Opinion: Something's rotten in the software economy

The UK software industry is in danger of going the way of manufacturing, says Simon Moores - due to over-regulation, compliance costs, skills shortages and the government's lack of a clear policy to support innovation.

In his speech to the Labour Party Conference in Brighton this week, Gordon Brown, UK Chancellor and prime minister-in-waiting, promised to take measures to resurrect the UK's failing manufacturing sector - but said nothing that might inspire those of us who remember Tony Blair's pledges on the growth of the country's knowledge economy.

Are we doomed then to decay? Are we to become a foggy, soggy, over-regulated and over-taxed island... or can we build on the geographical position of the UK and London as the Hong Kong of the west?

As a globally competitive source of software development, the UK is in danger of letting the future slip away from it. Just look at the growth of economies of countries such as Ireland, whose software sector is responsible for nearly eight per cent of the country's GDP and nearly 10 per cent of exports. In India, IT and BPO sectors logged exports worth $12.5bn in 2003 to 2004. China and Israel are also proving to be countries that recognise the true importance of a healthy and competitive software sector.

If you listen to the DTI, the future looks good. Let me quote from a 2001 DTI report: "The UK - with 100,000 software and IT businesses - is one of the most successful locations in Europe in attracting software companies. Growing 17 per cent annually since 1993, it is one of the most vibrant and fastest growing areas in the economy with a turnover of $31.5bn in 2001 and forecast to increase to $40.5bn by 2004."

But the truth is concealed behind the figures. Despite the dumbing-down of our education system, the UK still produces some of the best computer scientists in the world. But most work for companies based round the Pacific Rim. Some work for their UK technology transfer operations. Others emigrate. Meanwhile, at the DTI i2010 conference in September, it was revealed that even our indigenous high-tech companies do more R&D outside the Europe than within and that most publicly funded programmes are irrelevant to their needs.

Are we doomed then to decay? Are we to become a foggy, soggy, over-regulated and over-taxed island, off the coast of a culturally and bureaucratically fragmented peninsula, at the far side of the world from where the action is or can we build on the geographical position of the UK and London as the Hong Kong of the west?

From speaking with people inside the software industry, the harsher suggestion is that the UK is in danger of becoming a "software sweatshop" for companies that find it convenient to base their operations here until such a time as a more cost-effective business outsourcing opportunity appears elsewhere. It's a mirror image of the more accelerated experience faced by the manufacturing sector.

In some areas of development, there's no doubt our indigenous software industry thrives and it is no coincidence that the only sector of the UK-owned commercial software industry which is still truly world class is the one supporting our financial services industry.

In June, I spoke at the Irish Software Industry's annual conference, alongside a representative from Israel who pointed out that while Israel was investing more than seven per cent of its GDP in research and development, Ireland was only investing 1.38 per cent - below the goal of 2.5 per cent of GDP set by the European Union's Lisbon Agenda.

Ireland, the largest exporter of software in the world, I warned in my speech, has no clear policy to support innovation and its market success is threatened, like that of the UK, by emerging software economies, which have a lower cost of production and greater future capacity to create software.

Ireland's present success is arguably a beneficiary of EU generosity and the UK's complacency, and the initiative can and possibly will be snatched away from both countries unless their respective governments grasp the real nature of the challenge now facing European societies.

In the UK, our high technology businesses are being held back by over-regulation and compliance costs. Our workforce is falling behind in the skills needed today, let alone tomorrow. And our public services are victims of countless expensive failed transformation projects. None the less, government appears to believe we are doing well in comparison with the wrong countries.

No single nation has a large enough pool of information-literate workers available to sustain the rapid growth in the global networked economy. As BT's Ben Verwaayen told me last December: "We think we have a system that gets the best out of people and makes them productive. Think again."

Next week I'll be saying a few words on the challenges facing the UK software industry at the Conservative Party Conference in Blackpool. This is, I would argue, a challenge that lies beyond party politics and one that has to be met and urgently resolved before - as with the steady decline in our manufacturing industries - it is too late to act.