Software hub

Michael Alan Hamlin

Posted on December 14, 2007

The appreciating peso won’t stop progress

Like Philippine exporters, Indian exporters have come under pressure as the result of a fast-strengthening local currency, another “victim” of the shrinking U.S. dollar. Dire predictions of reduced export growth and reports of frantic handwringing are common. And indeed, the market value of India’s offshore outsourcing sector – software companies, business process outsourcing (BPO) firms, and Internet portals – has plummeted this year.

Despite the downturn, the National Association of Software & Services Companies (NASSCOM) still expects the software industry to reach its export target of $60 billion by 2010. Most of the pain resulting from “too much rupee appreciation in too short a time,” according to NASSCOM president Kiran Karnik is being felt by small- and medium-size companies, notwithstanding the contraction in market value experienced by industry heavyweights.

And there is still plenty of other good news. Earlier this week, for instance, IBM announced that India will become its hub for global applications delivery. IBM-generated export revenues alone are expected to reach $1 billion by 2010, up from $700 million in 2006. Wipro’s chief financial officer Suresh Senapaty told Reuters on Monday that the “Indian value proposition is so strong that whenever IT budgets come down [large corporations] source from India because they want higher bang for the buck,” when asked if a U.S. recession would put further pressure on the industry.

Senapaty may have just been putting on a brave face for investors, but Indian software services are here to stay. They’ve become so integrated into global business processes that even major competitive threats – specifically, China – are unlikely to impede industry development significantly. And the global market for outsourced application development and software services will continue to expand.

What does all this mean for the Philippine software industry (Full Disclosure: Some of the firms I mention below are clients. Some my firm has invested in.)? The industry here is a fraction India’s, of course. Where India expects to export $60 billion in software and software services in 2010, the Philippine industry is targeting $1.3 billion that year, less than two percent of India’s anticipated export revenues. It’s important to bear in mind, however, that the $1.3 billion target is just a best-guess estimate by the Business Processing Association of the Philippines.

The reality is that we don’t really know the value of software and software services exports. The structure of the industry explains why. In India, the industry is dominated by very large domestic firms, although the industry includes thousands of smaller firms. The large firms – such as Wipro, Infosys, and Patni Computer – are public companies listed not only in India, but typically in the U.S. For a variety of reasons, it pays for them to report export revenues.

The Philippine industry, on the other hand, is dominated by large shared services facilities owned by multinationals. While they export software and software services, revenues are booked at overseas headquarters. The cost of the software and software services local units export shows up in labor and overhead costs. The value added – the profits – is impossible to track.

But while Philippine software and software services exports are probably greater than research indicates, the industry is obviously very small compared to India’s. That doesn’t mean exciting things aren’t afoot, however. A number of local software firms are doing so well that they are planning to go public next year. The list includes Gurango Software (Services vs IP, November 14, 2007) – which is also on an acquisition spree – and two firms founded by industry legend Winston Damarillo.

Last week, Damarillo announced his Morph Labs and Exist Global will list next year. The IPOs are coming earlier than expected, Damarillo reportedly said, because “it has been a good year for Morphs and Exist.” Morph Labs was established to enable software-as-a-service applications. Exist Global develops software applications for clients.

Shared services facilities here are also leveraging expanding opportunities in the market for outsourced software services. I wrote recently (Tiny Gorilla, October 31, 2007) about the innovative transaction systems that Headstrong developed here for the public transportation systems in Hong Kong and Singapore. Raffles Solutions, a unit of the Singapore-based $1.5 billion Thakral Group, provides regional software and support services for the company’s Enterprise Division from the Philippines.

Raffles Solutions operates in the region through a network of local offices. It aims to become a major industry player in the areas of business intelligence, enterprise resource planning, and customer relationship management, and is targeting developing markets in Asia – its latest acquisition was a Sri Lanka firm – because of their potential. It also has regional offices in Hungary and the United States.

For many years little was heard from the Philippine software industry. This year that began to change. I sense that there’s much more to come and a strong peso won’t stand in the way.

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