Economic impact of the software industry A. Paul Sribhibhadh A.Paul Sribhibhadh The software industry is viewed by many as an exciting sunrise industry that is key to future competitiveness for our economy. However, forecasts of the economic size of the industry have focussed primarily on potential revenues of the software itself. Whereas in actuality, software has a halo affect in creating related business opportunities. In a study of the economic impact of the software industry in Southeast Asia countries by the Business Software Alliance and Price Waterhouse, it was found that there was a multiplying economic effect of about 1.7 (conservatively) for upstream and downstream industries. In addition, end-user industries also benefit enormously from reduced cost, increased productivity and increased business opportunities. As shown in fig. 1, for every baht created in the software industry, 1.7 times that amount is created from upstream and downstream industries and upwards of 10 times that amount could be realised from productivity gains and increased business opportunities from practically every imaginable industry. Therefore, if the local software industry was forecast to grow from seven billion to 53 billion baht over the next five years, as the Association of Thai Software Industry predicts, the total economic impact would be upwards of 90 billion to 670 billion baht, respectively. Understanding this should convince policy makers as well as business users of the importance of the software industry. If all of the software is imported from overseas, would Thailand still experience these economic benefits? The answer is yes, for a large part. Thailand would, however, miss out on the upstream and software publishing revenues. These revenues could be huge as witnessed from countries with explicit and coherent government policies supporting the software industry (e.g. Isreal, Taiwan, India etc.) Moreover, the software industry is subject to the law of increasing returns: the more you sell, the more you sell. And, if a large portion is exported, the supply is virtually unlimited (since software is reproduced electronically). Therefore, if Thailand is to keep most of the revenues generated from the software industry, a large portion of the software would have to be developed and owned locally. Why Thailand? The Internet has created a level playing field for software developers all around the world. Then, why would any software be developed in Thailand? Whether we develop packaged or custom software, developing what the customer needs is the deciding factor. Therefore, proximity and flexibility would tend to favour local developers for local and ASEAN markets in the area of vertical business software. For outsourcing (contract software development), Thailand is a politically and socially stable and friendly country that is very livable and has lower labour cost (relative to more developed countries). A location like Phuket with adequate IT infrastructure could be an attractive place for overseas developers. Finally, except for the telecom sector (high cost, low competition, slow service), Thailand has a relatively liberal trade environment for IT. In market economies (that most countries including Thailand are modelling themselves after), software development and the eternal quest for improvement through competition, is based on revenues. Software, like music and video, are easily and economically pirated with near original quality. Thailand still has very high levels of piracy (>80%) both by end-users and counterfeiters (copied CDs, pre-loading by resellers etc.) This will continue to be a drag on the progress of the local software industry. No market, no developers. Even if a flood of opportunities were available, there would be a very small pool of qualified commercial software developers available. This is a well known medium- to long-term problem that many in the academic, government and private sectors are trying to address. A former senior World Bank official and president of Asia-Pacific Management Consultants, Dr. Francis Colaco, observed that countries with a serious software industry have widespread 'software reverse engineering', that is, software developers that constantly study and learn (not necessarily disassemble) the details of leading software around the world. Thailand has a very low level of this activity. Perhaps we should do more of this to climb the learning curve much faster. A software business is easy to start but difficult to grow and sustain. Besides a steady stream of qualified personnel, it takes keen business management, adequate funding and source of research and development. The Ministry of Science, Technology and Environment (Moste) is trying to find a solution to the R&D and funding problems. In general opportunities, we must be good domestic users of software and develop to meet domestic demand before we can leap to the outside world. However, as we go through this process, we quickly learn and develop our competency to those international levels. We will have to hone our basics before we leap. There are two ways opportunities are created: a change in technology or a change in customer behaviour. The pace and enormity of change in the information technology is creating equally large opportunities for software developers. Advances in hardware, telecommunications and Internet-related software standards, create new possibilities for businesses and consumers. This in turn creates downstream competition that feeds the uses of these new technologies. For simplicity, we can look at two general groups of software: business and everything else. Business software would account for the largest portion of our software market, in the form of finished product and customised software. Traditionally, software developers have focussed products on improving business operations such as accounting, inventory management, warehousing, human resource, purchasing, sales automation etc. Supply chain improvement falls into this category. However, as competition becomes more open and the world more connected, two additional categories have emerged: commerce (customer and partner relationships) and knowledge management (internal sharing of organisational know-how). A ready opportunity for Thai developers is to outsource development (just like India) according to strict detailed specifications from more developed countries such as Japan, US, Australia, European and Scandinavian countries. There are also many opportunities for local software developers to leverage multinational finished products that may be imported into the country. These would include localisation, customisation (supply chain/enterprise resource planning, customer management), and integration (e-commerce delivery systems with back office operations). Most solution providers in the country fall into this category. E-commerce is a hot area but customised Web e-commerce sites are mostly a systems integration/configuration exercise as most of the management software for the retail aspect is dominated by companies like Microsoft, Netscape, IBM. The more interesting area for development would be the integration of these e-commerce systems with businesses' back office systems. This includes interfacing EDI systems or other electronic delivery systems with the company's order entry, inventory, warehousing, and financial systems. For finished products that are entirely developed by local developers, there are still some categories that can be developed locally such as accounting, decision-making software and line-of business point products (such as purchasing, human resource, logistics, insurance etc.) These require a close knowledge of the way of doing business locally. Decision-making software should be a large category for local developers as it applies to every business from agriculture, food processing, to high technology. Just because other horizontal categories were not mentioned doesn't mean that there are no opportunities to develop such products. However, there are more established software vendors already dominating such categories. These include operating systems, word processing, spreadsheets/statistics, graphics, communications, databases, CAD/CAE, utilities, networking software, enterprise-wide systems such as SAP, Baan etc. A summary of key business categories that should be considered include supply chain improvements, customer management, knowledge management (corporate intranet) and Ecommerce integration. The other major group contains software for entertainment, leisure, educational, and scientific research. Since educational and many entertainment activities are closely linked with local ways of doing things, there will always be unique opportunities for new software titles in these areas. In fact, it is important to develop these categories as they reflect local social and cultural norms. The worry for these segments is piracy and the penetration of the computer into homes. The other dimension to software systems, tools and applications, is content. Electronic content is increasingly becoming an area of opportunity and competitiveness. In the past, financial service companies have researched, collected and provided analysis to their clients and the market. However, with the increasing participation of multi-nationals in foreign economies, there is a whole content industry developing right under us. From a technology point of view, as corporate and public segments restructure, the relatively new (for the Thai developer) component-based technology such as ActiveX and Java Beans present a new opportunities for the developer. New hardware platforms also provide opportunities (albeit a little early and riskier) for the more adventurous to develop applications to target the new handheld devices such as the Palm Pilot or Windows CE-based systems. Business applications that take advantage of emerging high-bandwidth wireless telecommunications as well as better natural input methods (speech, handwriting, natural language) will also take shape in the coming year. Although there are a lot of claims about a large market potential for business objects, the degree of customisation will still be high and therefore limiting the scale of the market. This means that Thai developers still have hope of competing with large multi-national software vendors that sell such business objects. Visual Basic should still be the most popular development language in the medium term (with both object and procedural programming) with Java increasing in popularity and XML (Extensible Mark-up Language) emerging as a data exchange standard over the Internet. Platform wars should be irrelevant as whatever you choose, there are opportunities whether it is Windows NT, Solaris, or Linux. All are growing and are playing a role in most of the business segments mentioned as opportunities above. If you would like to have it run on more than one platform, you may want to consider using a portable applications development language like Java. What next? Hopefully it is quite obvious to our policy and business leaders the enormous opportunities and need to invest in developing a healthy Thai software industry. On the public policy side, first, the government should use its enormous purchasing power to help software companies in the short term. Make sure that government (including the Ministry of Science, Technology and Energy) is not competing in development and professional training with the private sector. Second, the industry really needs market and technology intelligence. Something similar to the III in Taiwan has helped enlighten and guide investment in the IT sector for over 15 years. Third, the government has to step in and kick-start (i.e. subsidise) financing options for software companies. It could simply be a specialised unit in the Industrial Finance Corporation of Thailand (IFCT) that can grow into a full-blown 'software bank' or spur future private venture capital investors. The loans ('intelligent capital') could have certain conditions (like the IMF) to help improve the corporate marketing and management. Fourth, ensure that any restructuring assistance for other industries include the use of IT in operations. It is difficult to be competitive if executives lack up-to-date and relevant data to make good timely decisions. Finally, longer term infrastructure support in areas of R&D, education and cheap, available high-speed telecommunications are necessary conditions to build and sustain the software industry. On the private sector side, our business leaders have to verbalise more explicitly how IT plays a strategic business role in the future of the company. Many top executives cannot visualise how IT helps improve customer satisfaction. Use IT as an offensive weapon to sharpen your core business competence. If you merely view it as a necessary evil, then any IT expenditure would be expensive. But if you view it as something to help you make more business, then, it is a strategic investment. Every executive should use the Internet to browse for relevant news and e-mail. Try buying something - anything - on the net at least once. You need to use it to believe its impact. Then perhaps the position of Chief Information Officer will really become a reality. The demand for software will only get bigger as software will increasingly affect our business and private lives. We have a choice whether to simply import and customise, or decide to fully participate in creating a full-fledged local software industry. This is our window of opportunity. The global economy is in transition. We just have to have the courage to jump in with both feet. A. Paul Sribhibhadh is the managing director of Imaginetic, a local software developer, vice president of the Association of Thai Software Industry (ATSI) and chairman of the IT Management Group of the Thai Management Association. He can be reached at paulsr@asiaaccess.net.th. Back to top