I recently spent a few days in Ireland, hosted by a government-funded organization, Enterprise Ireland.1 Tom Gilb, a leading software process and quality consultant, and I joined local entrepreneurs and managers in talking about best practices in software development. We also visited several local software companies making products such as back-office software and data storage programs. I came away with several impressions I think are useful to share with anyone interested in outsourcing software development as well as in achieving a healthy balance of entrepreneurship and what today seems to be called "lifestyle management." Ireland, predating India and China, has been a major success story for encouraging development not only of the software business but high-tech export businesses. There may be things that we all can learn.
First, some background. Many people tend to group Ireland (which has a population of approximately four million) together with the vastly larger United Kingdom (total population of about 60 million). But only Northern Ireland (with about 1.7 million people) is part of the U.K., along with England, Scotland, and Wales. Ireland has been a separate country since the 1920s, and it joined the European Union in 1973. The Irish government made secondary-school education free in the 1960s, the local universities have been very good for many years, and income as well as wage levels used to be very low by European standards. Not surprisingly, these and other favorable assets made Ireland a great launching point for overseas companies that wanted access to inexpensive technical workers, engineers, and the European market. The government also helped foreign investment indirectly and directly by, for example, making university education essentially free in 1996, and lowering corporate taxes, especially for export-oriented businesses and foreign investors. According to a recent New York Times article, Ireland today has a well-educated work force of approximately two million, minimal unemployment, and foreign workers totaling about 200,000 .
The Irish government began targeting the software industry in the late 1970s, first by encouraging U.S. companies to use Ireland as a base for localizing their products for the European market. In addition to Microsoft, early investors included Lotus and Digital Equipment Corporation. They were followed by Oracle, Novell, Informix, EDS, and SAP, and hardware or systems companies such as Dell, Sun Microsystems, Motorola, Ericsson, and Nortel. By 2000, in the software industry alone, Ireland boasted of more than 900 companies employing some 30,000 people, including nearly 800 local firms, with software exports (products and services) of about 8.5 billion euros .
The vast majority of local software entrepreneurs have focused on building small firms that create products mainly for local customers but also some users overseas that are looking for good technology at reasonable prices.
Of course, like just about every other country around the world, Ireland suffered from the collapse of the Internet boom. Employment in the software industry peaked at 31,500 in 2001 but stabilized at about 24,000 during 20032004. Meanwhile, software export revenues grew to more than 16 billion euros (about $19 billion) in 2004, mostly from foreign-owned firms. Local software companies totaled about 760 in 2004, with about 11,250 employees, 1.4 billion euros in revenue, and 950 million euros in exports .
It should be noted that the Irish software industry is tiny compared to India, which had approximately 570,000 software professionals in 2004 (excluding IT-related business-process outsourcing workers). India's largest software company, Infosys, alone had more than 35,000 employees. But the value of Indian software exports, from domestic and foreign-owned firms, only totaled about $12 billion in 2004much less than Ireland.2
Ireland also has become less competitive of late as a site for foreign investment as incomes and wages have risen, a problem that India and China are also now facing. But many of Ireland's advantages still existexperienced engineers, free education, good universities, national health care, access to Europe, and a friendly and efficient governmentnot to mention great local food and an astonishingly beautiful countryside.
I found many aspects of the software business in Ireland to be striking: the high degree of technical expertise in software development and interest in best practices; the aggressive pursuit of foreign investment and exports; and the impressive activity in local entrepreneurship (so many companies, and government investment in startups and R&D through Enterprise Ireland, which also had 34 export promotion offices overseasincluding locations in New York, Boston, Washington, D.C., Silicon Valley, and Los Angeles). There was also the primary focus of local companies on building their own software products rather than just offering low-cost programming services and custom-built systems, which is the primary focus of the Indian software outsourcing industry. In this emphasis on software products rather than services, Ireland more closely resembles the U.S. and Israel.
I found one other aspect of the Irish software business striking: The interest of so many entrepreneurs in growing their companies but not at the expense of maintaining their current lifestyle. My initial impressions were that "lifestyle" included independence from large outside investors, independence from the pressures of public stock markets, and independence from the syndrome that many U.S. software companies face: hectic work schedules, frenetic product launches, aggressive attempts at expansion, and then bankruptcy or market failure, more often than we care to admit.
In my first columns in Communications, as well as in my book The Business of Software, published in 2004, I began chronicling the problems of many U.S. software companies. Pushed by venture capitalists and investors, they tend to pursue the high gross margins of the products business, which can be as much as 99%, and invest heavily in product development and marketing for global "horizontal" mass markets. But too often these software startups have little or no sales and fall into what I have called the "99% of zero = zero" syndrome. Everyone works hard for what too often ends up being nothingthough failure equals "experience" in the U.S., and that does have some value. But, in the database we are constructing at MIT of public software products companies (SIC code 7372) going back more than a decade, we have found that the number of companies peaked in 1997 at 316 and totaled only 201 in 2003. Public products companies in the U.S are disappearing at a fast rate as they suffer from falling sales and then either bankruptcy or Darwinistic consolidation through mergers with larger firms (like Oracle buying PeopleSoft after PeopleSoft bought J.D. Edwards).
Most of the software engineers in Ireland work for foreign companies, and thousands of them have also suffered through the ups and downs of the global high-tech market. However, the vast majority of local software entrepreneurs have focused on building small firms that create products mainly for local customers but also some users overseas that are looking for good technology at reasonable prices. The handful of entrepreneurs I met did not overinvest or try to live beyond their means. They were looking for growth opportunities but not at the expense of risking the business and control over their own fates. Not surprisingly, the average Irish software company has about 15 employees and $2 million in revenues, and the owners and senior managers seemed only modestly interested in growing beyond this level of operations.
It is also true that many of the Irish firms are not attractive investments for venture capital firms because they go after relatively small product niches or commodity IT markets rather than the potentially billion-dollar payoffs. They are not likely to become the next Microsoft or SAP. On the other hand, some of the Irish companies do have unique product ideas and expertise in important areas, such as programming for wireless devices. They also have access to government funds and local university research to improve their R&D. Moreover, they have experience and know how to build quality software.
In short, there may be many more opportunities in Ireland for the software industry to grow and achieve more of a global presence, despite the country's small size. But there is a lifestyle cost that many of us in the U.S., Japan, Korea, and other placesespecially outside of Europeknow all too well firsthand. It remains to be seen how many Irish entrepreneurs are willing to make that investment. Perhaps they have found a better way, or at least a better balance of entrepreneurship and lifestyle management. We should all be interested observers.
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