Software is everywhere

The software industry is increasingly important for the Dutch economy. But how big is this sector?

Insights
Main Capital Partners
02/09/2021

Software is eating the world, American entrepreneur Marc Andreessen stated back in 2011 in The Wall Street Journal. What he meant by this: more and more tasks in our daily lives and critical business processes are being taken over by software. Software simplifies existing processes and creates new opportunities, whether in healthcare, business or (municipal) governments.

Bram Kaashoek is Managing Director Market Intelligence at software investor Main Capital Partners. He explains: ‘Software products have become extremely scalable due to the cloud. This has caused huge growth for the sector. If software suppliers have their product in order, they can connect customers all over the world at low marginal costs. This is truly unique.’

Double-digit growth
Long story short: the global software industry is on fire. Earlier this year, research agency Gartner predicted that the IT sector will grow by 9 percent worldwide in 2021 (to the equivalent of 3,300 billion euros) and by 5 percent in 2022. Within IT (which also includes, for example, IT customization, data centers and hardware), enterprise software is by far the fastest grower. Gartner predicts 13 and 12 percent growth for 2021 and 2022 respectively.

Source: Gartner

Software is an important industry worldwide, that is certain. But if software is so important in our modern society and economy, what is the situation in the Netherlands? What does the sector look like here? And, how big is it?

Dutch innovative strength
In an international perspective, we know that the innovative power of the Netherlands is highly regarded. In the Global Innovation Index, a respected list published by – among others- Cornell University and Insead, the Netherlands ranked in the top five for years. A recent and less-known study from Finland gives the same impression. In the study – Digibarometer 2021 – the Finns put the Netherlands in sixth place, following the Scandinavian countries and the United States.

Source: Digibarometer 2021, ETLA Economic Research.

But innovative power is not software. However, as Bram Kaashoek explains, ‘innovative strength is a strong determinant of a successful software industry, in addition to a strong knowledge infrastructure, availability of ICT resources, broadband infrastructure, a culture of entrepreneurship and availability of capital’.

The Dutch software industry knows quite a few international successes. Eye-catching business examples are payment platforms Mollie and Adyen. Also not to be overlooked are Unit4, Afas and Exact, big players in ERP and financial software, and the low-code software company Mendix, which was acquired by Siemens in 2018.  The now US-listed Elastic, an open-source search and analytics engine, also has its roots in the Netherlands.

Main Software 50
These international successes however, including some ‘unicorns’, are just the tip of the iceberg. Beneath the surface lies an enormous playing field of SMEs that have a turnover of a few million euros, to corporations with a turnover of 500 million euros or more. To put these companies on the map and, according to Bram Kaashoek, to give them the appreciation they deserve, software investor Main Capital Partners annually organizes the Main Software 50, a ranking for successful B2B companies in the Dutch software market.

The ranking list, which will celebrate its 10th anniversary this year, is not a comprehensive reflection of the Dutch software market. There is a selection bias, since only high-performing companies apply and a minimum revenue of 1 million euro is required to be included in the list. Nevertheless, the ranking mirrors the dynamics at the top of the Dutch software sector quite well: in the pandemic year 2020 the total revenue uplift was 20 percent, in 2019 it was 23 percent. Moreover, Bram Kaashoek points out, the revenue growth is of high quality: ‘ Among other factors we take the so-called recurring revenue from subscription models into account, which is a good indicator for predictable growth, as well as profitability and revenue from partner channels and international sales. All these figures are developing steadily.’

Source: Main Capital Partners

‘The Dutch software sector is doing well,’ Robbin te Velde agrees. He is Principal Researcher at Dialogic, an independent research bureau based in Utrecht. Te Velde has been researching the software industry in the Netherlands for two decades. Dialogic estimated the industry’s contribution to the size of the economy at 3.4 percent in 2014.

Te Velde expects that, given all developments, this percentage has increased significantly. But he finds it difficult to estimate how much ‘significantly’ means. How well the Dutch software sector is doing in terms of figures, is difficult to find in the available statistics.

Under the radar
For business statistics, we rely on Statistics Netherlands (CBS). CBS regards the software sector as a subsector of the ICT sector. This also includes the development of hardware, ICT consultancy and more.

Centraal Bureau voor de Statistiek (CBS). Part of the Ministry of Economic Affairs. Source: CBS.

Software is therefore somewhat hidden in the statistics. The CBS follows the – stay with me – Statistical classification of economic activities in the European Community, also known as NACE. This measurement method is revised every 15 years (the next one is in 2023), but in a European context. Major changes have to be agreed upon and then implemented. The CBS only takes care of the Dutch detailing.

With the current way of classifying companies and recording of business dynamics (number of companies, revenue growth, job creation), we miss part of the direct and indirect impact of Dutch software companies. The CBS acknowledges this. Goltan Varashk of CBS: ‘Software is a broad concept. You can develop, publish, sell or support it, to name a few. You can’t say that software belongs to one sector.’

The consequence: in the first place you miss companies that (mostly) supply software as a product, but are not registered as software companies with the Dutch Chamber of Commerce – and therefore fall outside the scope of the CBS. A typically Dutch example is Wolters Kluwer, whose strategy has been for years to transform printed content products into work process-supporting software for lawyers and accountants, for example. Wolters Kluwer has been very successful in this and can be viewed as a software company, although it is classified as a publisher. Another good example is Philips’ e-healthcare portfolio, which consists largely of software solutions in addition to hardware.

Second consequence is that you miss the self-employed who develop software, whether or not in their spare time, alongside their jobs or on commission. Te Velde: ‘People can make software at home. That has never been the case with any major enabling technology – think of steam, electricity and so on.’

Indirect economic effect
Because of these two blind spots, you also miss some of the indirect effects of software. Software enables efficiency in end markets, contributes to productivity, innovation and creates numerous new jobs that did not exist before digitization – such as e-commerce specialists in retail. Kaashoek: ‘More than other sectors, software has an enabling character. Since it improves business processes, software has a large indirect economic effect.’

It is therefore difficult to estimate the size of the Dutch software sector using our national databases. For an answer, we have to rely on experts who monitor movements in the sector on a daily basis. Bram Kaashoek is willing to venture an estimation. ‘According to PartnerNavigator there are about 20,000 software companies in the Netherlands, if you correct for the two effects mentioned above and only include professional developers. I estimate the direct contribution of software to the Dutch economy, thus the real contribution of the software industry, at 4 to 4.5 percent of the Gross National Product (GNP). This is approximately 30 to 35 billion euro’s.’

What are the fast-growing markets? Fintech software, digital security software, software for healthcare and govtech software, according to Kaashoek – who bases this on internal market research done by Main. In addition, there is still a lot invested in more generic software, for example in the field of HR, ERP, CRM and business process management (BPM). The pandemic has only increased the importance of software companies with cloud-based services. In corona year 2020, Dutch software company  Unit4 saw its cloud subscription revenue grow by 43 percent to 119 million euro’s.

Significant as well is the size of the – admittedly German – company SAP, which in addition to ERP and CRM supplies all kinds of solutions for business analytics and data management. With a turnover of 27 billion euro’s, SAP has a ‘market cap’ of approximately 150 billion. Kaashoek: ‘That’s more than the GNP of Hungary and twice that of Luxembourg.’

Software is eating the world – and, so it seems – a huge chunk of our economy.

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