Market Analysis on Outsourced Product Development

Commercial-Software is as different from custom software as commercial real estate is from residential. Would you turn to the developer who just built your home to build an office park? Unlikely, software built for multiple users is like property built for multiple tenants. You’re not solving the needs of a specific family but of the market in general. Similarly the tools, training and methods are entirely different. Increasingly software companies are waking up to this fact and rather than turning to general IT outsourcers, the same companies that made a business building custom software, they are now starting to turn to specialist that exclusively build and maintain commercial software products.

NASSCOM (National Association of Software and Services Companies), the organization representing Indian IT and services businesses, refers to this new industry as the ‘outsourced product development (OPD)’ market. Not so long ago, NASSCOM revealed the results of a study it jointly conducted in collaboration with US-based consulting firm McKinsey, which predicts that the market would balloon from $350 million in 2003 to an incredible US $8 billion by 2008. Some VCs estimate that OPD could in fact exceed $10 billion in this timeframe. If one assumes that a growing number of software companies are sending a growing percentage of their product offshore then it’s not hard to swallow these dizzying growth rates.

Increasingly new startups are capitalizing on the weightlessness of global-delivery to emerge as serious challengers to well-known organizations. These organizations start their life in a similar way to fables-semiconductor companies but having no manufacturing capacity of their own but in stead turning to the growing number of companies that cater to their very specific needs.

In a radical departure from the business model of the large software companies, these startups neatly sidestep expensive propositions such as opening development centers in prime locations such as Bangalore, by forging partnerships with firms that do this and only this for a living. These firms support the entire product-lifecycle encompassing everything from researching new product concepts, designing, engineering, testing and support.

The other major drivers are the VC firms — often the final trigger in the startup decision — for whom such high-potential startups are a veritable bonanza. By risking a very most sum, they can finance a startup that could yield rich dividends within a relatively short gestation time…something few other prospects can come anywhere close to offering.