The recent downturn in the information and communications technology sector, coupled with high profile closures or downsizings such as Gateway and Iona, have led to some concerns about the future of the Irish software industry. Arguments that lower wage economies are producing software engineering graduates just as good as ours are used to back up such predictions. But what is the reality? Is the Irish software industry doomed or are the pundits reading the wrong signs?
One man with his eye firmly on the industry’s future is Cathal Friel, recently appointed chair of the Irish Software Association. Friel acknowledges the threats posed by emerging economies such as India but considers them overrated.
‘India has always been perceived as the biggest threat,’ he says. ‘It produces more PhD students than Europe. But the one big benefit Ireland has had in the last seven to eight years has been the push to productise Irish companies. Indian companies offer mostly professional services; they have not productised their offering.’ Much of the credit, he says, goes to Enterprise Ireland that would only fund companies that had a product.
John McGuire, vice president of products at Cape Clear agrees. ‘It’s important to distinguish between software services or work for hire and the software product industry,’ he says. Creation of a software product, he says, is very much a people thing and success depends on tight relationships between engineering, marketing, finance and so on. ‘You can’t be successful if the business and marketing people are isolated from the software engineers. You must have a feedback loop.’
Irish software companies are therefore moving up the value chain, he says. ‘We are competing head to head with the best Silicon Valley has to offer. We are not just an outsourced services island. We have a large number of people with experience working in large vendors such as Microsoft, IBM, Oracle and so on and not just as engineers. They are working on the business side as well. We have world — class sales, marketing, press, and product management people and that’s the difference between nascent software industries and ourselves. While they have good software skills they don’t necessarily have the business skills to make a mark.’
Investment brings stability
Another advantage we have, according to Friel is that the established multi — nationals have a significant investment here and that they will be reluctant to simply abandon that investment when times are bad. They follow the money, he says, and the money is here. Companies like Dell, might move manufacturing offshore but they already have call centre and R&D activities here. So, Friel says, we have to focus on getting more R&D work. In that respect, he says, the Science Foundation of Ireland is doing a good job, funding basic R&D.
Friel is not the only one calling for increased research and development activity. By conducting R&D here, its advocates argue, Irish companies will generate intellectual property that will move them up the value chain making it more difficult to relocate the companies and the jobs they provide in lower wage economies.
One company conducting R&D on a global level is IBM who’s Global Financial Services Solutions Centre is located in Dublin. Brian O’Hara, the Centre’s manager explains the evolution of the Centre’s role. ‘Our roots were in core software development, programming and so on. However, the business changed significantly and we focused on two things. The first of these was the creation of solutions focused on industry, in our case the financial services industry. We evolved away from creating generic products to solutions for specific industries, mainly banking and insurance. The second thing we focused on, which seems to be an emerging trend, was the creation of licensable intellectual property.
‘In the past there was a lot of generic software development with commoditised skills that can be found anywhere. We said: “Fine, we will move to a level or two over that”. Take for example a big area in banking: risk. We created data models we can license to banks to help them analyse risk. We’ve been in the business of licensing intellectual property for about seven years, mostly licensing to major banks and insurance companies outside Ireland such as Bank of America and ABN AMRO. We are less focused on the kind of middleware products that other parts of IBM do.’
But is such a story the exception or the rule? One of the problems with the Irish software industry, say pundits, is that localisation activity makes up a significant proportion of the industry and that this is particularly vulnerable to competition from overseas.
Localisation evolution
Not so, say others. Elaine Stephen is director of Lotus Global Production Development at IBM Software. According to her, localisation has changed dramatically in the last decade. Instead of being a process tacked on to the end of the product development cycle, it is now an integral part of the design and engineering of an application.
‘If we look at the work we were doing in 1991, in terms of the processes and technologies we used, it’s a very different world today. We shouldn’t be giving the impression that we have been doing localisation since the 1980s and now it’s going to go away. We have evolved the localisation process so that it is unrecognisable. It’s driven to a large extent by the Web. When a Website changes in English, people don’t want to wait three months for the Japanese version. That’s not acceptable anymore.’
Consequently, she says, the localisation process uses innovation and automation and has had to progress in quantum leaps. This in turn has led to an increase in the level of skills required. Localisation, she says, is no longer simple translation. It is a major engineering task requiring extensive project management expertise and sophisticated tools. ‘We are driving the development of those tools and that is moving us up the value chain.’
According to Stephen, IBM’s other area of expertise is in guiding companies at the design stage of their software. ‘If you are designing software you can either design it from day one for the English — speaking market or as a global application. There are cultural and technological sensitivities that have to be built in so that the product works worldwide. For instance, how will it look in China or what are the issues in Thailand? So localisation is not a commodity business. It is knowledge based and it is not easy to move knowledge — based industries.’
Another company that came here originally for localisation but subsequently diversified is Microsoft, the world’s largest producer of software. Like Elaine Stephen, Joe Macri, general manager of Microsoft Ireland believes that this country still has a lot to offer the international software industry.
Three good reasons
‘If you look at the reasons why we came to Ireland in the first place, there were three key factors. The tax situation was clearly one. The second reason was the educational system and it is still highly rated across the countries we look at and the calibre of graduates is still high. The third reason, which people don’t focus on enough, was the social partnership. When we look at countries we look at the geopolitical environment and workforce stability. So those were our reasons in 1985 and they are still valid today.’
Like IBM, Microsoft has integrated localisation into the development cycle of a product. ‘When we first came to Ireland we waited for the US to release the English version of a product and then we worked on the language versions. Now we simultaneously ship (simship) nine to 12 language versions on day one.’
Another thing that has changed, says Macri, is Microsoft’s product mix. In 1985 when Microsoft first opened here, 80 per cent of the company’s product was packaged software. Today that figure is down to 20 per cent.
‘The notion of software is evolving into a notion of Web services,’ says Macri. ‘We introduced the term ‘software as a service’ a while back. This is not just about running word processing over a cable. It’s about software providing a function to users. Ireland today is primarily a hub for packaged software driven by multinationals. The critical question is whether it will continue to be the world’s largest exporter of software. That’s a really interesting question that delves into the operational as well as the development end but the two are intrinsically linked. What we are doing with .NET is allowing independent software vendors (ISVs) to develop their specific services on that platform. That means you need an operations hub and in Internet data centre (IDC) so the notion of Internet hosting and software development are merging. There’s a very positive focus on IDCs at the moment with really good announcements from the likes of Google and Overture.’
So it would appear that the multinationals are here to stay. But what of the indigenous software industry? Is the future as bright? Well, as the man said, there’s good news and bad news. The bad news is that there will be rocky, even painful, times ahead.
‘The future of the Irish ICT industry is in the hands of the indigenous sector,’ says Mary Cryan, director of the Technology Consulting Practice within Prospectus and author of the book, The New Pioneers that advised Irish software companies on how to break into the US market. ‘There are about 600 to 700 independent software companies in Ireland at the moment. Over the next three years we will end up with 250 reasonably strong companies. The rest will have liquidated or merged or will continue as the living dead. We need to focus on those 250 that have the potential to be strong in Ireland and on the global market.’
Three years on
The companies that survive will need to concentrate on three things, says Cryan. The first is developing a strong customer base to give them credibility. The second is strong research and development activity. And the third is the ability to trade within cash flow.
McGuire agrees, especially with the third point. ‘Everyone in software is talking about bootstrapping. In terms of valuations, venture capital companies are assigning much lower valuations. If you want to get a large amount of money, you have to practically give the company away. So, yes, if you go out and get customers first, you are in a much stronger position.’
And the good news? ‘There’s never been a better time to set up a software company,’ says Cryan. ‘You can set up a business, attract skills at the right price and you can set your timetable without being on a fast track to growth. You can stay in better control of your own destiny. It’s difficult to attract money but it can be done if you have good intellectual property. At the moment, people in the software industry are keeping their heads down. Now is the time to raise those heads and recognise our strengths.’
Cryan’s assertion is backed up by a recent report from Hot Origin that found that while five per cent of the software companies on the Hot Origin database last year have now gone, new companies are being formed all the time. According to Hot Origin’s John O’Connor, the main findings of the report was that even though the sector has been through some tough times, average sales were up on last year. ‘Privately held firms generated an average of EUR1.7m this year compared to EUR1.5m last year,’ he says.
There is no room for complacency however. If Irish companies are to move up the value chain in numbers, then the country will need to strengthen its R&D activities. ‘We would be very supportive of that,’ says Macri. ‘But there is a lot that needs to be done. These are long term, generational decisions. If you look at kids aged eight or nine, the majority do not have access to technology at home. In Ireland around 30 per cent of kids have Internet access while in the Nordic countries it’s more like 70 per cent. In the educational system, a lot more needs to be done to ramp up the focus on ICT in schools — not just in terms of the PC to pupil ratio and high speed Internet access, but also on the pedagogical side. A lot can be done using technology as a learning tool, not just for understanding technology in its own right, but as a way of increasing aptitude in all sectors.’
The other issue is the number of young people taking on science in secondary school or graduating from our colleges in IT. They are making those decisions based on the perceived job opportunities. Macri agrees that in the short term there are fewer jobs available in the ICT sector. But, he points out, if you ignore the distortions of the Y2K problem and the Euro changeover, the underlying trend in the market is positive and there will be a demand for software skills in the longer term.
19/06/2003
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