IT budgets as percent of revenue at highest level since 1997

After six months of work at Computer Economics, we've now released our 17th annual IT spending and staffing study, and the findings are quite interesting.

We found that median corporate IT spending across all industry sectors in the U.S. and Canada has now reached 2% of sales, the highest level this metric has shown since 1997, during the build-up to Y2K, when it hit 2.2%.

The 2% ratio this year is an increase from 1.7% in 2005, as shown in Figure 1.

Effectively, the growth in IT spending as a percent of revenue means that IT budgets are increasing faster than corporate sales. This is confirmed by the study, which shows that the median growth in IT spending on a dollar basis across all respondents this year is 4.1%, outpacing the 2005 U.S. GDP growth rate of 3.5% in 2005.

So what are companies spending all this money on? Our study finds IT staff is not at the top of the list. Although there are more companies adding IT staff than cutting headcount, the median increase in IT staff this year is only 2.0%, about half the rate of the increase in IT spending.

The study found that IT spending growth is strongest in business services, where it shows a 9.7% increase over last year, followed by healthcare, pharmaceuticals and medical devices, retail, and banking and finance organizations. Weakest growth, though still positive, is seen in the process manufacturing, utilities/energy, and wholesale distribution sectors.

The Computer Economics IT Spending, Staffing, and Technology Trends study, now in its 17th year of publication, provides dozens of additional ratios and other metrics for the composite sample, by organization size, and by industry sector. Statistics include benchmarks for IT operational budgets, IT capital budgets, IT staffing, technology adoption rates, ROI and TCO, and outsourcing utilization.

The study is available for purchase from the Computer Economics website.

A FREE 34 page executive summary is available upon request.

Loosening Microsoft's hold over midmarket software vendors

Michael Vizard writes at eWeek's Channel Insider that some application software vendors are growing cool in their attitude toward Microsoft, as the software giant is increasingly moving onto their turf. He says that because the small and mid-size business (SMB) market is dominated by Windows, it has been a natural platform for software vendors targeting that market.

But a curious thing is starting to take shape in the SMB market as the loyalty to Microsoft among ISVs in this space becomes increasingly strained. The process that drove a wedge in that loyalty was Microsoft's decision to acquire a number of companies and begin aggressively marketing applications targeting the midmarket space. This naturally set ISVs on edge, with many of them shifting their stance from being pro to neutral about Microsoft to being neutral or against.

Vizard points to Cognos and Sage Software as two examples of vendors moving away from the Microsoft camp.

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CDC Software weirdness

Earlier this month, Made2Manage and Onyx Software announced their agreement for Onyx to be acquired by M2M. Now, CDC Software, a Chinese software company based on Hong Kong is making a third offer to acquire Onyx, after having been rejected twice before by Onyx.

Josh Greenberg writes in Datamation about CDC's difficult-to-fathom behavior:

Onyx’s weird trip started last December, when it received an unsolicited bid from CDC, a Chinese company that previously had bought up two minor companies, CRM vendor Pivotal Software and ERP vendor Ross Systems.

According to filings by Onyx, CDC embarked on a strategy of mixed messages and seemingly bizarre behavior, setting up meetings with Onyx executives and then putting out press releases claiming that Onyx was avoiding CDC. After a few weeks of this kind of behavior, CDC retracted its bid, only to reinstate it in March.

Even at this writing, with the M2M deal looking like it will gain widespread shareholder acceptance, CDC continues its pursuit of a very unwilling Onyx, claiming publicly that the fees Onyx would have to pay to retreat from the M2M deal were "unusually high" and offering to fight the fees in court. Meanwhile, CDC has written to the SEC claiming that Onyx failed to consider other legitimate offers. And so the saga continues.

CRM News has more on the CDC/Onyx drama.

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Onyx CRM to be acquired by Made2Manage

Onyx CRM to be acquired by Made2Manage

Onyx Software becomes the latest catch for Made2Manage, which continues to build out its portfolio of software offerings. Onyx is one of the last remaining standalone CRM vendors.

The deal is worth about $92 million, all cash, and is expected to close in Q3.

In picking up Onyx, M2M is making an exception to its strategy of focusing on niche industry solutions. The deal appears simply to provide M2M with a good horizontal CRM product that it can offer to new prospects or cross-sell to its installed base.

M2M plans to operate Onyx as a separate business unit.

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Why organizations choose open source software

Si Chen gave a presentation at the Enterprise Open Source Conference in New York this week on, Why Enterprises Are Adopting Open Source Applications. Chen and his firm, Open Source Strategies, are one of the driving forces behind the open source ERP application Open For Business (or, Open4Biz, or OFBiz), so he's well qualified to talk on this subject.

He's also posted his entire presentation transcript along with the slides on his blog. It should be required reading for anyone wondering what open source is really all about.

Chen starts by listing three companies that have adopted Open4Biz and why they went the route of open source:

• Ameniti Travel Clubs, a subsidiary of UAL Corp and a sister company of United Airlines. They chose open source because it is easy to modify and allows them to move quickly with new business opportunities.
  
  
• Snaidero Engineering and Trading, a subsidiary of the Snaidero Group, Italy's number one kitchen cabinet manufacturer. They liked the freedom to customize open source and implement it in many sites around the world without having to pay additional license fees every time they redeployed it.
  
  
• British Telecom, one of the largest telecom firms in the world, which is implementing the Open4Biz application to support catalog management and online ordering for mobile products and services. Chen says, that British Telecom "will be serving all 18+ million residential and commercial customers in the United Kingdom with this system. As such, it is a very large deployment: they are scaling it out to support up to 16,000 simultaneous visitors using a cluster of 72 CPU's."

Concerning why British Telecom chose open source, Chen says,

When we asked British Telecom why they are going the open source route, we got a very interesting answer. The commercial solutions they looked at were expensive, given their volume and growth rate. It would have been several millions British pounds a year. More importantly, the commercial solutions would have still required a lot of coding and development. So it's like spending a lot of money to buy one of those mail order toys, only to get a box full of little plastic parts that you have to paint, glue, and assemble. Not much fun.

Conversely, with open source, they found that it had a reasonably good fit for their requirements. It still needed work, but they thought it was a good strating point because of a "well thought out data model," and it was "easy to change." Best of all, it was free, so the low cost helped as well.

The second part of Chen's presentation focuses more generally on the reasons that organizations choose open source over commercial software. Here he has a balanced view. His basic premise is that commercial software is the best choice when user requirements are generally the same across many organizations, there is little need for customization, and commercial software is not costly.

Conversely, however, when the organizations requirements are unique and there is the need to modify the software and the cost of commercial software is prohibitive, then open source is a good choice.

Although Chen doesn't put it this way, the point I got from this is that open source really shouldn't be viewed as an alternative to commercial software--it is an alternative to in-house custom development. Where companies today are spending much energy and effort to custom develop applications to support unique requirements, they really should be investigating whether there is an open source product that can be used as a starting point. The open source approach gives a head start to the development team and it also has the potential to leverage other development efforts of other organizations that are investing in the same open source product.

Chen has several other good points, which I won't elaborate on here. He talks about how service oriented architectures and the trend toward software as a service are catalysts for open source. He also talks about the current software vendor consolidation trend as reducing the choices in commercial software and thus strengthening the alternative of open choice.

I met Si Chen for coffee late last year and was impressed at the time with his vision for the potential of open source to change how business applications are developed and supported. Now, nine months later, he's still convincing.

Read his whole presentation on his blog.

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Linux vs. Windows survey results

At Computer Economics, we've completed analysis of our survey on Windows vs. Linux as a server operating system.

For those that participated in the survey, thank you, and the full report will be coming your way shortly.

An executive summary of the Windows/Linux study is available at Computer Economics.

SAP and Salesforce.com: opposing application platforms

Recent moves by both SAP and Salesforce.com illustrate two different approaches to building a new platform to support an ecosystem of related solution providers.

First out of the chute was Salesforce.com, which back in January announced its AppExchange platform, which allows anyone to build extensions, customizations, and complete applications on top of the Salesforce.com infrastructure. This approach allows the tiniest developer--even a single individual--to build a new application, deployed as a service, and offer it for sale through Salesforce.com's AppExchange directory. Salesforce.com recently dropped the price of entry to this game, from $75 per user per month, to $25. At that price, any developer with a hot idea can work out of his or her bedroom and develop an application for sale.

The opposite approach is shown by SAP, which recently launched a venture fund to finance software development firms that want to develop applications to work on top of SAP's Netweaver platform. In contrast to Salesforce.com, however, these applications will be on-premise deployments, and it's hard to imagine them being deployed anywhere but in an organization that is running SAP. It appears that with much of the software venture money these days going to new software-as-a-service startups, SAP needed to launch its own venture fund to get money to its partners that are using a traditional on-premise model.

So, there are two key differences between these two attempts to provide a platform for building an ecosystem of application providers: (a) Salesforce.com's on-demand model vs. SAP's traditional on-premise model, and (b) Salesforce.com's providing a very low cost, low entry-point platform vs. SAP's providing venture funding for developers.

With SAP's increasing dominance of the enterprise market, and its deep pockets, there's a good chance that SAP will be successful. But its goals are to extend the reach of its SAP installed base.

Salesforce.com's approach is more innovative, in my opinion. It is attempting to provide a web-based, on-demand operating system, upon which new applications may be deployed. Of course, there is nothing to stop other providers from offering similar platforms. Furthermore, because Salesforce.com's offering is based on a service-oriented architecture and open standards, there would appear to be nothing to stop applications from interoperating with those built on top of Netweaver. Or, vice-versa.

While it appears to be harder and harder for traditional enterprise system vendors to be successful--witness the latest merger/acquisition of SSA by Infor, now with over 50 separate systems in their combined portfolio--the models offered by SAP and Salesforce.com provide a glimpse into how applications will be developed and delivered in the future.

Datamation has more on recent moves by Salesforce.com with AppExchange, and there's a good overview of AppExchange on Salesforce.com's website. ASPnews has more on SAP's venture funding of developers for its Netweaver platform.

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The death of packaged software

Erik Keller has an interesting editorial over on Sandhill.com, where he argues that there is a shift going on in corporate IT in favor of building more applications in-house (or through contract developers) instead of buying software packages. Keller made some of the same arguments a couple of years ago, and I commented on them back then.

Basically, his argument is that there are three trends at work today that are making custom development a more viable option: service-oriented architectures (SOA), which make it easier to integrate custom software components into existing systems; the availability of open source, which can be used as a starting point for custom systems; and offshore development firms that are developing high quality code at low cost.

These points are generally well understood, although the implication that they represent a threat to software package vendors is not fully recognized. Keller made these same points two years ago.

But in his editorial this time, Keller points out something new: three negative factors on the side of commercial software providers that are fueling the trend toward custom development. Ironically, he says, these factors are exactly the same as those that worked in favor of packaged software in the past.

According to Keller, these factors are (quoting him directly, here):

Slow time to market: Like the mainframe-oriented IT shops of 1980s, many of the largest enterprise-software vendors find it difficult and expensive to quickly incorporate the latest technology into their products in a timely and innovative fashion. They also tend to have limited experience with the latest tool sets.

Poor quality: Internal IT groups often used to fail when they attempted large, complex projects. Over the last 15 years, buyers have found that most enterprise software vendors and systems integrators are no better and actually less accountable than their internal capabilities.

High expense: With large upfront charges and on-going maintenance fees hovering around 20 percent of list price, enterprise software has taken on the same bad characteristics of inefficiently managed internal IT staffs.

As I wrote two years ago, I still believe that commercial software packages are the best route for most companies, especially small and mid-size organizations that are ill-equipped to maintain, let alone develop, comprehensive enterprise applications. For example, if a manufacturing firm has difficulty implementing SAP, or Oracle, or Great Plains, just wait until it attempts to develop time-phase material requirements planning or available-to-promise logic from scratch.

That being said, however, the economics of the build-vs-buy decision are difficult to argue with. By paying approximately 20% of the license fee for maintenance each year for Oracle or SAP, you are essentially buying the software again every five years. Although companies should continue to use commercial software for basic horizontal functions, such as finance and accounting, manufacturing, and basic order processing, the build-option is becoming much more attractive for complementary and industry-specific or company-specific functionality.

The transition of the major vendors toward service-oriented architectures (SOA) is making the build-option easier, with the ability to plug in such niche-functionality more easily. As Andy Bartels at Forrester pointed out recently, by embracing SOA, vendors such as SAP and Oracle are unleashing forces they cannot control, as the same SOA that makes it easier for vendors and partners to build composite applications also make it easier for customers to build their own composite applications.

The vendors' embrace of SOA is actually sowing the seeds of their own destruction. But they have no choice. They can either get on the SOA train or get run over it.

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Oracle going dark

Josh Greenbaum is complaining that Oracle seems to be less and less open these days in dealing with the press and analyst community and is adopting a "circle the wagons mentality" as it moves into year two of its Fusion strategy.

In his article in Datamation, he writes, "Oracle is harder and harder to cover, and harder and harder to understand – at a time when its message is more complex and craves more understanding than ever before."

Josh contrasts Oracle's recent "closed door policy" with that of two of its top competitors:

Two recent conferences I've attended, SAP's Sapphire and Microsoft's Convergence, were noteworthy for the opportunities the companies afforded analysts and the press to talk to executives, customers, and partners. For anyone trying to answer the hard questions – like which company has a better long-term strategy – it's much easier to have an opinion when you're given something to go on. Especially if that information is constantly updated and refined by access to the actual decision-makers.

He also points out that when access is limited, it's easier for analysts to write negative stories than positive.

Ironically, I've been hearing positive things recently about Oracle's work with its J.D. Edwards acquisition. One source, who had a long career with JDE and still has contacts within Oracle's JDE offices in Denver, says that Oracle is doing a far better job with JDE than PeopleSoft ever did.

Furthermore, in spite of some misteps at first, Oracle seems to have gotten its act together in how it tests and releases upgrades for JDE.

So, why the entrenchment at Oracle?

Rolling up the rollup: SSA Global to be acquired by Infor

SSA Global, one of the primary consolidators of enterprise system vendors is now itself being acquired by Infor, another consolidator. There's a short press release on Infor's website just now, announcing the deal, which gives $19.50 a share to SSA shareholders, the majority of which are two investment firms, Cerberus Capital Management and General Atlantic Partners.

Why the deal? My guess is that SSA's investors see it as the best opportunity to get out. SSA's stock price has been on a steady decline since the beginning of the year and was trading around $16.00 the past week or so. Infor's offer of $19.50 represents a 20% premium over its current price. Sold.

Of course, this is from the investor's viewpoint. What about the customer's perspective? At first glance, I can't imagine that customers will be excited about this deal. I won't try to list all of the acquisitions that SSA Global and Infor each have made over the past several years. Use the search field in the right column to search for "SSA" or "Infor" and you'll find everything I've written about each firm's products over the past four years. Some, such as SSA's Baan (now ERP LN), were big names in the past. Some, such as SSA's Epiphany, have good up-to-date technology. Some, such as Infor's Lilly Visual applications and the former SCP Adage (Agilisys) system have deep industry functionality. But the list of products is very, very long, and it's hard to imagine how the combined entity can give adequate attention to such a diverse portfolio of products.

If you are a current customer of SSA or Infor, please let me know your experience with either vendor and your view of this deal.