PRIME MINISTERS SCIENCE, ENGINEERING AND INNOVATION COUNCIL FIRST MEETING, 29 May 1998 Canberra OPPORTUNITIES TO PRODUCE A VIBRANT

AUSTRALIAN SOFT ARE INDUSTR! " REPORT OF T#E SOFT ARE OR$ING GROUP

S%&&ary The Australian market revenues for packaged software in 1997 were $2.67 billion about 1.!" of the world market. #evenue from domestic production of this software was $$21 million and e%ports were $1&& million. The Australian software industr' is diverse including not onl' producers who develop packaged software for general sale but also those who custom build software. The industr' has a number of opportunities and advantages including broad e%pertise in small to medium enterprises( the chance to establish a sustainable commercial advantage in user industr' applications( significant e%port or overseas development activit' dependent on building the necessar' marketing an distribution( and opportunities to participate in development of basic operating s'stems and core desktop applications. )t is proposed that in order to realise these advantages and opportunities four ke' challenges need to be met*

+ the ,overnment should provide leadership and agree long term goals with the industr' + ta% and investment policies need to be small and medium enterprises -./01 and technolog' business friendl' + a 2Trust Australia3 campaign should be mounted as an industr' development and investment initiative to
capture for Australia a ma4or share of the Asia56acific region7s new and emerging industries that will rel' upon the development of 2high trust3 software s'stems and a 2high trust3 business and technical environment

+ we need to increase the suppl' of skilled computer industr' emplo'ees and encourage lifelong education and
personal skills enhancement for both the computer industr' workforce and computer users generall'

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

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The presentation to 6/.0)8 was made b' 9r :ohn ;ebster 8hief 0%ecutive The )nstitution of 0ngineers Australia. BAC$GROUND The working group was established at the 9ecember 1997 meeting of the 6rime /inister7s .cience and 0ngineering 8ouncil. )ts members are* 9r :ohn ;ebster 8hief 0%ecutive The )nstitution of 0ngineers Australia -8hair1 /r 9oug 8ampbell ,roup /anaging 9irector 8arrier .ervices Telstra 8orporation <td 6rofessor =ill 8aelli >niversit' of ?ueensland -co5opted member1 /r Alfred /ilgrom =eam .oftware -co5opted member1 The terms of reference of the working group were to*

+ + +

assess Australia7s strengths in this area identif' problems related to capturing the full benefits from this science base make recommendations on how to improve the collaboration between the science base and industr'

ACTIONS RECOMMENDED The working group presented the following recommendations which in large measure are drawn from the software industr' as discussed at an industr' workshop on 1@ April 199$. 1' G()ern&en* +r(),-e .ea-er/0,+ an- a1ree .(n1 *er& 1(a./ 2,*0 *0e ,n-%/*ry That the ,overnment work with the Australian software industr' to develop a vision to be delivered as part of the )nformation )ndustries Action Agenda. )n particular to support the proposal that A.oftware Australia 2&2&7 be formed as an industr'5owned vehicle for cooperative international promotion representation facilitation of clustering networking 4oint tendering and governmentBindustr' cooperation. + suggest referral to the /inister for )ndustr' .cience and Tourism the Con :ohn /oore /6 Ta3 an- ,n)e/*&en* +(.,4,e/ *( be SME an- *e40n(.(1y b%/,ne// 5r,en-.y That as part of its present review of the ta%ation s'stem the ,overnment take account of the need in the software industr' -and other advanced technolog' industries1 for international best practice ta%ation and investment regimes and note especiall' the impact of capital gains ta% on incentives for patient capital investment in innovative small and medium siDed enterprises -./0s1. + suggest referral to the Treasurer the Con 6eter 8ostello /6 A 7Tr%/* A%/*ra.,a8 4a&+a,1n be &(%n*e- a/ an ,n-%/*ry -e)e.(+&en* an- ,n)e/*&en* ,n,*,a*,)e *( 4a+*%re 5(r A%/*ra.,a a &a9(r /0are (5 *0e A/,a"Pa4,5,4 re1,(n/ ne2 an- e&er1,n1 ,n-%/*r,e/ *0a* 2,.. re.y %+(n *0e -e)e.(+&en* (5 70,10 *r%/*8 /(5*2are /y/*e&/ an- a 70,10 *r%/*8 b%/,ne// an- *e40n,4a. en),r(n&en*' This initiative is one which Australia is e%ceedingl' well placed to develop. ;hen successful it will create a differentiated position for Australian software and online businesses which few if an' countries in this region could match. + suggest referral to the /inister for )ndustr' .cience and Tourism the Con :ohn /oore /6 In4rea/e *0e /%++.y (5 /;,..e- 4(&+%*er ,n-%/*ry e&+.(yee/ an- en4(%ra1e .,5e.(n1 e-%4a*,(n an+er/(na. /;,../ en0an4e&en* 5(r b(*0 *0e 4(&+%*er ,n-%/*ry 2(r;5(r4e an- 4(&+%*er %/er/ 1enera..y' That the ,overnment work with educational providers and the software industr' to urgentl' increase the suppl' of trained and Eualified computer industr' professionals and technicians and enhance opportunities for lifelong education in the industr'. As first priorities provide incentives for mature5age people particularl'

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The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

#eport of the software working group

those with high5level e%pertise in other industries to acEuire software development skills and consider options for the e%pansion of cooperative education programs between industr' and universities. + suggest referral to the /inister for 0mplo'ment 0ducation Training and Fouth Affairs the Con 9r 9avid Gemp /6 T#E AUSTRALIAN SOFT ARE INDUSTR! $ey 1.(ba. *ren-/ a55e4*,n1 *0e /(5*2are ,n-%/*ry ,n A%/*ra.,a The following ke' drivers of economic development have particular relevance to the software industr'7s future growth path* H globalisation of industries and commerce( H rapid e%pansion of electronic connectivit'( H emergence of a 2knowledge econom'3( and H acceleration of change and innovation. C0ara4*er,/*,4/ (5 *0e /(5*2are ,n-%/*ry ,n A%/*ra.,a H global Ian archet'pal electronic business H both an industr' itself and a ma4or enabler of other industries H maturing H price5taking H strong research and skill base H structure dominated b' large global corporations H large number of Australian ./0s H Jederal ,overnment polic' basicall' non5interventionist o historicall' focussed on information technolog' and transfer -)TKT1 trade deficit and attracting large global corporations o )nformation )ndustries Action Agenda announced as part of Investing for Growth. S,<e an- +er5(r&an4e (5 *0e A%/*ra.,an /(5*2are ,n-%/*ry H Australian market revenues for packaged software in 1997* $2.67 billion o @ growing at over 1@" per annum marginall' ahead of world growth rate( o Australian market is appro%imatel' 1.!" of world market + revenue from domestic production of packaged software in 199!B96* $$21 million + e%ports of packaged software in 199!B96* $1&& million + !! &&& people are emplo'ed in 97&& businesses in the computer services sector -which includes most software development1* o over 9&&& are emplo'ed in businesses with less than 9 emplo'ees o onl' !1 businesses emplo'ed more than 1&& people. D,)er/,*y (5 *0e /(5*2are ,n-%/*ry The software industr' is diverse. )t includes not onl' the producers which develop packaged software for general sale -ie the' 2make for market31 but also those which custom build software. .ome custom5built software is also developed in5house b' user organisations. )n addition an increasing amount of software is embedded in other products such as motor vehicles washing machines and now smartcards. The following figure depicts this diversit'.

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

F,1%re 1= D,)er/e /e4*(r/ (5 *0e /(5*2are ,n-%/*ry

/arket barriers failures and opportunities will var' across this diverse industr'. Thus polic' initiatives ma' also need to var' or be targeted at particular segments. Jor e%ample the strategic e%porters Ithose businesses which earn more than 2!" of their incomes from e%ports Iare clearl' tr'ing to establish themselves and the Australian industr' in global markets. The' face ver' different pressures from sa' in5house software developers. O++(r*%n,*,e/

+ Australian software industr' ./0s have broad e%pertise + Australian industr' can establish a sustainable commercial advantage in user industr' applications -eg.
mining agriculture banking1

+ marketing and distribution are the ke' to significant e%portBoverseas development activit' + the basic operating s'stems and core desktop applications are becoming closer to commodities but
opportunities will remain for Australia to participate in their development provided that open s'stems and not proprietar' software interfaces become the norm T#E FOUR $E! C#ALLENGES To achieve a vibrant software industr' the working group recommends that in addition to the .oftware

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

#eport of the software working group

0ngineering ?ualit' 8entres initiative announced in Investing for Growth that action is reEuired on four ke' challenges. 0ach reEuires immediate attention b' government and industr' working together. 1' G()ern&en* *( +r(),-e .ea-er/0,+ an- a1ree .(n1 *er& 1(a./ 2,*0 *0e ,n-%/*ry To encourage confidence in the industr' and set it on a path to develop Australia7s capabilities to the ma%imum the Jederal ,overnment initiated the )nformation )ndustries Action Agenda in Investing for Growth. =' e%tending this Agenda through a sub5component focussed on software the industr' and government together can achieve*

+ #emoval of barriers to growth 5 which need to be seen in the conte%t of the e%istence of a few dominant global o o
software companies and hence the resultant oligopol' power issues* intellectual propert' is a ver' important trading commodit'( Australian software businesses will often create new intellectual propert' -)61 b' working with customers in other industries to be first to market with solutions for difficult problems.

+ ,rowth 5 Australia does not have a ma4or global software pla'er and our software industr' is likel' to remain
a niche market pla'er unless substantial unforeseen changes occur. ,iven this an achievable scenario and target is to see Australia with a broad skill base -one million productive programmers1 and hundreds if not thousands of ./0s e%porting software. o Australia can also be a ma4or centre for software development b' transnationals 5 a scenario that has alread' begun to emerge.

+ 9evelopment opportunities from the emergence of a Aknowledge industr'7 5 broader in scope than the present
common understanding of the software industr'. A new industr' where location is irrelevant and connectivit' is global. o other ke' factors include developing a leading edge technical infrastructure focussing on skills and knowledge language services intellectual propert' the impact of )nternet5based commerce and ;eb5based computing on patterns of trade and the nature of software products as actuall' sold and delivered.

+ ,reater e%ports and global recognition of Australia7s software capabilities 5 through the concept of .oftware
Australia 2&2& 5 an industr' suggestion to form an entit' to be owned and funded b' industr' as a vehicle for cooperative international promotion representation facilitation of clustering networking 4oint tendering and governmentBindustr' cooperation. o this initiative would provide one credible response to concerns that dominant global software providers will limit e%port opportunities for Australian software ./0s. o in man' respects the functions of the new bod' would be similar to those of the .oftware =usiness Metwork established in the >nited Gingdom. Cowever .oftware Australia would have a much stronger element of industr'5wide development and promotion. To that e%tent parallels can be seen in the recent development of the Aconcept car7 b' Australian automotive component companies and the collaborative work within the wine industr' on its 2&2! strateg'. 2' Ta3 an- ,n)e/*&en* +(.,4,e/ *( be SME an- a-)an4e- *e40n(.(1y b%/,ne// 5r,en-.y )nnovation in business is critical and is affected b' both the availabilit' of patient capital and incentives for research and development -#K91. These issues e%tend well be'ond the software industr'( but are crucial to it. There are two changes in the ta%ation regime which will have a particular impact on this industr'* + rewarding patient capital b' reducing or eliminating capital gains ta% for venture investments held for a significant period -sa' ! or 7 'ears1( and + removing impediments to off5shore venture capital coming into Australia( o the problem is that ta%5e%empt >. and >G funds become ta%able in Australia( rather than investing directl' such funds generall' invest through intermediate bodies( such entities are ta%ed as limited partnerships in Australia and >. and >G funds therefore prefer to channel their off5shore investments to other countries which offer reciprocit' of ta% treatment. There is an urgent need for changes in ta%ation policies and in the treatment of investment capital to encourage and reward risk taking in the Australian software industr'. The Jederal ,overnment7s )nnovation )nvestment Jund is a beginning. Ta% reform and especiall' capital gains ta% reform is also desperatel' needed if policies are to be

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

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trul' encouraging of innovation. #K9 assistance and e%port market development support are two other measures central to the development of an innovative and e%ports earning software industr'. 6' A 7Tr%/* A%/*ra.,a8 4a&+a,1n be &(%n*e- a/ an ,n-%/*ry -e)e.(+&en* an- ,n)e/*&en* ,n,*,a*,)e *( 4a+*%re 5(r A%/*ra.,a a &a9(r /0are (5 *0e A/,a"Pa4,5,4 re1,(n/ ne2 an- e&er1,n1 ,n-%/*r,e/ *0a* 2,.. re.y %+(n *0e -e)e.(+&en* (5 70,10 *r%/*8 /(5*2are /y/*e&/ an- a 70,10 *r%/*8 b%/,ne// an- *e40n,4a. en),r(n&en*' This is an industr' development and investment initiative which Australia is e%ceedingl' well placed to develop. ;hen successful it will create a real and substantial differentiated position for Australian software and online businesses which few if an' countries in this region could match. + This initiative can be seen as similar to the 2clean and green3 campaign -under what is now the .upermarket to Asia initiative1 which involved both overseas promotional activities and attention to refining the capabilit' of the Australian industr' to deliver well on the advertised claim of Aclean and green7. Mo one firm could mount this initiative alone and cooperation between industr' and government is central to success. + Australia can create a global competitive edge in this fast developing 2high trust3 segment of the software industr' and in emerging new electronic commerce industries through this industr' initiated concept. 2Trust Australia 5 'ou can depend upon it.3 + ,overnment should also encourage the emergence of self5regulator' s'stems for the accreditation of software development companies and software engineering professionals. This initiative would be underpinned b' the online legal and regulator' framework currentl' being developed. ;ork would need to continue with urgenc'. )t would need to encompass clear and reliable rules for electronic authorisation certification and distribution of digital signatures hardware and software standards for s'stems securit' and strong intellectual propert' regimes for electronic intellectual propert'. /ost of the necessar' reform is alread' well under wa' providing a firm base for this industr' development and investment initiative. :' In4rea/e *0e /%++.y (5 /;,..e- 4(&+%*er ,n-%/*ry e&+.(yee/ an- en4(%ra1e .,5e.(n1 e-%4a*,(n an+er/(na. /;,../ en0an4e&en* 5(r b(*0 *0e 4(&+%*er ,n-%/*ry 2(r;5(r4e an- 4(&+%*er %/er/ 1enera..y A current Australian strength in the information industries is our locall' trained and e%perienced computer professionals. /oreover our highl' skilled people are competitivel' priced relative to those paid in most other developed countries. As in the >.A there are clear signs in Australia that demand is greater than the current suppl' for skills and the gap is growing. )ndustr' estimates that Australia will need a 1251!" per annum increase in graduates over the ne%t five 'ears split eEuall' between professional and technical skills. To successfull' tackle this issue will reEuire innovation on the education front. This could for e%ample include allowance for diverse entr' points to the education s'stem in combination with the concept of lifetime training -which would make use of the skill base of the ever5growing number of over !&s particularl' those with high5 level e%pertise in other industries1 offering distinct opportunities to Euickl' build on our current strengths. Attention should be directed to options for the e%pansion of cooperative education programs between industr' and universities. >nder current government polic' educational institutions should have the fle%ibilit' to respond rapidl' and positivel' to this substantial increase in world demand for high value professional and technicall' skilled workers. This challenge must be accepted and government ma' need to facilitate initial actions. )f Australia can substantiall' increase the suppl' of trained and e%perienced workers in a sector in which Australia alread' has a world reputation for Eualit' education this will ver' likel' become a ma4or inducement for medium and large international corporations to establish in Australia new design high value production and service operations. OT#ER IMPORTANT ISSUES The )ndustr' ;orkshop put forward a range of other important issues for consideration. P%r40a/,n1 +(.,4y > 4(rre4*,n1 %n,n*en-e- e55e4*/ 20,40 .,&,* *0e +(*en*,a. (5 SME/ Nne ma4or threat perceived b' ./0 software companies is the potential unintended impact of government

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"

#eport of the software working group

outsourcing on their abilit' to innovate and grow( perhaps even to survive. A focus on building a constructive and cooperative relationship between the government and local companies to ensure that Australian software companies have eEual access to government business will counter a particular concern in the outsourcing of applications development. <ocal companies would benefit if the outsourcing of applications development remained on a pro4ect b' pro4ect basis and allowed vendors read' access to the intellectual propert' created. Re/ear40 5%n-,n1 5(r ,n-%/*ry 4(n/(r*,a 2,*0 a /0(r*er .,5e 4y4.e *0an *0e e3,/*,n1 CRC/ =' developing the 8#8 concept to account for the d'namics of rapid change in the )T industr' public research could focus more efficientl' on industr' needs. These modified 8#8s would respond to the rapid technological developments in the )T sector and keep the research effort close to market opportunities. Ma,n*enan4e (5 e3,/*,n1 +(.,4,e/ 5a)(%r,n1 (+en /y/*e&/ An' Agenda to develop the Australian software industr' must encourage the widespread availabilit' of interconnection -or interface1 standards which are open Ithat is readil' available to Australian developers. /an' computer industr' interface standards are owned privatel' b' leading market pla'ers which then have a disproportionate degree of control over access to the market. Thus the development perhaps even survival of the Australian software industr' in the global marketplace will be dependent on government pla'ing a crucial role in the maintenance of open s'stems. The Jederal ,overnment b' adopting the polic' of bu'ing and using software and information processing s'stems which interface freel' and where interface specifications are openl' available to Australian software developers will e%pand market opportunities for Australian developers. Jurther where such specifications are denied the Jederal ,overnment should permit reverse engineering to discover the necessar' connectivit' information wherever companies domiciled within the countr' of origin of the s'stems concerned would be entitled to gain access to such information b' reverse engineering or otherwise.

The paper was prepared by an independent Working Group for the PMSEIC and the views so expressed are those of the Working Group and not necessari y those of the Co!!onwea th"