Software vendor consolidation and buyer concerns

Oracle's aggressive acquisition strategy is just the latest evidence of a consolidation trend underway in the software industry. In the enterprise applications space, players such as SSA Global have also been primary consolidators.

One might think, therefore, that the software marketplace will ultimately consolidate around a handful of large vendors, which will enjoy economies of scale and offer long-term stability and one-stop shopping.

But M.R. Rangaswami of the Sand Hill Group argues that the enterprise software market is still open for other players.

The perception that customers want to buy everything from a single vendor--however warranted--is idealistic. Once a single software vendor manages everything, the customer is beholden to that vendor. Smart CIOs know this--and are hedging their bets. They are balancing the right amount of business they give one vendor with the need to keep that vendor honest and serving them well. This fact ensures that small and mid-sized best-of-breed vendors will always have a place in the enterprise technology lineup.

Rangaswami is touching a point that I feel strongly about: the balance of power between sellers and buyers of commercial software. (I'll let the reader guess where my sympathies lie).

Vendor power over the customer is especially troublesome in the enterprise software market, where customers are making a decision that will tie them to the vendor for many, many years. Once a customer implements an enterprise system, it is extremely difficult to undo that decision. Vendors know this, and some of them act like they own the customer, treating them like a captive audience. This explains, in part, the overall low level of customer satisfaction in the applications software industry. In most other industries, satisfaction levels like this would put a supplier out of business.

Yes, CIOs want fewer vendors to manage, and they want the stability and continuity of service that a larger vendor can offer. But they don't want to give up too much power in the relationship. As much as possible, they want to control their own destiny and preserve their freedom to choose.

In my opinion, the need to maintain freedom is driving several trends in the enterprise software industry that seemingly have nothing to do with one another. It is behind the popularity of Linux and open source. It is behind the trend toward open standards and service-oriented architecture, which should allow buyers to mix and match software components from different vendors. It is behind the rise of third-party maintenance organizations that provide an alternative to the vendor's own support services. One could even argue it is one factor behind software on-demand (or, software as a service), where the buyer does not need to make a huge up-front commitment to the vendor.

The vendor consolidation trend will no doubt continue, and it needs to continue. There are still too many weak performers. But that doesn't mean that the door is closed to new entrants, especially those that offer new and innovative solutions to real problems and commit themselves to customer service.

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