South Africa`s rapidly growing application development industry is set for tough times. This is the prediction from Derek Hughes, MD of MGX Software Development (formerly part of CCH before its recent acquisition by MGX Holdings), who says international and local trends will put the squeeze on local companies` ability to attract and retain skilled staff, with potentially negative consequences.
The benchmark for global software development is India, which has been reported to be facing its first profit squeeze. This after more than two decades of consistent growth, driven by US and European companies outsourcing the bulk of their development work to Indian companies such as Tata and Infosys.
"In India, as elsewhere, developers have come to realise their value," says Hughes. "As a consequence they are driving labour cost inflation and Indian companies are having to pay more to keep their people. This is in line with other trends in globalisation, and it happens in any knowledge industry.
It`s a simple matter of mathematics: if labour costs 300 pounds a day in England, and 10 pounds a day in India, where is a developer likely to sell his skills? This carries similar implications for the South African market."
The anticipated post-Y2K job losses did not occur, and the global IT skills shortage is accelerating rather than slowing down, Hughes adds. "In Europe the shortage is growing at 170 000 jobs a year, and by 2003 there will be a shortfall of 1,2 million IT positions there. The US shortfall is in the order of 600 000. These countries are bidding for a limited labour pool with strong currencies, which will put the squeeze on countries such as India and South Africa with their weaker currencies."
The downside also carries a potential upside, adds Hughes. "In strong economies, the cost of software development can be as high as $150 an hour and in developing countries as low as $10 an hour. This creates a huge opportunity for entrepreneurial companies. For instance, 30 developers in London can generate as much revenue and twice as much profit as 100 people in South Africa."
In central London alone there are 80 000 vacancies, Hughes reports. "It is beyond the scope of the entire South African software industry to address this shortage, so it makes sense to target a single vertical market sector, which is our strategic decision. With such a shortfall, we have also taken a policy decision not to compete on price, but rather to let the quality of our work speak for itself."
The labour squeeze in India is leading to a further knock-on, notes Hughes, as Indian companies begin to outsource some of their development to lower-cost countries such as China and the Philippines. "This means that outsourcers themselves are outsourcing aspects of their business to specialist companies in other countries."
The software development industry in India has become big business. It embraces more than 600 companies, and accounts for between 16% and 25% of the worldwide turnkey development industry, and is worth an estimated $10 billion a year. To underscore the quality of the software produced in India, 13 of the 15 highest-rated development companies in the world are to be found in India. The rise of this industry over the last two decades has had a material impact on the Indian economy.
"South Africa can and must take its lead from India," Hughes stresses. "Business and government must combine their efforts and energies to create the right environment."
Government has five key actions required of it, Hughes notes:
. It needs to create an intellectual property tax haven, and provide incentives for businesses to invest in creating the intellectual property;
. It needs to amend immigration laws to attract the right people - "We could double our workforce overnight with top Eastern European developers," says Hughes. This type of resource flow will not take jobs away from South Africans, but rather will bring knowledge to the country, stimulate the economy and create jobs in the local market";
. Improve the standard of education to create a stronger pool of candidates for the future; and
. Deregulate telecommunications as a matter of urgency. "Software development, more than any other industry, needs bandwidth," Hughes emphasises, "for videoconferencing, for software delivery and to ensure development teams remain in synch."
. Finally, the government has an important role in marketing these improvements and the industry they are creating to the global economy.
Hughes reports that MGX executives have begun the process of dialogue with government to ensure that South Africa takes its place on the global software stage.
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