Lee Suk-chae, chairman of KT Corp., one of Korea’s leading telecom operators, has recently surprised domestic software developers by announcing that it will reform its predatory software procurement practices. His reform initiative deserves attention as it could revitalize the domestic software industry.
In the first place, Lee said KT would pay “fair” prices for the software programs it purchases from local vendors starting next year. This may hardly sound like a reform: In a market economy, goods are normally supposed to be traded at their fair prices. But in Korea, this has not been the case as far as software trade is concerned.
When a big company like KT purchases a software product from a small developer, the price is usually determined on the basis of its development cost, without taking into account the value added to it. A simple formula is used to calculate the development cost of a program ― the number of workers who participated in the project multiplied by the number of days worked and their standard daily wage rates, which are set by the Korea Software Industry Association.
For instance, if a software project took 10 days for six developers, each with a university degree, to complete, the development cost is around 10 million won, given that the standard daily rate of an “entry-level” developer with a bachelor’s degree is currently set at 162,862 won.
This pricing formula treats software developers as if they are day laborers at construction sites. It does not recognize the value they impart to their products. Furthermore, it does not distinguish talented developers from mediocre ones by paying them the same rate. This is one of the reasons gifted engineers leave the industry.
But software publishers, which have little bargaining power against their giant clients, have no way but to accept the grossly unreasonable and unfair pricing method. Otherwise they cannot stay afloat.
This pricing practice should have been abolished long ago because it eliminates the incentive for Korean software companies to write creative programs. As Lee put it, under this environment, even Steve Jobs or Bill Gates would end up being a mere technician earning about 10 million won a month at most.
Hence Lee said KT would ditch the old practice and procure programs based on their value starting next year. This means KT would no longer seek to buy software at the lowest possible price, but rather at a fair price that reflects the value of the products it places on them.
The second reform step KT will take concerns intellectual property rights of software companies. In Korea, when a software publisher develops a program at the request of a client, the program’s ownership generally belongs to the latter. This makes it impossible for the software house to sell the same product to other companies.
This practice should also have been terminated earlier because it prevents software firms from getting the maximum value out of their products. Hence, starting next year, KT plans to arrange their deals with software vendors in a way that allows them to retain ownership of their programs. This is an important concession as it creates the incentive for software houses to develop products with multiple clients in mind.
Another reform calls for increasing the fees KT pays to domestic software vendors for maintenance and upgrading of their programs. Currently, KT pays local software firms about 7-8 percent of their development costs in maintenance fees each year. But this is about one third of the fees it pays to foreign software vendors, such as Oracle and SAP. Lee said KT would gradually narrow this gap to help domestic software firms improve their quality of service.
These reforms will increase KT’s software procurement costs. Lee said the measures would ultimately benefit the company by revitalizing the domestic software industry. Lee, a former minister of information and communication, is credited with helping the domestic IT industry pivot from hardware to software by introducing Apple’s iPhone. The new smartphone has triggered an application development boom in Korea.
Now the emergence of cloud computing is pushing us into a new era of software, posing a big challenge for the domestic software industry. Lee’s reform initiative is intended to help Korean software firms rise to the occasion. In this regard, we hope the government as well as other domestic corporations emulate Lee’s initiative and give the software industry a much-needed boost.
