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

The Enterprise System Spectator

Sunday, April 09, 2006

Enterprise software: four horsemen and four fortresses

At Forrester's IT Forum 2006 last week, Forrester executives Andy Bartels and John Rymer gave a joint keynote on "The Future of Enterprise Software." The presentation was an excellent overview of the competing forces that are changing and will change the enterprise software market in the coming years and what that means for buyers and vendors.

Bartels and Rymer said that overall the market will not return to the double-digit growth of the late 1990s--not because there is a lack of demand from customers for new functionality but because the large company market is saturated. The primary opportunity for new sales is in the small and mid-size businesses, which have a lower price point but sometimes cost more to sell to and service. Forrester research also points to increasing frustration on the part of customers to high software maintenance fees, further throttling vendor ability to milk revenues from the installed base.

Factors that drive vendor cost and revenue
The enterprise software market today is under siege by what the speakers call "the four horsemen of commoditization:"
  • Open source software
  • Service oriented architecture (SOA)
  • Software as a service (SaaS)
  • Offshore outsourcing
These four forces are driving tremendous change in enterprise software--for both buyers and sellers.

In the case of open source, the impact so far is primarily in server operating systems and Java middleware, and each major software vendor (IBM, Microsoft, Sun, SAP, Oracle, etc.) has a different approach to incorporation or resistance to open source. Many buyers, however, are already using open source or very interested in doing so.

Service-oriented architecture (SOA) has broad strategic acceptance among vendors, and it represents a platform change not unlike the transition from client-server to Web-based architectures that started a decade ago. Forrester predicts that SOA upgrades will drive software vendor revenues higher for the next four years, but after that the ability for buyers to mix and match software components using open SOA standards will lead to increased competition that will drive software prices lower. In other words, by adopting SOA, vendors are building the seeds of their own destruction. If you are a software buyer, however, this is good news.

Software-as-a-service (Saas), or software on-demand, is being used by companies of all sizes--it is not primarily a small company market, as many observers first thought. The major vendors are all adopting SaaS in some fashion, often for limited purposes. Buyers are using it selectively.

Offshoring is a mixed trend. Contrary to popular opinion, most IT shops are not doing a lot of offshore outsourcing, although many software vendors are using it to lower their own costs of development and maintenance. Although software vendors based offshore (e.g. India) are having a hard time breaking into the major markets in North America and Europe, they could become a factor to contend with after 2012, especially those that deliver high quality software at a low cost.

What's interesting, though, is that each major software vendor is incorporating or fighting these four horsemen differently. For example, Sun is moving to 100% open source for its products, while Microsoft for the most part is fighting it. Microsoft and Salesforce.com (of course) are jumping on the bandwagon for SaaS, which Oracle and SAP appear to be forced into adopting it.

Fortresses against change
Standing up against these four horsemen, according to Rymer and Bartels, are four factors they call "fortresses of stability." These are the factors that serve to constrain the changes from open source, SOA, SaaS, and offshoring. The four fortresses are:
  • Market Concentration: the dominance of a few major vendors, such as Microsoft, especially at the operating system level.
  • Intellectual Property Rights: the vigorous enforcement of patents and other IP rights, especially to counter the threat to vendors from open source
  • Installed Bases: the tremendous effort required for a software buyer to migrate from an incumbent vendor, especially at the applications level.
  • Brand Loyalty: the comfort factor that accrues to vendors that are well-established in the software marketplace
According to Forrester, although these four factors will mitigate the forces of change in the intermediate term, over the long run they cannot maintain revenue and profit levels for the major vendors today.

For new and emerging software vendors, these trends are good news. Contrary to conventional wisdom that software market share will eventually consolidate around a few players, the large vendors today only have one third of the software market, and they are NOT growing that much faster than the market as a whole. This means there are still opportunities for new vendors to ride to success on one or more of the four horses.

For software buyers, most of this is good news. Prices for software over the long term have to fall, in line with other elements of IT spending. Buyers will be best served by standardizing on one of the "ecosystems" (i.e. SAP, Oracle, IBM, Microsoft) as a basis for choosing new software components, while at the same time making use of open source, SOA, and SaaS to drive productive change.

Related posts:
Software vendor growth not in software
Software on demand: attacking the cost structure of business systems
Software on demand: small companies still don't "get it"
Buzzword alert: "open source"
Open source: turning software sales and marketing upside down
Key advantage of open source is NOT cost savings
Offshoring leaves software firm not so jolly
Risks of offshore outsourcing

by Frank Scavo, 4/09/2006 04:20:00 PM | permalink | e-mail this!

 Reader Comments:

Post a Comment

Links to this post:


Powered by Blogger

(c) 2002-2016, 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, ROI/TCO studies, 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
ERP Support Staffing Ratios
Outsourcing Statistics
IT Spending and Staffing Benchmarks
IT Staffing Ratios
IT Management Best Practices
Worldwide Technology Trends
IT Salary Report

Get these headlines on your site, free!


2014 Best Independent ERP Blog - Winner

2013 Best ERP Writer - Winner

Alltop. We're kind of a big deal.
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
Latest postings