Summary The Economic and Social Impact of Software & Services on Competitiveness and Innovation SMART 2015/0015

Transcription

1 Summary The Economic and Social Impact of Software & Services on Competitiveness and Innovation SMART 2015/0015 Summary of the content of the workshop presentations of Dr. Katrin Schleife (PAC) and Dr. Bernd Beckert (Fraunhofer ISI) Document for the participants of our Expert Workshop in Brussels, October 06, 2016

2 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 2 On behalf of The European Commission DG CONNECT by Pierre Audoin Consultants (PAC) GmbH Holzstr. 26, Munich, Germany in collaboration with Le CXP and Fraunhofer ISI Contact: Dr. Katrin Schleife (k.schleife@pac-online.com)

3 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 3 SUMMARY About the study The software industry is one of the most dynamic industries. But with new opportunities has come a range of challenges that software companies must meet. These challenges are specific and varied for European companies, but have to be evaluated in the context of the global ecosystem that makes up the IT market and its links with other industries. Against this background, the DG CONNECT department of the European Commission has decided to again take a closer look at the European software industry and its economic and social impact. It therefore commissioned the SMART 2015/0015 study in order to update the findings from the SMART 2009/0041 project on The Economic and Social Impact of Software and Software Based Services (2009/2010). 1 This study aims to: i) identify the potential current and future economic and/or social impact of the European software and services industry specifically on Europe; ii) identify the elements that are determinant for its growth and competitiveness; iii) assess the future market impact and expected market transformation due to the emerging Internet and data-driven technologies; and iv) derive policy recommendations to remove barriers and foster the development of the European software industry. PAC, Le CXP and Fraunhofer ISI are jointly working on this project. PAC and Fraunhofer ISI were already part of the SMART 2009/0041 project team. The final study report will be published at the beginning of Defining the software and software-based services (SSBS) market The following picture shows the market segmentation, which forms the basis of the market analyses in this project. 1 "Economic & Social Impact of Software & Software-based Services" (SMART 2009/0041),

4 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 4 Analysis of the European software and services market The overall SSBS market of the EU28 region was worth EUR 229 billion in 2009 and grew by a yearly average of 1.5% until Its average yearly growth is expected to accelerate to 2.9% between 2015 and Thus, by 2020, the SSBS market will amount to nearly EUR 290 billion. SSBS Market - EU28 - Market Volumes by Segments Market Volume in million EUR 350, , , , , ,000 50, Sources: PAC data. For the games software segment, PAC estimations are based on data provided by gaming associations in several EU countries. Games Software Infrastructure as a Service (IaaS) Platform as a Service (Paas) Software as a Service (SaaS) Application-related IT Services Infrastructure-related IT Services Application Software Products Infrastructure Software & Platforms Software-related segments such as infrastructure software & platforms and application software products will grow only slightly between 2009 and One main reason is the maturity of these segments in various European countries. Growth in these areas comes from investments by medium-sized businesses that in many cases do not have the same maturity level as large enterprises. In addition, software markets are increasingly under pressure as more and more companies are shifting towards using cloud-based solutions. The market share of cloud computing will increase enormously until 2020 (around 18% of the SSBS market). Services for the technical implementation of a software solution are hardly needed if companies start using a cloud service. This is one significant reason why the market for infrastructure-related IT services has been declining. Application-related IT services became the largest SSBS market segment in This segment will remain of importance because these services are needed for changes, improvements, upgrades, maintenance and management of existing solutions. The global games market is prospering as a result of a range of innovations: powerful smartphones enable mobile gaming, improved broadband and infrastructure capacities allow high-performance online gaming, and innovative revenue and digital distribution models have greatly expanded the addressable market. Understanding the role of in-house software development Recently, software-related make-or-buy decisions have shown a stronger tendency towards the make side, especially when it comes to product development. For many companies, software has become a critical success factor for products and services and is regarded as an innovation enabler.

5 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 5 In some cases, companies have transformed their traditional products into digital entities and started selling services instead of just products. Software is going to be at the core of such business models. Therefore, the question of whether to buy or make software is becoming increasingly strategic and is currently being discussed at board level in many companies. In the market, several different trends can be observed, including companies acquiring software houses in order to build internal resources, the extensive hiring of software-focused resources, and the extended cooperation between corporate clients and IT service companies. In order to understand the impact of these trends on the software industry and to assess the change in the industry s structure, it is mandatory to understand the influencing factors of make-or-buy decisions that are currently at work. In this report, the qualitative analysis is based on 1) own sector-specific know-how based on qualitative and quantitative research, and 2) expert interviews conducted as part of this project. Our research shows that in general, companies show a stronger tendency to conduct in-house software development if They are active in a sector where the level of maturity is generally low with regard to the use of standardized, off-the-shelf software solutions; The general quality and availability of a specific external solution is rather low (e.g. because the company is active in a small market segment); Their software requirements are too specific (e.g. because they are highly innovative and/or pioneers in digital transformation, or because they work in a highly specialized market segment); They do not want to give sensitive internal process know-how to external software partners; They have doubts about a quick and efficient communication with external software providers around software development and adjustment; They have a pronounced R&D strategy and see in-house software development as a relevant part of it; Their supplier and partner network is not that complex; They have a certain size and have enough internal IT resources and competencies; They used to do it in the past and they do not see any reasons why they should not continue to do so in the future. In order to estimate the amount of in-house software development in the nine analysed industries, we developed sector-specific market models. According to PAC data, the total market volume of internal software development expenditure is estimated to have been 52.3 billion in EU28 in Given an average yearly growth rate of 1.8%, this figure is expected to increase to 57.2 billion in Vertical analyses show that except for the public sector, where the figure remains more or less the same, market volumes of in-house software development will increase in all sectors within EU28 between 2015 and

6 Economic and Social Impact of SW & Services SMART 2015/0015 Summary The largest increase will be seen in the manufacturing industry. In this sector, product development as well as the development of software that is embedded in the products is part of the core business. In addition, topics such as Industry 4.0 and the Internet of Things (IoT) are currently adding strongly to manufacturers propensity to develop software internally. Related solutions are often not yet available in the market, or companies just want to prevent internal know-how from leaving the company. Compared with total software and IT services (SITS) spending, in-house software development expenditure amounted to 20.3% in This figure will slightly decline to 19.5% by This trend can be observed in the EU28 region for nearly all analysed industries. However, the falling percentages will not be due to a decline in in-house software development expenditure, but to a strong increase forecast for total SITS expenditure, which will grow at faster rates than in-house software development spending. The only exception is the manufacturing sector, where the growth of in-house software development will further increase and outpace external IT spending. Thus, internal software development will remain of great relevance in all analysed industries. Number of software companies The number of software companies in Europe (derived from Eurostat Business demography statistics) amounted to around 632,388 in This is about 2.16% of the whole economy. In the US, about 145,000 establishments are active in this sector, accounting for 2.17% of the total economy. The number of software enterprises in Europe grew by 31.4% between 2008 and 2013, which is considerably higher than the economy-wide increase of 5.2%. The number of US software companies grew by about 12.4%, in contrast to the decrease in the total number of companies (-5.4%). R&D and innovation indicators Business expenditure on R&D in the SSBS market amounted to 11.4 bn in R&D personnel totals 140,000 full-time equivalents and accounts for almost half of the R&D personnel in the whole ICT sector in Europe. The growth in software R&D investments clearly outpaces ICT manufacturing and the R&D development in the total European economy. Between 2010 and 2012, R&D investment increased by around 9% p.a. (ICT: 5.5%, total economy: 4%). R&D personnel also grew significantly during that period, by around 6% p.a. (ICT: 4%). Economic and social contribution of the software industry In our study the social contribution of the SSBS industry in the EU is measured in different terms: number of employees, value added and productivity. Employment The workforce in the EU SSBS industry was more than 3.1 million in 2013, which was about 2.4% of the total business economy or 2.3% of the overall economy. For comparison: In the US, more than 2 million employees (2012) work in the software sector, which is a share of about 1.7% (overall economy). Software sector employment in the EU grew by 16.1% between 2008 and 2013, as opposed to a decline in employment in the total business economy of about 3.4%. In the US, the trend is quite similar: The

7 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 7 software sector grew by nearly 23% between 2007 and 2012, while employment in the overall economy decreased by 3.9% during that period. Almost half of the workforce in the SSBS market is concentrated in three countries: France, Germany and the UK. Value added The value added of the European SSBS sector amounted to about EUR 220 billion in This was about 3.56% of the value added of the total business economy. However, the growth of value added in the SSBS sector (20.2%) exceeded total business economy growth of 3.78% in the EU28 between 2008 and Still, value added growth is lower than in the period (~50%). Productivity The productivity (measured in value added per employee) of the SSBS market averaged about EUR 70,500 per employee in This was about 50% higher than the productivity of EUR 46,800 for the total business economy. However, the growth in SSBS productivity was about 3.3%, lower than the growth of 4.4% in overall economic productivity. This means that while the number of employees and value added in the SSBS market have been growing significantly, valued added per employee has been rather constant. Key technological trends and their impact on software value chain and ecosystems Numerous technology trends may have a major impact on the development of the SSBS market in the coming years. Depending on their benefits, their cost and their level and pace of adoption by end users (niche or mass market), they may more or less help to accelerate the growth of the overall SSBS market. The following topics are seen to be key drivers of the European software industry: Digital transformation: Although software-supported digitization was already taking place in 2009/10, digital transformation was not as much of a key trend as it is today. Today, the digital transformation journey has become much more of a structural and organizational rather than a technological topic. Analytics/big data: The strategic importance of these topics has increased at a rapid pace and thus they receive much more attention than in the previous study. Mobility: Mobile applications provide immense growth opportunities. We see a widespread use of mobile devices in enterprises, for example for sales and field service. Social collaboration: Since 2010, there has not been a big uptake in the social collaboration area within the European software industry. A number of players have added such features to business applications. DevOps: DevOps was only just beginning to become a topic in 2009/10. Today it gets much broader attention. Cloud computing: Cloud computing is an example of an emerging software technology that has remained strongly relevant as a key driver since The cloud computing architecture has made the proliferation of mobility and IoT possible. In the 2010 report, we stressed the investments of companies into private clouds and this is still the case.

8 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 8 Internet of Things (IoT): The 2010 report focused on RFID as an enabler for the IoT. Nowadays, RFID is still relevant in the IoT and it is used in industrial manufacturing, retail and logistics, but it is one technology among many. Security: In our 2010 SMART study projections, we expected growth in security software. Back then, the impact of cyber security was not as strong as it is today, which means that the importance of security has even increased. Open source: The relevance of open source software has also increased since 2010 due to the rise of Linux, Apache and open source middleware as well as the use of open source software for the creation of cloud computing environments (private and public cloud) as well as big data usage (Hadoop) and mobile devices proliferation (Android). Identification of key barriers to the competitiveness of the software industry In addition to the key drivers we identified a list of the most important barriers to the development of a strong European software industry. This includes the obstacles to the development of a genuinely European software sector. The derived top 10 list of barriers is based on a first update of the list provided in the 2010 report, the results of further external studies, additional background information and internal expertise, as well as discussions during an external expert workshop in mid-april The top 3 barriers cover: 1) lack of digital skills and specialised IT experts, 2) lack of entrepreneurial spirit, and 3) market fragmentation in the EU28 member states. Impact of the software industry on Europe if certain policy actions are put into effect Our policy analysis consists of two parts: an updated ex ante impact assessment for selected policy actions and a final set of policy recommendations. The aim of the impact assessment is to be able to determine concrete policy activities with the highest economic and/or societal impacts. Although the ex ante impact assessment method has its limitations, it will give an indication of which policy measures will have the strongest impact and should thus be prioritized. The result will be a ranked list of policy measures. The results of the impact assessment show, according to the combined ranking, that there are four policy areas that should be given priority in 2016 and the following years: Top policy measures (highest priority) 1. Enhance e-skills in Europe 2. Remove market fragmentation for ICT enterprises in the EU 3. Support the adoption of ICT in industry and service sectors and remove governance barriers 4. Improve or unleash the entrepreneurial spirit in Europe

9 Economic and Social Impact of SW & Services SMART 2015/0015 Summary 9 A clear top-4 list emerges, which encompasses measures addressing e-skills, market fragmentation, ICT adoption in traditional industry and service sectors and the removal of barriers in these sectors, as well as the entrepreneurial spirit in Europe. These measures aim at mitigating perceived European weaknesses compared to more dynamic countries such as the US or some Asian countries. However, other measures are of significance as well. The extended list is a central input for the policy recommendations that are part of this study. The policy recommendations identify those subject areas that are of special importance to the development of the software and Internet industry in Europe in 2016, and they suggest a set of policy activities in addition to the ongoing activities of the European Commission. For the final policy recommendations, we additionally take into account what policy measures are currently being adopted or are already underway at European Union level. It can be observed that there are a variety of ongoing European policy activities in almost all areas of priority. Not all activities may have the same impact or are equally well-designed or well-equipped with budget. However, the European Commission has been very active over the past five years, addressing the main issues regarding the development of the software and Internet services industry. Especially the Digital Single Market Strategy launched in May 2015 and the 2016 Digitising European Industry initiative are steps in the right direction. They reflect the Commission s increased awareness of the need to support the ICT sector and overcome central barriers. Based on the findings from our research so far, we recommend increasing efforts or designing new measures in the following fields: 1. Enhance e-skills in Europe 2. Remove market fragmentation for ICT enterprises in the EU 3. Support the adoption of ICT in industry and service sectors and remove governance barriers 4. Improve or unleash the entrepreneurial spirit in Europe 5. Support ICT-related SMEs in their effort to grow 6. Ensure or increase trust in cloud computing and IT infrastructures, privacy and security 7. Roll out high-speed broadband networks 8. Introduce digital know-how in politics 9. Increase public R&D spending in the ICT area 10. Support open source software in all sectors of the economy and in public administration The final list of policy recommendations will be presented and discussed in the expert workshop on October 6, 2016, in order to get final input on where potential adjustments may be necessary for the final study report.

10 ABOUT PAC Founded in 1976, Pierre Audoin Consultants (PAC) is part of the CXP Group, the leading independent European research and consulting firm for the software, IT services and digital transformation industry. The CXP Group offers its customers comprehensive support services for the evaluation, selection and optimization of their software solutions and for the evaluation and selection of IT services providers, and accompanies them in optimizing their sourcing and investment strategies. As such, the CXP Group supports ICT decision makers in their digital transformation journey. Further, the CXP Group assists software and IT services providers in optimizing their strategies and go-tomarket approaches with quantitative and qualitative analyses as well as consulting services. Public organizations and institutions equally base the development of their IT policies on our reports. Capitalizing on 40 years of experience, based in 8 countries (with 17 offices worldwide) and with 140 employees, the CXP Group provides its expertise every year to more than 1,500 ICT decision makers and the operational divisions of large enterprises as well as mid-market companies and their providers. The CXP Group consists of three branches: Le CXP, BARC (Business Application Research Center) and Pierre Audoin Consultants (PAC). For more information please visit: