In changing software scenario, trust is vital

For the Chinese IT industry the rules of the game are swiftly changing. The Chinese, traditionally inward looking, with a history of custom software development, are now setting their sights on the West. It is here that they have begun to embrace third-party providers in their quest for the best application software.

It's all part of a radical change in IT itself, one that has now spread to China, where software specific to an industry is increasingly becoming an engine to help organizations achieve their business objectives. After all, these days software that is successful will be international, and if the technology is good and it is multilingual, so much the better.

In China there are several reasons for the dynamic change. Partially, it's globalization, in which Chinese are expanding domestic businesses to markets outside their borders where high performance software is already being used. Also, foreign businesses entering China are making the best use of software used elsewhere. Lastly, businesses worldwide are feeling growing frustration over the inability of their internal IT departments to continue building custom software while keeping pace with the complexity of new technology and to manage the increased cost. All of these drivers are resulting in a new focus on application software specific to particular fields.

For those companies that excel at the low end of the stack - the software tools, the operating systems software, the hardware - where there has been a good deal of commoditization, what makes a key difference in running a high-performing business is the application software. It has become the tail that wags the dog.

Specialized industry software allows: a bank to handle its deposits and loans and customer interfaces; an insurance company to process its claims and set its policies; a consumer goods company to master the logistics involved in getting materials and products from suppliers to customers. It's no longer about great hardware or leading operating systems or the best databases, but rather about smart application software.

The new markets, not only China, but also countries in Eastern Europe, for example, have turned the corner and are recognizing this need. However, reaching the next rung of the ladder can be challenging, which is why they have been lured to software produced by Western developers. They see enormous value in the years of intellectual property that have gone into application software development in the West and are eager to benefit from the best software produced by third-party providers.

So what forms will these burgeoning relationships take? One prediction is that we will soon see two types of relationships fostered between the Chinese and Western software developers. In the first, the client will choose to license the software and customize it in order to jump start their business and create a differentiator in an increasingly competitive market. In the second, Chinese and foreign businesses will work as joint venture partners to co-develop software products and take them to market.

The first model raises a concern that has long posed a challenge to Westerners conducting business in China, the risk of software piracy. So how does a Western software developer give a client in China a jump-start asset and let them customize it, while at the same time protecting their intellectual property? Although Chinese laws do exist to protect intellectual property (IP), the question is whether anyone is prepared to enforce them. IP protection will need to be adequately addressed before Western software developers are prepared to dive aggressively into the Chinese market.

Meanwhile, the prospect of a joint venture is attractive because Western companies, rather than investing resources to establish a foothold in a new and very different environment, have the advantage of leveraging the know-how of a local organization already well entrenched in China. This affords them the immediate benefit of a partner that has trust and recognition in the marketplace, knows the local players, and is more likely to defend the IP fiercely for the simple reason that it is also part of theirs.

As their businesses become more global, the Chinese will find that the secret sauce lies ultimately in gaining the application software that will allow them to run high-performance businesses. This shift is well underway, with interest in China having already led to discussions with IT services organizations. However, to take advantage of this opportunity, China still has work to do. The West will need greater assurances that the regulatory environment is friendly and conducive to building strong business relationships in ways that both sides can view as credible and mutually beneficial.

The author is managing director of Accenture Software. The views expressed in the article do not necessarily reflect those of China Daily.