by Richard Gordon | September 6, 2013 | Comments Off
Why do we need software? The simple answer is that it manages complexity. The more complex economic activity becomes, the more software is needed to manage and coordinate that activity. If companies want to stay innovative and cutting-edge, they need the latest software.
Historically, software sales to companies have been dominated by two regions: North America and Western Europe. Okay … except that we hear a lot about the increasing tech-savviness of many “emerging” nations, so why aren’t these markets contributing more to overall software sales?
The answer highlights – for me, anyway – some interesting ideas around software, why some regions have so much of it, and how it relates to economic activity. As my colleagues Bianca Granetto and John Rizzuto simply put, the overriding reason why North America and Western Europe dominate software spending today and into the foreseeable future and why emerging regions don’t have much of a look-in (in terms of global share of software spending) is because of the highly diverse and complex nature of North American and Western European economies:
- They basically rely on significant amounts of information technology to manage and coordinate that diversity and complexity. Fundamentally, the more information technology you use, the more software you need to run, manage and update that technology. IT begets software, because software is ultimately what enables the efficient processing and coordination of information which which is the foundation of diverse and complex economic activity.
- And the more you rely on advanced information technology – data centres, applications, and telecommunications – the more you need software to integrate, run, and update it. It’s an important nuance to keep in mind, this idea that software spending is a combination of both new investments as well as spending to maintain previous investments. In a very real sense, software spending is self-reinforcing in that the more spending you do now, the even more spending you’ll likely need to do in the future.
Not surprisingly, software sales vary enormously by industry; specifically, by an industry’s information processing requirements or “IT intensity”. Industries like banking and financial services are highly IT-intensive. Industries like agriculture and mining or even basic manufacturing are much less IT-intensive and much more labour intensive. This is where the differences between mature and emerging economies, in terms of which industries drive the economy, really impacts software sales. In China, for example, agriculture constitutes 10% of Chinese GDP, basic industry, including mining and manufacturing, 45% – these are not high-IT use industries. In contrast, agriculture constitutes just over 1% of US GDP and basic industry just over 19%. Instead, more IT-intensive services like finance, communications and transportation constitute nearly 80% of US GDP, compared to 45% in China (see “The World Factbook”, CIA, https://www.cia.gov/library/publications/the-world-factbook/).
Fundamentally, much of the economic activity in many emerging markets, at this point in their development, simply isn’t IT-intensive enough to justify or generate significant software spending … either in the form of significant new software investments or the maintenance of past investments.
Of course, the emerging market situation is likely to change over time, as these markets move up the value chain in terms of industrial mix, with a gradually increasing portion of the population employed in more and more IT-intensive industries. This, then, will create the same dynamic seen in mature markets, with increasing levels of software spending focused not only on new investments but also on supporting previous projects! We`ll explore further this topic during our upcoming IT spending webinar scheduled for Tuesday 8th of October at 4:00PM UK time – do register now!
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