Vertical-specific Software Innovation Networks will become the hotbeds for technology advances, with multiple networks battling it out in each vertical. These networks—made up of ISVs, service providers, and forward-thinking users—will collaboratively develop and market industry-specific solutions built on top of software platforms from IBM, Microsoft, Oracle, and SAP.


The Software Industry’s Innovation Model Doesn’t Work For Users
As they emerge from the economic recession, C-level execs in user firms seek to implement a growth strategy anchored by innovation and organizational flexibility. But in our networked economy, this requires tighter process integration across departments and trading partners. As they start embedding their business services into their customers’ and suppliers’ operations, firms are looking for a software foundation that is scalable, flexible, and extensible. Sensing an opportunity:

IBM and Microsoft open up and unify their platforms—to deliver flexibility. Software platform giants like Microsoft and IBM started investing massively in open-standards-based technologies like Web services to meet users’ need for process agility and enable cross-organizational collaboration. Their goal: to help firms become organic businesses.

Oracle and SAP invest massively in platforms—to protect firms’ IT investments. As the locus of software innovation started shifting from functional apps to underlying platforms and portfolios, app giants like SAP and Oracle got serious about investing in and building out their services-oriented and event-driven platform technology—like SAP’s NetWeaver and Oracle’s middleware stack.

ISVs supply composite apps on top of platforms—to enable process integration. ISVs have been building their solutions on top of standards-based application servers from IBM, Microsoft, and Oracle for years. But forward-thinking ISVs like Cincom have begun to market solutions that take advantage of the complete platform stack from these vendors including integration, portal, and process management tools. The result: packaged composite apps that can change and scale over time.

Software Innovation Networks Emerge—To Meet Customer Needs
This shift of innovation to and around platforms is just phase one of the shakeout in the software industry. As firms consolidate their software platforms, the platforms that command enough mass will become epicenters of innovation—and, like the eye of the storm, will begin to pull in the creative potential of startups, ISVs, and SIs and unlock the coffers of VCs. The result? Dynamic ecosystems made up of global software and service partners that supply a portfolio of software and service innovations that meet customers’ unique demand (see Figure 1). Forrester calls this fluid and self-sustaining market structure Software Innovation Networks—defined as: “Ecosystems of process consultants, ISVs, and lead user companies that develop and market customer-valued products and services anchored by standards-based software infrastructure platforms.”

Like co-dependents in biological ecosystems, members of Software Innovation Networks will entertain fluid yet symbiotic relationships among themselves. Four specialist roles will provide the services that make up Software Innovation Networks (see Figure 2):

Inventors. These intellectual powerhouses will conduct R&D and/or design products and services that result in patentable inventions. Examples of inventors: Microsoft’s scientists in Microsoft’s Beijing Lab, i2’s developers in Bangalore, or MBAs at Accenture’s Institute for High Performance Business who invent breakthrough business models. But inventors can also be Web service framework providers like Bowstreet and software “engine” providers like ILOG that power many industry- or domain-specific apps.

Transformers. Transformers are multifunction production and marketing services that convert inputs from Inventors and other Transformers into valuable business innovations for either internal or external customers. Major software platform vendors will assume this role—and so will large SIs that act as “pivotal providers” that combine internal service capabilities with boutique/regional consulting firms.

Financiers. Financiers are the funding source for Software Innovation Network service providers—especially Inventors and startup Transformers. While VCs perfectly fit the profile, this role will also be played by vendors’ corporate venture and incubator groups—such as Nokia Venture Partners, Nokia’s Silicon Valley-based VC arm, which uses its $650 million fund to invest in promising software startups.

Brokers. Brokers are marketmakers—or middlemen—who find and connect Software Innovation Network service providers—buying, selling, or enabling software and service delivery within and among vendor and user companies. These could be SAP’s NetWeaver Partner Initiative or independent consultants, as well as technology licensing offices in vendor organizations—such as IBM’s licensing office, which generated $10 billion in IP licensing revenues since 1993.

But like in biology, self-selection will allow only a few platform vendors to succeed and become the orchestrators of Software Innovation Networks. Forrester believes that these top-tier platforms will come from IBM, Microsoft, SAP, and Oracle. Why? Because these four vendors have billions in the bank and strong customer bases of many thousands—thus they boast viability and offer a readily available market for hoards of Inventors, Transformers, Financiers, and Brokers to tap into.

Vertically Focused Software Innovation Networks Will Dominate
Flexible platforms from IBM, Microsoft, SAP, and Oracle will form the basis of Software Innovation Networks, but real business value will come from innovative applications that sit on top of the platforms. There’s no doubt that many of these apps will boast cross-industry appeal. Case in point: PeopleSoft’s HR solutions, which will be standardized on IBM’s middleware platform. But Forrester expects that emerging “killer” apps will address industry-specific pain points and opportunities. These solutions will help firms cope with vertical- and even sub-vertical-specific regulations and mandates, supply networks, and customer demands.

Going forward, industry-specific Software Innovation Networks will be the hotbeds for technology advances, with multiple networks battling it out in each vertical. Budding verticalized Software Innovation Networks include (see Figure 3):

Microsoft’s retail Software Innovation Network. Microsoft has enhanced its strong partner network by creating industry-specific ecosystems, such as its Smarter Retailing Initiative, which teams with inventive retail ISVs like JDA Software Group, CSR, and Retalix for innovative merchandising and retailing applications. As part of the initiative, Microsoft also collaborates with SIs like Accenture to transform these IT inventions into complete business solutions—including integration and process consulting services—targeted at improving in-store operations and shopping experience. Early customers include Liz Claiborne and A&P. A fast follower in the RFID market, Microsoft also partnered with startup inventors like GlobeRanger and market veterans like Manhattan Associates to shape its RFID middleware go-to-market strategy.

IBM’s banking Software Innovation Network. IBM has also been proactive in building out industry-specific Innovation Networks—which is no surprise since it doesn’t have any of its own business applications to hawk. One example is IBM’s Banking for On Demand Business program, which weaves in internal and external services and solutions to help banks build and run more integrated and flexible processes. The initiative leverages Big Blue’s middleware IP as well its Business Consulting Services (BCS) business transformation capabilities. But when it comes to applications, IBM brokers access to its banking app partners—ISVs like Siebel, i-flex solutions, and TEMENOS and lead-user companies like Fidelity Investments.

Navi Radjou is Vice President, Enterprise Applications, Forrester Research. Prior to joining Forrester, Radjou worked as IT consultant in Asia for three years. He holds undergraduate degrees in computer science from the University of Paris and CNAM-Paris and an M.S. in information systems from Ecole Centrale Paris. Radjou also attended the Yale School of Management.