at a lower price point in the newer areas,” says Jim. “There has been no talk of cost arbitrage in the last nine months. Instead, companies are looking at revenue generation activities, revitalizing their product lines and broadening their markets by leveraging new technologies.”
Besides Asia, Europe is one of the geographies OPDs are looking to expand in. “We’re continuing to invest sales and marketing resources in China – for clients who want to tap China’s huge and highly skilled workforce (while maintaining a toe hold in a region that represents a huge market for them). And we are investing heavily in Europe for optimizing the R&D functions of a number of ISVs, telcos/carriers, etc.,” says Pallab.
Perhaps the biggest challenge for OPDs in the post-recession period is to match up to the increased expectations from them. As Jim puts it,”The playing field is becoming more difficult for companies, they need to be much better than they were. The bar for software quality and presentation has gone way up.”
As Karthik points out, the recovery story happened three months back. “Now it’s about finding out which are the growth areas and where are the new avenues of growth.” He opines that with the advent of cloud computing and SaaS, software companies moving to them will have significantly larger opportunities.