Enterprise System Spectator blog: ERP and enterprise system vendor evaluation, selection, and implementation.

The Enterprise System Spectator

Friday, March 24, 2006

Software vendor growth not in software

The ever-provocative Josh Greenbaum takes a cynical view of enterprise software vendors' push towards software on-demand (software-as-a-service) and service-oriented architectures (SOA).

Josh points to a Merrill-Lynch study that puts the market for enterprise applications at only $21-23 billion a year, while the market for consulting and services is "a whopping $550 billion." He argues that with IT spending growing weakly, enterprise software vendors are looking to expand beyond software. This, he explains, is what's really behind vendors' interest in software-as-a-service and SOA.

In an article in Managing Automation, he writes,
With overall growth shrinking, applications companies like SAP and Oracle have to fund their double-digit growth plans by grabbing IT dollars from the consultants. From the applications vendors' perspective, companies are wasting a tremendous amount of IT budget on custom integration and applications development services, money that could be more effectively spent on packaged applications that deliver out-of-the-box innovation without requiring a hefty service fee.

The services companies are taking one of two possible tacks. Some are postulating that the perpetual license model for applications software, and the requirement to staff an IT department with systems and applications administrators, is vulnerable to a potentially more cost-effective model such as on-demand and software as a service. Others -- IBM Global Services in particular -- are saying that innovation can no longer come from a packaged software solution, and that custom consulting is the way to go.
Our research at Computer Economics confirms the slow growth in IT spending. We find that the median IT budget in the U.S. and Canada has only risen at a 1.5% average annual percentage rate over the past three years. Furthermore, corporate revenues are rising faster than IT spending, meaning that on a percentage-of-revenue basis, IT budgets are actually shrinking, slightly, at least over the past three years (although the 10 year trend is up).

Furthermore, application software currently consumes less than 10% of the typical IT budget, according to our 2005/2006 IT Spending Study. Therefore, as Josh points out, if software vendors want to grow, they either have to buy other vendors or do something besides sell software.

To be sure, software-as-a-service and SOA are hot topics--among software vendors. But preliminary results from our next year's survey, currently in progress, show that nearly half of IT organizations report "no activity" in either of these hot topics--they're not even researching them.

Software-as-a-service and SOA may still be the path to growth for software vendors. But the slow uptake of these technologies by end-user organizations means that significant growth is still at least several years away.

by Frank Scavo, 3/24/2006 07:13:00 AM | permalink | e-mail this!

 Reader Comments:


Can I offer a different interpretation of your data -- obviously without having seen it? 'Nearly half of IT
organizations report "no activity"' can also be seen as indicating that over half are reporting some degree of activity in this regard. In most presidential elections, anything over 52% is considered a landslide. While I wouldn't apply the same reasoning to your data, could a shift in the spending patterns of over half the IT budgets in your surveyed population actually indicate a hugely
positive trend towards on demand and software as a service?

Thanks as always for keeping the ideas flowing.


Josh, thanks for the message. I suppose it's a matter of seeing the glass half-empty, or half-full.

I went back and checked our survey results from two years ago (we didn't survey this technology last year.) In that year, 2004, 73% of the respondents indicated "no activity". So far this year the "no activity" group is around 50% (since the survey is still in progress, I do not want to quote the exact number...it will probably change). Now, one explanation might be that in 2004 we referred to the technology as "on demand computing" whereas this year we referred to it as "software on-demand." So, there could be a difference in the response rate due to different wording of the question.

But a more likely explanation is that there has been, in fact, a significant increase in adoption.

Therefore, a more positive way to present the findings would be to say that the trend toward software on-demand, or software as a service, is growing and there is still much room to grow.
Post a Comment

Links to this post:


Powered by Blogger

(c) 2002-2018, Frank Scavo.

Independent analysis of issues and trends in enterprise applications software and the strengths, weaknesses, advantages, and disadvantages of the vendors that provide them.

About the Enterprise System Spectator.

Frank Scavo Send tips, rumors, gossip, and feedback to Frank Scavo, at .

I'm interested in hearing about best practices, lessons learned, horror stories, and case studies of success or failure.

Selecting a new enterprise system can be a difficult decision. My consulting firm, Strativa, offers assistance that is independent and unbiased. For information on how we can help your organization make and carry out these decisions, write to me.

My IT research firm, Computer Economics provides metrics for IT management, such as IT spending and staffing benchmarks, technology adoption and investment trends, IT management best practices, IT salaries, outsourcing statistics, and more.

Go to latest postings

Search the Spectator!
Join over 1,700 subscribers on the Spectator email list!
Max. 1-2 times/month.
Easy one-click to unsubscribe anytime.

Follow me on Twitter
My RSS feed RSS News Feed

Computer Economics
Outsourcing Statistics
IT Spending and Staffing Benchmarks
IT Staffing Ratios
IT Management Best Practices
Worldwide Technology Trends
IT Salary Report


2014 Best Independent ERP Blog - Winner 2013 Best ERP Writer - Winner Constant Contact 2010 All Star Technobabble Top 100 Analyst Blogs

Key References
Strativa: Business strategy consulting, strategic planning
Strativa: IT strategy consulting
Strativa: Business process improvement, process mapping, consultants
Strativa: IT due diligence
Strativa: ERP software selection consulting and vendor evaluation
Strativa: CRM software selection consulting and vendor evaluation
Strativa: Project management consulting, change management
StreetWolf: Digital creative studio specializing in web, mobile and social applications
Enterprise IT News: diginomica

Spectator Archives
May 2002
June 2002
July 2002
August 2002
September 2002
October 2002
November 2002
December 2002
January 2003
February 2003
March 2003
April 2003
May 2003
June 2003
July 2003
August 2003
September 2003
October 2003
November 2003
December 2003
January 2004
February 2004
March 2004
April 2004
May 2004
June 2004
July 2004
August 2004
September 2004
October 2004
November 2004
December 2004
January 2005
February 2005
March 2005
April 2005
May 2005
June 2005
July 2005
August 2005
September 2005
October 2005
November 2005
December 2005
January 2006
February 2006
March 2006
April 2006
May 2006
June 2006
July 2006
August 2006
September 2006
October 2006
November 2006
December 2006
January 2007
February 2007
March 2007
April 2007
May 2007
June 2007
July 2007
August 2007
September 2007
October 2007
November 2007
December 2007
January 2008
February 2008
March 2008
April 2008
May 2008
June 2008
July 2008
August 2008
September 2008
October 2008
November 2008
December 2008
January 2009
February 2009
March 2009
April 2009
May 2009
June 2009
July 2009
August 2009
September 2009
October 2009
November 2009
December 2009
January 2010
February 2010
March 2010
April 2010
June 2010
July 2010
August 2010
September 2010
October 2010
November 2010
December 2010
January 2011
February 2011
March 2011
April 2011
May 2011
July 2011
August 2011
September 2011
October 2011
November 2011
December 2011
January 2012
February 2012
March 2012
April 2012
May 2012
June 2012
July 2012
September 2012
October 2012
December 2012
January 2013
February 2013
March 2013
May 2013
June 2013
July 2013
September 2013
October 2013
December 2013
January 2014
February 2014
March 2014
April 2014
May 2014
June 2014
July 2014
August 2014
September 2014
October 2014
November 2014
December 2014
February 2015
March 2015
April 2015
May 2015
June 2015
July 2015
September 2015
October 2015
November 2015
February 2016
May 2016
June 2016
July 2016
August 2016
September 2016
October 2016
January 2017
February 2017
May 2017
June 2017
October 2017
January 2018
April 2018
May 2018
Latest postings