Aug. 23 (Bloomberg) -- For those who equate India's strength in computer software with its vast army of cheap engineers, Oracle Corp.'s decision this month to buy a controlling stake in I-Flex Solutions Ltd. must have come as a surprise.
Oracle Chief Executive Larry Ellison, who shelled out $909 million for I-Flex, clearly was interested in something other than a high headcount.
The Mumbai-based company employs 5,500 people. By contrast, Tata Consultancy Services Ltd., India's No. 1 software exporter, has 44,000 people; Oracle itself has 9,000 engineers in India.
I-Flex's revenue of 11.4 billion rupees ($260 million) makes it a mid-sized company in a nation where each of the top three software exporters has sales in excess of $1 billion.
Besides, I-Flex's profit dropped 86 percent in its fiscal first quarter from a year earlier. That's highly unusual in India. Infosys Technologies Ltd., the country's No. 2 software exporter, had its worst quarter in recent years in the three months to September 2002, when net income rose 12 percent.
So what did Ellison see in I-Flex when he bought Citigroup Inc.'s 41 percent stake in the company for $593 million and agreed to make an open offer to other shareholders for an additional one- fifth of the equity?
The answer is: intellectual property.
While other Indian software companies are focused on providing services to Fortune 500 clients, I-Flex has built a software product exclusively for the banking industry.
Flexcube
Flexcube, as the product is called, has been the world's best- selling banking software for the last three years, according to U.K.-based International Banking Systems. As many as 240 banks use Flexcube, including Citigroup, UBS AG, Rabobank Nederland, the third-biggest Dutch bank, and DBS Group Holdings Ltd., Southeast Asia's biggest bank by buttets.
Oracle's purchase of the I-Flex stake contains a message for India's software services companies: create proprietary knowledge.
At present, India's software-services industry is a low-risk affair where flawless end holds the key to profitability: Companies win an order, hire programmers, train them, complete the project on time with few errors, then move on to the next order. Investors are happy because there never seems to be a terrible quarter.
So when a service company says that it gets a chunk of its revenue from financial services, it only means that it has a set of programmers working for banks or insurance companies, just as it has other groups of code-writers working for clients in areas such as health care, retail or aviation.
Programming
After a few months, a programmer who was earlier buttigned to Bank of America Corp. may find himself on a Sears Holdings Corp.'s Kmart project.
The end result is a mixed bag for India: the country today boasts of a number of successful technology services providers.
Out of the $40 billion software ``outsourced'' worldwide last year, 44 percent went to India.
At the same time, Indian software service companies realize that they possess very little know-how of their own. Nor do they enjoy the brand equity of big-name consulting firms.
To get better prices, Indian companies need their own products. That would go a long way toward boosting average annual per-employee revenue of $23,000.
A case in point: Revenue per employee at I-Flex was 2.5 times the national average last year.
Domain Expert
``After joining I-Flex, within three years an engineering student is an expert in his domain, which might be derivatives or treasury,'' Deepak Ghaisas, chief executive of I-Flex's Indian operations said in an Aug. 8 interview in Mumbai. ``He starts speaking the same language as the user. He doesn't remain just a programmer. That's where we differentiate ourselves.''
Critics say the I-Flex example doesn't show if India has what it takes to create successful software products. I-Flex, they say, was lucky because it had Citigroup as its parent.
After all, the company's first product, Macrobanker, was conceived within the bank. And when I-Flex became a separate enbreasty in 1992, it was known as Citicorp Information Technology Industries Ltd. The name change took place in 2000.
It's true that I-Flex received support from Citibank in the initial years; the lineage also helped a great deal in securing customers for Macrobanker in Africa and Southeast Asia.
Linkages such as those between Citigroup and I-Flex can provide mutual benefits: The Indian company acquires knowledge, while a global airline, retail chain or health-care provider receives a potentially valuable investment stake.
Citibank pocketed $593 million on its $900,000 investment in I-Flex. Meanwhile, Oracle, a database software company, got a product it can use to claim a bigger share of the $70 billion that banks spend annually on computer-related technology.
Had Larry Ellison only wanted programmers who work for a fifth of the pay in the U.S., he would have taken out a recruitment ad in a Bangalore newspaper.
