The following post is the translation of an oped we contributed to the AFDEL (French software vendors association) December newsletter. Although, this article was originally targeted at French software vendors, we believe the idea to be very relevant for most European software vendors.
As the crisis seems to be coming to an end, the key question for businesses is when and where will the recovery happen. The French economy seems to have bottomed out and many experts are predicting a slight growth for the coming quarters. For software publishers, the question is now how to take advantage of it and where to invest.
Historically, many French software vendors have focused their international development in the U.S. and other developed countries. While it is true that the U.S. market is the largest homogeneous market for high technology, it is now mature and saturated. Operational difficulties for medium-sized publishers are real, both for recruiting and managing a good team as well as for the intensity of competition. Growth in Europe is hampered by fragmentation of markets in language, legal framework and competitive levels. Moreover, the growth rates expected in Europe in 2010 are modest: from -0.5% in Spain to +1.6% in Germany - and +1.5% in France (source: The Economist). The software industry is now mature in these markets and initial equipment has now been replaced by support and maintenance contracts that are themselves under strong price pressure.
However, there is hope in the east and south: in the emerging countries, particularly but not only in the BRICs. It already appears that the way out of the global crisis will mainly be driven by the recovery in consumption and investment in emerging markets. Even in 2009, the GDP of China will grow at 8%, a level never reached by developed countries over the past 20 years. The expected GDP growth rates in 2010 are:
– China: +8.5%
– India: +6.3%
– Brazil: +3.3%
– Russia: +2.5%
Major software vendors, including US vendors, have already started to conquer these markets. In France, these countries, including China and India, have been considered providers as low cost engineers’ labor pool. The outsourcing of certain functions including IT development remains an important issue but whose success is far from guaranteed. Beyond these possible reductions in development costs, it seems important to consider these countries as markets to conquer in the short term: software is a revenue game more than cost cutting game. This approach is easier for the biggest companies who can simultaneously take on multiple countries leveraging their customers’ and partners’ networks. For medium-sized vendors, human and financial investments will be significant, but the risk profile seems favorable in the current macro-economic environment thus justifying the investment. Among the best practices of expansion in emerging countries developed with our clients, the simplest are often the best:
– Follow-up customers. Any development in a new market is risky.
Capitalizing on major clients is a must. It is always easier to open a new country with a portfolio of clients in deployment. They will provide the basis for creating a team then a dynamic growth. Their local experience may prove useful in very different cultures. This rule also applies to partners and distributors. The more you go along with your usual ecosystem, the better the chances of success and the lower your risk.
– Target markets. For a medium –sized software vendor, it is difficult to have the resources to address all these markets. The selection of target countries, or regions when China and India are concerned, is a key issue. The verticals vary considerably from one country to another (Aeronautics and commodities in Russia, manufacturing in China, services in India ...). Economic and demographic characteristics of targeted regions are important points to be included in the analysis process before making a decision.
– Adapt your business model. While sales cycles are rather shorter in emerging countries, it is often necessary to adjust the original business model. The upfront investment in license are rarer, customers preferred rental or risk-sharing. Working with partners and customers already implanted allow finding the right mix before investing in a more significant deployment.
The expansion in emerging countries is not without risk. In addition to the necessary investments, the challenges of operational execution and focus are always present. The risk is overall higher than a geographical expansion in a European country but the long term potential is incomparable. The economic crisis is in this case an opportunity to redirect investment strategically.
The development of software vendors that will happen through the economic recovery in France will be moderate; on the contrary, the vendors looking for strong growth opportunities should now focus on emerging markets. Many companies are well positioned to target these markets now and be back on the growth path. The opportunities are theirs to seize.
Frederic HALLEY
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