Claims about the maturation of the software industry and death of innovation have been debated to death. Not without reason. Almost 50 percent of the top 50 application software companies that existed in 2000 have been acquired in the last 5 years.

Even with the so-called recovery IT spending levels have barely reached the historical levels IT as in the year 2001. Steep discounting has become the norm, as the IT market has turned into a buyers market. But does this necessarily qualify as being a mature industry. If maturity is defined as “being fully developed to a complete or final stage” or “not subject to major change”; it is clear that the software industry is not fully mature. Most CIOs will agree that this is not how they would describe their software infrastructure. In fact, some would argue that their problem is the exact opposite – too many moving parts and not enough stability or predictability.

If the industry is still evolving then in which area are we are likely to see biggest changes or discontinuities? The barely visible changes in the horizon are likely to redefine the software landscape in the coming years.

Here we highlight 5 key areas that are likely to see dramatic changes in enterprise software.

Explosive growth of user population
Tech Strategy Partners estimates the total cumulative seats sold by enterprise application software companies to be less than 50 million, which is only 10 percent of the global organized sector working population of 500 million.

Majority of the population of actual consumers of information are often called casual users, are yet to fully participate in the IT-led productivity growth. This is set to change.

First, the device and client proliferation with pervasive computing is making it feasible to reach a larger base of potential users in a cost effective manner. Second, the next generation application development platforms offered by vendors like IBM, Microsoft and Oracle will make it easier for customers to ‘compose’ custom applications. Even if these vendors were to partially realize their vision of allowing business analysts to compose application, they will still lower the barrier to automate a large number of manual processes.

Increased adoption of SaaS deployment model
Most industry pundits agree that the software industry has a customer satisfaction problem. This stems from experiences of delayed and costly deployments, difficulty in making small changes, painful upgrades and lack of problem resolution SLAs, among other things. One of the main causes for this is the current deployment model of enterprise software, which requires specialized and intensive care throughout the life cycle and forces the business user to be completely dependent on the IT department.

Business users view Software as a Service (SaaS) as an attractive alternative that helps them win back control of their software infrastructure from the IT departments, achieve the service levels they need from a business perspective and manage to more predictable costs. So far, SaaS has had most success with mid-market customers of sales force applications. That is likely to change too. Several analyst surveys indicate customers would be willing to adopt a similar model in both traditional back office and other departmental application areas.

The recent customer wins for Salesforce.com and Siebel On-Demand indicate a growing acceptance of SaaS in the large enterprise.

Shift from buying functionality to outcomes
The industry track record of creating value for customers is spotty at best. To be honest, traditional software vendors rarely control the levers that drive business value. For example, they don’t determine how customers deploy, configure or use their software. As customers restructure their businesses, they increasingly decide to outsource outcomes, especially the one’s that are not critical or where they don’t have differentiated capability.

These areas are the same as the areas where customers spend majority of their IT budget, such as, customer relationship management; finance and accounting; and HR and payroll processing. Going forward customers will evaluate the benefit of buying functionality from software vendor’s vis-à-vis buying outcomes from service vendors. For the software vendors to demonstrate the same benefit, they need to offer more than just the software.

Consolidated enterprise application platform
Customers have made a lot of progress in consolidating their application landscape around the ‘integrated suite’ providers.

However, customers are still away from a single consolidated application platform. Even when customers have one standardized vendor, they still have to deal with different platform technologies and versions. Majority of the customers for the large application vendors are still on legacy technology, and some use technology that pre-dates the Internet era.

The installed base of the contemporary Services-Oriented Architecture is minuscule. Over the next 5 years there are 3 trends that will force greater adoption of these technologies. First, almost all major technology companies are redesigning their platform, e.g., MSFT with Longhorn, Oracle with Fusion, SAP with Enterprise Service Architecture, and Lawson with Project Landmark. Second, these technologies will become more mature and powerful in terms of enabling new usage scenarios and unlocking business value for customers. Finally, the IT investments made by the customers at the turn of the millennium will outlive their “useful life” and become ready for replacements.

Simplification of IT management software
Over the last few years customers have ruthlessly driven consolidation and standardization of their applications stacks.

As a result, you see them choosing among Linux, Unix or MSFT for their enterprise servers; EMC, IBM or Netapp for storage systems; Oracle, db2 or sql for database systems; SAP or Oracle for ERP systems; and IBM, MSFT or BEA for middleware stack. This has been driven by a need to remove complexity and costs associated with it from the IT shops. The same does not hold true for IT management software, e.g., security, systems management or storage management.

They continue to be heavily fragmented, partially because few vendors exist that can address all the pain points customers have. Most vendors like MSFT, CA, Symantec, Mercury Interactive and BMC address only a sub-set. Even the few that have the capability to address majority of the pain points, like IBM, don’t have an integrated solution. The management software landscape for most large enterprises today represents the back-office application landscape prior to the launch of an integrated ERP offering. This scenario is unsustainable both from a complexity and cost perspective. We are likely to see the emergence of integrated management platforms that get us closer to the goal of making complicated data centers look like a single large server.

The customers and the industry are still struggling to deal with the aftermath of the internet bubble. As customers digest and optimize the technology purchased during that era, they will begin to focus on the new challenges ahead of them. Vendors that can help customers address these discontinuities in their landscape are most likely to keep their place in the shrinking list of successful software companies.


Rahul Sood is a Partner at Tech Strategy Partners. TSP is a boutique management consulting firm based in Redwood City, CA. Sood can be reached at rahul.sood@
techstrategypartners.com