The market for software is truly global, and so are many good-management practices in the industry’s three segments: mass market, enterprise solutions, and professional services. But a 1998 McKinsey survey of 100 software companies around the world found clear distinctions between practices in Europe and those in the United States.¹ The most important problems facing the industry involve internationalization, sales and marketing, pay and stock options, and staff turnover. In all these areas, Europe trails the United States.

First, European companies are relatively slow to sell their products abroad: US companies, despite their huge home market, internationalize earlier (Exhibit 1). Nonetheless, Europe does have some outstanding competitors in the global race—not only well-known giants such as SAP in Germany, but also new firms that could act as role models for others in Europe. Take Intershop, which is developing applications for electronic commerce: in 1996, it spent $10 million, more than its entire annual revenue, on internationalization (which included moving its headquarters from Jena, Germany, to San Francisco). Today, Intershop’s products reach more than 70 countries, and in the first three quarters of 1999, sales increased by more than 130 percent, to almost $21 million. But in Europe, such companies are still the exception. To compete in an increasingly global business, European firms must stop hiding in their local markets.

They should also start to focus more intensely on sales and marketing, as their US counterparts do. The industry’s dynamics mean that there is room for only one or two leaders in each software category. To win the race, intensive sales and marketing are vital: product marketing budgets for software match those of classical consumer goods. But in this area, European companies still lag behind those of the United States. On average, 39 percent of the employees of US software product companies work in sales, marketing, and service. In European companies, only 25 percent do.

As for pay, both US and European companies tie it to performance, but here too practices diverge. The incomes of the highest-paid European salespeople, for example, are only 23 percent above the average, as opposed to more than 130 percent in the United States. In the United States, moreover, bonuses account for a larger share of an average sales representative’s income than they do in Europe (Exhibit 2). In part, these differences reflect the fact that half of the income of US sales reps is related to performance while less than 30 percent of the income of European reps is.

In some ways, Europe is catching up on incentives. But tax and labor laws make stock options unattractive in several countries, and this puts many software firms in Europe at a great disadvantage; as recently as 1998, only 41 percent of them used stock options, as opposed to 91 percent of their US counterparts. Leading European software firms are starting to tackle the problem, however. SAP, for instance, has introduced a "virtual" stock options program: employees buy so-called virtual shares, which confer benefits comparable to those of real stock options. SAP pays the virtual stock gains directly from its cash flow, charging these high costs as personnel expenses.

Staff turnover is far lower in Europe: 7 percent for all three segments of the industry, rather than 21 percent, as in the United States. Yet this may actually be a problem. Some of the lower European turnover results from a relative paucity of opportunities—in the United States, more than two-thirds of the employees of software companies who leave their jobs do so because they have received better offers elsewhere—and from legal constraints on discharging workers. The McKinsey survey found that US software companies have learned to live with high turnover, which helps them introduce new thinking and ideas, renew their energy, and gain access to new networks.

But there is always a trade-off between the positive effects of employee turnover and the knowledge drain that goes with it. Both Europe and the United States can learn from each other: Europe shouldn’t be afraid of the higher employee turnover rates to come, and US companies should find effective ways of keeping their top performers.