On the supply side, commercial-software development is viewed as a fast growing opportunity. Nasscom, the Indian IT and services trade group, promotes the model that it terms the outsourced product development (OPD) market. Nasscom, along with consulting firm McKinsey, recently released a study that pegged the market at US $8 billion by 2008, up from just a little more than $350 million in 2003.

Suddenly Something

What is the fuel propelling this trend? And what makes analysts believe that it will grow so fast?

One major driver is the rise of the new-generation entrepreneurs. After the dotcom bust and the slowdown that followed, entrepreneurial activity and Venture-Capital (VC) investment suffered for some time. When it restarted, it was a different set of entrepreneurs — business/sales guys who had clearly seen some need and were trying to fulfill that business need, through their solutions. This stands in contrast to the telecom/dotcom era, when techies led most of the entrepreneurial ventures, and often got a kick out of beating big companies by becoming faster and smarter. These new entrepreneurs think like mature business managers, right from day one. “They are at ease with business realities like outsourcing,” says Ajay Vij, VP, Business Development, Aditi, a product development company based in Bangalore. “They do not essentially want their team to sit next to them.”

Who is building your commercial software?

One of Aditi’s clients is Stelae, a Paris-based company that has a content-management product, which is used by media companies to take content from various formats and convert it to XML for easy storing and access on the web. The R&D effort was funded by, among others, Anvar, the French agency that funds innovative small-and medium-sized companies. To take the product to commercial market, “I was sure that we would rely on offshoring,” says Aruna Schwarz, CEO, Stelae. So after the core algorithm was developed and the basic product architecture was finalized, Aruna and her CTO, Pierre Fraisse, decided to offshore the development to Bangalore.

The VC firms — often the prime decision influencers for startups — are the other major drivers. For them, offshoring is a godsend. “Today, at US$3-4 million, you can fund a product startup,” says Ajay Kela, CEO, Symphony Services — one of the biggest outsourced product-development companies in Bangalore — who himself has spent time in the Valley funding the startups. “Today, by investing the same amount a VC can fund three companies, instead of one,” he says. For VCs, that is spreading the risk.

Risk avoidance includes installing management that won’t create fixed-cost overheads in the form of infrastructure purchases, long-term leases or new-construction debt and especially unnecessary hires. Frankly, if VCs want to pull the plug quickly, overhead is an obstacle.

Symphony works with the VC community to promote the business. So does Bangalore-based Aztec Software, another product-development company. Aztec’s CEO V. Chandrasekaran says, “While we follow the regular sales cycles to sell our services to big Independent Software Vendors (ISVs), we often market to VCs for targeting the startups.” Many companies follow this model of catching them early. VCs, for their part, are only too willing to be a major positive force.