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.


Anonymous said...


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.



Frank Scavo said...

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 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.