The Road Ahead – The Software Companies

Pro

1 April 2005

Although for some the snippet that Ireland is the world’s largest software exporter is something of a cliché, the fact remains that software development and localisation by multinational software companies has had a major effect on the local economy.

There is also a healthy indigenous software sector, comprising companies ranging from the classic startup in an attic to multimillion dollar publicly quoted concerns. Here’s what some of the leading players in this sector thought about the prospects for software in 2005.

Q1 This time last year, many of you were optimistic that 2004 would be a good year for the IT business. Did it meet your expectations and what were the factors that affected your business for better or worse this year?

Joe Macri, Microsoft
This time last year a large part of our optimism was based on the increased significance that was being placed on return on investment and the drive for productivity. This is something that our customers were highlighting to us and we felt was something that we could deliver to them in the form of Microsoft software and services. This optimism has been borne out with continued growth being experienced across all parts of our business.

In addition the stronger economic outlook has meant that IT budgets have been put back in place and investments in this area being viewed once again as strategic decisions for most companies rather than as ‘nice to dos’.

Ireland continues to be a good place to live and work and the general upturn in the economy has meant that 2004 has been a pretty good year for business. Some significant product launches from Microsoft including Office System 2003 and Windows Server 2003 have also helped to build momentum in our business and have met our customers growing needs.

Chris Horn, Iona
In general I think global economic performance and confidence within the business community continued to improve in 2004.

We witnessed growth in our own Artix business this year and ended the most recent quarter (Q3 ending September 30th) profitably and with a strong balance sheet.

‘Doing more with less’ has continued to dictate IT investment to a great extent in 2004. CIOs are constantly seeking solutions that will help reduce the operational costs of their current deployed systems, while continuing to derive ongoing business efficiencies.

This is particularly true of the telecommunications sector, which has emerged from a period of global market consolidation, to a period of intense competition where the rapid introduction of new subscriber services is critical.

However, for many operators the introduction of new services is hindered greatly by the multiple generations of systems, platforms and networks within their IT infrastructure. Many operators are now investing in service oriented integration, where new services can be plugged into and access existing systems in a standard fashion, as a means to minimise the risks and costs associated with new service creation and deployment. This enhanced understanding of web services and the trend towards a service oriented approach to integration, to gain increased efficiencies from existing IT systems, helped drive our business in 2004.

Liam Mullaney, Sage
Sage Ireland continued to perform strongly in 2004 by leveraging the key strengths of our business. In a market where a substantial proportion of revenue comes from existing customers, our customer base of over 50,000 Irish small and mid-sized enterprises, is an important source of revenue opportunities. Our range of localised solutions, expanded by acquisitions, meet the requirements of SMEs by incorporating local business practices and legislation.

Sage builds local software for local business and has grown by buying, and then continuing to develop, software providers with solutions designed specifically for local applications, and then by applying to those solutions our global standards of support and service.

Sage Ireland made two important acquisitions in 2004, which enabled the company to expand and enhance its product portfolio: Coretime, the developer and author of the Tempus Pro time and billing/project management system; and SSAP, a leading provider of taxation products, support and advice. Our solutions are delivered by an established community of local business partners and backed up by a local support service.

These strengths will continue to differentiate us from our competitors, and are at the core of our growth strategy.

Phil Codd, SAP
SAP in Ireland has seen modest growth over 2004. The first six months of the year were relatively flat with upswing in the second half of the year. The business case developed by clients is much more tightly scrutinised than before and this has led to longer sales cycles with the upshot being that the expectation within the business is clearly defined with an emphasis on earlier realisation of benefits to our customers.

Nicky Sheridan, Oracle
After modest expectations for 2004 we in fact fared much better than expected. We are seeing a renewed confidence within Irish industry and this is facilitating decisions for large-scale solution projects to proceed.

A recent set of IDC reports showed that of the leading vendors in the Western Europe Application Server market, Oracle showed the strongest growth of 22.2 per cent and was the only vendor to show growth in constant currency terms. The reports also show Oracle to be the clear market leader in Object Relational Database with 55 per cent market share in Ireland, putting us well ahead of the competition. In the Application Server space we are also performing well with 29 per cent market share in Ireland, and the fastest year-on-year growth of any vendor.

However, hiring qualified staff was the critical success factor for Oracle in 2004 and we will end the year 15 per cent below headcount targets, which somewhat reduces our ability to meet the continuing strong demands for Oracle products and services.

Frank Kennedy, CA
2004 was a good year for CA in Ireland and did meet expectations. The finance and government sectors continued to invest. A number of factors affected the business but to focus on one major one, our investment in the SMB market space had a major influence. CA has invested €20m across EMEA on growing our SMB market share. That includes the Customer Interaction Center, an outbound call centre that generates leads for partners. We also launched a suite of products behind the Total Protection banner, specifically for SMBs and we witnessed a strong reception for the launch of ARCserve 11.

CA Brightstor ARCserve Backup is our leading SMB product with significant marketshare so it was important that the launch of ARCserve 11 went well. 2004 was the year we pulled our SMB strategy together behind identified and well-known products and significant new investment to secure growth.

Freddy Kavanagh, Novell
The IT market remains competitive and the priority for CIOs is on controlling total cost of ownership and maximising their IT investments, rather than implementing the ‘next big thing.’

Novell has benefited from this demand, because many of our technologies are designed to help companies manage their infrastructure and resources more effectively. We have seen our business shift from some of our legacy products towards newer solutions.

Key successes included growth in our SUSE LINUX enterprise products and services business, our identity-driven products and solutions, and our resource management business.

With that in mind, 2004 proved to be a good year for Novell.

Q2 The traditional software licensing model is being challenged by initiatives like Open Source and technologies that encourage the deliver of ‘software as a service.’ Do you see software licence revenue or ongoing service contracts as being your major focus in 2005?

Joe Macri, Microsoft
We see delivering high quality commercial software as the primary foundation for the software industry going forward. All of the investments in R&D and the innovation which will enable the software industry to remain relevant in the future is being funded through the commercial software model.

In 2004 we saw the open source model and the idea of ‘Free software’ being challenged for the first time. This whole concept is being subjected to proper scrutiny, particularly in relation to real cost-of-ownership, valuing IP and Indemnification for Customers and many of the industry groups are highlighting the real issues that enterprises are facing when they consider open source as an option to rely on for their businesses.

Numerous third-party studies (IDC, Meta, Yankee, Forrester) show that the commercial software model provides better TCO. In addition, independent research shows that Microsoft software has less vulnerabilities than Linux and that those vulnerabilities are fixed more quickly. Microsoft averaged 27 days of risk while Red Hat averaged 57 days of risk and it was the fastest of all the Linux versions tested.

Another factor that is going to be of critical importance for 2005 is that no vendor today stands behind Linux with full IP indemnification. It is rare for open source software to provide customers with any indemnification at all. With uncapped protection for legal costs associated with a patent, copyright, trademark or trade secret claim alleging infringement by a Microsoft product, Microsoft’s indemnification is one of the best offered by the leading players in the industry for volume licensing customers. This will be a key factor for decision makers in the year ahead.

Chris Horn, Iona
I still believe that the open source movement represents a challenge and an opportunity. Most software companies must identify how to work with this model to the benefit of their business, their customers and to the industry in general. In IONA, we already provide an open source version of our CORBA technology, we support our products on Linux, and we also have a strategic alliance with the JBoss group, a leading provider of open source J2EE (Java 2 Enterprise Edition) application server technology. We certainly expect to see further benefits from our open source strategy during 2005.

I don’t see any significant change in emphasis in how we approach software licensing and service contract renewals in 2005. We will continue to ensure our customers receive the business critical levels of enterprise service and support they have come to expect from IONA.

Liam Mullaney, Sage
In the small and medium enterprise space we are not seeing a tremendous amount of pressure from Open Source Software, but the rise of the hosted/ASP model is an indication that customers are interested in exploring ‘rental’-based software pricing schemes. From our point of view, it is not a choice between licence revenue and service contract, but rather providing the customer options and flexibility that suits their business – Pay As You Go.

Phil Codd, SAP
SAP already offers a number of ways to allow our customers to benefit from our software deployment with a number of flexible ways such as hosted sourcing and in addition we have successfully supported Linux since 1999. In order to bring SAP’s business solutions expertise to the quickly growing open source movement, SAP has embraced initiatives including collaboration with MySQL.

Nicky Sheridan, Oracle
Oracle is a strong supporter of the Open Source Computing Model particularly the Linux Operating System and we have deployed our applications on a Linux environment. Viable Open Source solutions require commercial support levels and as such actually tend to adhere to traditional licensing models. Customers require and expect to pay for the use and support of commercially robust infrastructure, and I don’t see this changing radically.

The main benefit Oracle brings to Linux is that it makes it enterprise-ready. Working with Red Hat and UnitedLinux, Oracle has enhanced the performance, reliability, and security of the Linux kernel. Customers are seeing strong performance and reduced costs.

The emergence of software as a service continues as an evolution rather than a revolution. The chief business drivers we are seeing from our customers are the desire to achieve lower and more predictable IT costs, the difficulty of hiring and retaining qualified IT personnel, a need to move existing personnel to more strategic roles, 24 x 7 access, and mitigation of risk.

The arrival of Grid Computing facilitates hardware and software configurations, which give companies flexibility over their computing needs and related investments. Because a grid enables flexibility, businesses no longer need to worry about spikes in demand and the cost of maintaining excess capacity, companies can now simply reallocate resources as needed (or on-demand).

Frank Kennedy, CA
CA is a huge supporter of open source and this year open sourced its Ingres database, doubling the user base of that product as a result.
However, we believe that it will take two years before those who download open source software actually start deployments and consequently before we start seeing support revenues.
We believe license revenues will explode in 2005. CA is the management software company. In 2003/2004 new management software licenses outgrew new application licenses for the first time as customers demanded better management of their IT infrastructure. As environments continue to increase in complexity and management becomes even more of an issue we expect that trend to continue at a pace and hence for new licenses to grow with it.

Freddy Kavanagh, Novell
The software market is evolving rapidly.

Open Source is a disruptive technology that is changing the way software is developed and sold. The development model is based on information sharing and leads to faster innovation and quicker fixes when problems arise.

In terms of licensing, companies are no longer being held to ransom by a single vendor. They have a genuine alternative for both server and desktop operating systems, which is forcing proprietary vendors to rethink the packages they offer customers – not only the payment mechanisms but also how their software fits hardware upgrade cycles and how they sell services and support.

Other developments such as web services, utility computing and Service Oriented Architecture all demand closer integration and collaboration between technology. This means vendors need to work more closely together to deliver interoperable, open solutions that can work across mixed IT environments. Increasingly Novell is seeing a shift to service based contracts and long term partnerships with customers to meet this demand.

Q3 What do you expect to be the major technological challenges and issues facing the software industry in the coming year?

Joe Macri, Microsoft
Intellectual Property matters related to the EU and the software patent directive (CII).

Demonstrating customer value from innovations, getting beyond ‘good enough’.

As with last year, while budgets are loosening, the need to demonstrate return on investment is still of critical importance. In addition improving the value of upgrades and linking investment in technology to enhanced productivity measures for the enterprise will be central to the health of the IT industry moving forward.

IT security will also remain as a challenge for all of us in the sector. As a result of the extensive awareness campaign run through the government / industry consortium called ‘Make IT Secure’, increased awareness of the issue has been raised. However, it is an ongoing challenge for the industry to remain ahead of the criminals who perpetrate the crimes in this area. We need to continue to invest in information and educational programmes so that our customers can take the necessary steps to protect themselves.

Chris Horn, Iona
In general, as identified, open source will continue to present further challenges for some software companies in 2005. A tighter auditing and corporate regulatory environment will also present issues for enterprise companies seeking to extract meaningful data from a heterogeneous IT environment. The likely demise of stock options as a renumeration mechanism—at least for companies subject to US FASB rules—during 2005 will almost certainly impact the industry.

Business will continue to demand more from existing IT assets without incurring huge cost. ‘Doing more with less’ will prevail as an IT investment strategy in 2005, driving the need for more flexible interoperability between different vendor applications, databases, servers and platforms across an enterprise IT environment. Middleware, its management, the momentum gaining in the industry for web services and Service Oriented Architecture, will all be critical issues. Middleware itself has become more complex. Proprietary solutions, like IBM’s MQ Series and Tibco, remain out there, along with systems based on standards like CORBA, J2EE and now web services. Enterprises now need middleware for their middleware! We believe the concept of an extensible Enterprise Service Bus (ESB) will be critical in addressing this issue in 2005.

Liam Mullaney, Sage
One of the biggest challenges for Sage is harnessing technology to suit the requirements of businesses from sole traders to large enterprise and making advanced technologies more accessible to smaller businesses. One technology does not suit all.

An ongoing challenge is in helping businesses get the most out of their software and computerise the way they operate their business. For example, Sage e-Banking enables business customers to connect Sage accounting software to their bank’s Internet or PC banking software. This removes the need to manually re-enter information into their banking and accounts or payroll software. Building awareness around the benefits of technology is a key challenge.

Certain customer groups have expressed interest in web-enabled software (eg payroll bureaus, accountants). Sage Coretime time and billing/project management system and Sage CRM are already web-enabled and applied in an ASP model. With the rollout of broadband, this option is becoming more commercially viable and is under assessment within other product development roadmaps.

Phil Codd, SAP
Certainly RFID projects will start to emerge and SAP is in a position to work with companies to deliver solutions in this area. SAP is also focussing on delivery of our NetWeaver platform, which we have seen strong international uptake of. Throughout Irish business, a large focus on wireless working in general will be seen and the rollout of broadband services is going to be especially of interest to SMB’s.

Nicky Sheridan, Oracle
I see fascinating technology opportunities in 2005 including further deployment with reduced costs by companies deploying Grid Computing.

I also see fantastic opportunities for companies to get on top of all their data by moving structured and unstructured information, often accumulated by a combination of phone, e-mail, fax, instant messaging, and web conferencing, into databases where it can be controlled and accessed. Remember, only 10 per cent of the world’s data is currently stored in a database!

I see ongoing opportunities for companies deploying Mobile Computing Solutions, with corresponding increases in efficiencies improving profits as managers and employees work on the move rather than just at their desks.

But our biggest challenge in 2005 will be out ability to find the right people to meet current demand for our products and services.

Frank Kennedy, CA
The ongoing challenge for IT departments is the cost of infrastructure and how to manage that cost. The software industry has to help customers to manage that cost. The basis of CA’s enterprise infrastructure management proposition is to improve simplicity, visibility and cost of the infrastructure. It is also the reason for new licensing models like FlexSelect.
In terms of technologies themselves providing a challenge for the software industry: 2004 was the year that Wifi actually gained acceptance and deployments started. It was also the year that companies started to examine the possibilities of RFID in close detail.
Technologies like these change the the infrastructure picture. New devices are being added to networks, old devices are becoming more powerful. This raises security, data management and asset-management considerations. CA has launched products this year to take these developments into account and will continue to do so throughout 2005.

Freddy Kavanagh, Novell
Recent polls have indicated that more than 60 per cent of CIOs expect to boost their spending on security over the next year and within this, a large proportion are focusing on identity management as a means of enhancing their business processes. Identity management allows organisations to link disparate users, applications and resources around their business.

In the case of viruses, the management of patching and security updates is becoming a time-consuming task for many IT departments and companies will increasingly be looking for resource management tools that enable them to automate basic processes and distribute fixes throughout a network from a single terminal.

Novell also expects Linux to continue to gather momentum. On the server-side, Linux is advancing well beyond application servers and is a serious contender for mission-critical use. On the desktop, Linux is making in-roads particularly for transaction workers, technical workers and software engineers.

Linux is increasing the number of options available for companies and we are seeing many more CIOs running mixed environments, where they are choosing different operating systems for different applications based on technical merit—not because it is the only option available! Novell believes Linux has the security and scalability for widespread use in the enterprise.

Q4 You have significant development/support operations in Ireland to support your international efforts.
a) Do you expect to increase or decrease your operations here over the next 12 months?
b) Will there be a change in the type of work being undertaken by your Irish development operations?

Joe Macri, Microsoft
We expect to remain at a similar level over the course of the next year. In an industry this dynamic, the activities we undertake here must, of necessity , constantly evolve. This won’t present itself in a sudden shift but rather is a process that is happening over a period of time.

Chris Horn, Iona
We don’t expect to make any significant operational changes locally. We have achieved a level of stability across our organisation and believe we are appropriately positioned for long-term success across all geographies and functions.

Dublin will remain a centre of excellence and innovation for product research and development.

Liam Mullaney, Sage
In October 2004, Sage Ireland established a new office in Cork which will mean an additional annual spend of €1m and the creation of over 30 new jobs including research and development positions.

Our R&D operations in Dublin and Cork grew from 24 to 36 people in the last year. Our CRM R&D operation in Dublin employs an additional 24 R&D staff and we will continue to expand and develop in line with growth in this market.

At Group level, we have continued to strengthen our product portfolio, reinvesting 29 per cent of software revenueinto developing new and upgraded solutions for our customers.

Although operations will remain for the most part unchanged, we will see much greater integration between our development operations in Dublin and Cork and our customer support to ensure ease of use functionality and customer feedback directs the development of future software.

Phil Codd, SAP
SAP has invested significantly in support for its customers with our EMEA support headquarters in CityWest in Dublin where we have over 300 dedicated support staff. In addition, our Galway office provides support for SAP Business One, our small to medium business solution. Here we have 250 support staff, which will continue to grow over the next year. In both instances SAP invests heavily in staff training and development to ensure our customers get eth most up to date and experienced support possible.

Nicky Sheridan, Oracle
We are on a growth drive and we will continue to invest in Ireland. We recently announced a new Belfast office and we currently have over 100 open positions. But we are concerned about Ireland’s ongoing competitiveness in comparison to other countries, specifically the US and the inability of companies to find people with the right level of skills required.

There is a change in the mix of people we need to recruit to fill higher value-add positions. We are now seeking people with a balance of both IT and business skills, and of course languages are always helpful. We want to provide our customers with professionals that are not just IT experts in their field, but have a strong business acumen to really understand and match our products with their real business needs.

Freddy Kavanagh, Novell
Ireland is a very important base for Novell. Our Sales Support Organisation for Europe, the Middle East and Africa is run from Dublin and one of our international product development centres is also based in the city. The proportion of money invested in research and development on a global basis by Novell has increased in 2004 and this will benefit the Dublin operations.

If you look around the world, a number of national governments are backing Open Source as a means of encouraging innovation in their economies. The advantage is that software development jobs can be created locally because the code is publicly available and can be revised and edited anywhere in the world. This is in contrast to much software development, which tends to take place in the US.

Q5 What grounds for optimism do you see locally and internationally in 2005?

Joe Macri, Microsoft
Economic growth forecasts showing circa 5 per cent growth nationally for the next three years, combined with recovery in major markets around the world will drive demand for our products.

In addition, through our sponsorship of the recent European Tech Tour we were able to witness first hand the level of innovation that is taking place amongst indigenous software companies. The amount of energy, ideas and the level of research that is happening within this group of companies, partnered with the funding that is available through the venture capital companies would encourage a certain sense of optimism.

The roll out of 3G and the increased penetration of PCs in the home and broadband amongst small businesses and home users will provide additional impetus for IT products and services. The continued focus on seeking to maintain Ireland’s competitiveness and with a priority being placed on driving worker productivity this should also open up opportunities for IT vendors to show our IT can deliver productivity gains.

Chris Horn, Iona
I see a number of reasons for quiet optimism in the global macroeconomic situation. It is now five years since the Y2K investment cycle. ‘Old economy’ enterprises are now becoming the post-new economy companies. China is emerging as a very significant economy. Global competition is becoming really that: global. Hence enterprises are having to become more and more innovative to compete, and innovation is in part supported by successsful use of IT.

Locally, there appears to be widespread recognition that Ireland must compete better in innovation. Investment in R&D is increasing, but worldwide the returns on R&D investment can be disappointing and unpredictable. Ireland has a major opportunity to manage R&D innovation more efficiently and successfully than any other location.

Liam Mullaney, Sage
Our product range closely reflects the business requirements of SMEs and accountants in practice and therefore we continue to attract large numbers of new customers.

Sage Ireland’s mid-market division is showing improved growth, due to an improved product portfolio and better management of the business partner channel. With significant new product releases planned for next year, we are in talks with a number of resellers and signed four new Sage Business Parners in the last six months to meet our aggressive growth strategy.

Our focus in 2005 will be on growing our customer base, continuing to improve our products and services and developing our acquired businesses. The start to the new financial year has been encouraging and we view 2005 with confidence.

Phil Codd, SAP
Looking at the current business view for 2005 we are seeing major interest in Human Capital Management projects as well as Mobile requirements and Customer Service needs. There are a number of exciting projects already being discussed for 2005 and the general buzz in the market felt during the latter half of 2004 should convert to a healthy IT market in Ireland as whole for 2005.

Nicky Sheridan, Oracle
Locally a strong economic performance, strong fiscal policies and rising company profits as well as a rise in confidence levels mean people are prepared to make purchase decisions. This in turn creates a strong demand for Oracle’s products and services.

The challenge however is to hire 15 per cent more people to meet existing demand. International exchange rates, currency fluctuations and increasing costs are all concerns that will continue to impact Ireland as a location of choice for multinational corporations.

Frank Kennedy, CA
In addition to my own appointment as country manager for CA in Ireland, there have been other recent investments to develop resources in Ireland in the form of new security and sales expertise.
All that highlights the optimism we feel about the Irish market. Our SMB proposition, Total Protection, which we market entirely through our partners, also has particular resonance in the Irish market and will be an area of growth.
Internationally, the need for all companies to display tighter compliance will continue to be one of the drivers behind IT investment. CA is ideally positioned to take advantage of that in terms of our enterprise infrastructure management proposition providing better audit control over infrastructure and data. Also, as new technologies like Wifi and RFID continue to throw challenges at IT departments, we believe that management software will be critical to controlling costs and spiralling infrastructure.

Freddy Kavanagh, Novell
The general consensus among industry analysts for 2005 is an IT market growing at 7 per cent, which means gradual growth and investment in projects that will enable CIOs to control the total cost of ownership and maximise their IT investments.

If you are looking to utilise your existing IT resources rather than ‘rip and replace’ a whole system, the key is interoperability and the ability to link different systems so they can communicate effectively. This makes technology such as server consolidation; resource management; automation of basic processes and identity-based solutions, the areas that will grow in 2005.

From Novell’s perspective, we have a strong portfolio and we expect the growth we experienced in 2004 to continue next year. This will be supplemented by revenues from new and forthcoming product launches such as Novell Linux Desktop and Open Enterprise Server, which have already attracted a lot of attention in the market.

14/02/05

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