Comment: Software sector must scale new heights

29 Jun 2005

When politicians and pundits speak of the Irish software industry, they routinely describe it as the largest software exporter on the planet, producing some €15bn worth of exports annually.

However, this belies a number of anomalies that need to be addressed. The truth is that multinationals such as Microsoft and Novell produce the bulk of Irish software exports and the indigenous sector accounts for just €1.4bn of the €15bn exported annually.

Yet 15,000 of the total 25,000 software industry workers in Ireland are employed in 660 indigenous companies. The need to scale and bring in additional revenues is obvious if these 15,000 jobs are to be sustained going forward.

In recent weeks, the Irish Software Association (ISA) has drawn up a blueprint for Ireland’s indigenous software companies to achieve the scale needed to compete in global markets. The plan is based on the findings of a report, entitleBarriers to Growth — Opportunities to Scale, commissioned by the ISA and launched at its National Software Conference recently.

The survey shows many indigenous companies are small and experiencing difficulties in growing revenues at a satisfactory rate. Only 10pc of the companies surveyed have annual revenues of €10m or more and half of all companies surveyed have revenues of less than €2m.

Furthermore, most companies are modest in their ambitions. Of the 90pc with revenues less than €10m, only 48pc expect to break the €10m barrier within three years. Only two companies expect to grow their revenues to more than €100m over the same period.
“To achieve true international scale, companies need to have revenues approaching the €50m mark,” says Bernie Cullinan, chairwoman of the ISA. “The report highlights the challenges companies face in achieving this goal especially with regard to funding and partner strategies. Our blueprint addresses these issues and others that Irish software companies face if they are to achieve the necessary critical mass.”

Despite Ireland’s success at attracting inward investment from multinational software companies, the ability of indigenous companies to become major international players themselves is vital for the continued success of the local
software industry.

“Ireland is currently the world’s No 1 exporter of software,” says Michele Quinn, director of the ISA. “That is a significant achievement but as our cost base increases, our attractiveness to multinational firms as a base for manufacturing decreases. Our future is one we must build ourselves. We must provide the right structures and environment to give our indigenous software companies the best opportunity to compete on the international stage.”

This, the ISA warns, leaves little incentive to fund the bright new ideas that might propel Ireland forward over the next 10 years. “That’s retarded as a policy,” warns the report’s author, Donal Daly, a serial entrepreneur who has led several successful software companies. “Especially since the seed capital area of investment in Ireland is so poorly funded.”

In terms of research and development (R&D), Cullinan argues there is still much work to be done in making the new R&D tax credits more relevant to companies still trying to grow. “The real beneficiaries of the tax credits are already profitable companies, which early-stage and later-stage companies are most often not. As a result they are not going to be an incentive for companies to invest in R&D.”

Cullinan also argues achieving scale in the software sector is not about creating hundreds of new jobs but investing in intellectual property and being able to compete on a level playing field in overseas markets of choice. “We need to separate this idea that companies of scale are companies with large numbers of employees. That’s a dangerous trap to fall into because immediately we’re competing with India, which can produce thousands of workers. Scale is about focused innovation that delivers serious growth in revenue.”

At the ISA conference Dublin City University’s Professor Michael Ryan made the sobering revelation that four years ago the university’s computer courses would have received more than 800 first preferences in CAO applications. In the last academic year only 180 first preferences were submitted for its computer courses.

Daly attributes the situation to the negative coverage by media of the sector during the technology downturn. “Why would someone go into high-tech courses if they don’t see examples of success? Success begets success.”

Summing up the likely impact of a fall-off in Irish students opting for technology careers, Cullinan says: “It will have an impact in terms of the number of jobs given to Irish people. It will have no impact on the number of jobs created because we can bring highly skilled people in from other countries and they will pay tax here. It is a challenge definitely and one we are worried about.”

By John Kennedy