A bill to revise the Software Industry Promotion Act was passed on May 2 along with some 60 others during the last session of the 18th National Assembly. The revised law, which goes into effect from next January, bans chaebol-affiliated IT service companies from working on public-sector projects.
The new regulation is one of the initiatives the government has recently taken to jump-start the stagnating domestic software industry, which it has pledged to foster as one of the nation’s future growth engines.
The revised law ring-fences a market estimated at 2.5 trillion won a year to give small, independent software companies a chance to grow and build their names in the global market.
Thus far, chaebol subsidiaries have swept public-sector system integration projects, based on their financial muscle. Last year, the top three IT service companies ― Samsung SDS, LG CNS and SK C&C ― accounted for 73 percent of public-sector SI orders.
Chaebol companies have deep pockets that enable them to outbid their smaller competitors. The main source of their financial strength is the sweet related-party deals they get from the sister companies of their groups.
These chaebol IT firms usually farm out their public-sector projects to a group of small software developers on terms that leave little room for the subcontractors to make money or develop creative programs.
For instance, software firms usually have no copyright claims to the programs they developed in the process of carrying out the subcontracted work. This predatory practice gives software developers no incentives to produce innovative programs.
The amended law is intended to free independent software companies from the tyranny of large IT service companies, at least in the public-sector market. In the private sector, the government has sought to create a level playing field by pressuring chaebol groups to give small software firms a fair shot at their in-house projects.
The government’s vision is to develop a software ecosystem where all players, small and big, play a role to create a virtuous circle. Currently, big companies flourish while small players languish. This system cannot be sustained, let alone evolve into a prosperous growth industry.
In a sustainable ecosystem, small software companies are offered incentives to give full play to their creativity. This benefits the clients they serve and brings them reward in the form of profits and reputation.
The revised law is intended to help the software industry move in this direction. Yet it alone is not enough to achieve this transition. The government needs to follow it up with additional reforms.
For instance, public agencies need to ensure that they pay software companies fair prices for their work. In many cases, the prices for their projects are set too low because lawmakers have slashed the project budgets during the parliamentary deliberation process.
If software companies are not paid properly for their work, it will be difficult for them to write good quality programs.
The government also needs to arrange contracts between public agencies and software companies in a way that allow the latter to retain the ownership of the programs they have created.
This arrangement would enable software publishers get the maximum mileage out of their development efforts by selling the same programs to other clients. This measure is also essential to helping domestic software firms tap into the global market.
Cultivating high-caliber software manpower is another task the government should tackle. For this, it recently unveiled a plan to set up software “meister” schools to upgrade secondary vocational training, and specialized software colleges and graduate schools aimed at fostering world-class software architects. These plans should be implemented as planned.
Software companies, for their part, have to rise to the occasion. They should focus on developing packaged software ― a set of programs bunched together, such as Microsoft Office ― that can attract overseas customers. For marketing and distribution of their products abroad, they need to cooperate with large corporations who have a global network.
Chaebol-affiliated IT service companies are also advised to lift their heads and look for new SI projects in overseas markets, such as South America, the Middle East and Eastern Europe. They need to enhance their consulting capabilities, as IT services usually start from consulting and lead to system development.