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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!

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