2006-07, Persistent’s seventeenth year, was a very significant year for the Company. This year, ‘outsourced product development’, which has been Persistent’s focus, acquired prominence.
NASSCOM has begun reporting separate figures for ‘product outsourcing’ and analysts like Sandhill Group and Forrester have written about product outsourcing as being a ‘different and specialized form of outsourcing’. NASSCOM estimates that product outsourcing (which was roughly USD 1 Billion in 2005) is the fastest growing category for outsourcing and is expected to cross USD 8 Billion by 2009.
With an impeccable track record, marquee customers and a sixteen year focus in this area, Persistent has been identified as a clear leader in this new category. Product Companies have typically not outsourced much in the past but are now considering outsourcing as a strategic initiative. This came out clearly in the 2006 Sandhill Report on outsourcing that Persistent had sponsored. Analysts identifying Persistent as a leader in this new category will certainly help the Company in strengthening its business further.

Establishment of this category was very important from our perspective and this has certainly helped Persistent differentiate from the rest of the outsourcing companies. To maintain leadership in this market, however, Persistent must continue to execute well and grow. Persistent is determined to maintain leadership in the years to come and will continue to differentiate as it grows.

Product development is very different from IT outsourcing. It requires a distinct approach and, to build products successfully, the team needs to understand what it takes to build products.
The best way to illustrate this difference is to compare product development with IT projects.

Typically, most IT projects start with well-defined requirements. Given these fixed requirements, vendors typically use time and money as variables to come up with a reasonable estimate for the project. After completion of the project, the project goes into a maintenance mode.

For product development, requirements are not very clearly defined. Most product developers are given ship-dates for the product. Ship-dates are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. So, unlike a typical IT project where requirements are fixed and time & money are variables, a product development project starts with fixed time and money & requirements become the variables. So essentially, the product development team’s task is to come up with the best set of requirements that can be built within a fixed time and budget.

An offshoot of this product development life cycle is that all requirements can never be completely fulfilled in a particular version. Most product companies therefore plan multiple versions for their product.

While product teams must focus on developing the best product for the current release, they must not lose sight of the fact that there will be more versions to come. Every team member on the product development team must not only have a clear idea of the product for the current release but also have an overall vision of the product direction. Every team member must contribute not only to building the features for the current release but must also contribute enhancements and provide feedback for future releases of the product.

Persistent has built a product development culture during these sixteen years. Persistent’s comprehension of the product development life-cycle helps it to be successful in this difficult market.

Over the last couple of years, Persistent has studied outsourcing in other more mature areas such as automobile manufacturing, electronics manufacturing, semi-conductor manufacturing and other such industries. We have tracked four very clear phases through which outsourcing has moved. The changes in phases can be associated with improved efficiency in different aspects. Persistent identifies these phases and the efficiencies achieved as follows:

	Labor Cost Efficiency
	Process Efficiency
	Design Efficiency
	Innovation Efficiency

We have observed that in Phase 1 (labor efficiency), product development moves to lower cost geographies, if qualified resources are available at a fraction of the cost. During this phase, though the companies move work to lower cost geographies, they continue to (micro) manage projects and resources from the head quarters. Factories are moved ‘as is’ and local resources are employed for product delivery. Tasks that require relatively lower skills and expertise are moved first.

The next phase of outsourcing typically focuses on process efficiency. These efficiencies are achieved by improving manufacturing processes. Outsourced providers are in a position to provide better quality and price performance as compared to captives through better processes, volume efficiencies in manufacturing and raw material purchase. Contract manufacturers get set up to exploit these efficiencies.

A very natural extension to process efficiency is design efficiency. When manufacturing in large quantities, contract manufacturers are able to influence design decisions to improve the cost of effectiveness of manufacturing. For instance, the standardization of parts and manufacturing processes: an Electronics contract manufacturer is in a position to influence design decisions because of his intimate knowledge of many different components.

In the fourth phase, contract manufacturers move over to become innovators and typically become responsible for the complete design of components. This has resulted in a class of ODM (Original Design and Manufacturing) Companies.

While we have observed these trends for automobile manufacturing, electronics manufacturing and semi-conductor industry, we find that the software industry is currently in Phase 1 and Phase 2.
We realize that Phase 3 is inevitable and therefore Persistent decided to setup a Go-To-Live practice to prepare the Company for this eventual turn in the industry.

Following the manufacturing industry, Persistent believes that the next generation of outsourced product development will be about setting up a software factory that can help software product companies to outsource their product for improving the quality of the product while reducing the risk of failure during the engineering development process, at a significantly lower cost.

During the year, Persistent setup a partnership with Microsoft's Visual Studio group to setup a complete "end-to-end" software factory. Persistent's Go-To-Live practice allows a start-up company not to hire experts for specialized tasks such as installation, configuration management, globalization, integration with other products, testing, test automation, release management and many others. Persistent has been involved in more than 800 product releases over the last 16 years and has rolled up its experience in shipping products into building a team of specialists who could take a product from concept through the entire product development life-cycle.

In addition to providing its customers access to its processes through the Go-To-Live practice, during this year, Persistent packaged its expertise in domain specific areas to setup the following competency centers:

	Performance Engineering
	Usability Engineering
	Identity Management
	Microsoft Technology
	Life Sciences
	Connectors

During the year, Persistent was able to establish its capabilities in these areas. Persistent's expertise in these specialized areas helps it in establishing its credibility with new customers. With these competency centers Persistent was able to provide its product development customers with better and specialized services.

Persistent's offering of connectors has helped it address the "last-mile" problem for many of its product development customers. During the year, Persistent established several strategic alliances with Companies such as Microsoft, HP, BMC, RSA Security, Google, EMC Documentum, Hummingbird and Business Objects.

During the next year, Persistent plans to continue establishing competencies in more specialized areas.

Market opportunities for embedded systems and systems on a chip are very large. The need for specialized skills creates a high entry barrier for new entrants in this area. Persistent acquired ControlNet (India) Pvt. Ltd. (ControlNet) to establish a presence in this area. Persistent’s strength in outsourced software product development complements ControlNet’s expertise in embedded systems and systems on a chip. This acquisition will allow Persistent to establish a new domain of expertise in the outsourced product development.