Milestone Group Quarterly: January 2006
Articles
Face to Face:
Dr. Anand Deshpande, PhD - Founder, Chairman and Managing Director, Persistent Systems
Tell us about Persistent Systems, what does the company do?
Persistent specializes in building software using the outsource product development model. We work with software product companies, building products for them in an offshore/outsourced model.
Take us through a couple of client case studies.
We work with some very large companies and we build parts of their product from end to end, to include product development, QA, support and maintenance. When we work with small start-ups, we tend to engage with them very early. We are involved in building the concept, adding stuff to it and building the product. We handle QA, user testing and all of the product development activities that go with that. Over the last 15 years, we have had about 150 customers and we have done more than 700 product releases.
Classic IT outsourcing is a very crowded and mature space. How does Persistent stand out?
There’s a bit of a difference in terms between product outsourcing and IT outsourcing. With a typical IT project the requirements are well defined. You are essentially trading off time and money. When it comes to product outsourcing, that is typically not how people do it. The first thing they do is fix the time. Releases and priority are defined by people upfront. The next thing fixed is the amount of money and people that are going to be on the team. Most of the time, product development is about defining the best set of requirements that can be completed within the timeframe and with the money available. Add the dimension of outsourcing or off shoring, when you don’t have requirements that are very clear, and this whole thing becomes very complicated. That makes it much harder for ISPs to outsource than it has in the past. This is an area that we have addressed in our process - how to work effectively with companies who want to build products.
A lot of ISVs might be worried about their intellectual property being developed offshore. What are the risks and take us through how ISVs should be thinking about their IP being offshore.
If you look at product development, especially commercial product development, you will find that there is a certain part, (the core of the product) which is something that is typically done domestically. If you look at all of the activities that occur from core to shipping, 70 percent of the effort goes to QA, configuration management and testing. The IP of building test harnesses, test cases and those kinds of things, that’s an IP that we contribute to the product. When you work with a company such as Persistent who has done more than 700 releases, you go from a company that has a great concept to one that can take that concept all the way to production to a ship date. In that sense, we are contributing significant IP to most of these products.
You get to look inside a lot of ISVs development shops. What are you seeing overall and where are ISVs typically weakest in the development arena?
There are two parts to the answer. First, when you look at small start up companies, you’ll find a few entrepreneurs who understand the core of the product but have never really parsed through all the aspects of the product. The 70 percent that I mentioned is comprised of the QA, testing, support, maintenance and integration of the product with other products. Today’s product development is not just about building prototypes. Most companies are expecting fully mature products that can be deployed and built in mission critical environments. Second, we find that the startup and smaller companies tend to underestimate the effort involved in taking proof of concept all the way to production. Larger companies we have worked with tend to have a large number of origination products and have issues in effectively milking them for a longer period without having to expend their key resources and energies on some of the older products. We find that a lot of the larger companies have yet to discover these issues; how to run a cost effective shop without having to spend all their key resources in products that are stable and need to be maintained for a longer period. We can very effectively take over the maintenance on those products and essentially stretch their performance.
You just closed an $18 million dollar round of financing from very prominent VC’s, yet you already had sizable revenues and were profitable. Why did you decide to take venture money at this point?
The reason we decided to work with venture capital is that we have been around 15 years and there were certain things we were doing in a particular segue. This is a strategic partnership with top tier VC’s joining our board of directors. We think that there is a lot for Persistent to do over the next few years. We are early in a market that is likely to happen and is growing significantly. Scaling the company and getting the right access to the market are things that influenced our joining with VCs.
Here in North America, we hear a lot about job hopping and spiraling labor costs in India. What are the long term trends in the India offshore model and is it truly sustainable or are the benefits going to subside over time?
There is a lot of turnover in the Indian market right now. If you look at it beyond that, people are looking for certain things in their work. You need to keep people excited about the work they are doing, to control attrition. And yes, the costs are going to keep going up. We think that it will be about 20-25 percent net cost year on year for salaries. Even though the costs are going up, we need to figure out what the value proposition is that we are offering. If it is just the cost of the model, then clearly this will go away. What we believe is that the 70 percent that I have been talking about is process oriented activities that we are doing right now; we are able to deliver products more cost efficiently, not just because of lower per head costs but because of our ability to build things better or faster or getting them done at a better price point while reducing risks of engineering failure.
Do you see a trend where the largest ISVs will simply employ more and more people in India as the likes of Microsoft and Oracle and SAP are doing?
Yes, they are starting to do that. Again, the very large companies will do that; the small companies will turn to Persistent and others to do this. What we find is that, when the large companies look at flexibility and other things, independent companies are in a better position to help them.
What’s on your road map as a company and where will we see Persistent in say three years?
Last year we did $33 million in revenue. As our fiscal year ends on March 31st, we will be in the range of $50 million dollars. We have about 2,200 employees right now. Moving forward what we find is that product outsourcing is starting to become main stream. We believe that this will continue. We exist in the beginning of a market that is starting to happen around product development outsourcing. We want to be a leader in this market and we have been looking at how outsourcing happens. That is where we are in terms of where we want to go. We want to consolidate and grow this business and see how to be a leader in the outsource market.
Outsourcing is not just necessarily a US to any another country phenomena; we have seen this even within India. Companies are starting to outsource things like automobile manufacturing, assembly line electronics, hardware, chips, even shoes, manufacturing of clothes or any of these kinds of things. We have found that in all of these areas, four very distinct phases of outsourcing occurs.
The first phase is what we call cost arbitrage, the second phase is process efficiency, the third phase is design for manufacturing and the fourth is OEM (design and manufacturing). Process cost arbitrage means that people are looking for places to get cheap labor. So they essentially do the same thing that they are doing now somewhere else and say, “Okay let me put as many people as I need to, as long as it costs me less. I am going to have twice the number of people to do the same job, potentially, but I am going to locations are one fifth of the price.”
Then with the next step the company says, “Do I really need twice the number of people if costs will go up?” Or, “I can learn something better and I can do this more efficiently by doing some rearranging or tuning of processes more local.” An example of this is electronic manufacturers; they took over plants from IBM in the process efficiency mode. They would buy out the plant, take the same people, run them on three shifts, sell the same product to many companies and basically start to play off efficiencies.
The next step is getting to design and manufacturing. Once you start to do these kinds of things you say, “I have deals with all the vendors that I am buying from. I have a deal for the kind of boxes that I am going to get. I am going to get a deal for defining, I am going to make everything gray because it is easier for me to manufacture in my factory and change things faster. I am going to make standard components to the extent that I can and put them together and make these kinds of things happen.” They start to put their IP in the manufacturing and then they find that very different products start to develop. You see this in practically anything, you find companies that specialize in these things. Cars are being manufactured not in terms of components but in assembling assemblies. A Delco or a GM might have certain sound system things or Bosch might do the brakes. These manufacturing companies now start to build efficiencies around manufacturing.
This now moves to the next step, which is design for manufacture. Bosch makes the best brakes in the industry and they make the brakes for all the cars, not just one particular car. In this scenario, they are doing the innovation on service.
If you look at software in this context, software today is Stage 1 and Stage 2. When people say, “How can I reduce my labor costs or get it done with cheaper labor? I don’t mind if they are less efficient.” The next step in India and other countries (all the CMM, etc.) they are trying to say that “I can be more efficient, have my processes in place and make this more efficient.” That’s where process efficiency starts to happen.
What we are trying to work on right on now is to design for manufacturing in software. It’s our major initiative over the next three years and that is where VC’s help us; designing a new business model, a new way that software is going to happen. It’s happened in every single industry, there is no reason why it won’t happen in software. This is our focus. People will buy components, sub assemblies of software, rather than everyone writing everything from scratch. Clearly, we have gotten used to a world where we want things more efficient, and less expensive. You don’t go build a car by assembling nuts and bolts anymore.
Dr. Anand Deshpande, PhD - Founder, Chairman and Managing Director
Dr. Deshpande began his career with a stint at Hewlett Packard in 1989-90. He returned to India in 1990 and founded Persistent Systems.
Dr. Deshpande has a strong technology preface/strength and has the capability to translate technology ideas into business usages. Anand has ensured that innovation and creativity are nurtured in the organization. Anand is a hands on leader, leading from the front.
A renowned business partner like Microsoft has honored Persistent System with several awards on technology innovation and commitment to providing outstanding business solutions. Besides, Anand has received several awards and has chaired conferences organized by NASSCOM, CSI and various industry bodies.
Anand had the vision to build Persistent’s business model around Product Development 15 years back when it was not a significant IT segment. Today Product Development is a niche segment by itself and one of the fastest growing IT segments.
This vision led growth has resulted in Persistent being classified as an “Inventor” by Forrester Research. Persistent is ranked as the 11th fastest growing Indian companies in the Technology Fast 500 Asia Pacific 2004 report.
Alumni of IIT Kharagpur, Dr. Anand Deshpande has completed his graduation in Computer Science Engineering followed by a PhD from Indiana University. |
