Indigenous software firms must scale up to survive

10 Dec 2003

Only 24 Irish software companies from a total of more than 700 have a turnover greater than €2m, the Irish Software Association’s Vision 2008 Competitiveness Strategy Group has warned, which will not sustain them to compete in international markets.

The ISA has said that there is an urgent need to scale up indigenous companies in the software sector and a key aspect of this will be the Government mandating that 25pc of all procurement goes to SMEs, directly or indirectly.

The head of the ISA’s Vision 2008 Competitiveness Strategy Group John Shiel warned that there is a global software crisis looming whereby small software companies will cease to exist in an emerging new world order. The aim of the strategy group is to develop plans to find a sustainable position for Irish-based companies in a global market, which includes identifying five key niche areas where Ireland can take a lead going forward, similar to its lead in the middleware market in the late 90s. An example of such a niche area is Ireland’s recognition as the ‘birthplace of e-learning’ through spawning market leaders such as Skillsoft, Riverdeep and Electric Paper.

Shiel identified three key issues impacting the competitiveness of the Irish software industry today. Firstly, rising costs may force multinationals to relocate out of Ireland, which would deprive the Irish economy of almost €9bn worth of exports annually.

A second threat is the pressure from emerging software economies like China and India, who have a significantly lower cost of production and greater capacity to produce software.

The third threat identified by Shiel is the fact that the indigenous software industry in Ireland is struggling to create companies with a turnover of greater than €2m, with only 24 companies out of a total of 700 indigenous software companies achieving such a landmark in revenue. His strategy group questioned the long term viability of some of Ireland’s technology leaders in the new world order of software as their only option for growth historically has been winning expensive contracts in export markets.

Shiels’ answer to the problem so far is to create scale in the indigenous software industry by enabling companies to become world leaders in specific sustainable industry niches. “There are market niches where the Irish software industry has unique competitive advantage today or where it could have unique and sustainable competitive advantage in the medium term.

“Ireland does not have a home market of any significance which forces the software industry to export in order to grow. Conversely, Ireland does not have a large population and therefore does not require thousands of successful companies. We need to build barriers to entry for other companies in other countries by developing our knowledge and expertise in domain clusters.”

Shiel warned that current opportunities are being lost because Ireland’s focus is on general rather than specific niches. He also pointed out that industries identified by Forfás in its review of ICT clusters in Ireland such as application software, digital content and e-business are too broad.

“If we gain dominance in these areas, through proper research, we can identify market niches where we can create a cohesive focus to become world leaders. We can also identify where the business model of existing companies needs to be modified to work with emerging trends and leaders.

“For example, IT outsourcing is now becoming dominated by the hardware manufacturers like IBM, HP and EDS. All of these companies have a presence in Ireland and would represent a significant business partner if the software sector focuses on their needs to dominate their space,” Sheil said.

ISA chairman Cathal Friel said that the association was relieved and grateful that the Finance Minister Charlie McCreevy TD restored the Business Expansion Scheme and the Seed Capital Scheme until 2006, after telling the industry point-blank during the year that the schemes faced the chop. The effect of the introduction of R&D tax credits on the industry has, Friel continued, has yet to be assessed as their structures won’t be clear until the Finance Minister published his Finance Bill in February. “The devil will be in the detail. As yet we are unsure of the parameters and the options available to SMEs engaging in R&D but we are confident that the Government is willing to be co-operative on the subject.”

At present the introduction of R&D tax credits has become a contentious issue in the UK, with companies claiming to be hindered by too much red tape and the fact that the benefits account for as little as 5pc of the cost of engaging in R&D. “We believe the Irish Government will be easier to engage with and it would probably take a year or two before the new tax credit system runs smoothly,” Friel said.

The ISA chief expressed anger at the decision by Education Minister Noel Dempsey TD during the summer to “quietly scrap” a scheme that would have seen 1,000 PhD students distributed among indigenous companies. The scheme, worth around €30m per annum, “would have seen research activities in the country more than double.”

Friel also expressed consternation at the €650m given to Science Foundation Ireland to invest in emerging sectors such as biotechnology and the nature of the investments taken so far. “SFI is necessary in terms of boosting Ireland’s performance and profile in the scientific community, but the indigenous software sector is not getting anything from SFI and it is a real sector of the economy that will need all the support it can get in the years ahead,” he said.

By John Kennedy