Software sector seeks scale


22 May 2006

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The Irish Software Association is nothing if not optimistic, saying at its annual conference last week that the indigenous software industry has the capacity to deliver annual revenues of €7.5bn to the economy by 2010, growing employment numbers from 16,000 to 50,000 in the process.

The argument goes like this: there’s nothing wrong with the technology, but where many Irish software companies must do more is around their execution capabilities to grow their businesses.

It’s a recurring theme – barring a few notable successes, many indigenous firms over the years have struggled to break through the barriers of being anything other than small or niche players.

By the ISA’s estimates, true international scale requires annual revenues approaching €50m – a tall order given the size and spending power of the Irish market, putting international sales as a key priority for any company looking to grow.

Andy Malik (pictured), managing director of Lehman Brothers, gave the perspective from the US as to what is needed from the investment community.

Malik is no stranger to Irish companies, having been involved in taking Iona and Parthus public. He noted that the investment climate here is a lot warmer than it used to be. “When we were working with Iona 10 years ago, there were two VC funds. Now there are scores.”

With the market having corrected itself following the dotcom madness, “tried and true” is back in vogue. “Today, companies need to be profitable, certainly a quarter or two, and you need to have growth and critical mass,” he added.

Malik noted the trend towards software as a service (SAAS); “it’s on everyone’s lips on Wall Street today,” he observed. The SAAS model is a fundamental change in how much of today’s enterprise software is delivered. Instead of paying upfront for a product, customers buy it on a regular basis, usually monthly.

For the provider, the benefit to the SAAS model is that it provides them with predictable recurring revenue – the kind that investors like.

Melinda Ballou, a programme director with the research firm IDC, pointed out that SAAS is a dynamic area of the market that is equally suited to serving the needs of small and large businesses.

She drew the analogy between the old and new distribution models with buying CDs versus downloading music from iTunes. “You’re no longer physically shipping software, it’s now available over the web,” she said.

Salesforce.com is one of the foremost players in this space and Fergus Gloster, senior EMEA vice-president, was on hand to explain the company’s success.

“This is not a niche solution in any single vertical. SAAS has evolved to be capable of meeting the requirements of a very diverse market group,” he said.

Having software available over the web can give an Irish company global reach instantly, as happened to one firm that developed a solution and made it available via Salesforce.com. “A very large company in Spain that it had no way of ever selling to was interested in buying its software – that’s a very interesting dynamic,” Gloster said.

Eric Hjerpe, venture partner with Atlas Ventures, spoke of the need to forge partnerships with other companies, which helps to give a company greater scale and reach than it could achieve by using its own resources.

Using partnerships “projects a shadow of a much bigger company,” he said. Hjerpe urged software companies to concentrate on product development, leaving services revenue to the partner.

It was a salutary lesson for Irish software companies, as over the years many have ended up becoming service companies by default.

Although partners can help a company to scale, this shouldn’t be a substitute for feet on the street. “To build a large software company, say in Asia or the US, you have to live there, work there and focus on customers there; it shows a commitment to the market,” Hjerpe said.

His remarks were echoed by Peter Conlon, entrepreneur and current CEO of Xsil. “We will not set up a business that we do not think will be global,” he commented.

Not long after starting trading, Xsil established offices in the Far East to be closer to some of the large semiconductor manufacturers that make up the company’s customer base.

Reflecting on the long sales cycles required to do business in the region, he remarked: “We were in Japan for four years before we had a purchase order.”

Hjerpe also focused heavily on creating the right team to lead a company. Drawing on previous experiences from his time at Siebel, he spoke of the need for a committed, driven CEO that could personally relate to the requirements of the customer.

Growing companies should recruit with an eye on the future, he added: “Don’t hire for the position today; think about what the person has to be to fulfil the job requirement two years from now,” he said. “It’s all about the team, because at the end of the day they will define your success.”

Another piece of advice was to build great products – which may not be as straightforward as it sounds. “I look at a lot of products and they’re crap,” Hjerpe said bluntly. “The user interface might look great but you can’t administer them. Think about the most important areas: reliability, manageability – you’ll find there are always areas to improve.”

By Gordon Smith