Tuesday, September 20, 2005

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.

Related posts
Executives hesitate to recommend their ERP vendors
Key advantage of open source is NOT cost savings


Anonymous said...

I'm helping a large financial services intermediary choose a software vendor for operations service support (incident, problem and change management). This collapsing vendor list (Oracle/Peoplesoft/Siebel, HP/Peregrine) is good news and bad news. It makes the choosing easier. As the vendors consoldiate, each vendor has a broader offering. At least that's the sales pitch. Of course, under-the-covers it's still an aggregation of unintegrated (unintegratable?) parts.

On the other hand, when just a few big vendors serve a market, they work hard to make their products un-integratable, so, there's no hope of a best-of-breed solution. Also, there's the tilt in power toward the seller, as Frank points out.

A little voice in the back of my head is telling me that this collapse is a big deal. When hardware companies start buying category leading software companies you can bet on two things. One, the software company will never be heard from again. Remember Clarify? Remember the names of the many software companies purchased by SUN? Hardware salesmen simply give away the software to try to make the hardware sale. Since no revenue is attributed to the software, no further development or meaningful support is offered. How about that IBM software?

Two, when the category leading software companies are acquired and the little vendors are left out, that's the end of the category until the next technology wave. In this case the next technology wave seems to be hosted/on-demand/ASP'd/call-it-what-you-like. Some analysts are saying that Oracle bought Siebel to get their hosted SFA service acquired from Upshot.com. But, the old-guard never (hmmm...never?) jump on the new technology wagon successfully. Remember those SFA packages that ran on mini-computers?

You've got to wonder when Mercury and BMC will be acquired. Once consolidation like this gets started, all the players look for buyers. BMC is crap, so probably SUN will buy them. Mercury is better, so maybe CA buy them. The rest of the vendors are financial lilliputians that won't get past my client's finaicial viability test?

So, what next?

If we look at the hosted/on-demand/ASP'd/whatever vendors there is only one financially strong pure-play vendor; salesforce.com ($2.5b market cap, ticker=crm). But, they don't offer anything like the features and functions we need.

My fear is, three years from now, after my client and I have picked software and implemented it across all 3000 users and hundreds of tasks and dozens and dozens of processes, the software will be unsupported. The package vendor will no longer invest in further development. On the other hand, the community-development approach Salesforce.com has taken, akin to the open source community in it's structure, could produce astonishingly fast product evolution. That could lead to a good enough product within the next 3 years.

Anonymous said...

What we are seeing here as a trend is the emergence of a different approach to software development. The Cathedral and Bazaar by Eric Raymond predicted it back in 2000. You can easily see this in a few business solutions just emerging (SugarCRM, Compiere and Asterisk just to name a few). These are solutions which have proved to be of enterprise grade quality, without the lock in factor from the vendors. This lock in, trying to be forced by the current business solution vendors, is against market rules, the market rules normally react slowly, but decisively against factors that do not comply with them.
The consolidation that we see in this industry segment will only accelerate this next wave.

Ramiro Vergara