The Enterprise App Vendor Crisis

2010 may be the year that many of the Crisis Points identified in ZapThink’s Vision of Enterprise IT are coming to fruition. Point in fact: a jury awarded Oracle over $1.3 Billion dollars in a suit against SAP on charges of copyright infringement and improper customer poaching. While the details of the suit are not relevant to ZapThink’s coverage, the bigger story is — the pending demise of large enterprise software vendors due to the drastic changes in the way that Enterprises develop, manage, and procure IT assets.

ZapThink’s perspective is the hey-day of large, new enterprise IT purchases is over. We’re entering an environment where companies have already over-invested in IT assets and are now looking to make more use of what they have, rather than procure more of what seems to deliver incrementally fewer benefits. This represents the “Enterprise Application Crash” part of our ZapThink 2020 vision, but probably should more accurately be called the “Enterprise Application Vendor Crisis”.

Bigger Fish Swimming in a Smaller Pool

The larger context of the Oracle vs. SAP lawsuit is that the forces of market consolidation combined with a general slowdown in IT purchasing and a difficult economic environment has resulted in fewer, but larger, enterprise IT application vendors chasing fewer deals. Large enterprises have felt the pinch in their IT budgets now for several years, and most of these companies have already purchased multi-million dollar solutions from the handful of large vendors that remain in the space.

Likewise, the enterprise IT app vendors have consolidated themselves to the point where the same short list of just a few vendors ends up on the requests for proposal (RFP) of most companies. Basically, the same vendors are all chasing the same deals, and there simply aren’t enough new customers to generate growth. In essence, we have a few really big sharks in a feeding frenzy over deals in a pool that is increasingly evaporating. And there’s very little likelihood that this will change.

The economic environment is not creating enough (or any?) new firms with the budget and need for multi-million dollar enterprise IT application investments. Most enterprise app vendors intentionally must target the Fortune 1000 or some similar large-company grouping because in order to stay alive they must generate large ticket sales with equally large recurring maintenance revenue. The market has already carved up the available customer base of large enterprises, and these customers are locked into multi-year agreements with their existing incumbent suppliers. The likelihood of these customers switching is low, and as evidenced by the lawsuit, might be near impossible given the extent to which sales forces must go to even enable such a switch. The only possibility for new enterprise app vendors to grow their revenue is to generate new, large customers. However, that’s near an impossibility in an economy that shows signs of sluggish growth, if any growth at all.

The Future of the Enterprise App

Perhaps the bigger question is: is there a future for enterprise software at all? We’ve written quite a bit on this subject. So as to not repeat what we’ve written before. Here are a few excerpts from pieces we’ve written as far back as 2004:

In 2004, we wrote in our “Software’s Dirty Little Secret” ZapFlash:

“Software has been low-tech for so long that we’re all used to it that way. After all, software production is still a craft-based enterprise, with experienced practitioners turning out custom software in small teams. Just as when cobblers produced shoes and seamstresses fashioned clothing, today’s software is either entirely custom or appallingly ill-fitting. Custom software is enormously expensive, often requiring teams of developers, and only meets the particular needs of the moment. Meanwhile, commercial off-the-shelf (COTS) software is rarely flexible enough to meet all the needs of its users, requiring users to work within the constraints of the software, rather than the other way around. In any case, regardless of whether it’s custom or COTS, today’s software is of appallingly low quality — and that’s software’s dirty little secret.

ZapThink predicts the end of craft software, as standards mature and vendors learn how to build high-tech software. … As the industry matures and becomes high-tech, software will no longer be judged on how well it can meet today’s requirements, but rather how flexibly it can meet tomorrow’s challenges… if vendors become able to deliver software that can truly meet as-yet undefined business requirements, then enterprises will demand such software.”

Then in our “Middleware: Part of the Solution or Part of the Problem” ZapFlash in 2005 we wrote:

“The bigger problem, however, is that companies now think of distributed computing entirely in terms of connecting systems. Rather than focusing on the creation of business logic that meets business needs, companies now create layers of middleware. Companies now have to deal with the problem of integrating their disparate middleware implementations throughout their enterprise — middleware for their middleware, if you will. They must now spend millions more to manage and integrate the middleware that they have glued in place so well that it is virtually impossible to change or remove…It simply makes no sense for companies to spend money to get their middleware to work well with other middleware.”

In our “Tracking the Elusive SOA Platform” ZapFlash in 2005 we wrote:

“As the Service-oriented composite application platform market is only now beginning to get traction, most companies implementing SOA today are assembling their own custom platforms from pieces and parts — often using their existing middleware and platform infrastructure.”

From our “SOA for Independent Software Vendors (ISVs)” ZapFlash in 2006:

“The shift to SOA is fundamentally changing this economic reality. Customers are coming to expect a much flatter cost of change and the ability to evolve their business without having to rip and replace their IT investments.”

In our “SOA Forecast for 2007”, we wrote:

“The final prediction ZapThink will stick its proverbial neck out to make for 2007 is that the SOA suites might get a bit too big in 2007. Warren Buffet is fond of saying, “don’t ask a barber if you need a haircut”. What he means to say is that vendors of a service or a product have a self-interest in promoting the need for products that probably won’t keep you away from their sales department for long. While there’s no doubt that SOA vendors are solving real problems with products that, in many cases, actually work, the problem is that these SOA solutions have grown from individual, point-products that solve discrete SOA problems to gigantic SOA suites that seem to be every bit the monolithic platform that they had been intended to replace. In fact, we have been quoted as saying that monolithic SOA platforms, in which you have to buy all the various parts of the solution in order to get the true value as promised by the vendor, is at its core an un-SOA philosophy.”

Our “Avoid Vendor Driven Architecture (VDA)” ZapFlash in 2007 admonished:

“The core problem with VDA is that the vendor is not a disinterested third party. They are there to sell technology. So, no matter what your requirements are, their technology will meet the need. Chances are, your requirements are not given proper consideration and, chances are just as likely that the technology solution is not optimal for your problem domain or enterprise. Moreover, you’ll probably pay too much for the VDA SOA solution versus a best-of-breed approach.”

From “Is there a Future for Enterprise Software”, posted in 2009:

“The first major factor is significant consolidation in the marketplace for enterprise software. While a decade or so ago there were a few dozen large and established providers of different sorts of enterprise software packages, there are now just a handful of large providers, with a smattering more for industry-specific niches. We can thank aggressive M&A activity combined with downward IT spending pressure for this reality. As a result of this consolidation, many large enterprise software packages (such as Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Supply Chain Management (SCM) offerings) have been eliminated, are in the process of being phased out, or are getting merged … with other solutions. Many companies rationalized the spending of millions of dollars on enterprise software applications because the costs could be amortized over a decade or more of usage, and they could claim that these enterprise software applications would be cheaper, in the long run, than building and managing their existing custom code. But, we’ve now had a long enough track record to realize that the result of mass consolidation, need for continuous spending, and inflexibility is causing many companies to reconsider that rationalization.

As if to prove a point, SAP stock slid almost 10% on missed earnings. Some may blame the overall state of the economy, but we point to the writing on the wall: all the enterprise software that could be sold has been sold, and the reasons for buying or implementing new licenses are few and far between.”

And finally, from our “RIP Enterprise Software” post earlier this year:

“It is important to note that the common theme is transformation. There are many enablers of this transformation, including SOA, complex systems approaches, governance, collaboration, and Cloud Computing — but no one of these enablers is the whole story. But make no mistake, there’s a sea change in how enterprises leverage technology…

…This sea change will shutter large IT shops, sink unsinkable incumbent vendors, redefine the role of the CIO, and turn the practice of Enteprise Architecture upside down. In ten or twenty years, the whole notion of enterprise IT will be unrecognizable from where it is today. And nothing we or the vendors can do will stop this change.”

We’ve written many more articles, white papers, and talks on this topic for many years. As you can see, the writing has been on the wall for enterprise IT software vendors for quite some time.

The ZapThink Take

Since we’ve already given you our take on the enterprise IT software market over our one decade of being in business (happy anniversary, ZapThink!), the best way to round out this particular post is to place the responsibility for IT innovation and architecture in the hands of where it should be the most – the enterprise. As enterprises find an increasingly less-diverse set of vendors to work with, a more economically challenging environment, and the need to innovate and manage increased complexity at an ever-increasing pace, companies will have to look inwards. The solution to their IT problems is within their own hands and control. As the vendors fight amongst each other for dwindling business, you should avoid those battles by focusing on developing architectural strategies that enable agility and innovation without depending on a single vendor. This is the only rational and cost-effective strategy in an increasingly unpredictable world.