companies traditionally considered hardware vendors are increasingly pushing towards offering ... Second, the expanding open source software is challenging the traditional ... reflected in the growth figures is that due to several trends software is increasingly ...... The internationalization speed of e-commerce companies:.
National Software Industry Survey 2008: The Finnish Software Industry in 2007 Mikko Rönkkö, Olli-Pekka Mutanen, Nina Koivisto, Jukka Ylitalo, Juhana Peltonen, Anne-Marie Touru, Sami Hyrynsalmi, Pia Poikonen, Olli Junna, Jyrki Ali-Yrkkö, Aku Valtakoski, Ye Huang, Jussi Kantola Copyright © Helsinki University of Technology ISBN 978-951-22-9736-8
National Software Industry Survey 2008 The Finnish Software Industry in 2007
c Helsinki University of Technology and University of Turku Copyright ISBN: 978-951-22-9737-5
Temppu ja miten se tehdään Ohjelmisto-osaaminen on yksi tarkimmin varjelluista salaisuuksista, toteaa yhdeksän eri Euroopan maan ICT-järjestön syksyllä 2008 EU-komissaari Viviane Redingille luovuttama Euroopan ohjelmistostrategia. Moniin pieniin, eriytyneisiin markkina-alueisiin hajaantunut Eurooppa yrittää yhdessä tunnistaa vahvuutensa ja kehittämiskohteensa ja löytää tilanteeseen sopivat lääkkeet. Tässä olemme myös itse kunnostautuneet kansallisesti: Suomessa jo 11:nä vuonna tehty Ohjelmistoyrityskartoitus on koko Euroopan mittapuulla historiallinen saavutus, sillä kansallisen ohjelmistomarkkinan tilaa ei ole tiettävästi selvitetty yhtä pitkään yhdessäkään toisessa Euroopan maassa. Kartoitusten mukaan suomalainen haaste on vuodesta toiseen, kuinka jalostaa maailman huippua olevasta insinööritaidosta myös kaupallisesti menestyviä innovaatioita ja viedä pitkälle jalostettuja tuotteita ja palveluja maailman markkinoille. Suomalainen innovaatiokoneisto ei ole valitettavasti kyennyt tuottamaan kovinkaan merkittäviä kansainvälisiä läpimurtoja. Alalla hyvin tunnettu esimerkki on markkinakooltaan sekä koulutus- ja innovaatiokoneistoltaan Suomen kaltainen Israel, joka johtaa meitä teknologiapörssi Nasdaqiin listautumisissa sata vastaan nolla. Mutta ei tukikoneistoa voi kaikesta syyttää, vaan parannettavaa on myös koulujärjestelmässämme, joka ei riittävästi kannusta yrittämiseen ja henkilökohtaiseen vastuunkantoon. Lisäksi syytä on mm. vallitsevassa ilmapiirissä, jossa yrittäminen nähdään lähinnä ahneutena tai palkkatyötä saamattomien pakkorakona, yrittäjien kasvu- ja kansainvälistymishaluttomuudessa, epäonnistumisen ja leimaantumisen pelossa sekä oikeaehtoisen ja -aikaisen rahoituksen saatavuudessa. Aiemmin omasta teknologiaosaamisestaan hurmaantunut Suomi on kuitenkin hitaasti vääntäytymässä ymmärtämään laajemmin yrittämisen ja erityisesti globaalin kasvuyrittämisen kokonaiskenttää. Vaikuttavimpia esimerkkejä uudesta ajattelusta ovat poikkitieteelliseen ajatteluun pyrkivä Aalto-yliopisto ja Suomen tärkeimmän innovaatiorahoittajan, Tekesin rahoituspäätösten pelkkää insinööriosaamista laajempi katsantokanta. Tulostakin toki syntyy. Suomalainen ohjelmistotuoteala kasvoi edellisvuodesta lähes yhdeksän prosenttia yli 1,5 miljardiin euroon. Vaikka kasvu hidastui edellisvuoden 13 prosentista, on tahti silti muuhun teollisuuteen verrattuna reipas. Ohjelmistoyritykset ovat vuodesta toiseen suomalaisten kasvuyritysten kärkijoukossa; esimerkiksi Deloitten teknologiakasvuyritysten kärkikymmenikkö on kasvattanut viimeisen viiden vuoden aikana liikevaihtoaan vähintään tuhat prosenttia. Suomalaisyritysten kansainvälisen kilpailukyvyn kannalta vaikeammin mitattavaa osaamista löytyy muihin tuotteisiin sulautetusta ohjelmistoälystä. Monet maailmalla tunnetut menestystuotteet matkapuhelimista hisseihin, konttinostureihin tai metsä- ja paperikoneisiin eivät olisi läheskään niin menestyksekkäitä ilman niihin liitettyä ohjelmisto-osaamista. Unelma Suomesta 2020 on orastava visio yrittäjyyttä arvostavasta uudesta Suomesta, joka uskoo yrittämiseen kansakunnan hyvinvoinnin perustana, on synnyttänyt sitä tukevan ilmapiirin, keskustelukulttuurin ja toimintaympäristön kannustimineen sekä kaiken tämän perustana avoimen kansainvälisesti toimivan koulutusjärjestelmän. Kaikki liittyy kaikkeen ja kaikkia tarvitaan. Tämä on paras tapa turvata hyvinvointiyhteiskunnan ja maapallon parempi huominen.
Jukka Viitasaari Johtaja Teknologiateollisuus ry
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Foreword Software industry is often characterized by scalability that has enabled a few highly visible companies to rapidly grow from start ups to global corporations. Unfortunately, this phenomenon is rare and does not represent the best benchmark when analyzing growth patterns of our local software firms. Too many Finnish software firms remain small throughout their life, partly because our home market is tiny. The mechanisms of industry consolidation do not favor the Finnish industry since it lacks the large companies that could consolidate smaller ones through acquisitions. Entrepreneurs play a major role in leading new firms to grow and internationalize. This report provides two particularly interesting findings on this front. First, in the theme section about firm growth, the research high-lights the role of ambitious entrepreneurs that are ready to do what it takes. The researchers provide a compelling argument that this is the single most important factor in the growth of Finnish software firms. Second, the theme section on internationalization shows that currently Finnish companies are entering foreign markets both younger and smaller than previously. This marks a shift from reactive internationalization through following customers to proactive internationalization. In one way this is an indication that the software industry has been recently shifting from technology to customer and market orientation. Nevertheless, most of the Finnish software firms are still very small in order to be competitive internationally. There are no easy solutions to this structural challenge. One way would be to foster firm growth; the second alternative is to increase consolidation through the means of mergers and acquisitions. Even though most of the Finnish software companies are too small to use acquisitions as a means for growth, some entrepreneurs have solved this issue by selling the firm abroad. This is usually a positive development, since it can significantly increase the resources of the firm and enable growing the business unit more than would have been possible as an independent company. These trade sales have also given us a number of serial entrepreneurs with significant capital and international networks. Current global economic recession poses new challenges to the industry. Growth is expected to slow down, but is still expected to exceed the growth of the Finnish economy for this year. We believe that the role of software as an integral part of many new innovations and ideas will continue to have an important impact outside the software industry, as presented in this report. While several software companies are facing difficulties due to the current recession, it can also provide opportunities for those firms whose solutions can increase the productivity of other industries.
Risto Siilasmaa Vice-Chairman The Federation of The Finnish Technology Industries
Jussi Autere Professor Software Product Business Helsinki University of Technology
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For the Reader This report presents the results of the eleventh annual National Software Industry Survey. During 2008, the development work started in 2007 to improve the overall quality and coverage of the study was continued. The most visible results of this work are restructuring of our report, making better use of the data across years, and last but perhaps most importantly by extending the coverage of the survey from software product businesses to the entire software industry. These changes in the project created some challenges that the reader should be made aware of. First, as the sampling strategy was changed to cover the whole industry better, some of the differences in descriptive statistics presented reflect changes in the way the sample was chosen instead of real changes in the industry. Previously the survey covered only software product firms, but this year first attempt was made to also systematically cover software firms that do not produce software products. This, as well as more rigorous data collection procedures, resulted in almost doubling the amount of respondents compared to the previous year. The impacts of these changes will be discussed through the report. Our second caveat to the reader is that while the non-product firms are addressed in the report, the coverage of these firms in our survey is not as good as that of product firms. As a consequence, the results relating to non-product firms should be considered as indicative but not necessarily accurate. During the 2008 survey project, we collected also data related to software development in other industry contexts. However, there were several setbacks while collecting the data and due to this the publishing of the final version of this report was delayed. Finally, we wish to thank all sponsors and other parties that have helped us to do our research and compile this report. This year’s run of the National Software Industry Survey has been both the best and most difficult in the history of the project. The 2008 report is organized into four chapters. The first chapter gives an overview of the industry while and the second reports the main results of the survey characterizing the industry. The two subsequent chapters present the findings of two main research themes: growth and internationalization at the firm level.
Mikko Rönkkö Research manager Helsinki University of Technology University of Turku
Olli-Pekka Mutanen Project manager Helsinki University of Technology
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Contents 1 Overview of the Finnish Software 1.1 Introduction . . . . . . . . . . . . 1.2 Finnish Software Industry . . . . 1.3 Implementation of the Study . .
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2 Main Results of the Study 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Characteristics and Regional Distribution of the Industry 2.3 Industry Growth and Internationalization . . . . . . . . . 2.4 Profitability and Productivity . . . . . . . . . . . . . . . . 2.5 Challenges and Development Prospects of Firms . . . . . 2.6 Research and Development . . . . . . . . . . . . . . . . . 2.7 Financing and Ownership of Companies . . . . . . . . . . 2.8 Use of Open Source Software . . . . . . . . . . . . . . . . 2.9 Significance of Software for the Finnish Economy . . . . . 2.10 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . .
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3 Research Theme I: Growth 3.1 Introduction . . . . . . . . . . . . . . 3.2 Existing Research on Firm Growth . 3.3 Growth Patterns of Finnish Software 3.4 Determinants of Firm Level Growth 3.5 Conclusions . . . . . . . . . . . . . .
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4 Research Theme II: Internationalization 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Existing Research on Internationalization . . . . . . . . 4.3 Internationalization Patterns of Finnish Software Firms 4.4 Determinants of Firm Level Internationalization . . . . 4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . .
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A Research Methods
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B Further Resources Online
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Chapter 1
Overview of the Finnish Software Industry 1.1
Introduction
This report presents the results of the eleventh annual Finnish software industry survey. The software industry is a challenging one for survey research due to the pervasive nature of software; Software is a key component of many modern technology products, and can be also used as an integrated element when producing services. Moreover, it is difficult to separate the software industry from other information product industries [101]. The recent boom in online services has further increased the challenges in defining the boundaries of the industry [72]. The main focus of this report is on the software product business, but non-product or service businesses are covered to some extent as well. Software industry is a subset of professional software development. We classify these activities into four categories as shown in Figure 1.1. Software business is traditionally divided into software products and custom made software [79]. This classification is reflected on the horizontal axis of our classification. Recently the boundaries between software industry and other industries have become increasingly blurred due to two trends. First, hardware producers are relying on software on functionality and differentiation. In some cases firms considered traditionally to be solely device or machinery vendors have expanded their business to include also complementary software products or services that have a significant software component. Second, the emergence of online services and e-business has resulted in firms operating in other industries, such as media, retailing, and various services, to expand into Internet based offerings. This “extension” of software industry is reflected in the vertical axis of our classification. The term visibility in the offering refers to how apparent it is for the customer that part of the good or service being purchased is software. Again, on the lower half of the figure the degree of standardization refers to the replicability of software. In the lower left quadrant the software is often unique and exists only on one server or server system while on the lower right quadrant the same software is copied on several devices that are sold to different customers. Previously researchers have estimated the software development done in outside the actual software industry is of the same magnitude as the size of the software industry [112]. One weakness of the classification presented in Figure 1.1 is that it does not fully capture the firms that do not perform end-to-end software development, but only a part of the process. These firms that include for example testing services or just renting programmers however con-
1
Figure 1.1: Contexts for professional software development sider themselves to be in the software industry. In our categorization of professional software development, these firms are considered to belong to the customer specific software development quadrant. The Finnish software industry is often defined using the official Statistics Finland industry classification code 722 (Software consultancy and supply). However, our experience has indicated that this relatively recent classification does not capture all firms of the Finnish software industry. In addition, industry classifications cannot take into consideration software business that is conducted by firms operating primarily in other industries, for example electronics. Indeed, the industry classification of Statistics Finland did not make a difference between customized software and software products until beginning of this millennium, when the old industry code for software was split in two: “Publishing of software” and “Other software consultancy and supply”. This new classification is only slowly gaining use, as shown in Table 1.1. Finally, the official statistics cover all corporate entities in Finland including the subsidiaries of large international corporations like Oracle or SAP. In this study our goal is not to explicitly define the boundaries of the industry. Rather, we contacted a large list of firms and measured the amount of software business conducted by these firms. This exploratory approach suits studies where the population to be surveyed is not known prior to the study [51]. The survey was also limited to Finland-based companies that are either independent or clearly distinct from their corporate parents. In other words, we excluded companies whose operations are mainly sales office functions of a foreign corporation. This report is structured as follows. The rest of this first chapter introduces the Finnish software industry as portrayed by previous studies, trade press, and industry experts. After this short introduction, the goals and methods of this study are described. The second chapter focuses on the growth and development of the Finnish software business at the industry level. In addition to providing estimates of the growth figures, the chapter highlights some of the other interesting findings of the industry level analyses including for example the trends in product development and open source software. The third and fourth chapter present the results of this year’s research themes: growth and
2
Table 1.1: Official statistics of the software industry Number of firms
Employees
Revenue (1000 e)
4 6 20 48 78 127
194 266 346 409 450 314
16,686 29,752 45,158 43,858 66,254 32,478
2,835 2,926 2,981 3,109 3,161 3,323
24,372 24,649 23,983 23,639 26,085 29,062
2,546,171 2,569,306 2,661,990 2,933,508 3,247,357 4,040,536
7221 Publishing of software 2001 2002 2003 2004 2005 2006 7222 Other software consultancy and supply 2001 2002 2003 2004 2005 2006 Source: Statistics Finland
internationalization at the firm level. In these two sections we answer the research questions of what kind of patterns firms follow when they grow and expand internationally, and which factors determine success in these endeavors. Finally, several appendixes are provided for readers interested in additional analyses and description of the data and methods used.
1.2
Finnish Software Industry
The global software industry has received increasing attention lately. This is not surprising since software has recently penetrated to virtually every aspect of human life. In the consumer segment of the software market, some of the recent highlight include the predicted surpass of computer and console gaming industry over music industry [4] and the emergence of the so-called community network services [72], such as Facebook and Flickr, where people interact and create their own content online. In the business software segment, productivity gains by using software are still expected particularly in service industries [3]. As an industry, the global software industry is currently experiencing consolidation and seeing several new modes of operation emerging [2]. The consolidation is a sign of maturity and acquisitions have become one of the most important ways of growth for some of the larger companies. This has resulted in the software business being increasingly concentrated on a few large mainly American companies. As a consequence, trade sale to a large corporation headquartered in the United States has become a common exit mode for many European companies [3]. Additional signs of maturing of the industry include decreasing profit margins and search for new business models, where particularly Internet based business has received great interest lately [72]. Nevertheless, the industry is still characterized by technological shifts that have provided endless opportunities for high-growth firms. Clearly the most significant trends are the prolifer3
ation of computing devices and the nearly ubiquitous broadband access in several markets. A recent report by PriceWaterhouseCoopers [2] predicts that the most prevalent trend caused by these two development is the increasing popularity of the so-called software as a service model, where the a single software system resides on the vendor’s servers and is accessed by multiple customers over the Internet. The traditional software industry is under pressure from two different directions. First, several companies traditionally considered hardware vendors are increasingly pushing towards offering expanding their offering with software. For a Finn, Nokia is a prime example of such company. This has the potential of not only creating new software platforms, but also cannibalizing existing businesses when traditional hardware vendors bundle software that was previously offered by a third party provider. Second, the expanding open source software is challenging the traditional proprietary development by providing a zero cost licensing model and benefits gained by userdriven innovation. Finally, the incumbents in some markets are challenged by new firms operating with software as a service model. Changes in technology and globalization have changed the market so that several of the services that were previously not traded in the global markets now are [44, 12]. This has enabled some of the developing countries to challenges the traditionally western world dominated software sector. Particularly the emergence of India as an information technology powerhouse has increased competition and caused several companies to shift some of their operations from western countries to other corner of the world. While software is increasingly penetrating to everyday lives, the growth rate of the industry is only modestly above the growth rate of the global economy, as is summarized in the Table 1.2, which list the growth estimates for 2006-2008 provided by the European Information Technology Observatory [40] . The one reason why the increasing visibility of software in our lives is not reflected in the growth figures is that due to several trends software is increasingly provided free of charge for the end user. This is a result of a combination of advertising supported software and open source software. Within the European Union, the information technology industry employs 7.8 million people and this figure is projected to increase by another million jobs by 2011. The software sector, which is a subset of this industry, is growing at an even faster rate. Analysts forecasts an 8.0% compound average growth rate [3]. The European software industry is currently second to the US industry and the consolidation and several other mechanisms increasingly solidify the American domination of particularly the software product markets. While the traditional proprietary product model is indeed dominated by large US companies, the service sector in Europe is equally strong [3]. In the open source software, Europe is often considered to lead the way. Software products are characterized by large economies of scale. This puts European software vendors at a disadvantage. While several European software companies already consider Europe as the home market [5] and the harmonization of the markets is underway, there are still considerable legal and cultural barriers to cross-border business in Europe [3]. Another challenges that European companies have faced recently is the shortage of skilled workforce. According to several European employer organizations [3], this problem is both qualitative and quantitative. The shortage of trained engineers and seasoned managers is one of the trends that drives software companies to invest in emerging economies. Additionally, some of the managers of software companies are not considered to be sufficiently qualified to lead their companies to global success. The Finnish software industry very much reflects the description of the European industry presented above. There are only very few software product companies that can be considered international success stories. The service businesses and hybrids of products and services serving local and regional markets however have proliferated. Our estimate is that the Finnish software
4
product business revenues accounted for 1.5 Be in 2007. The total software business is composed of software product business and all related services. Our estimate of total revenue of the software business in Finland was approximately 2.8 Be in 20071 To put this figure into perspective, we have included the size and growth rate of software industry on European and global level in Table 1.2 2 In the Nordic region, the total packaged software market reached a value of 6 Be in 2007 [83], of which Finland’s share was more than a quarter. While the market share of the Finnish software industry is relatively small on the global level, some of our software product companies have been quite successful. A recent report by PriceWaterhouseCoopers ranked Finland in the sixth place when comparing how many companies different countries had in the global top 200 list of software product companies [2]. In another report [111], there were four Finnish software companies among the top 100 European software vendors in 2007. Both of these reports rank Finland higher than the estimated market share would predict. There are three possible reasons for these differences. First, software market is increasingly concentrated on a few very large companies, which means that the firms higher in these firm rankings produce a lot more revenue than firms that appear lower in the rankings. Second, it is possible that Finland is behind in the number of medium sized firms that do not reach the top lists, but still produce substantial amount of revenue. Several of the industry experts that we have talked with support this explanation. Third, it is possible that the difference in rankings is caused by differences in how they are created. Table 1.2: Comparison of regional software markets in 2006–2008
World US EU
2006 (Be)
Forecast for 2008 (Be)
Mean Growth Rate 2006-2008
208.8 89.9 71.5
238.5 105.6 81.2
7.40% 8.40% 6.50%
In the official statistics, software industry is recorded as a part of information technology industries (industry code 72). According to these figures, there were approximately 8,000 firms employing 46,000 people in the Finnish IT sector in 2006 [9], of which 33,000 were in the software industry. Software firms represent roughly two thirds of the IT sector and the rest is different hardware related services and information services. Table 1.3 shows the official statistics describing the size of the software industry. From these figures we can see that a typical software company is relatively small. The majority of the Finnish software companies have fewer than 5 employees, and many of these companies employ only one person, the founder and owner. This distribution of company size is probably more caused by the fact that establishing a software company is relatively easy than by the alternative explanation that it is difficult for a software firm to grow beyond the micro enterprise scale. Indeed, when we analyzed the websites of the companies responding to the survey, we found that a number of companies were just one programmer that had a product that was sold over the Internet. This kind of operations can be set 1 The difference of our figure and the 4 Be presented in the official statistics for year 2006 presented in Table 1.1 is due to different scope of the study. The official statistics include revenue generated by Finnish sales offices by foreign corporations while our study only includes firms that originate from Finland or in some other way have a close tie to our country. 2 Due to changes in statistical classifications of EITO and uncertainty in the world economy we are using software market share estimates from different sources. These figures are not fully comparable with the figures in previous reports
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up with very little capital or personnel. In this sense the software industry can be unique since it can sustain firm that range from the very smallest to large corporations. In other industrial sectors the minimum sustainable firm size is much larger. The lack of manufacturing process and related equipment in the software industry is probably the key differentiating factor that explains these differences. Table 1.3: Software industry in Finland according to Statistics Finland Revenue (Me)
Personnel
Mean
Median
Sum
Mean
Median
Sum
N
Industry code 72210 by revenue class 0-
