London: Senior executives in internationally dynamic software firms say that the current economic crisis will not significantly affect their European business models, according to The Software Report 2009. Dublin beats London in terms of positive perceptions as the key European location for software projects; however, the South East of England, followed by London, are considered to be the strongest cost/quality options for locating a software facility in Europe, with Ile de France (Paris); West Nederland, Bavaria and Stockholm all in the six leading areas. Northern Ireland has been the most successful regional location in Europe in attracting foreign direct investment in software development centres between 2001 and 2008.
The report into the European business development strategies of software firms, by FDI consulting and research specialist Oxford Intelligence, sheds light on the foreign direct investment plans of some of the world’s most innovative and internationally mobile software companies. The Software Report 2009 stresses the important contribution that software firms make to European employment through foreign direct investment. “Software continues to be one of the main sources of overall FDI into Europe, but 2009 will see a continued decline, before the recovery begins in 2010” said Michel Lemagnen, Director of Research at Oxford Intelligence.
CEOs of international software companies say they are finding it harder to meet their growth targets and competition is more intense with consequent pressures on pricing and profit margins. Because of this, cost factors are likely to become a more important factor in location selection. “Operations in non-profitable markets are likely to be relocated into a centralised European sales function or even shut down altogether in the case of in-country offices”, added Lemagnen.
In 2008 the total number of software FDI projects into Europe declined by an estimated17 per cent, with the US, Europe’s biggest provider of new projects and jobs, falling by around 32 per cent. The decline has mainly hit sales and marketing investment whilst R&D projects have been more resilient – a positive indicator of the role Europe continues to play as a location for high-end, new development work.
Michel Lemagnen says that economic development agencies are placing too much emphasis on attracting larger companies and so-called 'value added projects' in the software sector. The result is a failure to assist smaller foreign companies, in particular on Sales and Marketing type investments, which account for 60% of projects. He describes this approach as 'a critical risk - because agencies are potentially missing out on the next Google or Yahoo – companies capable of stellar growth'.
According to Oxford Intelligence, this reflects a political and strategic decision made by EDAs at national and regional level. They suggest that this strategy must be re-visited to provide better service to companies who really need help and to ensure that the born-global, stellar growth companies are not missed. There is compelling evidence showing that many companies that started out with small sales offices have gone on to become serial investors..
Oxford Intelligence forecasts an 11 per cent decline in software FDI deals in Europe in 2009 and a modest growth of five per cent in 2010, led by the UK, which will be the first to benefit from the upturn in the US economy and business confidence.
M&A activity has been slightly more resilient than FDI and this will continue to be the case as successful companies make strategic acquisitions in order to survive, gain access to new markets, new technologies and to increase their market share. “Local and regional government agencies who are ‘host’ to foreign direct investors will need to be vigilant and responsive to any new parent company needs at an early stage, if they are to retain and grow companies locally”, according to Michel Lemagnen.
Companies are increasingly open to considering a wider choice of European locations and this is particularly the case for software development centres. Dublin, London, Paris and South East England continue to be the leaders, but their dominance is much weaker than previously. The drivers behind this broadening of location investment choice are three-fold: market growth potential in emerging markets; the search for talent in relation to technical software development skills; and finally - Costs. 26 per cent of executives thought that the biggest challenge was “finding the right staff”.
Michel Lemagnen said: “Software is growing at a faster rate than the IT market – executives are on the whole optimistic about future European strategies and it’s a positive sign that 88 per cent see their preferred method of expansion as organic business growth”.
