Can Nucleus Software Bank On Packages?

It may be an early bird in developing banking software, but making the transition from services will still be tough.

Their nucleus: 1983. Their vision: 6/6. Their timing: disastrous. When 3 young men--Vishnu Dusad (IIT-Delhi), Yogesh Andlay (IIT-Delhi), and Arun Jain (Delhi College of Engineering)--pooled Rs 12,000 together to start the grandiosely-named International Information Systems (later scaled down to Nucleus Software Workshop), their aim was to develop mass-market software products that would allow them to make their fortunes. Everyone thought they were mad.

Vishnu Dusad, CEO, Nucleus Software

FACT FILE

Name: Vishnu R. Dusad, B.Tech. (Textile), IIT, Delhi, 1982
AGE: 41 years
COMPANY: Nucleus Software
BUSINESS: Developing and marketing software products
INITIAL INVESTMENT: Rs 12,000
TRACK-RECORD: Rs 20,000 in 1983-84 to Rs 5.40 crore in 1997-98
NUMBER OF
EMPLOYEES: 120
WORKSTYLE: Hands-on
MANAGEMENT CREDO: To provide high-end banking products
HOBBIES: Reading, music

Survival in software development requires different skills. For instance, a products company must have the ability to develop the specifications and the features that a customer wants. Also, the investments are huge; typically, a products company re-invests nearly 20 per cent of its revenues into development, which, for a global major like Microsoft translates into $3 billion (Rs 12,600 crore). Finally, the developer has to mass-market the product globally. Agrees Sumeet Kapoor, 38, COO, Chipsoft Group: "Selling products is an inherently risky business."

No wonder the Indian software industry focused only on on-site and offshore customised services. However, the troika instinctively felt that there was money in products. After all, the global majors straddle the world only because they earn repetitive revenues from their products and upgrades. By comparison, a services-driven company can make continuous profits only by consistently cutting costs to survive. Unfortunately, Nucleus' first product, a CD-ROM-based Basic interpreter, was a flop.

One predictable reason: it didn't have the money to market it. Over the next 16 years, the promoters persisted--and have, finally, managed to graduate to developing software products. A quarter of Nucleus' Rs 5.40-crore income in 1997-98 was accounted for by products, and the rest by projects; in the next 3 years, it aims to reverse the ratio. A simple equation of good ideas and hard-work made it possible.

Initially, Dusad focused on retail banking software, especially lending, when specialisation was rare in software companies. This gave Nucleus an unbeatable headstart in its niche. The work culture helped. Says R.P. Singh, 37, Director (Technologies), Nucleus: "A good university provides a free atmosphere for students to learn and hone their creative skill-sets. At Nucleus, we have balanced that with a customer-driven culture to meet deadlines and targets."

Work came in the form of small projects. "We got our first big cheque of Rs 12,000 in October, 1983, from Ballarpur Industries," recollects Dusad. The first thing they did was to buy an electronic typewriter--that too from an auction at the World Health Organisation--which Dusad and Jain lugged back to the office on a scooter. For the record, they bought their first computer only in 1986.

Working for Ballarpur Industries turned out to be good for another reason. It led to a crucial break. When the company's Director (Technology), Ram Bhagwat, moved to Citibank, he invited the trio to do some software jobs for the bank. The only condition: change the name of the company. Thus, Nucleus Software Workshop--now managed independently by Jain--was born, its wagon hitched to the Citibank juggernaut, becoming a captive software service-provider for the bank. Says Bhagwat, 52, Head (Technology), Citibank: "The early 1980s was when software development was finding its feet in India."

Of course, Tata Consultancy Services was the sole exception since it had begun operations way back in 1967. But Citibank's Bhagwat was impressed by the trio's attitude to work. As he puts it: "Very adventurous, very genuine." With Citibank's retail banking operations growing, Dusad and Andlay floated Nucleus Software Exports in 1989, a company whose turnover went up 28 times over the next 4 years albeit on a small base of Rs 24 lakh. For the bank's corporate operations in Singapore, Nucleus developed a data-warehouse so that portfolios of high-end customers could be built from databases across the bank. The software could perform simple tasks like generating a call-list of all customers with foreign exchange accounts in pounds along with a warning that the pound was likely to weaken in the near future.

While working for Citibank offered security, Dusad realised that his company needed to get into products. "The direction was clear," says Dusad. In 1993, the company took a simple, but strategic, decision, and decided to develop products only for the banking sector. Since money was a problem, a public issue was planned that year. Its lead-manager, VLS Finance, advised Nucleus to raise 7 times the amount it required, or Rs 7.50 crore. Of this, Rs 4.50 crore came to the company, and the rest was parked with VLS Finance.

With the money came a deluge of problems. Both the collapse of non-banking finance companies and Asia's economic crisis hit business, leading to a loss of 10 orders. The result: Nucleus' profits plummeted from Rs 94.82 lakh in 1995-96 to Rs 5 lakh in 1997-98. Worse, its investors were disillusioned since the prospectus had projected a turnover of Rs 19 crore in 1997-98 while the company clocked a turnover of just Rs 5.40 crore.

The scrip price too reflected this: on March 26, 1999, Nucleus quoted at Rs 50 on the Bombay Stock Exchange compared to Infosys Technologies' Rs 2,707.50 and Satyam Computers' Rs 1,390.75. Explains Kislay Kumar Kanth, 32, Senior Analyst, DSP Merrill Lynch: "The services software companies are more attractive to the investor because of their better cash-flows." However, the promoters are optimistic. Which has only increased after the launch of Finesse--a retail transactions product, with features like a Post-Dated Cheque Management System--in October, 1997, and Electron, an electronic funds transfer software.

What was lost on the financial front was gained in operational terms. When the State Bank of Mauritius wrote to nasscom, the association for Indian software companies, Nucleus grabbed the customer. "We won the contract as our package was customisable to the local regulations and banking laws," explains Prakash Pai, 38, Vice-President (Business Development), who won the $125,000 (Rs 52.50 lakh)-deal in less than 24 hours in May, 1998. Soon after, an alliance was struck with DCDM, Andersen Consulting's partner in Mauritius. And a stream of global customers followed: Bank Of Malawi, and a World Bank tender to automate the Bank of Mongolia's 24 branches. Back home, the list included HDFC Bank, American Express, and Avco Financials.

Still, there are doubts over the company's future. And RBI Net, the network planned for electronic fund-transfers which is based on its own software, is bound to affect the sales of Nucleus' Electron. Moreover, Nucleus' hi-tech products cannot be used by the nationalised banks, who are restricted in their computerisation by the agreements with their unions. Explains A.K. Bhargava, 55, Deputy General Manager (Computer Policy), Punjab National Bank: "Our needs are such that we do not have to invest in costly packages."

Clearly, Nucleus can survive only if it creates innovations that the banks can't do without. Or it could go the way of Silicon Valley start-ups and be bought over. In late 1997, Citibank Information Technology offered to pick up a 60 per cent stake in the company. But Dusad refused because he knew that Nucleus was on the right track. While the industry is scrambling to cure the Y2K bug, Nucleus is thinking of packaging growth after 2001. But only if he doesn't sell out by then. After all, that's what start-ups are started up for today.