Friday, September 5, 2008

Software opportunities in government

Even as Indian software sector has grown at a phenomenal pace over the past few years, this boom has largely bypassed the massive market in government services. Apart from a few high-profile areas of government-citizen (G-to-C) interface (grievance redressal, petition monitoring, portals, e-payments for public services etc), there are very few examples of customized (to government requirements) internal process application softwares.

The potential is immense - file management systems, financial accounting packages, ERP solutions, HR management, office work flow automation, payroll packages, inventory management, GIS etc. All of these are commonplace in the private sector. Local Bodies - panchayats and municipalities, corporations, departments, and regular government offices, require some or all of these aforementioned softwares. Given the large numbers of such government offices across all states, the Indian market is truly massive. It only requires a few successful demonstration examples to prise open the floodgates.

Many government agencies and departments have internally developed software applications which cover a few of these activities. But most often these are a patchwork quilt of stand-alone (developed as client-server applications) modules, which rarely "talk to each other". The result is an information over-load, located in multiple and independent databases, which cannot be processed to generate any actionable or relevant reports.

Internal development suffers from many problems. For a start, in the absence of employees with the requisite competence to develop these applications, departments rely on outsourced programmers. Restrictions on salaries, means that there are severe limitations to the quality of personnel who can be hired. Further, the high turnover among them ensures that the development of a typical software goes through two or three sets of programmers.

Government agencies go in for internal development of these applications since the cost of buying them is prohibitively high. Most of these applications are not readily available off-the-shelf, and require customization to operate in government work environments. Given the small numbers of potential clients available, the software developers demand very high prices for their products. Government agencies are wary of paying these huge prices to procure software solutions that have not been tried out elsewhere in similar environments.

In many ways, this market is trapped in a chicken-and-egg gridlock. It is futile to expect government or any government agency to take the leap of faith and catalyse the development of the market. Realistically, this gridlock can therefore be broken only when the private vendors realize the full potential of the market available, and lower their prices. It makes good business sense to even provide preferential treatment to the first few clients (like giving software free, while charging them for support), so as to encourage the development of the market by getting a few successful examples on the board. In fact, the first few customers offer the developers an ideal opportunity for real-time testing of their software and ironing out its deficiencies.

So here is a possible business model to break the deadlock. First, create the market by getting a few demonstration examples up and running. Once we have runs on the board and credibility is established, the market gets opened up. In order to realize the full potential in a price sensitive market, the software needs to be priced at relatively lower rates. Profits should be amortized over the shelf life of the software by way of maintenance support. The large numbers involved provide enormous potential for massive profits from economies of scale.

It is a win-win arrangement, more so for the private developer. For the government agency, the choice is between increased operational and administrative efficiency or status quo. For the private software developers, faced as they are with intense competition and declining margins in their existing markets, a massive new market gets opened up.


Rajeev Ramachandran said...

Hey Gulzar. This needs some thought, but preliminary comments: Its not that simple. The problem is one of confidence (prisoners' dilemma?). When a company has invested in a new project for the government, what reason do they have to believe that they will have a real advantage when bidding for the next project? And companies don't want to be in the situation where they have to say that they "lose money on each deal, but make up for it in volume".

Urbanomics said...

I agree. It is not as simple as it appears. In virgin markets as these, with its specific work environment, any well tested and customized software will surely have a head start against any competitors. A "first mover advantage"! This becomes especially important in government procurement, with its rigid pre-qualification requirements, that would ensure that the "first mover" has an advantage.