Soft sell, hard facts


27 Feb 2003

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Three years ago the OECD released the results of research that showed Ireland was the world’s largest exporter of software.

Predictably enough, the statistic was to become widely regurgitated in government documents, by the news media and by the software industry itself.

And why not – wasn’t this another example of outstanding achievement by that wondrous beast of limitless potential, the Celtic Tiger?

Take a closer look at this statistic, however, and a different picture emerges. The fact that Ireland was and apparently still is the world’s largest exporter of software suggests that we have a massive indigenous software development industry.

The truth is that most of that export value comes from the localisation and distribution of product from US multinationals such as Microsoft, Oracle, Symantec and Lotus. The number of firms in the indigenous software sector is actually relatively modest. There is only a handful competing successfully on the world stage and even fewer listed on major stock exchanges.

After all the talk about technology booms and IPOs (initial public offerings), there are just six publicly listed Irish software companies: Iona Technologies, Trintech, Datalex, Baltimore, Parthus and Riverdeep (SmartForce having been subsumed last year into another e-learning provider, SkillSoft). By contrast both Israel and Finland have around 30 publicly listed software companies.

Indeed, we do export software to the four corners of the Earth but most of it emanates from US companies based here rather than from home-grown firms. It is the balance – or imbalance – between indigenous and international software companies in Ireland that is most striking. In 2001, out of a total sector worth just over €13bn, multinationals accounted for €11.57bn, or 88.5pc, and of software exports worth €12.2bn in 2001 foreign-owned companies were responsible for nearly €11bn, or 89.5pc.

Far from being a dominant force in the software world, it seems, Ireland should more correctly be seen as a highly effective route to market for US software firms. Although its software sits on 90pc of computer desktops around the world, Microsoft does little exporting from the US – Ireland is its principal gateway to world markets. Likewise, the Dublin arm of anti-virus giant Symantec is now the biggest volume shipper of boxed software in the European market.

In short, if the ‘US effect’ is stripped out, we’re left with a very different animal: not a software giant but an industry of much more modest proportions.

But the picture is not as bleak as it seems, argues Patricia McLister, head of Enterprise Ireland’s software and internationally traded services division, which has devised a five-point strategy to steer the sector’s future development, ranging from increased research and development (R&D) investment to improving market access for expanding software companies. The indigenous sector is well respected internationally, she says, and has so far weathered the tech downturn better than most.

“The size of the sector is not at the point we’d like it to be but it’s growing,” she says. “The last couple of years have been tough but, according to the numbers that are coming through, we’re still growing and we haven’t lost as many jobs as we might think.”

Michael Kelly, CEO of Fineos, which sells back office systems to the financial industry and is the current Irish Software Association company of the year, also takes an upbeat view. “We’re not doing too badly. We’re the envy of countries such as Denmark and Holland that have little software activity and although we’re lagging behind one or two countries we’re not too far behind,” he says. “Generally I’d be encouraged because I think the industry is going through pain now but the companies that survive this painful period will come out quite strong and that’ll be the next wave of IPOs you’ll see in two to three years’ time.”

The Irish software sector is not unique in the challenges it faces as it seeks to move to a new level of development. In the Europe and Middle East regions, there are two other small countries that have developed a thriving software sector in recent years – Finland and Israel – and both face serious obstacles to growth.

The overall turnover of the Finnish software industry was €900m in 2001, with exports valued at €400m. It is no secret that one company, Nokia, dominates the Finnish software industry. In recent years a whole cluster of companies has developed around it, including Digia, which develops applications on the Symbian platform, and NetHawk, which specialises in network protocol testers.

It seems that Finland and Ireland face some of the same challenges in developing their respective software industries. In a comment that will resonate with many Irish software executives, Pekka Ruusunen, chairman of Finland’s Software Entrepreneurs Association, notes that although Finns have extremely good technology, they don’t always have the commercial skills to go with it. Also, while the pressure on skills has eased in the last year or two, there are still selective skills shortages in the market. “Although we have the skills now, we don’t always have the talent,” he says. “The way I see it is that one extremely talented guy can make another 10 or 15 around him productive.”

In contrast with Ireland, however, a large number of Finnish software companies have successfully negotiated IPOs. Ruusunen estimates that upwards of 30 of them are publicly listed, the vast majority on the Helsinki Stock Exchange. He believes that the high number of listed companies has been a major contributor to the growth of the software sector in Finland in that they act as role models for up-and-coming firms to emulate.

Another factor underpinning the success of the sector, he explains, is the co-ordinating role of the Finnish government acting through agencies such as the Technology Development Agency, or Tekes, which, among other things, partly funds R&D programmes within small companies and fosters technology networks.

If anything, the growth of Israel’s software industry has been even more impressive. In 1990, software exports from Israel amounted to US$90m. By 2002, overseas sales had soared to US$2.55bn.

Despite their relative youth many Israeli software houses have reached early maturity helped by partnerships with US technology firms. Of Israel’s 400 software firms, 30 of them are publicly listed, the vast majority of them on the Nasdaq. Nasdaq-listed companies include Amdocs (telecoms billing software), Magic (applications software), Check Point (internet security) and Mercury (manufacturing and internet systems).

Amnon Leibovici, secretary general of the Israeli Association of Software Houses, identifies the main challenges facing the software industry as the ability to “continue to offer products and expertise that are attractive to foreign markets”. With domestic software sales declining from US$1.05bn in 2001 to US$0.95bn in 2002 – a 10pc drop – as a result of the deteriorating economic and political climate, export markets are more important than ever to Israeli software firms.

No more than in Israel or Finland, having a buoyant indigenous software sector in Ireland is seen as vital to the health of the economy. There are several reasons for this. First, it provides a platform for the creation of new software companies. This aspect was noted in a report, Ireland’s Software Cluster 2002, by the software incubation firm HotOrigin, which stated: “The ongoing development of the indigenous industry is essential to fostering high levels of company start-ups as the majority of founders are from indigenous technology companies.”

Second, indigenous software companies are reservoirs of the R&D activity that the Irish Government sees as essential if Ireland is to evolve into a knowledge-based economy. “We have to become a knowledge-based economy and climb the scale in terms of R&D,” says McLister of Enterprise Ireland. “The indigenous sector is small but the technology level is much, much higher than the multinational sector in Ireland. We cannot remain as localisation centres for large companies. That business is going to lower-cost economies. If you accept the argument that smaller companies are better innovators of technology then I think the indigenous sector has got to be a major driver of the future ICT [information and communications technology] sector here.”

Third, on a practical level, with multinationals already well represented in Ireland there are limited opportunities for additional growth. “There are few big software companies that haven’t come to Ireland,” notes Austin McCabe, managing director of Symantec and president of the American Chamber of Commerce in Ireland. “All the low hanging fruit has been picked. The challenge now is to move the indigenous companies to the next level.”

One of the things that will help build up a stronger indigenous sector and get it through the current downturn is fostering closer links with the multinationals, believes Michael Kelly of Fineos.

“Ten years ago, indigenous software was just not a runner,” he recalls. “It’s only since the local economy has recognised the value of the big players such as Microsoft and Oracle that the sector has come on. There’s been a huge learning process in the last 10 years around the whole investment side, the work done by Enterprise Ireland, what the colleges provide and the people who work for those multinationals and maybe want to start up their own business.”

Kelly, a former Ernst & Young Entrepreneur of the Year, believes that over the coming years the Irish industry will reap the rewards of this learning period but to be a success on a world stage will require more international experience.

“I believe it’s important for the management of Irish software firms to have worked abroad and to have sold abroad. It’s not good enough just coming out of a multinational in which you’ve developed software or managed a team. You have to have been out there and marketed. In our case, we sold three large enterprise systems abroad before we made a sale in Ireland,” adds Kelly.

The Irish software industry is not the giant that some people might think it is but neither is it a dwarf. Careful stewardship over the coming years should see it mature to become a force on the world stage – and that will really give the OECD something to write about.

IT nations: how we compare

Ireland

Population: 3.9 million
Indigenous software sector
Number of software firms: 770
Turnover (in 2001): €1.508bn
Software exports (in 2001): €1.28bn
Employment: 14,000*
Number of publicly listed software companies: 6

* Total employment in 2000

Finland

Population: 5 million
Indigenous software sector
Number of software firms: 900
2001 turnover: €900m
Export revenues: €400m
Employment: 10,000
Number of publicly listed software companies: 30

Israel

Population: 6.5 million
Indigenous software sector
Number of software firms: 400
2001 turnover: US$3.7bn
Export revenues: US$2.65bn
Employment: 14,500**
Number of publicly listed software companies: 30

** Software professionals only