Does France Hold The Key to the European Software Sector’s Future?

It is an all too familiar story.  European software companies grow to a certain size but have trouble scaling and are eventually bought by foreign, typically U.S. companies, leaving Europe with a dearth of global champions in a sector that is at the very core of the IT sector. But a French decree passed in late February aims to change the future direction of the European software industry.

The French decree encourages – but does not oblige – government agencies to grant up to 15% of public contracts to small, innovative companies, a move that is expected to have “significant” impact on the growth of software companies, says French venture capitalist and software sector lobbyist  Bernard –Louis Roques, pictured here with Nathalie Kosciusko-Morizet, the French government official charged with the development of the digital economy, a supporter of the decree.

The decree will help boost the standing of the French software sector, now ranked third, behind Britain and Germany, says Roques, who is pushing for similar measures to be adopted across Europe. “We have good companies, we have good products, we have to aid them to develop,” Roques said during a recent interview with Informilo. “All software vendors in Europe see a Small Business Act as a number one priority.”

 Today industry observers are hard pressed to name Europe’s next SAP, the German giant that sells software that thousands of the world’s largest companies use to run their operations. Indeed, in 2008  the revenues of the top 100 French software companies combined was only 3.8 billion euros, a tiny fraction of the revenues earned by the likes of American software companies such as Microsoft or Oracle.   Five French software companies, with an aggregate turnover of  371 million euros, were acquired over the past year.

“These acquisitions show how difficult it is for French companies to remain independent once they gain a certain threshold,” says Roques,  a founder and general partner at Paris-based venture firm Truffle Capital , which organizes an annual list of the top 100 French and top 100 European software companies. “A true industrial policy is now essential for this sector.”

The French decree mimics a U.S. law which has been on the books since 1953. The law has helped American companies, which already benefit from a larger, more uniform market, to scale more quickly, giving them the ability to outgun their European rivals and eventually snap them up.

Small  and medium sized companies – those with less than 250 employees that earn under 50 million euros in annual revenues – make up some 70% of Europe’s GDP and are responsible for 80% of new jobs created in the last two years.
During the French presidency of the European Commisision, the French government tried to have a Small Business Act law passed Europe -wide but the proposal failed due to opposition from countries such as the U.K., which object to any government intervention.  Another issue is the measure could contradict an agreement on public procurement concluded between the EU and 27 other countries which commits governments to opening up their public tenders to foreign companies.

But France maintains that if other countries – such as the U.S. – are able to obtain derogations that allow them to favor domestic companies European countries should be able to find a way to do so. The French decree gets around the problem by only encouraging and not mandating that government agencies set aside up to 15% of its contracts for small businesses. “This possibility represents a real step forward towards a French Small Business Act and I am counting on government agencies to implement it systematically,” French IT Minister Kosciusko-Morizet said in a statement.

Roques says he believes that France will lead the way for the rest of Europe. Adopting the policy now will give France a two to three year advantage over other European countries, he says. Eventually other governments will follow, he predicts.  “I think now there is now an acknowledgement on the part of governments and the European Commission that the software sector is a hotbed of innovation and the one industry they should bet on in the future,” Roques said.

The new law will mean that small French software companies will no longer have to work through big systems integrators but can sell directly to government agencies, reaping more profits.

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