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Report: Software Firms: Go Global or Lose

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Software companies need to have a global presence to be where the action is — and can’t shy away from making “bold” moves even in the recession — Accenture said in two reports released today.

“As Western markets slow and their workforces age, software manufacturing — and hence capital — are migrating toward Asia and Eastern Europe,” the consultancy and technology outsourcer said in its 2008 Global Software Study. “The primary driver of this shift is not so much labor as it is growing markets and the need to reduce risk by building and buying in multiple locations.”

In mature markets, such as the U.S., software companies will make more money from maintenance contracts than from new software sales, Accenture (NYSE: ACN) said. In contrast, in emerging markets, software companies will earn more from sales than from maintenance contracts.

Companies should also make sure that they are actually getting the maintenance fees they’ve earned.

“Such an assessment can result in a boon to the top line, as one major software vendor discovered: A study the company conducted of its licenses worldwide revealed that it was owed more than $1 billion in license fees,” Accenture said.

Missing out on licensing fees continues to be a significant problem, Accenture said, citing a recent study by the Business Software Alliance that claimed that the software industry lost over $50 billion to piracy in 2008.

But companies must be careful about extracting cash from customers during hard times, according to Pekka Huttunen, director of Accenture’s software industry practice.

“This could be the right time to build tools and best practices so that companies are in a position to take more control of licensing when the economy returns,” he told

He added that software providers could deliver technology to help companies with software asset management, gaining insight into usage while also providing that insight to the customer.

Offshoring holdouts

Meanwhile, there’s also the allure of moving offshore, as software companies find better markets and younger, cheaper employees in Asia and Eastern Europe, Accenture said.

“Software development is moving offshore and the availability of software developers is declining in developed nations,” the company’s report said.

Yet following the trends may not work for everyone. Huttunen added that some companies see both economic and moral value in keeping software production close — “inshoring” or “nearshoring”.

“For instance, in the U.S., there are areas where companies may have access to a relatively high skill labor pool at a lower price,” he said. He added that companies may also be motivated by the moral value of helping local, disadvantaged people.

Be bold

However bad conditions may seem, software companies should remain aggressive and not focus on cost cutting, Accenture said in a second report.

“Accenture’s research into the 1990-1991 recession and the dot-com meltdown reveals a clear distinction between enterprises that followed a strategy of managing their cost structures and strengthening their strategic positions and those that did not,” the company said. “In fact, those that took the bolder path outperformed their industry peers for six years following the recession.”

For some, being bold may require hopping on the latest trends. For instance, Accenture said software buying patterns will change as companies become more comfortable with Software as a Service (SaaS). Accenture also said that companies that have gone through a painful experience with at least one licensed software installation are more likely to embrace SaaS.

Huttunen said that SaaS could enable software companies to gain more customers, though it also might erode the revenue earned per customer.

Another realm for growth is around Web 2.0 technologies. For instance, as the Facebook generation enters the workforce, companies will be forced to adopt new social and collaborative technologies, while software makers will work to provide the right security for the right applications, according to Accenture.

Even the most aggressive companies will need to take a close look at their own software portfolios and decide which products will sell and which products will not.

Huttunen also explained that many software companies have acquired technology that is not yet fully integrated into the main product, so employees currently deployed to canceled projects could be re-deployed to integration.

In making acquisitions during tough times, companies could follow Oracle’s example, the reports said. Its “acquisitions of PeopleSoft, Siebel, and Sun Microsystems have dramatically increased its presence in several of the areas most coveted by business software manufacturers,” Accenture said.

But Huttunen warned that some companies that made acquisitions a few years ago may have paid a price that was based on revenue targets that will be difficult to meet.

And when it comes to hitting revenue targets, the channel will be more important than ever. Accenture cited Citrix’s success in this area as a model for others to follow.

“Citrix currently has about 6,200 channel and alliance partners (including Microsoft, HP and Dell) in more than 100 countries,” Accenture said.

Companies will need both a direct sales channel and an indirect sales channel, it added, citing two companies with big plans.

“SAP and Avaya are investing particularly heavily in their indirect sales capabilities,” Accenture said.

Added Huttunen, “Even though these are challenging times, there are opportunities for software companies. Current conditions favor those vendors looking to provide more value with their software.”

Despite the difficult conditions facing the industry, it may well emerge stronger, he suggested.

“Tough times help make change happen faster and force innovation,” Huttunen said. “It’s human nature that if you can do without change, most of us choose not to have the change.”

Article courtesy of

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