Europe’s Software Sector Blues

Weakened by the global financial crisis and American rivals who continue to acquire the Continent’s best companies, Europe’s software sector is calling on local governments to take urgent measures.  A recently released annual ranking of Europe’s Top 100 software companies  found that the mean increase in turnover for Europe’s software companies in 2008 was 3%, down sharply from 10.3% in 2008. The survey is seen as a key index of the industry’s health on the European level.

The annual ranking is organized by Paris-based Truffle Capital, with the support of Vivane Reding, European Commission for the Information Society and Media. The 2008 four top ranked companies are the same as in 2007: SAP, SAGE, Dassault Systems and Software AG. Only 50 of the companies have revenues above €76 million .

Part of the problem is that 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.

The European software sector “has been weakened by the global economic crisis and is growing slowly as a result,” says French venture capitalist and software sector lobbyist Bernard -Louis Roques, a general partner at Truffle Capital. “If we had adjusted for the acquisition of European software houses by American companies, aggregate growth would have been almost twice as strong.”

 The total turnover generated by European companies acquired by American software houses in 2008 was around €500 million , according to the Truffle 100 survey. Total turnover for 2008 of the Truffle 100 companies was €25 billion, compared with over $60 billion in turnover from Microsoft, a single U.S. company.  Only three of the Truffle 100 companies in Europe have turnover of more than €1 billion.

With Europe’s best software companies being sold off to Americans
  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.

Roques is asking European governments to provide support for the industry as a matter of urgency. “This very competitive sector is increasingly dominated by the United States,” says Roques. “This trend must not become an irreversible one.”

Of course not all of the acquisitions of Truffle 100 Europe companies are made by American companies. Italy’s Gruppo Formula was acquired by SAGE, the U.K.’s Financial Objects was bought by Switzerland’s Temenos and the U.K.’s IBS Opensystems was taken over by Capita, another British company.

And the news from the sector was not all bad. Profits rose from €3.2 billion in 2007 to €3.6 billion in 2008, an 11% increase. And, the sector’s workforce increased by 13.7% to reach 211,985 in 2008. Significantly, the number of R &D jobs rose by 25%, from 41,591 employees in 2007 to 52,020 in 2008.

Still, Roques believes it is crucial that national governments intervene to shore up the sector. The European market is more fragmented than the U.S. market and there are no massive European research programs that lead to commercial spin-offs, putting European companies at a disadvantage with their U.S. counterparts. In Europe “national agencies should be involved in granting R & D programs or at the very least, governments should be involved in implementing fiscal frameworks for R & D investment,” says Roques.

In those countries which have granted tax breaks for companies that set aside a certain percentage of their revenues for R &D, such as France, the governments have extended the measures to cover big companies as well as start-ups. That is a mistake, says Roques. Unlike start-ups , the big companies don’t use the tax breaks to generate more jobs, they just use them to make more profits, he says.  By adding big companies into the mix the worry is that in a financial crisis, when governments are scrambling for ways to save money, that the tax breaks will become too much of an opportunity cost to governments.

That said, France has taken some steps in the right direction that Roques hopes other countries will follow.
 A 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. 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. While a framework is being put in place at the European level that encourages other countries to adopt similar measures, progress has been slow, says Roques.

Roques urged politicians to stop focusing on troubled industries such as steel, automobile and finance and instead focus on the future. The future is more about technology and innovation,  he says.  “If European companies that become market leaders are bought and located somewhere else then key decisions and the company’s strategy is decided somewhere else,” Roques says. “If Europe is where we want those sorts of decisions to be made then we need to work very strongly to promote innovation and enterprise and we don’t see that happening right now.”




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