<software>
   <settings>
       ....
       </setting name="local directory" type="string">/home/username/</setting>
       ....
   </settings>
</software>

xmlstarlet val -e file.xml
xmlstarlet ed -u "//settings/setting/@name" -v 'local directory2' file.xml
xmlstarlet ed -u "//settings[1]/setting/@name" -v 'local directory2' file.xml

# edit file inplace
xmlstarlet ed -L -u "//settings/setting/@name" -v 'local directory2' file.xml