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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, writes Bloomberg Asia columnist Andy Mukherjee.

What did Larry 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.

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.

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.

Andy suggests that 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 execution 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.

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, Andy concludes. [Full article at Bloomberg]

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Source: Oracle Bought Indian Software, Not Cheap Labor (ORCL, INFY)