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Some IP Considerations
Many authors have observed the complex role that software plays in national economic
development strategies, pointing out that the domestic use of software products and
services must be considered in parallel with the development of software exports
(Schware, 1992; Hanna, Boyson and Gunarante, 1996; Tessler and Barr, 1997).
Experience has led us to view a nation’s capacity to create and deploy software systems
as a limited national resource – its “software capacity” (Barr and Tessler, 1999).
Economic development is accelerated if this limited resource is optimally allocated
among the various activities that depend on software.
Among the many possible thrusts of a national economic development policy, there are
seven that depend heavily on the ability to create and deploy software systems. They
range from modernizing information systems in existing industries and government
agencies to creating new export industries, including, perhaps, a software export industry.
Since the same software talent and know-how is consumed by all of these development
efforts, as illustrated in Figure 1, expansion of the software workforce is typically another
early strategic priority.
The exact talent and know-how required to pursue these avenues of development is
different for each one. For instance, requirements analysis, systems integration, software
Developing a National Software Strategy
procurement, and project management are key skills for information systems
modernization. In contrast, software product exports require expertise in software
technology, design, programming, product management, and software marketing.
For most countries, the mix of available skills is the key factor in planning their software-
dependent growth strategy, because the size and maturity of the software workforce
determines which avenues for growth are available in the early stages. India, for example,
while blessed with an abundance of skill programmers to fuel its software services export
industry, is just now applying these skills to modernization of industrial and government
systems, which may be one reason that India is yet to develop a significant software
products export industry. (Note that the revenue per engineer for software products is, on
the average, several times that for software services.)
Each country’s situation is different and there are no absolute guidelines for optimal
allocation of the software capacity. The right strategy for a given country or region at a
given time depends on:
• Current assets, including skilled people (technical and business), investment
capital, existing industries besides software, telecommunications infrastructure,
and an expatriate business community;
• The country’s unique geopolitical situation and cultural history, e.g., India’s early
advantage in English-speaking markets; and
• The changing state of the global software industry, e.g., India’s ability to
capitalize on a series of global IT investment binges in client/server, ERP, Y2K,
telecommunications, and e-commerce technology, in the 1990’s.
It is interesting to note that the famous “3 I’s,” India, Ireland, and Israel, each of which
now export over a billion dollars a year in software, have all taken very different paths to
success. India exports about $10B a year, still almost exclusively in software services.
Ireland’s $1.2B indigenous software export industry is largely product sales. And Israel’s
$3B software export revenue is dominated by software technology licensing.
The impact of IP policy is quite different for different kinds of software activity. While
planners face a wide range of policy issues that impact software industry development
(finance, labor, immigration, trade, education, etc.), the major focus of this paper will be
on IP issues. (See Kraemer and Dedrick, 1999, or Tessler, Barr and Hanna, 2003, for a
broader treatment of policy issues.)
Some thinking about who has the rights to innovations that may occur on these projects is
the principal IP issue here. Generally, governments are inclined to support the efforts of
local firms to capitalize on these innovations. (See Section 7.) Also, big foreign software
vendors will express concern that their products not be pirated, but piracy is usually less
of an issue in the “enterprise systems” world than it is in mass-market consumer
software.
Needless to say, using Open Source platforms, like Linux, and the growing corpus of free
software technology can dramatically reduce the initial procurement costs of these
systems and free the client from proprietary platforms. Open Source is many things:
• A body of free software code that can be freely modified by the users;
• A community of software developers;
• A cost saving mechanism for systems integrators and their clients;
• A software products market sector - the only market sector defined by its IP
policy; and
• A political movement, e.g., a national policy that is explicitly anti-monopoly and,
at least implicitly, anti-Microsoft and, sometimes, anti-US;
Of course, the strategic implications of Open Source are important to the entire software
industry, not just to government projects. But since it came up first in this context, let us
offer two caveats:
That being said, the Open Source movement is large and growing and important. It will
likely evolve in the coming years to satisfy the needs of all its stakeholders. And for the
time being, it creates tremendous opportunities for systems integrators, since it
dramatically reduces the initial costs of deploying some common types of enterprise
systems.
Again, there is more to be gained with this kind of foreign investment than just the
money. Working in a well-run software shop or marketing organization is valuable
experience. Often the initial software workforce has technical skills but no project
management or marketing experience, for instance.
One other side effect of attracting software work from MNCs: When enough of these
operations locate in the same region, they support the development of a “habitat” – a
high-tech community offering specialized expertise and services needed by these
subsidiaries – consultants, documentation writers, disk duplicators, etc. (Lee, Miller,
Hancock, and Rowen, 2001). It just so happens that indigenous software startups need the
same expertise and services. This is how the indigenous Irish software publishing
industry got its start, for example, by piggybacking on the habitat expertise that
developed around the MNCs in Dublin (Crone, 2002).
In attracting foreign investment, of course, the investors may have serious IP concerns, as
well as security issues. While government regulations and judicial recourse are important,
these concerns are only finally addressed over the course of long business relationship. In
India in the early days of its software industry growth there was no national IP policy or
enforcement mechanism. The local subsidiaries made private contracts with the MNCs to
ensure protection of their IP. This was less of an issue in the early days, because most of
the work done in India was maintenance of rather mundane information systems. But the
sincerity and diligence of the Indian firms help establish an environment of trust directly
with their clients where much more sensitive information could be shared. (Of course,
India’s IP regulatory and enforcement environment has also evolved in the meantime.)
Every bank runs on software, as does every airline and every insurance company. Making
investments of the software capacity in key industries is an important part of a national
software strategy – making existing businesses more efficient and more competitive
globally. Furthermore, some manufactured products contain a lot of embedded software –
everything from automobiles to toys – another drain on the software capacity.
As was the case with government modernization, it is the local software consulting and
contract services firms who are most likely to be involved with industry modernization,
often working with foreign systems integrators and products vendors. (Local enterprise
software product vendors typically appear much later in the development of the software
industry, see Section 6.4.) And again, these commercial projects can be an important
stimulant and source of experience for the local firms. In fact, domestic experience in a
particular industry often shapes the later export offerings of small local firms, many of
which are founded by veterans of these commercial projects.
With commercial systems, we see again the IP issue mentioned in Section 2 about the
ownership of invention and innovation on these projects. There are several additional IP
concerns:
• Very often business will want or need to be on the same software platforms as
their international customers and business partners. This may preclude lower-cost
Open Source projects and technology and require licensing of proprietary systems
• Clients also have other proprietary information, including production methods,
technologies and know-how, and must be assured that they can share this
information with software consultants and systems integrators.
• Client companies often have software IP assets themselves, including embedded
software.
There are several new types of businesses that can now, thanks to the Internet, be located
in any country. Often these businesses require significant software investment to be
globally competitive:
• For an on-line business like Amazon or e-Bay or an on-line game, the software is
the key asset in its offerings.
• For a call center or services outsourcing business, the key asset is the knowledge
of the employees whose services are being offered. Still, the software shapes the
form of the offering, which can be a competitive advantage or disadvantage.
On-line businesses bring up some new IP and privacy issues. For example, even in low-
end outsourcing businesses, like retail call centers, incidents involving the security of
customer information can cause permanent damage to a business, or even to a country’s
reputation.
software exports generate hard currency. For development policy makers, and for
entrepreneurs, it is hard to resist expending software capacity to try to build an export
industry. In fact, it is often the case that limited resources are focused on exports when
they might best be used to attract foreign investment, revitalize an existing industry, or
train the next generation of software people.
Talented software people going abroad to work can have a direct economic benefit to
their home country, in terms of the money they send home. There are indirect benefits as
well, including their potential help with business connections wherever they are working
and their increased experience and know-how when they return (see Section 3).
What was once a “brain drain” of technical talent is increasingly a two-way street – in
fact, a global market for software talent (Barr and Tessler, 1996). Labor is typcially the
easiest form of software export to organize, and it has few IP-related issues. It probably
also is the least beneficial to a country’s economic development. And it’s a cyclical
business, subject to the immigration policies of the host countries, which is where IP
issues would also be handled.
Developing software locally for foreign companies is by far the largest type of software
export. This may involve a local subsidiary of a multi-national corporation, or a local
software services provider who does contract work for foreign firms. Almost always
these software services firms get their initial experience by doing local projects for
government and commercial organizations. Eventually, they become very sophisticated
in the kind of work they can do (consulting and advanced technology) and in their
business processes.
While the bulk of outsourced software work still involves rather standard software
systems, increasingly, software product development, embedded systems, and other
proprietary systems are being outsourced globally. Here the client will have the highest
concern about the protection of proprietary technology and business information.
Mass-market publishing is the shrink-wrapped variety of software, like games and other
consumer products. It is typically written for the PC and, increasingly, for mobile
devices. These shrink-wrapped products are inherently a high-risk, “title” business like
music publishing. Almost all the money is made by the few big hits and other titles have
difficulty getting any attention at all. Most products never even make it into the sales
channel.
In countries where there is rampant piracy of consumer titles, there is no domestic market
for PC titles. This forces developers to immediately try to sell their products abroad,
which puts them at a tremendous disadvantage. (Note, for instance, that this is not an
issue for on-line offerings, like multi-player games.)
One other IP issue is patent and copyright protection for these products and the technical
innovations the firms develop. While the value of the copyrighted titles may be short-
lived, any software company working on the technological cutting edge is likely to create
technical innovations that could be a separate source of revenue. It is unusual for early-
stage entrepreneurs to think in terms of licensing these innovations – they are focused on
their products. But to the extent that national policy can simplify and promote the
protection and capitalization of these inventions, e.g. by creating an IP foundation and
offering IP expertise, they can be an effective export themselves.
The crown jewel of the software business for the last 30 years has been publishing
software products for businesses and other large organizations. This is where companies
like IBM, Oracle and even Microsoft make their money. This is the hardest software
business for new companies to master, but 80% of worldwide software sales are in this
category.
Besides the lack of venture capital, one key disadvantage that startup firms have in many
countries is the lack of a domestic market for their new enterprise software products.
While piracy takes its toll on domestic enterprise software sales, it is not the dominant
issue in this category. What startups need are local customers who have state-of-the-art
information systems and who are willing to serve as beta-test sites for innovative
software in its early stages. Government and industry consumers are often reluctant to
include untested products from small firms in their planning. And without a domestic
customer to help with product evolution and validation, the local firm is at a disadvantage
when it enters foreign markets.
Because new enterprise software products must fit into a much more complex operational
environment, the development of secondary innovations that might generate significant
license revenues is quite common in these firms. In fact, many enterprise startup
companies actually wrap an innovation or two into a product and try to take it to market
as a solution. Increasingly, the enterprise market is open to unwrapped innovations –
licensed technology that is incorporated into other companies’ products. Most
entrepreneurs, however, are not even aware of this possibility and are unfamiliar with the
mechanics of partnering and licensing technology. Certainly savvy venture investors will
be concerned with IP protection, but in most countries, investors do not have enough
experience in the software business to help guide the entrepreneurs.
In most countries, government and university research facilities employ some of the top
software talent, sometimes consuming a significant portion of the country’s total software
capacity. (Not all programmers are equal. The best are 10 times more productive than the
average, and probably more innovative too.) The fruits of these research efforts are
typically not market oriented and rarely find their way into actual products or solutions.
(The celebrated spin-off from a university lab is the exception to the rule. In fact, many of
these startups are actually a way of packaging and proving the commercial value of an
invention, and are acquired by other software companies for their IP assets before they
become real businesses.)
Research in these labs does often result in significant technical innovations and
inventions. However, since the labs are not generally motivated to generate revenue from
their inventions, and are not capitalized adequately to develop and market an IP portfolio,
this is rarely a source of national export revenue. But, with some help, there is potential
here. Israel, for example, exports $3B of software technology a year, almost exclusively
in the form of technology licenses and much of it comes out of defense research labs.
And the use of a national software IP portfolio for “trading” with holders of other needed
IP could be a significant benefit as well.
We should say explicitly that the IP licensing business is a complex and cutthroat as any
business. Lawyers are involved. This is not a business for the faint of heart and must be a
global business from the get go. Still, it’s a significant opportunity.
For most countries there just isn’t enough software capacity to staff these various ways of
using software to support economic growth. Decisions by policy makers and by
individuals shape the developmental path taken. Soon enough, everyone realizes that
more software people are needed. In fact, without some critical mass of software talent
and experience, many avenues for development are closed. (Consider, for example, a
multi-national corporation choosing among possible sites for a new facility – the size and
maturity of the software labor pool is high on their list of criteria.
Unfortunately, the same software talent used in all of these economic development
strategies is also critical to growing the software workforce itself – teaching, mentoring,
directing research, etc. Sadly, this expenditure of the nation’s software capacity is often
overlooked, since it doesn’t directly impact the economy, resulting in slower than optimal
growth.
As an illustration of how software IP policy must take the state of the country’s software
industry into consideration, countries in the very early stages of software capacity
development may benefit dramatically from pirated software and free Open Source
technology. It can be quite expensive to buy licenses for the software that every student
uses in classroom and lab work. A realistic assessment of the country’s situation,
combined with a long-term view to creating value, is the best approach to developing an
IP policy that supports the fledgling industry.
One final thought about software education and training – it’s not all technical. Software
activities require project management and marketing know-how and, increasingly,
knowledge about IP protection and capitalization (Barr and Tessler, 2002). We strongly
recommend that the curriculum of software professionals include education in the roles
and significance of intellectual property in marketing products and services, attracting
venture capital, and creating corporate value.
Avron Barr is a strategic marketing consultant. His consulting firm, Aldo Ventures,
works with software businesses to help them understand their markets, define their
offerings, and explain their ideas. Aldo Ventures also consults with policymakers,
industry associations, donor organizations, and NGOs about the software industry's role
in national economic development strategy. www.aldo.com
Patrick Reilly is a Patent Agent and IP Attorney and the Founder and CEO of the
Intellectual Property Society, which is a donor supported membership organization
working to increase public awareness of, and participation in, the evolution of intellectual
property rights and emerging technologies. www.ipsociety.net
10. References
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