3.6 Sector Overview
3.6.2 Software Sector
The computer software and services sector originated in the US in the 1950s and
has since expanded to serve multiple product and service niches. The sector is
dominated by global brands such as Microsoft, SAP and IBM at one level and
Independent Software Vendors (ISVs) at the other. The former provide generic
solutions with minimal customisation, the latter more commonly deliver niche
oriented and custom built solutions. Two million workers or at least 1.35 per cent of
the EU labour force are directly engaged in software production (Steinmueller,
2004).
As a sector within the ICT industry, software has grown at about 10 per cent per
annum over the last 25 years representing about 4 per cent of total world output
(Rowen, 2007). As technology has evolved, the separation of applications from
infrastructure reduced barriers to entry for small firms and led to the emergence of
niche opportunities in formerly peripheral markets (Messerschmitt & Szyperski,
2005; Saxenian, 2006) of which Ireland is a prime example. Pertinent to the focus of
this research, Mowery (1999) suggests that ‘low physical capital intensity and high
human capital intensity has enabled national influences rather than the industry-
specific effects commonly associated with mass-production technologies, to affect
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clustering, geographic concentration and a high volume of innovators (Breschi &
Malerba, 1996).
Software firms vary significantly because of the wide array of markets in which they
compete and their differentiated knowledge and resource bases (Zahra & Bogner,
2000). The sector delivers a variety of application and infrastructure solutions
throughout business and consumer markets. Application developers target the
needs of specific segments in a way that maximises market share by servicing
multiple end-users, often allied to the delivery of technical and project
management skills.
Innovativeness
The seeds of Ireland’s high tech cluster emerged in the 1990s underpinned by
growing competencies in software design and production (O’Riain, 2004). Firms
pursued niche export markets employing a low-end disruptive approach, rather
than competing directly with established players. Contrasting Israel with Ireland,
Niosi, Athreye, and Tschang (2012)suggest that Israel has gained advantage through
comparatively higher absorptive capabilities whereas software innovation in Ireland
is largely path-dependent on the FDI sector however the impact of technology
transfer is much less evident than the emergence of born globals on the sector’s
expansion.
Output, export and employment profile
The ICT sector employed 43,280 people in Ireland in 2012; an additional 25,000
were employed across other sectors in the economy. The sector is dominated by
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than €2M per annum (Enterprise Ireland, 2008). In 2013, 40 companies or 8 per
cent of firms in the sector achieved turnover in excess of €10M. Indigenous
software firms are highly export intensive with export volumes at 73 per cent
compared to an average of forty five per cent across the EI client base.
Referring to the sector’s 30 year history, EI’s strategy for 2009-2013 (Enterprise
Ireland, 2008, p.3) states that ‘the New Software Economy is an environment in
which Irish companies are uniquely well-placed to prosper’. The report noted that
the sector comprises 500 companies, employing over 10,000 people, with
combined sales of €1.4 billion. A profile of the broader ICT sector (Table 3-4) depicts
its significant role in the economy.
Information Communications Technology Sector
Output - Constitutes approximately 25% of Ireland’s total turnover
- Second largest exporter of computer and IT services worldwide Export value
2009
- One third of the country’s exports by value
- Five of the top 10 exporters in Ireland are technology companies - Computer services exports €24,223 million (€3,951M UK exports)
Employment - 75,000
Enterprises - 5,400
Ownership - 233 foreign owned including the top 10 global ICT companies - 1,277 indigenous firms generating output of over €1 billion annually
Growth net employment growth rate of 6% in 2009 and 4% in 2010
Table 3-4: ICT Sector Profile (ICT Action Plan 2012, ICT Ireland, 2013)
Trading Profile
Computer software embedded in hardware or carried via other physical media are
classified as merchandise while the sale and purchase of software transmitted
electronically as well as exports of software licences are classified as computer
services (CSO, 2013a). Services account for an increasing proportion of total value
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Domain expertise developed in a number of specialist areas including telecoms,
finance, public sector, digital media entertainment and e-learning (Enterprise
Ireland, 2009) while next generation internet, location based services, mobile ICT
and social networking have been a more recent source of innovation and new
revenue (ICT Action Plan, 2012). Table 3-5 presents an overview including selected
companies within the sub-sectors.
eLearning Content solutions, Learning Technologies, eLearning Services, Supplementary Tools – online books, portals, manuals, Job aids and workbooks.
Akari Software, Enovation Solutions and Intuition Publishing,
Digital media entertainment
Mobile content, Interactive TV, Animation, Digital Games, Film/ TV. Brown Bag Films, Jam Media and Kavaleer Productions.
Travel technology Distribution and reservation technologies, payment solution providers, business process and enterprise management solutions, CRM, mobile technologies and digital marketing
Datalex, Open Jaw Technologies and Mobile Travel Technologies.
Public Sector Hub, Enterprise solutions, Security & privacy solutions.
Business process management, Collaboration & productivity tools Careworks, Keelvar Ltd and Quest Computing.
Telecommunications Applications: Messaging, content, security. Mobility solutions: Mobile payments, personalisation. Middleware: billing and revenue assurance. Infrastructure: integrated communications and quality assurance.
E.g. Accuris Networks, IQuate and Openet.
Financial and Enterprise
Global sourcing and security management. Claims software for the insurance industry.
Cylon Controls, Vizor Ltd and Zarion.
Table 3-5: Software Sector Profile and Sample Companies (EI, 2008, p.2)
Irish firms generate a high proportion of revenue through professional services in
support of integration and implementation efforts in the client environment.
Software products are highly replicable however professional services delivering
client-specific solutions are labour intensive placing additional demands on a
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Age-Ownership
Although the Irish Software sector emerged in the late 1960s (Heavin et al., 2003)
the indigenous sector is relatively young with firm age averaging less than ten
years. Founder entrepreneurs populate CEO roles, the majority of them being from
technical backgrounds with less than 25 percent being sales, marketing and
financial professionals (Enterprise Ireland, 2008). Appointment of career managers
to replace founder entrepreneurs is a frequent response to failure to adopt
formalised approaches to scale (Child & Kieser, 1981), often at the behest of board
members and investors. In contrast to the engineering sector, displacement is more
common than succession in software firms. The sector employs a high proportion of
professional staff and demonstrates more limited levels of family involvement than
in manufacturing engineering.
The following section on IPOs is specific to the indigenous software sector (having
no parallel in the engineering sector). It is included here based on its significance as
an indicator of investor sentiment and a signal of the potential inherent in the
sector.
Initial Public Offerings
Initial public offerings (IPOs) are a key barometer of the health of the technology
sector. In the Irish context, the historical success of companies such as Iona in
middleware, Smartforce and Riverdeep in education and Trintech and Baltimore in
data security, reinforced by public listings on NASDAQ in the 1990s, resulted in
software becoming the first industry in Ireland’s history to sow the seeds of a
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each of the firms depicts something of a vicious cycle (Table 3-6), largely based on
failing to meet the challenge of aggressive growth. Through a combination of entry,
acquisition and dissolution, sectoral revenues have remained relatively static over
the last ten years. As acquiring firms are largely foreign-owned, they absorb the
revenues overseas while acquired firms are reported as dissolutions (Evans, 1987).
Firm Nasdaq IPO Listing Exit from Nasdaq
Iona 1997 Acquired by Progress Software (US) in 2008
Smartforce 1995 (CBT Systems) Merged with Skillsoft. Acquired by SSI Investments (US) in 2010
Riverdeep 1999 Delisted in 2002 when the stock price fell below $2
Trintech 1999 Acquired by Spectrum Equity Investors (US) in 2012
Table 3-6: Record of Irish Software Company NASDAQ Listings
In 2012, Fleetmatics, a provider of cloud-based fleet management solutions became
the first Irish Software company to launch an IPO (New York Stock Exchange) in ten
years. Fleetmatics is one of the indigenous sector’s top earners with revenues of
$177.4M (€129M) in 2013, Globoforce with 2012 earnings of approximately $187m
(€136M) postponed a planned Nasdaq listing in March 2014 (the first by an Irish
firm in 14 years) stating the intention to await more favourable market conditions.
While praising Ireland’s policy of encouraging high-tech export businesses,
Cusumano (2005) suggests that many Irish entrepreneurs are interested in growing
their companies but, not at the expense of maintaining their lifestyles including:
independence from large outside investors, from the pressures of public stock markets and independence from the syndrome that many US 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 (p.27).
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A meta-analysis of the growth patterns of gazelles found that firms who introduce
new-to-market products are significantly less likely to survive – they are also less
likely to be acquired than to be liquidated (Parker et al., 2010). This diagnosis
appears representative of the indigenous sector, perhaps explaining why few
software companies have scaled beyond €20m and why overall revenues have
plateaued over the last decade.
3.7 Conclusion
Assessment of firm-system fit relies on a contextualised understanding of
educational and skills provision, the fiscal environment, the technology
infrastructure, legislation, intellectual property protection, the institutional
landscape and the relationships between them (Feldman & Kogler, 2010). This
chapter provides an overview of the economic and policy landscape in the Republic
of Ireland and documents the significance of the software and manufacturing
engineering sectors in the global and Irish context. In light of the recession
prevailing during the primary research phase of this thesis, it can be argued that the
characteristics and challenges associated with innovating in such circumstances
present a more useful mechanism for identifying environmental fit than in the
boom times that preceded it.
Primary analysis of system dimensions is presented in the analysis chapters (5&6)
with emphasis on significant associations between firm contingencies and
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Chapter Four
Methodology
Dialectical pragmatism.134 | P a g e