Technology has transformed the business landscape in recent years. Software has streamlined finance and accounting, transformed manufacturing and enabled SME owners to run their entire business from a mobile phone.
Despite these successes, most business applications do not get off to the best start. Compared to the vast consumer market where companies like Apple and Amazon spend billions competing to develop the ‘next big thing’, the business-to-business arena is relatively small.
With the exception of ERP and accounting systems, there are not the economies of scale to permit experimentation and the temptation is to bring products to market as quickly as possible. Rather than a well-planned release, in practice products often make a hasty escape.
Even big companies fall into this trap – witness the case of Fujitsu and its Post Office Horizon system.
Unsuspecting customers
Whether it is a new application or a new version of an existing app, the way the process usually begins is that someone has a great idea and an unsuspecting customer buys into it. Unfortunately the customer then finds themselves testing an alpha version rather than doing the final field testing on a beta version – an unexpected workload they don’t have time for and certainly don’t appreciate.
As a result a blame culture emerges, with the customer accusing the supplier of incompetence and the supplier blaming the customer for failure to specify their requirements. The software ends up in the bin and the customer moves to another supplier only to find that things are no different or, in many cases, worse.
R&D risk
The root problem is that research and development projects are expensive to fund and are also very risky. During my long career in the software industry I have seen failed development projects bring down even successful and well respected names. Software companies know they need to get from A to B but they are often not able to fully fund the journey, and external funding is extremely difficult to come by.
Lenders require any business loans to be backed by assets which, in the case of software houses, are usually non-existent, so proprietors have to provide personal guarantees.
Equity funding is another possibility though venture capital investors will want a share in the company – something that established software companies may be unwilling to agree to, or they may have existing share structures that restrict their ability to take on new investors. And even VCs now often require some type of personal guarantee and will apply interest well above the base rate.
It may be possible to obtain R&D tax credits, but it is a complex process and of course will not cover the full cost of development.
Creative accounting
Sometimes companies try to mask research and development expenditure through the use of creative accounting. It is perfectly legal to post the R&D expenditure to the balance sheet as an intangible asset and then write it off over a period of years – but if it does not result in a saleable product then the company is forced to write off the expenditure in the profit and loss account which may force it into a loss-making situation for many years. And ultimately, the cash still needs to be found.
An accountant or bank will disregard the value of an intangible asset in a balance sheet, which could then show the net assets as negative and suggest the company is trading illegally by having liabilities which are not covered by assets.
The solution
So, what is the solution? One idea is a government-backed fund that provides R&D grants solely for software development. It could be managed by specialist fund managers who would approve projects and monitor them to ensure that companies adhere to their plans. Where a project is successful – and a high percentage should be provided there has been thorough due diligence – then the fund would achieve returns via a percentage of sales.
B2B software is a global industry and the UK is a leader in the field. The opportunities are growing all the time, as improved communication and hosting facilities enable support to be provided in all parts of the world. And once an application is released, the capabilities of the platform software enable it to be quickly translated into many different languages.
A fund for software development could not only encourage the launch of new and improved software and boost national productivity, it could also enhance the UK’s status as a tech superpower and boost export earnings in the years to come.
I’ve built 7 businesses… & faced these same challenges every time