Ironically, “The smaller companies are just taking advantage of the vendor base that the big companies have helped create,” quips a senior manager of a captive ISV development center. While almost all the big ISVs — Microsoft, Oracle, SAP, IBM, CA, Veritas, HP, BEA, Intuit, Adobe, Quark — have captive development centers in India, many of them have also outsourced part of their activities — mostly testing and peripheral development — to various service providers. That has not only given the service providers a foundation to build upon, but also helped them in learning project-management skills that are essential in a product-development cycle. The service providers, in turn, put those skills to work while serving the smaller ISVs.

The larger product-development outsourcing service providers often provide a few extras. Wipro, for example, sometimes works with startup companies on a revenue-share model. In the majority of instances, the startup ISV has to pay upfront to prove its viability.

In reality, for a small company, managing core-project outsourcing is easier said than done. And there are more challenges for a startup to outsource. Unlike, say a Microsoft, the one product the startup is working on is a bet-the-company project. Fears of intellectual-property violation loom large. “We decided on the vendor [Aditi] after being convinced about their IP protection capability,” says Aruna of Stelae. In fact, for many start-ups, that is the most important factor to consider in sourcing a service provider.

Naturally, suppliers are more than sensitive to this need and stress that stringent IP-protection practices are followed. “In many cases, because of our experience, we are in a better position than a client to ensure effective IP protection, because that is the most important factor for our business,” contends Rajul Garg, founder and VP, Corporate Development, IndusLogic — a product-development firm based in Noida, India.

Governance Matters

Beyond IP protection, service providers are often more skilled than their clients (the startups) in terms of developing quality standards and project-management skills, thanks to their experience of serving mature ISVs. In a classic Silicon Valley startup, the development center resembles more of a research lab than a commercial facility. The OPD providers, on the other hand, have Six Sigma black-belts, CMM-I Level 4 or 5 certifications that is available to mature ISVs or startups from day one. While the startup’s technologists can focus on the big idea — of solving a customer’s problem — the service providers ensure that the product is not just a spark of brilliance; it is a complete, all-round commercial product. That is a big step towards a flatter “commercial-software” world.

Another reason why many startups struggle is because their small management team is often stretched thin in the sensitive early phases of existence. Outsourcing helps them to buy that extra time for themselves.

Take the case of Mantas Inc., based in Herndon, VA, — a maker of compliance and predictive anti-fraud software for the financial-services industry. Mantas outsourced its end-to-end product development to IndusLogic. Yet the way Mantas has juggled an acquisition and its outsourcing firm, is indicative of what the future may hold for many of its peers.

“To take the product to commercial market, I was sure that we would rely on offshoring from day one.”		— Aruna Schwarz CEO, Stelae

Another instance is that of Sotas, a player in the analytic-applications space for financial services and telecom services. Sotas has a small development facility in Gurgaon, India. With an established development center that was up and running in its fold, Mantas had the option of moving all of its development to its own captive center. But what Teresa O'Leary, VP, Technology, Mantas decided to do was handed over the operations of the Sotas facility to her outsourcing partners at IndusLogic. O’Leary’s logic was simple — she wanted to concentrate more on her core work, which certainly is not managing offshore facilities.

A Disruption Without an End Point

To what extent can offshoring level the playing field for startups and large ISVs? Just because startups have discovered the model and leveled the field a little more, does not mean that they will have the edge in offshoring.

The big ISVs are realizing this shift and are not sitting pretty. Microsoft, which so far has worked on peripheral development in India, has actually named individual components in the forthcoming Windows Vista platform that it is being designed out of India. Adobe is the leading ISV on this front. Adobe’s India development team, based in Noida, has complete ownership of the PageMaker and FrameMaker products. It handles all phases of the new feature releases starting from conceptualizing, designing, delivering and testing for all releases of these products. It also owns the PDF maker, the engine that is used to create PDF from Microsoft Office applications and engineering applications such as AutoCad and Microsoft Visio. Intuit follows a different model. It actually has people working on core products sitting in Bangalore, but work as part of collaborative workgroups spanning across all of its development centers. In short, the revolution has started. When a disruptive force changes the status quo, it is the customers who stand to benefit the most. The key advantage for IT organizations is greater choice. n