Barr Reilly

Developing a National Software Strategy: Some IP Considerations Avron Barr Aldo Ventures, Inc. www.aldo.com

Patrick Reilly Intellectual Property Society www.ipsociety.net

Software’s impact on national economic development policy is multifaceted. Crucial development activities like modernizing existing government and business systems and attracting foreign investment require the capacity to create and deploy sophisticated software systems. We identify seven of these “software dependent” growth strategies. They all share the same pool of software talent and know-how. The prospects for developing an indigenous software industry, including export companies, are dependent on many factors, including the human resources available, trends in the global software industry, and national policies and programs. This paper considers national Intellectual Property policies as they pertain to the development of software industries in emerging economies.

1. Software’s Role in Economic Development Many authors have observed the complex role that software plays in national economic development strategies, pointing out that the domestic use of software products and services must be considered in parallel with the development of software exports (Schware, 1992; Hanna, Boyson and Gunarante, 1996; Tessler and Barr, 1997). Experience has led us to view a nation’s capacity to create and deploy software systems as a limited national resource – its “software capacity” (Barr and Tessler, 1999). Economic development is accelerated if this limited resource is optimally allocated among the various activities that depend on software. Among the many possible thrusts of a national economic development policy, there are seven that depend heavily on the ability to create and deploy software systems. They range from modernizing information systems in existing industries and government agencies to creating new export industries, including, perhaps, a software export industry. Since the same software talent and know-how is consumed by all of these development efforts, as illustrated in Figure 1, expansion of the software workforce is typically another early strategic priority. The exact talent and know-how required to pursue these avenues of development is different for each one. For instance, requirements analysis, systems integration, software

Developing a National Software Strategy procurement, and project management are key skills for information systems modernization. In contrast, software product exports require expertise in software technology, design, programming, product management, and software marketing.

Total Software Capacity

Government modernization, infrastructure & social programs Attracting foreign investment Increasing competitiveness of firms in existing industries Exploiting new, software-intensive business opportunities Exporting software talent, services, products and technology Creating new IP in software technologies and solutions Expanding the software workforce (education & training)

Figure 1. A nation's capacity to produce and maintain software is must be deployed across all economic development activities.

For most countries, the mix of available skills is the key factor in planning their softwaredependent growth strategy, because the size and maturity of the software workforce determines which avenues for growth are available in the early stages. India, for example, while blessed with an abundance of skill programmers to fuel its software services export industry, is just now applying these skills to modernization of industrial and government systems, which may be one reason that India is yet to develop a significant software products export industry. (Note that the revenue per engineer for software products is, on the average, several times that for software services.) Each country’s situation is different and there are no absolute guidelines for optimal allocation of the software capacity. The right strategy for a given country or region at a given time depends on: •

Current assets, including skilled people (technical and business), investment capital, existing industries besides software, telecommunications infrastructure, and an expatriate business community;

•

The country’s unique geopolitical situation and cultural history, e.g., India’s early advantage in English-speaking markets; and

•

The changing state of the global software industry, e.g., India’s ability to capitalize on a series of global IT investment binges in client/server, ERP, Y2K, telecommunications, and e-commerce technology, in the 1990’s.

It is interesting to note that the famous “3 I’s,” India, Ireland, and Israel, each of which now export over a billion dollars a year in software, have all taken very different paths to success. India exports about $10B a year, still almost exclusively in software services. Ireland’s $1.2B indigenous software export industry is largely product sales. And Israel’s $3B software export revenue is dominated by software technology licensing.

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Developing a National Software Strategy The impact of IP policy is quite different for different kinds of software activity. While planners face a wide range of policy issues that impact software industry development (finance, labor, immigration, trade, education, etc.), the major focus of this paper will be on IP issues. (See Kraemer and Dedrick, 1999, or Tessler, Barr and Hanna, 2003, for a broader treatment of policy issues.) 2. Government Modernization, Infrastructure, and Social Programs Central to most countries’ economic development planning are efforts to improve government effectiveness (national databases, e-government), build out infrastructure (telecommunications) and implement social programs (education, rural medicine). Many of these efforts require serious software systems development and deployment, and local software people to help build and maintain them. This is often an opportunity to stimulate the domestic software services industry. Local software consultants and services firms gain experience with current technology and with business practices (like bidding on contracts and quality assurance). Local firms also benefit from partnering with foreign systems integrators and vendors who may be brought in for their specific expertise. The technical know-how (on state-of-the-art systems), domain knowledge, and business maturity local firms gain from these projects is essential for them to become software exporters. Eventually, it may even lead to innovation and invention. Some thinking about who has the rights to innovations that may occur on these projects is the principal IP issue here. Generally, governments are inclined to support the efforts of local firms to capitalize on these innovations. (See Section 7.) Also, big foreign software vendors will express concern that their products not be pirated, but piracy is usually less of an issue in the “enterprise systems” world than it is in mass-market consumer software. 2.1 Open Source Needless to say, using Open Source platforms, like Linux, and the growing corpus of free software technology can dramatically reduce the initial procurement costs of these systems and free the client from proprietary platforms. Open Source is many things: • • • • •

A body of free software code that can be freely modified by the users; A community of software developers; A cost saving mechanism for systems integrators and their clients; A software products market sector - the only market sector defined by its IP policy; and A political movement, e.g., a national policy that is explicitly anti-monopoly and, at least implicitly, anti-Microsoft and, sometimes, anti-US;

Of course, the strategic implications of Open Source are important to the entire software industry, not just to government projects. But since it came up first in this context, let us offer two caveats:

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Developing a National Software Strategy 1. Open Source is a small market with an ambiguous attitude towards creating wealth, which is, after all, central to economic development. In other words, gaining experience in Open Source technology may actually reduce the net earning power of the nation’s software talent. 2. Declaring one single software technology as the national standard is tempting because it focuses limited resources and reduces inefficiencies. But this singletechnology strategy can backfire if the wrong technology is chosen. For example, Japan adopted a single programming language, PROLOG, for it’s national Fifth Generation Project in 1985. By the time the project was over, PROLOG had all but disappeared from the international scene, reducing the impact of the project and setting back the Japanese software industry by several years. That being said, the Open Source movement is large and growing and important. It will likely evolve in the coming years to satisfy the needs of all its stakeholders. And for the time being, it creates tremendous opportunities for systems integrators, since it dramatically reduces the initial costs of deploying some common types of enterprise systems. 3. Attracting Foreign Investment Software is a factor in several aspects of foreign investment: •

Multi-national companies (MNCs) can open local subsidiaries and hire local talent, including software talent. Software-focused subsidiaries can be development shops hiring hundreds of programmers, as is often the case in Bangalore or Hyberdad. (On the other hand Ireland, not having a surplus of software developers in the 1980s, positioned itself as a site for localization and support subsidiaries of US software companies entering the European market.)

•

Often the same people who went to work abroad on software services contracts or as expatriates (see Section 6.1), can be extremely useful as managers when they return home because they are familiar with the client’s systems, practices and people. In some cases, these returning expatriates are key to attracting investments in software subsidiaries.

•

These subsidiary operations often must duplicate the operational systems environment of their parent company. This, in turn, requires licensing the same software the parent uses, which, of course, requires the usual assurances about piracy, as discussed in Section 2 in the context of government systems.

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Direct venture investment in local software companies or in businesses that are directly enabled by software (see Section 5).

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Foreign investment in existing industries might also involve modernization and investment in computer systems (see Section 4).

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Developing a National Software Strategy Again, there is more to be gained with this kind of foreign investment than just the money. Working in a well-run software shop or marketing organization is valuable experience. Often the initial software workforce has technical skills but no project management or marketing experience, for instance. One other side effect of attracting software work from MNCs: When enough of these operations locate in the same region, they support the development of a “habitat” – a high-tech community offering specialized expertise and services needed by these subsidiaries – consultants, documentation writers, disk duplicators, etc. (Lee, Miller, Hancock, and Rowen, 2001). It just so happens that indigenous software startups need the same expertise and services. This is how the indigenous Irish software publishing industry got its start, for example, by piggybacking on the habitat expertise that developed around the MNCs in Dublin (Crone, 2002). In attracting foreign investment, of course, the investors may have serious IP concerns, as well as security issues. While government regulations and judicial recourse are important, these concerns are only finally addressed over the course of long business relationship. In India in the early days of its software industry growth there was no national IP policy or enforcement mechanism. The local subsidiaries made private contracts with the MNCs to ensure protection of their IP. This was less of an issue in the early days, because most of the work done in India was maintenance of rather mundane information systems. But the sincerity and diligence of the Indian firms help establish an environment of trust directly with their clients where much more sensitive information could be shared. (Of course, India’s IP regulatory and enforcement environment has also evolved in the meantime.) 4. Increasing Competitiveness Of Firms In Existing Industries Every bank runs on software, as does every airline and every insurance company. Making investments of the software capacity in key industries is an important part of a national software strategy – making existing businesses more efficient and more competitive globally. Furthermore, some manufactured products contain a lot of embedded software – everything from automobiles to toys – another drain on the software capacity. As was the case with government modernization, it is the local software consulting and contract services firms who are most likely to be involved with industry modernization, often working with foreign systems integrators and products vendors. (Local enterprise software product vendors typically appear much later in the development of the software industry, see Section 6.4.) And again, these commercial projects can be an important stimulant and source of experience for the local firms. In fact, domestic experience in a particular industry often shapes the later export offerings of small local firms, many of which are founded by veterans of these commercial projects. With commercial systems, we see again the IP issue mentioned in Section 2 about the ownership of invention and innovation on these projects. There are several additional IP concerns:

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Developing a National Software Strategy •

Very often business will want or need to be on the same software platforms as their international customers and business partners. This may preclude lower-cost Open Source projects and technology and require licensing of proprietary systems

•

Clients also have other proprietary information, including production methods, technologies and know-how, and must be assured that they can share this information with software consultants and systems integrators.

•

Client companies often have software IP assets themselves, including embedded software.

5. Exploiting new Software-Intensive Businesses Opportunities There are several new types of businesses that can now, thanks to the Internet, be located in any country. Often these businesses require significant software investment to be globally competitive: •

For an on-line business like Amazon or e-Bay or an on-line game, the software is the key asset in its offerings.

•

For a call center or services outsourcing business, the key asset is the knowledge of the employees whose services are being offered. Still, the software shapes the form of the offering, which can be a competitive advantage or disadvantage.

As mentioned earlier, the prospect of hundreds of billions of dollars of high-end services being outsourced over the Internet, like accounting or x-ray interpretation, has many countries interested in expending software capacity to enable rapid development of these software-enabled businesses and the infrastructure needed to support them. While Business Process Outsourcing, or BPO, as the next wave of high-end services outsourcing is called, is a great business opportunity, its long-term impact on economic development may be problematic. As is already the case with call centers, customers move their business from country to country looking for quality and the best price. The inevitable glut of quality service providers from all over the world will bring down prices for even the most sophisticated teleservices – the “race to the lowest possible price” scenario. On-line businesses bring up some new IP and privacy issues. For example, even in lowend outsourcing businesses, like retail call centers, incidents involving the security of customer information can cause permanent damage to a business, or even to a country’s reputation. 6. Exporting Software Talent, Services, Products, and Technology For economic planners, software is an attractive industry itself – non-polluting and ecologically sustainable, requiring relatively low capitalization, presenting a constantly expanding global market, and relatively prestigious. Yes, software is the key to competitiveness in all industries, and yes, it is the key to the knowledge economy, but

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Developing a National Software Strategy software exports generate hard currency. For development policy makers, and for entrepreneurs, it is hard to resist expending software capacity to try to build an export industry. In fact, it is often the case that limited resources are focused on exports when they might best be used to attract foreign investment, revitalize an existing industry, or train the next generation of software people. 6.1 Software labor exports Talented software people going abroad to work can have a direct economic benefit to their home country, in terms of the money they send home. There are indirect benefits as well, including their potential help with business connections wherever they are working and their increased experience and know-how when they return (see Section 3). What was once a “brain drain” of technical talent is increasingly a two-way street – in fact, a global market for software talent (Barr and Tessler, 1996). Labor is typcially the easiest form of software export to organize, and it has few IP-related issues. It probably also is the least beneficial to a country’s economic development. And it’s a cyclical business, subject to the immigration policies of the host countries, which is where IP issues would also be handled. 6.2 Software services exports Developing software locally for foreign companies is by far the largest type of software export. This may involve a local subsidiary of a multi-national corporation, or a local software services provider who does contract work for foreign firms. Almost always these software services firms get their initial experience by doing local projects for government and commercial organizations. Eventually, they become very sophisticated in the kind of work they can do (consulting and advanced technology) and in their business processes. While the bulk of outsourced software work still involves rather standard software systems, increasingly, software product development, embedded systems, and other proprietary systems are being outsourced globally. Here the client will have the highest concern about the protection of proprietary technology and business information. 6.3 Mass-Market, shrink-wrapped software products exports We divide software products publishing into mass-market and enterprise publishing, because the IP considerations are quite different (as are the marketing methods). In our experience, software product publishing is a much more involved business to get into, and exporting software products involves significant additional complexity and risk. The primary reason for this is a lack of understanding of the complexities of software marketing on the part of software entrepreneurs. (Barr, Tessler and Miller, 2002.) Mass-market publishing is the shrink-wrapped variety of software, like games and other consumer products. It is typically written for the PC and, increasingly, for mobile

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Developing a National Software Strategy devices. These shrink-wrapped products are inherently a high-risk, “title” business like music publishing. Almost all the money is made by the few big hits and other titles have difficulty getting any attention at all. Most products never even make it into the sales channel. In countries where there is rampant piracy of consumer titles, there is no domestic market for PC titles. This forces developers to immediately try to sell their products abroad, which puts them at a tremendous disadvantage. (Note, for instance, that this is not an issue for on-line offerings, like multi-player games.) One other IP issue is patent and copyright protection for these products and the technical innovations the firms develop. While the value of the copyrighted titles may be shortlived, any software company working on the technological cutting edge is likely to create technical innovations that could be a separate source of revenue. It is unusual for earlystage entrepreneurs to think in terms of licensing these innovations – they are focused on their products. But to the extent that national policy can simplify and promote the protection and capitalization of these inventions, e.g. by creating an IP foundation and offering IP expertise, they can be an effective export themselves. 6.4 Enterprise software publishing The crown jewel of the software business for the last 30 years has been publishing software products for businesses and other large organizations. This is where companies like IBM, Oracle and even Microsoft make their money. This is the hardest software business for new companies to master, but 80% of worldwide software sales are in this category. Besides the lack of venture capital, one key disadvantage that startup firms have in many countries is the lack of a domestic market for their new enterprise software products. While piracy takes its toll on domestic enterprise software sales, it is not the dominant issue in this category. What startups need are local customers who have state-of-the-art information systems and who are willing to serve as beta-test sites for innovative software in its early stages. Government and industry consumers are often reluctant to include untested products from small firms in their planning. And without a domestic customer to help with product evolution and validation, the local firm is at a disadvantage when it enters foreign markets. Because new enterprise software products must fit into a much more complex operational environment, the development of secondary innovations that might generate significant license revenues is quite common in these firms. In fact, many enterprise startup companies actually wrap an innovation or two into a product and try to take it to market as a solution. Increasingly, the enterprise market is open to unwrapped innovations – licensed technology that is incorporated into other companies’ products. Most entrepreneurs, however, are not even aware of this possibility and are unfamiliar with the mechanics of partnering and licensing technology. Certainly savvy venture investors will

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Developing a National Software Strategy be concerned with IP protection, but in most countries, investors do not have enough experience in the software business to help guide the entrepreneurs. 7. Creating New IP in Software Technologies and Solutions In most countries, government and university research facilities employ some of the top software talent, sometimes consuming a significant portion of the country’s total software capacity. (Not all programmers are equal. The best are 10 times more productive than the average, and probably more innovative too.) The fruits of these research efforts are typically not market oriented and rarely find their way into actual products or solutions. (The celebrated spin-off from a university lab is the exception to the rule. In fact, many of these startups are actually a way of packaging and proving the commercial value of an invention, and are acquired by other software companies for their IP assets before they become real businesses.) Research in these labs does often result in significant technical innovations and inventions. However, since the labs are not generally motivated to generate revenue from their inventions, and are not capitalized adequately to develop and market an IP portfolio, this is rarely a source of national export revenue. But, with some help, there is potential here. Israel, for example, exports $3B of software technology a year, almost exclusively in the form of technology licenses and much of it comes out of defense research labs. And the use of a national software IP portfolio for “trading” with holders of other needed IP could be a significant benefit as well. We should say explicitly that the IP licensing business is a complex and cutthroat as any business. Lawyers are involved. This is not a business for the faint of heart and must be a global business from the get go. Still, it’s a significant opportunity. 8. Expanding the Software Workforce For most countries there just isn’t enough software capacity to staff these various ways of using software to support economic growth. Decisions by policy makers and by individuals shape the developmental path taken. Soon enough, everyone realizes that more software people are needed. In fact, without some critical mass of software talent and experience, many avenues for development are closed. (Consider, for example, a multi-national corporation choosing among possible sites for a new facility – the size and maturity of the software labor pool is high on their list of criteria. Unfortunately, the same software talent used in all of these economic development strategies is also critical to growing the software workforce itself – teaching, mentoring, directing research, etc. Sadly, this expenditure of the nation’s software capacity is often overlooked, since it doesn’t directly impact the economy, resulting in slower than optimal growth. As an illustration of how software IP policy must take the state of the country’s software industry into consideration, countries in the very early stages of software capacity Barr and Reilly

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Developing a National Software Strategy development may benefit dramatically from pirated software and free Open Source technology. It can be quite expensive to buy licenses for the software that every student uses in classroom and lab work. A realistic assessment of the country’s situation, combined with a long-term view to creating value, is the best approach to developing an IP policy that supports the fledgling industry. One final thought about software education and training – it’s not all technical. Software activities require project management and marketing know-how and, increasingly, knowledge about IP protection and capitalization (Barr and Tessler, 2002). We strongly recommend that the curriculum of software professionals include education in the roles and significance of intellectual property in marketing products and services, attracting venture capital, and creating corporate value. 9. About the Authors Avron Barr is a strategic marketing consultant. His consulting firm, Aldo Ventures, works with software businesses to help them understand their markets, define their offerings, and explain their ideas. Aldo Ventures also consults with policymakers, industry associations, donor organizations, and NGOs about the software industry's role in national economic development strategy. www.aldo.com Patrick Reilly is a Patent Agent and IP Attorney and the Founder and CEO of the Intellectual Property Society, which is a donor supported membership organization working to increase public awareness of, and participation in, the evolution of intellectual property rights and emerging technologies. www.ipsociety.net 10. References Arora, A., Gambardella, A. and Torrisi, S. (2001) In the Footsteps of Silicon Valley? Indian and Irish Software in the International Division of Labor, SIEPR Discussion Paper 00-41, Stanford University. http://www.sses.com/public/events/euram/complete_tracks/modularity_and_division/ arora_gambardella_torrisi.pdf Barr, A. and Tessler, S. (1996) The Globalization of Software R&D: The Search for Talent. Council on Foreign Relations, Globalization of Industrial R&D Study Group. http://www.aldo.com/papers/cfr1296.pdf Barr, A. and Tessler, S. (1999) Software Entrepreneurism in Korea, Stanford University, http://www.aldo.com/papers/FinalReport.pdf. Barr, A. and Tessler, S. (2002) Towards a Professional Software School. Aldo Ventures, Inc. Barr, A. and Tessler, S. (2002) Developing Sri Lanka’s Software Industry. A Report to the World Bank. http://www.aldo.com/Publications/Papers/Sri_Lanka_Aide_Memoire_070202.pdf. Barr, A., Tessler, S. and Miller, W.F. (2002) Korea and the Global Software Industry, Aldo Ventures, Inc., November 2002. http://www.aldo.com/Publications/Papers/Korea2002.pdf

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Developing a National Software Strategy Carmel, E. and Agarwal, R. (2001) Tactical Approaches for Alleviating Differences in Global Software Development. IEEE Software, 18, 2, 22-29.. Crone, M. (2002) A Profile of the Irish Software Industry. Northern Ireland Economic Reseach Centre, http://www.qub.ac.uk/nierc/documents/Software/IrProfile.pdf Enterprise Ireland (2002) Annual Report & ireland.com/documents/uploaded/EIAR(51).PDF

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