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The Future of Enterprise Software - How Software Companies can Achieve High Performance in an Era of Disruptive Change and Uncertainty (released 2005)
 

The Future of Enterprise Software - How Software Companies can Achieve High Performance in an Era of Disruptive Change and Uncertainty (released 2005)

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The enterprise software industry, after sev- eral years of declining growth, stands at the verge of what promises to be a tumul- tuous time. Just as the Internet was responsible for the last explosion ...

The enterprise software industry, after sev- eral years of declining growth, stands at the verge of what promises to be a tumul- tuous time. Just as the Internet was responsible for the last explosion of growth in the industry in the past decade, it is now laying the groundwork for dramatic change that will sweep across the software sector in the coming years. Indeed, we already are seeing some of the first waves of change making their mark in the form of growing acceptance of open standards and the development of open source and soft- ware-as-a-service, which at the moment are competing for attention with the industry’s move towards consolidation.

To shed light on the nature and extent of these changes and how they will affect the industry, Accenture recently conducted comprehensive research involving software company executives, venture capitalists, CIOs and other technology leaders in major corporations, and Accenture’s own experts. We believe our findings and analyses — which are detailed in this paper — will provide software company executives with valuable insights that they can use as they shape their strategies for achieving high performance and market leadership in the dynamic and uncertain years to come.

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    The Future of Enterprise Software - How Software Companies can Achieve High Performance in an Era of Disruptive Change and Uncertainty (released 2005) The Future of Enterprise Software - How Software Companies can Achieve High Performance in an Era of Disruptive Change and Uncertainty (released 2005) Document Transcript

    • The Future of Enterprise Software: How Software Companies can Achieve High Performance in an Era of Disruptive Change and Uncertainty
    • 3 Introduction 04 The Metamorphosis of Enterprise Software: 05 How the Internet is Driving the March of Change Perfecting a Disruptor: The Reinvention of Software-as-a-service 12 Consolidation in the Enterprise Software Sector: 18 Gateway to Growth or Path to Pitfalls? Orchestrating the Future of Enterprise Software: 23 Growth and Controlled Disruption Avoiding the Perfect Storm 26 Table of Contents
    • 4 The enterprise software industry, after sev- eral years of declining growth, stands at the verge of what promises to be a tumul- tuous time. Just as the Internet was responsible for the last explosion of growth in the industry in the past decade, it is now laying the groundwork for dramatic change that will sweep across the software sector in the coming years. Indeed, we already are seeing some of the first waves of change making their mark in the form of growing acceptance of open standards and the development of open source and soft- ware-as-a-service, which at the moment are competing for attention with the industry’s move towards consolidation. To shed light on the nature and extent of these changes and how they will affect the industry, Accenture recently conducted comprehensive research involving software company executives, venture capitalists, CIOs and other technology leaders in major corporations, and Accenture’s own experts. We believe our findings and analyses — which are detailed in this paper — will provide software company executives with valuable insights that they can use as they shape their strategies for achieving high performance and market leadership in the dynamic and uncertain years to come. Introduction
    • 5 In the mid-1990s, a seminal event occurred in the life of enterprise soft- ware: the industry met the Internet. At the outset, the event triggered the next — and likely last — great wave of growth in the sector. Hence, 10 years later, with no next wave in sight, the industry is maturing and consolidat- ing. But just as the industry now is trying to settle into a more permanent and stable structure, it is about to be transformed again — as the Internet unleashes forces that are driving tra- ditional enterprise software vendors toward the next step in their evolu- tion: the industrialization of their value chains. Today, pulled between the traditional dynamics of the com- puting industry on one hand, and the rapidly growing disruptive influence of the Internet on the other, enterprise software is on the verge of a meta- morphosis. Waves of Growth To understand where enterprise soft- ware is today, it is helpful to remind ourselves of the role of software in business. Enterprise software has two primary roles: to inform and to auto- mate business activity. Hence, it achieves growth via two main avenues: addressing new business activities, or improving the way it supports activities already addressed. In the first 30 years of the industry both avenues were used, but the for- mer has triggered the largest waves of growth. Since its inception in 1968, when IBM decided to un-bundle its hardware from its software, enterprise software has grown in a succession of bursts (see sidebar 1-1). Each platform shift — from mainframe to minicomputer to client/server — delivered a new type of user to enterprise software, one whose business activity and interactions were fundamentally dif- ferent from that of the previous user groups. With each new user type, new “use cases” for software could be cre- ated to support these new activities and interaction models. Hence each platform shift sparked a new round of growth. The move from mainframe to minicomputer meant computing power that previously was the province of a select few in corporate finance now could be tapped by other key departments across the business. For instance, software such as Computer-Aided Design — devised for engineering departments on a mini- computer platform — had little in common with the mainframe-based payment processing software used in large banks. The introduction of client/server and local area networks in the 1980s further democratized computing, as any company employee theoretically could benefit from the use of PCs and enterprise applications. By the early 1990s, computing was becoming pervasive across the corpo- rate landscape. Yet something — or, more accurately, someone — impor- tant still was missing from the busi- ness network: the consumer. That all I. The Metamorphosis of Enterprise Software: How the Internet is Driving the March of Change
    • 6 changed when the Internet arrived on the scene. In a single burst, the full hierarchy of participants in business activities — every kind of company, department, employee, customer and consumer — could at last be on the same network, collaborating and trans- acting with each other. Like previous platform shifts, the introduction of the Internet served as the impetus for growth in the enterprise software industry. But the size and scope of expansion driven by the Internet was unlike any seen before. Across applica- tions, system management and devel- opment tools, vendors invented new use cases (e.g., customer self-service) and re-invented old ones (e.g., order management) for the new networked world. Oddly, however, while the Internet spawned such massive advances in the industry, it also marked the end of the platform shift as a primary growth mechanism. To be sure, there are still plenty of users left to bring to the enterprise software value network and new platforms yet to be developed. However, there is no new type of users left, which inherently limits the num- ber of fundamentally new activity types and the impact that any new platform or users can have on the industry. For instance, there certainly are businesses in China and India that will be joining the value network in the near term as those countries’ industrial might continues to grow. But from a software use case point of view, those companies share many characteristics with their Western counterparts — they still need order management, email, security and the like. Similarly, the current explosion of mobile or convergence platforms pri- marily will extend the existing use cases by ensuring that users can be on the network anytime, anywhere. It like- ly will create great opportunities for content or service providers, as well as some for software providers. But none of these will be as rich as the opportu- nity to improve business productivity that arose the first time these users were brought to the network. Therefore, none of these developments will spur the kind of sector-wide hyper growth observed in the past big waves. With no new categories of business participants to add to the network, the industry will have to wait quite a while-until the edge of the business network is pushed beyond humans to billions of appli- ances and sensors that will silently participate in business activity — for the next big wave of growth. As a result, 10 years after enterprise software met the Internet, some of the product categories born of that wave (and most of those that were re- energized by it) now are joining prod- ucts from the client/server, minicom- puter and mainframe eras in a very large “core” of mature software tech- nologies. As one product category after the other matures, the market is undergoing a phase of rationalization and consolidation — a classic pattern for the tail end of a wave. This time, however, there is a twist: With no big wave in sight, many industry observers believe that an industry structure for the long run is being created. The greater impact: industrialization of the value chain Yet, while the Internet has led to mar- ket maturation and consolidation — and winners are busy claiming their stake of this maturing market — a comparatively silent revolution has started: The Internet has begun re- writing the rules of the enterprise software game-and, indeed, the very definition and design of the software product — by fostering two highly sig- nificant developments: 1. Steady increase in the adoption of a growing set of open standards for Internet-based computing by all vendors 2. Acceleration of a re-architecture of software using Service Oriented Architecture (SOA) To be sure, these are no small changes. Proprietary standards and designs long have been fundamental to the business model and the eco- nomic rents of software vendors. These new approaches to software certainly will level the playing field — and, in some cases, open the door to highly disruptive business models. In fact, the industry already is seeing the first wave of these disruptors — the soft- ware-as-a-service companies (the progenitors of utility computing) and open source vendors — emanating from the new Internet-enabled envi- ronment. And that is not the end of it by any means. Accenture sees the Internet setting the stage for a raft of new market entrants with innovative takes on enterprise software. Armed with open standards, SOA and the Internet as their distribution mecha- nism, a global cottage industry of small software developers will package and distribute useful intellectual prop- erty (IP) as application services (many of which will complement offerings from the large vendors). Service providers with re-usable knowledge will backward-integrate into applica- tion services to extend the reach of their IP. Other companies will use ver- tically integrated models spanning from application services to business services to serve the needs of specific customer segments. Hence, just as the traditional vendors are eagerly consol- idating the sector, the Internet is building a global bridge to the seem- ingly unlimited masses of development talent around the world, inviting them to enter the market. The net result of these changes is a monumental shift in how vendors cre- ate and deliver software. As the Internet’s reach and transparency grow, and pressure mounts on vendors to achieve dramatically higher levels of efficiency, vendors are forced to systematically reallocate tasks and resources to their most efficient com- bination. In short, the Internet is the impetus behind the industrialization of the enterprise software value chain.
    • 7 In an industrialized value chain, SOA is a critical element — the “produc- tion blueprint” — due to its built-in interoperability of software compo- nents. This may not mean much to a business user, but to a producer of IT solutions, this is gold — indeed, it provides the opportunity for a new production paradigm for enterprise solutions. With interoperability, tasks such as design, development and testing can be decoupled and distrib- uted, and can be assigned most effi- ciently to local and offshore labor. Web services "factories" all over the world can produce, in parallel, the new components that will make the customer's solutions. Software cus- tomization, assembly and testing time also can be radically reduced. The net benefits — a benefit that does mean something to business users — is a radical improvement in time to value and total cost of ownership (TCO). What does this mean in practice for vendors? Consider that the traditional value chain was designed to maxi- mize the value a vendor could create through proprietary product innova- tion. Upstream in the value chain, product development, the crown jewel of the company, typically is closely held and controlled — or "tightly coupled." Downstream, activi- ties such as installation, customiza- tion and management of the software solution throughout its useful life are designed for maximum, unencum- bered delivery: They are handled inde- pendently by channel partners and the customer's IT department. In other words, they are "un-coupled." However, as markets mature and as more shared standards and architec- tures are adopted, the game changes. Value shifts from proprietary product innovation to TCO and speed to value. And so the design criteria for the value chain must be revised: Downstream activities, which tradi- tionally can account for 50 percent to 90 percent of a customer's TCO and can define much of the customer's overall experience with the product, become critical. Improving the effi- ciency of these activities often requires some "re-coupling": a coor- dination of the parties involved in the installation, customization and management of the software solu- tion. Hosted delivery models, for example, achieve this at the extreme by bringing all these activities in house. Boosting efficiency also requires a product architecture such as SOA that is specifically designed for easy and efficient installation, customization and maintenance. Upstream, in product development, the source of value also shifts away from proprietary innovation to speed and efficiency — i.e., how quickly and inexpensively a vendor can get a new product to market. To increase speed and efficiency, vendors must, and can, open up their development process and distribute it. A distrib- uted and open product architecture such as SOA is again a key enabler. Industrialization, of course, is not a new concept. Interoperability of product components was the basis of the great waves of industrialization of the 20th century, beginning with Henry Ford's reinvention of the auto- motive business in the 1920s. Before Ford, automobiles were assembled out of custom-finished and -assem- bled parts by highly skilled, highly paid craftsmen. Cars could take years to build, were unreliable and only affordable to the wealthiest — not unlike some of today's enterprise solutions. Ford's interoperable part system allowed him to decompose the car manufacturing process into series of discrete but reliably inter- connected steps — to specialize labor, develop the moving assembly chain, and create a new, massively more efficient and faster production paradigm. In less than a year, Ford's production innovations dramatically reduced production time and — TCO, and in the process created the mass market for automobiles. The Internet is enabling a similar rev- olution. It is becoming the heart of a new paradigm for the production and delivery of software. With its global reach, the Internet is the conveyor belt or moving assembly chain bring- ing the work to a global workforce of developers, and serves as the distrib- ution system and backbone of the maintenance system. With its trans- parency, it is the market-making mechanism driving resource alloca- tion decisions. Its standard architec- ture — SOA — is the interoperable parts system, and its open standards are the measuring gauges that ensure that every component is assessed against a universal reference. Is this really happening? The skeptic may point out that such sweeping reinvention of the value chain is unlikely because there is an inherent inertia in enterprise comput- ing that protects the established model. To some extent that is true. Change will not happen overnight. Some customers still are ordering old client-server versions of products, and many mainstream customers lack a strong business case for yet anoth- er re-architecture of their infrastruc- ture. But traditional software vendors should not find too much comfort in these thoughts. One reason is that preserving the mainstream will not be sufficient to generate growth any- where near what traditional vendors — and their investors — expect. Between one-half and two- thirds of a typical software vendor's enterprise value is based on market expectations of growth. Take away that expectation, and enterprise soft- ware vendors will see their market capitalizations plummet and their CEOs looking for work. Another reason is that preserving the mainstream simply may not be possi- ble. As with any classic disruption pattern, the Internet's impact on enterprise software has begun at the fringe of the established markets, so preservation of the core still seems
    • 8 Sidebar1-1: Traditional Patterns of Growth for Enterprise Software Since the 1960s, enterprise software grew with the rest of the computing world through a series of expansions in user base. The minicomputer introduced departmental users. Client/server introduced process par- ticipants. Finally, the Internet brought computing to every type of business, department, employee, customer and con- sumer in developed economies. As IT democratized, each burst in the user base brought about new use cases. While the economic value of each new use case may have been lower on average than that of the previous use cases, the great expan- sion in the number of uses more than made up for it (Figure 1-1a). The Internet, in par- ticular, greatly magnified the size of the network by adding hundreds of millions of users and setting the stage for massive value creation. Every burst in user base size required dramatic gains in affordability, because each new constituency could only place a smaller value on software. Software was helped in this affordability race by two other industries, computing hardware and telecommunications, that are still governed by Moore's law of exponential gains. Through these successive bursts, enterprise software growth far outpaced average economic growth over this 40-year period. Today, the hierarchy of (human) business participants is complete (Figure 1-1b)— it will only expand again when automated devices of all kinds are added to the busi- ness network and silently participate in business transactions. The completion of the business hierarchy is a key reason for the maturing sector we see today and for what we believe to be the lack of a next wave of hyper growth. Software innovation throughout the first 40 years followed a cyclical pattern of reinvention of the stack (Sidebar 1-1c). At any point in time, the market can be char- acterized by two parts: • The edge: new and emerging end user needs, characterized by high rates of innovation and high fragmentation. Purchasing at the edge is often decentralized, driven by end users or departmental buyers. This means that spending is not as highly scrutinized and can proceed relatively unencum- bered by otherwise tough corporate standards and controls. • The core: known and understood needs, characterized by technological stability and concentration. The products in the core provide the foundations for inno- vation at the edge. Spending at the core is centralized and controlled by the IT and finance departments; as such, it is rarely allowed to grow in excess of company growth. After innovations are perfected, the "good enough" crisis sets in. What used to be at the edge becomes part of the core. New cycles of innovation then can proceed as maturing edge segments are rationalized into the core. At times, innovation at the edge provides benefits so important that it triggers a reinvention of technologies at the core. This was the case with the plat- form shifts. The move to client server, as well as the move to net-centric comput- ing, created benefits so large that they resulted in the re-writing of the old use cases. In each case, the supporting sys- tems management and development tool categories also experienced high growth as new software was written to manage, optimize and secure the new architectures. Architectures New Uses New Users Host Mainframe Financial and accounting operations Senior executives & accountants In financial institutions Mini-Computer Computer Aided Design, Shop Floor Automation Departmental users (e.g., engineering) In large businesses PC-LAN- Relational Database ERP, Office Automation, SFA Process participants In most businesses In advanced economies Internet – Browser – Netcentric architectures Browsing and searching, email, ecommerce, cust- omer self-service Every type of company, employee, customer, consumer In the world’s most advanced economies Service Oriented Architecture Hosted models Convergence devices Enterprise mobility Universal portals TBD Every type of company, employee, customer, consumer Anytime, anywhere In most economies Ubiquitous broadband Any-to-any architectures Ubiquitous devices, sensors Real time enterprises Others, to be invented Every type of company, employee, customer, consumer Every device Anytime, anywhere In every economy 1X 60s 10X 70s 100X 80s 10,000X 90s 2005 Infinite Number of Uses Economic Value of Each New Use Case e Sidebar Figure 1-1a: A Model for Enterprise Software Growth Source: Accenture
    • 9 possible. But the reach of the Internet, the ideal nature of software as both product and information, and the inefficiencies of the traditional value chain create an opportunity that is simply too great to be ignored. In fact, much already has been accomplished in just a few years: • Open standards are now the norm • SOAs are the de-facto architecture for new software products • Utility computing models, after a false start in the late 1990s, are now successfully disrupting markets like customer relationship manage- ment with purpose-built, SOA- enabled products • Open source has produced what many thought no single company could have created: a credible alternative to the most complex product in enterprise software, in the most dominated market — the operating system. There are now more than 100,000 open source projects in progress, and the num- ber of open standards and potential product categories is growing rapidly. • Software vendors are increasingly distributing product development across the world • The valuation of Google — a con- tent service provider — is greater than that of any software vendor save Microsoft The Upcoming Metamorphosis of Enterprise Software The end of the old platform-based expansion mechanism and the begin- ning of the industrial age of enter- prise software are nothing to lament. Quite the contrary, they mean that the industry can coalesce around shared approaches to enterprise com- puting and finally get IT right. Of course, the industry has plenty of work to do. In addition to the notori- ously under-served expansion markets (international, and small and medium businesses), there remains a great deal of opportunity in the core mar- kets. In large enterprises, many The "good enough" crisis is a fixture of the industry which, in time, reaches every market segment after an innovation cycle has run its course. The onset of the "good enough" crisis in a given market segment is often the tipping point for the re-struc- turing of this segment. As such, the "good enough" crisis is one of the defining ele- ments in the evolving structure of the industry. What is different today, over 40 years since the birth of the packaged soft- ware industry, is that the "good enough" crisis has reached many segments even recently seen as immature, including busi- ness applications. A new part of the "stack" is now being carved out: the IT Services and IT labor markets, which are now the focus of innovation of a different kind: business model innovation. Sidebar Figure 1-1b. How the Hierarchy of Business Participants Was Completed A portion of the stack is “carved out” and “reinvented” so new needs can be met and new users served. Users “at the edge” of corporations acting as “professional- consumers” or “department buyers” are the typical targets Innovation proceeds and new use cases are invented to leverage the new innovation — new entrants typically lead in the early days, particularly if the innovation is aimed at new user markets The good enough crisis sets in. Dominant vendors emerge, and in some cases, established vendors catch up with the innovators The innovation is “recycled” into the mainstream. Centralized procurement models take over: stability and efficiency are now paramount. Carve out and Innovate New users or edge users, departmental or pro-sumer buyers, new users Rationalize, Stabilize, Consolidate Core Stack • User interface • Business logic • Middleware • Database • Operating System (Cold – low to moderate growth) Edge (hot – high growth) 1 2 34 Mainstream users, corporate buyers, Mainstream users Sidebar Figure 1-1c: The Cycle of Reinvention of the Software Stack: the Core and the Edge Source: Accenture Banks – payment processing Engineering – CAD CRM Office Applications Customer Self Service eCommerce Host Mainframe Corporate Large Info Intensive U B Type of User Type of Business U B Mini-Computer Departmental Corporate Large Info Intensive Large U B Client Server Departmental Corporate Large Info Intensive Process Small Large U B Net Centric Departmental Corporate Consumer Large Info Intensive Process Small Large U B Source: Accenture
    • 10 processes have yet to be automated, or automated well, and most have yet to be truly transformed. In addressing these opportunities, software will be helped as always by technological advances in computing and network- ing technology, which still are gov- erned by Moore's law of exponential gains. Software will leverage these advances to become increasingly intelligent and adept at integrating vast amounts of information, at relat- ing to humans and, increasingly, at making decisions. Software also will be helped by a new industrialized value chain that will allow it to address every opportunity efficiently and will greatly expand software's audience. Together, these advances will position software more than ever as one of the great transformational engines for business innovation. But to realize that potential, the enterprise software industry will have to undergo a metamorphosis. And because of the confluence of tradi- tional industry dynamics and the Internet's influence on the sector, the ways in which the industry trans- forms will seem consistent at times and downright paradoxical at others. At a high level, the computing model appears relatively clear: Application services anywhere on the Internet, beyond the firewall and within the firewall, will inform and automate business activity anywhere. Composite applications will combine these services seamlessly into unique or personalized applications. Information will flow fluidly from any device on the network to any other (server, PC, appliance, PDA and many others). Software will confer ever greater intelligence and insight into business activities. Increasingly sophisticated tools will be required to manage, optimize, and secure this new, highly distributed architecture. The industry structure however, will be paradoxical, at least for a while. Like anything shaped by contradictory influences, it will morph into a hybrid. Concentration and fragmentation On one hand, the maturation of the core markets and resulting vendor consolidations will produce a more concentrated sector; large vendors will become even larger. On the other hand, the Internet and its level- ing influence will introduce a flurry of new entrants of all stripes: myriad small software vendors across the world — essentially any company with re-usable intellectual property. The result will be an "hourglass" industry, marked by a discernable polarization at the ends and a disappearing middle. On-premise computing and utility computing The reinvention of the value chain will create opportunities for chal- lengers that will create innovative new business models to expand the audience for enterprise computing and disrupt the mainstream. But tra- ditional vendors will not stand still, and they as well will industrialize their value chain. This war of the value chains will smooth out the dif- ferences between utility and private enterprise computing, making user companies' decision of one versus the other a matter of specific circum- stance rather than overall policy. In this new world, utility and private enterprise software models will coex- ist, with no one model assuming prevalence. Vertical integration and horizontal layering Finally, vertical integration will reap- pear in the industry, challenging the horizontal layering of the stack that was so successful at producing the first 40 years of growth. As vendors re-invent their value chain, some will forward-integrate into IT or business services to solve customer needs more completely and directly. Symmetrically, IT or business service providers will backward-integrate into application services. Utility providers will integrate across application infrastructure, applications and ser- vices, while traditional vendors also, to a lesser extent, will integrate vertically across product layers (such as with SAP's move into application infrastructure or even EMC's foray into document management software). What Vendors Should Do Of course, how, when and how much these dynamics will affect enterprise software vendors will vary signifi- cantly from company to company; thus, every vendor should assess the developments from its specific van- tage point. After all, with its range of more than 60 highly specialized seg- ments, enterprise software is hardly a homogeneous market. Yet while the specifics will vary, Accenture believes that at the highest level, every sizable enterprise software vendor is facing two types of corporate wars. The first type of war could be described as "regular warfare." It is governed by traditional industry dynamics, and involves going head to head with well-known competitors over the maturing core of the sector while positioning to participate in the hot edge of the market where product innovation will still be rewarded. Vendors on this path often will merge with or acquire companies to achieve the size and economies necessary to compete or to diversify away from maturing markets. They also may aggressively pursue "platform status" for their products to margin- alize competitors. The second type of war could be described as "guerilla warfare." It is governed by disruptive, Internet-cre- ated dynamics, and will involve ven- dors competing against companies or entities with business models they still may not comprehend. These are the wars of the value chains. For the Internet-based disruptors, perfecting
    • 11 their value chain innovation will be a key to success. For traditional ven- dors, reinvention of the value chain will be a required defensive move. What will this reinvention look like? Upstream in the value chain, tradi- tional vendors must dramatically improve the speed and agility of their product creation process. They can do this by: • Adopting SOA and using it as a blueprint for a new product-cre- ation paradigm • Copying open source: Building col- laborative development models to maximize the speed of innovation, so as to help diversify away from commoditized spaces • Co-opting potential disruption by orchestrating an innovation net- work of vendors around them • Leveraging open source: Including open source components into their products and focusing their own development investment on creating truly differentiating functionality Downstream, traditional vendors must achieve value chain efficiency (as measured by the customers' TCO and time-to-value) comparable to that of utility computing. Vendors can do this by: • Adopting SOA, this time as a blue- print for a new software delivery paradigm • Orchestrating delivery activities with channel partners and cus- tomers to operate under a shared, highly efficient model To win the value chain wars and achieve high performance, traditional vendors will need to change their mindset and approach to their busi- ness model. They will be tempted to look upon SOA as yet another oppor- tunity to innovate on the product- something SOA clearly will be. Arguably, SOA is still quite new and has a long way to go, hence seeing it as a product innovation to be per- fected is understandable at this time. But vendors should not overlook SOA's transformative impact on their value chain. They must inject both a new mindset and a new discipline into their business: The mindset is a focus on the full solution, its total impact on the customer experience, and its total cost of ownership; the discipline is a systematic reengineer- ing of the value chain, downstream and upstream. Vendors that adopt this perspective will be much better positioned in the coming years to both defend their core market and expand to other markets (such as international and small businesses) that their current business models have not allowed them to tap. The Future Begins Now To be sure, competing on two vastly different fronts at once is no easy task, especially when each requires unique approaches and skills. But vendors simply do not have a choice, as the future belongs to those high performance companies that can suc- ceed at both. Although enterprise software and its value chain will most likely morph and adapt in ways few people can foresee, one thing is certain: The next 10 years promise to be fascinating for any observer of the industry. The con- solidators are busy consolidating the mature core of the market, and Internet-based disruptors are nipping at their heels. For enterprise software vendors, standing by is not a good strategy. It's time to act. In the following sections, we will review in more detail how various enterprise software vendors can respond — or are responding — to the challenge as they pursue high perfor- mance in these uncertain times. II. "Perfecting a Disruptor: The Reinvention of Software-as-a-service" assesses the impact of Saas on enter- prise software, and outlines keys to success for Saas providers. III. "Consolidation in the Enterprise Software Sector: Gateway to Growth or Path to Pitfalls" takes the perspec- tive of those vendors seeking to con- solidate their segment. IV. "Orchestrating the Future of Enterprise Software: Growth and Controlled Disruption" addresses the opportunity a few vendors have to accelerate growth and co-opt disrup- tion in the market via a platform strategy. V. "Avoiding the Perfect Storm" pro- vides insight into how to recognize and avoid a scenario many traditional "best of breed" vendors may face eventually where they must simulta- neously compete with aggressive mega-vendors and fend off disruptors.
    • 12 After four years of squeezing budgets, closing ranks and sticking with the tried-and-true, the world of enter- prise technology is now slowly awak- ening from its conservatism. As usual, it is the business users who are lead- ing the charge of change — and they are not asking for IT's permission. After the PC, the Internet, the Blackberry and countless other inno- vations, business users in the enter- prise now are embracing Software- as-a-service (Saas) as a genuine alternative to traditional packaged solutions. The new-generation Saas providers have much on their side, but some skeptics still see them as little more than a distribution or financing alternative for enterprise software, confined to the small and medium business markets. This is complacent and wishful think- ing on their part. But it does remind Saas providers that the key to their ability to achieve high performance, and to the demise of their critics, is their wholesale re-invention of the business model. In fact, the most suc- cessful of the emerging Saas providers will not be simply alterna- tive software companies, but rather services providers that happen to be powered by software. From their bat- tles with traditional vendors will emerge a reinvented software value chain — at once more agile and more efficient — and a computing world that will be one step closer to a future as a utility. The New Generation of Saas Utility computing was all the rage during the Internet boom. Businesses were funded to rent anything from storage to processing capacity to applications. Most flopped in spectac- ular fashion, while others barely sur- vived. Today, utility computing is enjoying a revival, with Saas its lead- ing light. Yet, significant skepticism remains about Saas's viability in the enterprise and its ultimate business impact. The skeptics' argument is twofold. First, they believe that in the enterprise, the economic model of utility computing is not inherently superior to that of private, on- premise computing. They argue that most large enterprises should have sufficient scale to run their own IT plant efficiently, especially as the cost of key inputs into enterprise comput- ing (labor now available globally, and processing and storage are still gov- erned by Moore's law) continues to drop. Second, they believe that the value proposition of utility models in the enterprise still will fall short on several key attributes, including the ability to fit specific customer needs, customer's desire for control over their applications, and security risk. Indeed, skeptics can point to the fail- ure of the first generation of utility providers as evidence of the challenge and indication that Saas will remain limited to the small to mid-size busi- ness markets. Accenture believes this thinking is now dangerously dated II.Perfecting a Disruptor: The Reinvention of Software-as-a-service
    • 13 and misses the point behind the cur- rent rise of Saas. In our opinion the new generation of Saas differs from earlier pioneers in three important ways. Strength of value proposition The first generation of ASPs provided traditional on-premise software in a hosted environment. Their value proposition centered on the cost sav- ings and payment flexibility offered to customers. In return, customers had to accept a lower quality of experi- ence, as the software was not easily tailored for specific needs. Where cus- tomization and integration with het- erogeneous backend systems were needed, they could be achieved, but with methods — and resulting cost and time — similar to that of the on- premise world, which defeated the purpose. The first ASPs, like many of the initial dot-coms, expected too much from the reach of the Internet alone, and were short on actual pro- prietary value. In contrast, the new generation of Saas providers was designed from the ground-up to provide an outstanding customer experience. Instead of assembling off-the-shelf packaged software from leading application vendors, current Saas vendors designed their own with the user and hosted paradigm in mind. The value proposition of the new Saas providers centers on speed to value and ease of use as much as it does on total cost of ownership (TCO) — a situation stemming from the providers' incor- poration of the latest architectural thinking and standards, such as Service Oriented Architectures (SOAs) that allow them to tailor their offer- ing and integrate efficiently with backend systems. Salesforce.com and NetSuite, for example, offer custom development platforms to their cus- tomers and partners. Furthermore, these vendors leverage their customer intimacy advantage, effortlessly monitoring individual usage patterns and driving feedback into feature design to further enhance their value proposition. A different business model built on scope advantages, more than scale On the surface, previous-generation ASPs and new ones share the same business model: hosted software delivery. In reality, first-generation ASPs and the new Saas providers could not be more different. The ASPs saw software as the product to be delivered, and relied on scale in their data center operations to position themselves as highly efficient distrib- utors of software. Thus they spent their engineering expertise and resources on optimizing the delivery and business infrastructure of their service. However, they lacked control over two key elements: the applica- tion software they distributed, which was sourced from a third-party soft- ware vendor (or from another busi- ness unit in cases where the ASP was owned by a software vendor); and their pricing, which was negotiated with the software vendor. In contrast, the new generation of Saas providers understands that soft- ware is not a product to be delivered, but instead the architecture for a ser- vice and for an operating model. It is the business, but it is not the product. Hence the new vendors are vertically integrated: They own their software and can shape it to improve their customers' experience and the effi- ciency of their own operations. Furthermore, their SOAs confer a number of advantages, including greater adaptability and efficiency in both product development and opera- tions; ability to tailor their offering to individual customer needs; a blueprint for industrial-strength operations in which modules can be maintained, updated and replaced without holistic re-writing and re-testing of the application; and the operation with all of their customers on a single code base, which reduces engineering and customer support burdens. In short, software is their control point for both the customer experience and operational efficiency. Timing and market conditions The first ASPs reached the market dur- ing the greatest expansion in enter- prise software spending of all time. Counter-intuitively, this timing was unfavorable, as the ASPs' then bare- bone offerings did not stand a chance against the premium on-premise offer- ings with class-leading features for which businesses were rushing to pay. In contrast, the new Saas providers have reached the market at the perfect time, a time of the confluence of the three crises of IT: • The "good enough" crisis: A situation in which product-based differentia- tion is no longer rewarded, thus triggering the maturation of every product category. Ten years after the Internet, and 20 years after client/server and the PC, many enterprise software segments have been hit by the "good enough" crisis. • The "IT does not matter" crisis: A general disillusionment with IT (cap- tured by Nicholas Carr's May 2003 Harvard Business Review article) that has produced a conservative spending environment for the past four years. • The "complexity" crisis: A desire for simplification and reluctance to introduce new technologies in an enterprise environment already struggling to deal with the legacy of decades of IT experimentation (a term coined by research firm IDC). The three crises form the perfect back- drop for Saas's rise to the mainstream. The much-improved offerings of the new generation of Saas companies now increasingly are recognized as "good enough" to meet enterprise cus- tomer requirements. The fact that their on-premise competitors' offerings are still undeniably more featured is moot: Customers do not care. Meanwhile, the basis for competition is shifting as customers seek lower-cost solutions (a continuation of the "IT does not mat- ter" crisis) that can easily and rapidly
    • 14 be procured and consumed (an out- growth of the "complexity" crisis). TCO, speed to value and the overall quality of experience are now the basis for competition, and in these three areas, Saas shines. Will Saas Disrupt or Merely Extend the Enterprise Software Markets? At this time, the impact of Saas is most evident in horizontal business- application segments, where the main strengths of Saas are speed to value and the displacement of labor-inten- sive integration and management tasks. But CRM is only the first major battlefield for Saas. Saas vendors already are positioned in many func- tional segments and vertical markets, including: • CRM (Salesforce.com, RightNow, Digiprize) • ERP (NetSuite) • Financial Services (Digital Insight) • Human Resources (Taleo, Employease) • Marketing Analytics (WebSideStory) • Service Purchasing (Rearden Commerce) • Content Management (CrownPeak) • Data Migration and Compliance (Zantaz) Much of the debate over the impact of Saas centers on a key issue: whether Saas will disrupt the main- stream markets or merely extend the software markets to new users such as small and medium businesses that could not afford these solutions in the previous on-premise paradigm. The impact of Saas should be assessed category by category, as it will differ from one to the other. For any prod- uct category, we propose framing this issue with two assessments: First, what will be Saas's ability to meet large enterprise requirements? Saas relies on a sufficiently generic and stable set of requirements, shared by a broad base of customers, to be viable. The higher the complexity, specificity and variability of a given customer's needs, the worse the fit for Saas. Many of the machine-to- human interactions that make up standard business processes (such as CRM and HR, for example), can be supported successfully by Saas mod- els that leverage SOAs for flexibility. Indeed, that is quite a large section of today's application world. But even in the age of the "long tail," no model can be infinitely segmented to address every market requirement economically. For instance, the core processes in financial services compa- nies (straight-through processing) or telecommunications organizations (billing and activation) are not strong candidates for Saas-although their supporting processes are. In the long run, industry trends favor further growth for Saas as more enterprise requirements stabilize (reflecting the continuation of the "good enough" crisis) and the sophistication of Saas architectures and models improves. Second, what will be the value oppor- tunity for meeting large enterprise requirements with Saas? The opportu- nity for Saas depends on the relative inefficiency of on-premise alterna- tives. In other words, the greater the share of resources and time devoted to downstream activities (such as installation, configuration and maintenance of the on-premise appli- cation), the more attractive Saas will be. Given the preceding assessments, Accenture categorizes the impact of Saas as follows (see figure 2-1): • Market extension and disruption: Saas extends the market for a cate- gory of products to new markets (most notably, small and medium businesses and international users), and it also disrupts on-premise ven- dors in the mainstream markets. This will happen in situations where Saas is capable of meeting enter- prise requirements and the value opportunity is large. The CRM cate- gory is a prime example. • Market extension: Saas only extends the market for a category, but fails to disrupt incumbents. This will happen where Saas cannot meet true enterprise requirements but can significantly improve the affordability of a solution, making a Saas solution attractive to new users such as small businesses. This likely will be the case for the ERP category. Ability of Saas to Meet Large Enterprise Requirements Sufficient Low High Insufficient Opportunity: Relative Inefficiency of Traditional Value Chain C. Distribution Alternative e.g., Infrastructure Software A. Market Extension and Disruption e.g., CRM (Sales, Customer Support, Marketing), HR Mgt., etc. D. No Impact e.g., industry-specific custom large enterprise processes B. Market Extension e.g., ERP Figure 2-1: Categorizing the Potential Impact of Saas in a Given Product Category Source: Accenture
    • 15 • Distribution alternative: Saas becomes an alternative to estab- lished distribution. It is adopted by incumbent companies, as well as new entrants, which leverage Saas to facilitate their market entry. This will happen where Saas can meet enterprise requirements but does not significantly improve the affordability of solutions-such as is the case for many infrastructure software categories. • No impact Identifying disruption patterns is, indeed, possible. Salesforce.com, the trailblazer among the new breed of Saas providers, is the poster child for a Saas disruptor. As should be expect- ed, the first adopters of Salesforce.com's offerings were small and medium businesses, as well as departmental business buyers in the enterprise using their own discre- tionary authority (sometimes unbe- knownst to corporate finance or the IT departments). These customers pur- chased something that was easy to buy, use and procure rapidly, and that met most of their needs — a first in the enterprise. After purchase, these customers were satisfied by a user experience that was intended for them. As word of mouth spread, Salesforce.com rapidly built its departmental beachheads in the enterprise by its ability to provide value added high performance tools. Today, a small but growing number of its deals are corporate-wide deals that involve the finance and IT departments, a testament to its increasing mainstream status, to and disruption of on-premise vendors. Building on the successes of compa- nies such as Salesforce.com, the Saas category is growing at an average rate of 25 percent per annum — or about four times average sector growth. This is strong growth, but not hyper-growth. A key reason for this, besides the relatively low price per seat charged by Saas providers, is that Saas does not offer anything radically new to enterprise customers. On the contrary, it supports the same use cases, albeit in a simpler, easier and cheaper package. Hence, Saas does not create a strong rationale for enterprise customers to replace the solutions they already have — in other words, it does not trigger the upgrade or replacement decision. Instead, Saas wins its deals when customers must replace existing solutions for internal reasons, such as a merger, the redesign of processes or the obsoles- cence of their existing solutions. As a result, the overall revenue impact of Saas on the enterprise software remains modest. However, incumbent providers should not take much solace in this, as the impact of Saas on their market valuations can still be consid- erable. In today's low-growth applica- tion markets, Saas is absorbing much of the net market growth. And for a typical vendor — with between 50 percent to 80 percent of its value based on expectations of future growth — exclusion from the growth opportunity can be disastrous. The Competition for Saas Supremacy The mega-vendors have taken notice of this. At the time of this writing, SAP and Microsoft are signaling their upcoming entries in the Saas fray. When they do unveil their offerings, the next race — between mega-ven- dors and the Saas pioneers — official- ly will be on. In that race, each side has distinct advantages on which they will seek to capitalize, passing on high performance benefits to their end users. Today's Saas vendors can count on several factors in their favor: • The reluctance of market leaders to compromise their core business models, which will affect the tim- ing, nature and vigor of their response • The learning curve for the new business model. Companies such as NetSuite, Salesforce.com and others each have more than six years of experience perfecting their business and offering, while mega-vendors such as IBM-which have even greater tenure in the space, but a different approach-still have to break through with their own offerings • The Saas providers' existing cus- tomer franchise, which they must continue to delight The mega-vendors will bet on a dif- ferent set of factors: • Their unmatched resources and market power • The relatively moderate growth pace of Saas, which gives them some time to learn from the Saas pioneers • Their resources to acquire any seri- ous disruptor at the opportune moment • Their ability to catch up on SOA and improve the attractiveness of their on-premise offerings A Saas Provider's Imperative for Success: Continuing to Innovate the Business Model To succeed in the upcoming races, Saas upstarts must continue to lead in perfecting their innovation: the business model. They have a few opportunities to do so. Continue to lead the re-invention of the value chain The Saas versus on-premise races are really a competition between value chains. On-premise vendors, whether they adopt Saas or not, will be forced to reengineer their value chain. Today, Saas vendors have an early lead thanks to their vertical integration and early adoption of SOA. But that lead may be short-lived, as every ven- dor eventually will catch up with SOA. Therefore, Saas providers must find new ways to drive ever-greater operational leverage in their value chain. The Internet is their friend in this pursuit, allowing them to reach collaborators worldwide that can augment or perfect the Saas
    • 16 providers' offerings. Here again, Salesforce.com is showing the way by making its custom development plat- form available to the masses of devel- opers around the world and position- ing itself as the center of a global ecosystem of application service developers and providers. Vendors also can participate in open source pro- jects. Driving this effort is a unique perspective among Saas providers: The customer experience, not return on proprietary intellectual property, is paramount. Thus, Saas providers typi- cally have more freedom than their on-premise competitors to leverage open source. Foster a passionate customer service culture Early in the life of a Saas provider, much of the effort centers on the software development efforts required to build the service. During these times, vendors may be tempted to allow a typical product engineering culture to dominate. This would be a mistake. A key advantage Saas providers have over most on-premise vendors is an opportunity to develop a passionate culture of the customer. A core service purpose should drive these vendors' investment strategy, the development of their offerings, the design of their business processes, metrics and reward systems, and recruitment of staff. Master the incremental improvement game Saas vendors must continually enhance the customer experience so that existing customers will remain loyal and adopt new offerings, and new customers will join. Unlike on- premise vendors, they do not seek to replace their offering outright, but rather, to enhance and expand. Once established, with a core offering and a significant customer base, they can update their offerings incrementally based on observed customer needs (which minimizes risk). They can test customer responses to ideas and con- cepts rapidly, directly and in detail. Enterprise customers no longer see Saas as a small and medium business offering. Most of the CIOs Accenture surveyed see Saas as one of the tools in their portfolio Percentage of respondents who agreed or strongly agreed with statement about software-as-a-service (or on-demand). 1. Most respondents believe Saas is relevant in the enterprise On-demand is all hype On-demand is for small and medium sized business only On-demand has some, limited, applicability in the enterprise On-demand has broad applicability in the enterprise, but a lot of work is required 2. Over the next three years, respondents expect focused Saas adoption in the Enterpris A requirement for select areas of software functionality only A requirement for most areas of software functionality 19% 5% 52% 24% 57% 9% Sidebar Figure 2-1a: Software-as-a-Service: Enterprise Customers Anticipate Focused Adoption Perception of On-demand Relative to On-Premise Against Each Attribute Attribute Percentage of Respondents 65%+ 45-65% 30-45% 15-30% 0-30% Speed to value Total cost of ownership Flexibility and scalability Availability and robustness Functional fit Project risk Security Control Inferior On Par Superior Relative strength Relative parity Relative weakness Sidebar Figure 2-1b: Enterprise Customers Perceive Speed to Value First and TCO Second as the Most Differentiated Features for Software-as-a-Service Sidebar 2-1: Software-as-a-Service is Going Mainstream of options. Not surprisingly, speed to value and TCO are the key differentiating attributes for Saas, while security and control are the potential deal breakers. Source: Accenture June 2005 survey of larger enterprise CIOs, Accenture analysis Source: Accenture June 2005 survey of larger enterprise CIOs, Accenture analysis
    • 17 And they can segment their customer base with great refinement and bring a science to their product marketing and management activities that on- premise vendors never had. Saas ven- dors that excel at this discipline will change the risk profile of the business and create a business model that, though steeped in software engineer- ing, will have the economic, business process and cultural characteristics of a high-margin service business. Maintain ownership of the customer Saas vendors must be cautious in designing their channel route to retain accountability for customer success. As they expand in the enterprise, emu- lating the distribution model and channel management practices of tra- ditional enterprise software players would be a bad idea. Whether through orchestration of third parties or through direct influence, Saas vendors must maintain control of the customer experience. Vendors may have to tem- porarily trade off some initial growth for quality of customer experience as they perfect their channel model in the enterprise. But in the long run, it will pay off in the form of stronger and more profitable relationships. Software-as-a-Service: A First Successful Stage for Utility Computing Ultimately, the names of the winners matter relatively little. The significance of the competition lies in its potential to transform the industry's prevailing business model as it drives vendors to address the key remaining issues with the business model: • Technical paradigm: Today's SOAs are immature, and many issues such as manageability and security remain. • Product development paradigm: Collaborative models — in particular, those based on creating a mutual economic opportunity — have yet to be perfected. • Customer-centric, service design paradigm: This is quite an innova- tion for enterprise software. New skills, behaviors and organizational models will be required to make it happen. • Industrialized delivery: Vendors are just beginning to realize how they can reinvent and optimize downstream delivery activities in an SOA world. Vertical integration will help today's vendors address these issues and per- fect the model within a controlled, well-coordinated environment. Hence, scope will pay off for a while in the race for business model inno- vation. Eventually, ownership of the application may no longer be neces- sary, as any application will be designed to be available "on tap." More generic forms of utility com- puting will become possible. Scale will again become a key driver of operational leverage and a whole new cast of candidates aspiring to the title of Enterprise Information Utility provider will appear. These providers likely will meet the follow- ing requirements: • Independence or neutrality vis-à- vis the application vendors, reflect- ing the fact that choice will again be a desirable attribute for customers • Superior efficiency, based on massive scale, industrialized management of operations, and purchasing power • Global customer reach that will include the ability to serve cus- tomers locally as needed • Global reach to large masses of developers that will include the ability to operate a marketplace for the monetization of their intellec- tual property • Ability to leverage collective or public sources of knowledge or intelligence for the benefit of their customers No player yet exists that combines all of the preceding attributes. System integrators and outsourcers, large hardware vendors, telecommunica- tions services providers, online market places such as eBay, and information service providers such as Google all bring a part of the edifice. Hence, one can expect some interesting corporate moves as the future of utility com- puting evolves. In the meantime, the competition for Saas supremacy takes center stage.
    • 18 Playing the consolidator role in an industry in the midst of a metamor- phosis can be risky business. One does not want to be left consolidating yes- terday's world when a new world is on the way. Hence, assessing the nature and timing of the new world is obviously critical. We agree with the many supporters of enterprise soft- ware consolidation that there is no new major wave of hyper growth coming to the sector any time soon. But there is a new order ahead, one shaped by the Internet's increasingly distorting influence on the sector. Therefore, consolidation should not be a vendor's only strategy. When they do consolidate their markets, success- ful vendors will pursue economies of scope not scale, becoming great dis- tribution umbrellas for a broad prod- uct portfolio. And to ensure their acquisitions are worth more than their acquisition premium and the cost of the complexity they will intro- duce, we advise acquirers to do something that software companies rarely do: relentlessly pursue and achieve synergies. To Consolidate — or Not As we discussed in the chapter "The Metamorphosis of Enterprise Software," the enterprise software industry today faces a future without a development that will spark unbri- dled optimism and widespread growth. Ten years after enterprise software met the Internet, vendors have encountered the "good enough" crisis- a situation in which customers are reluctant to upgrade to newer ver- sions of software products when installed versions work adequately. This crisis is a major factor in the con- servative spending on enterprise soft- ware that prevails among customers and the projected overall sector growth of about 8 percent per annum. Furthermore, reduced rates of innova- tion have weakened the position of best-of-breed vendors, depressing their capitalizations and making them targets for acquisition. Add to this the fact that roughly one-third of the market's segments remain highly fragmented (Figure 3-1) and one has a recipe for a market ripe for consolidation. However, vendors that decide to become consolidators must consider their timing and approach carefully. While there is no big wave in sight, there is and always will be a hot edge of the market. Convergence platforms, next-generation user interfaces, inter- national markets, security and compli- ance, and edge-of-network technolo- gies, to name a few, are all high- growth areas. Furthermore, although much of the sector may be maturing, it is also transforming under the influ- ence of the Internet. Disruptive busi- ness models (open source and utility computing are two prominent exam- ples) are reinventing the software value chain. They are precisely target- ing maturing segments where effi- ciency, not product innovation, is the basis for competition. III.Consolidation in the Enterprise Software Sector: Gateway to Growth or Path to Pitfalls?
    • 19 At the same time, the Internet is low- ering the barriers to entry into the enterprise software markets. By forc- ing vendors to adopt common open standards and driving the adoption of Service Oriented Architecture, the Internet is paving the way for the global masses of developers and a whole new cast of participants to join the party. These dynamics, while seemingly distant for some, are rele- vant for a key reason. They affect, positively or negatively, the most important component of any vendor's valuation: growth. About 50 percent to 80 percent of an enterprise soft- ware vendor's value is based on expectations of cash flows above and beyond current cash flows that the vendor will capture in the future (Figure 3-2). Hence in the long run, positioning for growth, and addressing potential disruptive threats to growth, is likely to have greater impact on a vendor's valuation than seeking to achieve greater economies of scale or scope via consolidation (Figure 3-3). Finally, customers are on the fence about the prospect of consolidating offerings in the hands of fewer large companies. While they clearly desire less burdensome, more integrated software purchased through fewer vendors, they are also quite aware of the risks that consolidation brings. (see Sidebar 3-1). Conditions for Success Given these issues, can a consolidator strategy be successful? Theoretically, yes. Back-office and overhead func- tions such as finance, human resources, IT and facilities — as well as customer-service activities — can sup- port increasing volumes of business without a commensurate need to scale. Selling and marketing activities can be made more efficient as well, as companies expand their product portfolio and sales people can bundle products, extracting more value out of each customer relation- ship. Product development expenses typically are seen as fixed, and • Pre/Post Relational DBMS • Application Server Software • Message Oriented Middleware • Transaction Processing Monitors • Packaged Data Mart/Data Warehousing • Relational DBMS • End-user DBMS • Software Config. Management • Application Platform Suites • File System Software • Virtual User Interface • CRM – Customer Service and Support • Data Management Facilities • Electronic Design Automation • Storage Resource Management • Object Oriented DBMS • ERP – Manufacturing • Architecture, Engineering and Construction • XML DBMS • 3rd Generation Languages • Analysis, Modeling, Design • Web Site Design / Dev. Tools • Automated Software Quality • Data Mining Software • Event Automation Tools • Storage and Replication • Threat Management Software • Secure Content Management Software • Integration Suites • End-user Query, Reporting, Analysis • Technical Data Analysis • Network and Service Mgmt Software • CRM – Sales • UDE • Software Construction Components • Portal Products • Output Management Tools • Performance Management • Change & Configuration • Problem Management ERP • CRM – Marketing • Content and Document Mgmt • Content Access Tools • Identity and Access Management • Security and Vulnerability Mgmt Software • Real Time and Team Collaboration • E-Learning Software Concentrated HHI*>1800 Moderately Concentrated 1000<HHI*<1800 Fragmented HHI*<1000 Growth Rate (’03-’08 CAGR) 5% 10% 15% *Herfindhal-Hirschman Index Key: Application Development & Deployment System Infrastructure Application Software Figure 3-1: Fragmentation of the Enterprise Software Sector Current Value Future Value McAfee BMC SAP Mercury Interactive Computer Associates Adobe Cadence Design Autodesk Microsoft Symantec Corp Sybase BEA Systems Oracle Intuit Compuware 43% 49% 50% 52% 56% 58% 59% 68% 68% 70% 79% 79% 80% 84% 90% 57% 51% 50% 48% 44% 42% 41% 32% 32% 30% 21% 21% 20% 16% 10% Figure 3-2: Current Value versus Future Value for Leading Software Companies (as of July 31 2005) Source: IDC, Gartner, Accenture Analysis Source: Company Financials, Accenture Analysis Market Value based on shares outstanding and stock price as of July 31, 2005, plus long term debt as of end of FY 2004. Excess cash based on balance sheet cash and short term investments at end of FY 2004, minus operating cash (assumed to be 2% of revenues) Enterprise value equals market value less excess cash Current value of Operations defined as NOPLAT/WACC and represents the present value of current operations in perpetuity Future value is defined as Enterprise value minus the value of current operations and represents future incremental value the market expects the com- pany to create, beyond the value delivered by current operations
    • 20 because costs of good sold are negligi- ble, strong economies of scale should be achievable. Dispensing with the theoretical, is big- ger always better? In analyzing publicly traded enterprise software vendors over a three-year period, we found that large vendors do perform better on average than their smaller competitors (see Sidebar 3-2). However, our analy- sis also produced a few counter-intu- itive findings and caveats — one of which is that there is great variability of financial performance within each company and across companies that is not explained by size of company. For example, some vendors with revenue in the $100 million to $500 million rev- enue range are as profitable as vendors with revenue above $2 billion. Other factors — such as market structure and vendor position, the company's invest- ment strategy, competitive dynamics or management performance — clearly affect results. We also found good evidence of economies of scale in selling, marketing and back-office activities, but not for product development (Sidebar 3-2). In fact, the 85 compa- nies with revenue above $100 million that report their research and development expense invest a fairly uniform average of 16 percent to 17 percent of their revenue in research and development. Investment policy and reporting policy may help explain this uniformity (companies may simply be conforming to market expec- tations of what is required to fund future growth), but we think there is more to this. We believe the opportuni- ties for economies of scale in research and development simply are not as evi- dent as they are usually accepted to be. We can suggest two explanations for this. First, the structure of the software market, with its myriad micro-seg- ments, does not in general lend itself to very large scale. While Microsoft and Oracle enjoy exceptional Operating Margin Improvement (’01-’04) >5% increase >5% increase >5% decrease >5% decrease Revenue Growth (’01-’04) Avg. TRS = -13% N-13 SD = 81% Avg. TRS = +31% N-14 SD = 29% Avg. TRS = -80% N-3 SD = 18% Avg. TRS = +10% N-3 SD = 17% Figure 3-3: Growth Trumps Profitability When it Comes to Shareholder Value 2001-2004 Total Return to Shareholders (TRS) vs. Margin Improvement and Revenue Growth Acceleration (Public Companies with $100M or more Revenue) Vendors often justify their acquisition strategies with statements of the cus- tomer's desire for doing business with fewer and larger vendors. We believe the customer's supposed positive view of mergers has been somewhat overstated. Sidebar Figure 3-1a: Percentage of respondents who agreed or strongly agreed with statement about impact of software mergers 1. Customers agree that consolidation will produce some benefits to them Will result in better integrated, less cumbersome software infrastructure Will help reduce our cutomer’s vendor management burden 2. …But will not solve all problems Will result in better service of customer’s needs Will result in more reliable products 3. Customers also consider the costs or risks from consolidation 4. Overall, about one-third of respondents see mergers as a positive development Will increase risk of vendor lock-in Will decrease price competition Will reduce pressures for vendors to innovate 65% 61% 17% 17% 87% 61% 35% 57% Our data suggests that while customers see some benefit to mergers, they also expect significant drawbacks. Overall, we found them to be neutral, with only about one-third seeing mergers as a clearly positive development. Source: Accenture June 2005 survey of larger enterprise CIOs, Accenture analysis Sidebar 3-1: What Enterprise Customers Think of Mergers Source: Company Financials, Accenture Analysis
    • 21 economies of scale in the very large operating systems and relational data- base markets — where they respective- ly reap $14 billion and $6 billion in revenue from a single product line- they are the exception. These two mar- kets, at $20 billion and $15 billion in size, respectively, dwarf the other 60 or so segments, whose median size is only about $1 billion. With much smaller markets to address, and there- fore much smaller scale achievable in any of them, other vendors must rely on diversification to grow, which requires new products to be developed every time. Hence, while these vendors can achieve economies of scope, as evidenced by lower selling and market- ing expense ratios for example, they do not succeed in increasing returns on their engineering investment. Second, the product development effort required to address a given mar- ket is not as fixed as generally accept- ed. To sustain their revenue within the same market, vendors must update their products frequently, all the while maintaining multiple legacy versions of their products over time. Some vendors can spend one-third or more of their product development resources on such updates. Hence, vendors continue to invest in product development to support existing revenue streams in markets they already have addressed. In sum, while size matters in enterprise software, evidence suggests that ven- dors eager to improve the economics of the business through consolidation should look to back-office, selling and marketing functions as their targets. What Vendors Should Do Given these findings, we believe that consolidators should define their opportunity primarily as combining a broad product portfolio under a robust and efficient sales and marketing umbrella. Their greatest claim to syner- gy is to aggressively capture economies of scope in back-office operations and selling and marketing activities, Sidebar 3-2: Economics of Software Vendors Larger vendors perform indeed better on average than their smaller counterparts. Economies of scope in G&A, selling and marketing appear to be the most striking advantage of larger vendors. With the exception of Microsoft and Oracle, larger vendors do not seem to realize significant economies of scale or scope in R&D, con- Sidebar Figure 3-2b: Selling and Marketing Expense of Publicly Traded Enterprise Software Companies vs. Size Sidebar Figure 3-2a: Operating Profit Sidebar Figure 3-2c: G&A Expense of Publicly Traded Enterprise Software Companies vs. Size Sidebar Figure 3-2d: R&D Expense of Publicly Traded Enterprise Software Companies vs. Size 34% 35% 30% 23% 39% 11% 11% 9% 6% 16% 17% 16% 17% 17% 23% Average S&M Expense/ Revenue 30% 40% 50% 0% 10% 20% Company Size $0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+ $0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+ Operating Profit Mean +/- 1 Standard Deviation Mean +/- 1 Standard Deviation Mean +/- 1 Standard Deviation Mean +/- 1 Standard Deviation Company Size Average G&A Expense/ Revenue 15% 20% 25% 0% 5% 10% Company Size $0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+ Average R&D Expense/ Revenue 25% 30% 35% 0% 15% 10% 5% 20% Company Size $0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+ 0% 20% 40% 60% -60% -40% -20% 9% 16% 12% 24% -14% trary to popular belief. The software sector is a collection of many specialized segments (more than 60 recognized by IDC with a median size of only about $1 billion). This specialization and small aver- age market size inherently limits the scale achievable by any player on a particular segment. Source: Company Financials, Accenture Analysis
    • 22 effectively positioning themselves as great distribution companies with superior market access. With selling, marketing and back-office activities representing by far the largest com- ponent of a vendor's cost structure- typically 40 percent to 60 percent of revenue — net efficiency gains can be significant. Following this approach, consolidator companies will be great distribution organizations that, in addition to excelling at merger plan- ning and integration, will compete primarily on the basis of their mar- ket-facing capabilities: brand man- agement, sales and channel management, marketing and customer service. A word of caution, however. Consolidators must have a relentless focus on realizing synergies, which is not the typical custom in the soft- ware sector. Acquired vendors often are given a high degree of organiza- tional autonomy to preserve their market focus and their talent pool. While this approach may work with acquisitions of small vendors pur- chased for their products or intellec- tual property, it does not deliver the economies of scope and scale sought by consolidators making large acqui- sitions. A synergy-creating discipline will dictate swift action to consoli- date simple back-office activities. It also will require consolidators to be creative in addressing the new prob- lems they no doubt will introduce as they become larger and more com- plex. For example: • Sales force and channel partners may become overloaded with a very broad product portfolio and more complex account management approaches • Customers may become confused by products with overlapping func- tionality, or by an excessively broad and vague value proposition • Collaboration and knowledge shar- ing between groups may suffer • Architectural integrity of solutions may be weakened by introduction of acquired products • Accountability for the customer experience may become diluted across multiple groups Conclusion With these potential pitfalls in mind, vendors pursuing a consolidation strategy must be sure they have made the right assessment of the state of maturity, and potential for innovation or disruption, in their core markets. They also must avoid overpaying for their acquisitions by being realistic about their synergy opportunity. Once they have made acquisitions, they need to immediately focus on realiz- ing synergies by quickly reorienting their key market-facing capabilities and slashing unnecessary back-office costs. Finally, consolidators must understand the level of complexity they are introducing into the organi- zation with each acquisition and have a plan in place to eliminate or mini- mize it. Vendors that successfully address these issues will be much better positioned to achieve the syn- ergies that so typically elude most corporate mergers.
    • 23 Achieving true platform status is one of the greatest feats for an enterprise software vendor. It all but guarantees entrenchment into a sustainable lead- ership position and the marginaliza- tion of competitors while granting vendors some ability to control or influence market and technical devel- opments that take place around them. In today's market, marked by the intensifying consolidation of mature segments and the increasingly disrup- tive influence of the Internet, platform strategies are more relevant than ever. Yet, the requirements for success are stringent and competition significant and intense. Only a few will likely suc- ceed in building the next proprietary platform before the Internet and open standards render the issue moot. A Strategy For Market Leadership Platform strategy has been a staple of the computing world ever since IBM in 1968 decided to un-bundle its soft- ware and hardware, in effect setting the stage for the layering of the com- puting stack. Initially a technical term, a platform in the modern sense may simply be a technical and business foundation upon which others inno- vate. At the heart of the concept is the realization of the implicit interde- pendency among vendors and of the need and opportunity for some to pro- vide the foundation for the industry's approach to a particular challenge. The test of a true platform is the exis- tence of a vibrant, healthy innovation network around the vendor — a test very few actually pass. Microsoft, with Windows, is a classic software plat- form company. There has been a renewed focus on platform strategy lately for two main reasons. The first is that, as growth in the enterprise software sector slows and major segments of the software stack mature, companies are more eager to enhance their importance in the market. As we discussed in chapter "The Metamorphosis of Enterprise Software," the enterprise software industry today faces a future without a development on the horizon that will generate the type of unbridled optimism and widespread growth unleashed by the emergence of the Internet in the 1990s. Without such a spark, vendors look to platform status as a way to draw more customers, partners and developers to their "orbit." Arguably, one could conceive of platforms in domains as distinct as system management, security, stor- age, business applications, applica- tion infrastructure, and business intelligence. The second reason that platform strategy is gaining in popularity is the emergence of Service Oriented Architecture (SOA) as the de-facto architecture for enterprise software. As vendors increasingly adopt SOA, they find that they now have the capabilities to more effectively posi- tion themselves and their products in relation to an ecosystem of comple- mentary vendors, present or potential. IV. Orchestrating the Future of Enterprise Software: Growth and Controlled Disruption
    • 24 The candidates for platform status — which we refer to as "orchestrators" — seek to entrench themselves in a lead- ership position for their space. They share this objective with the other candidates for market leadership in the segment: the consolidators. There the similarity ends. Where a consol- idator sees a mature and stable indus- try, an orchestrator sees the potential for growth that it wants to capture and destabilization that it wants to control. To capture growth opportuni- ties, an orchestrator is willing to give up some scope and rely on the collec- tive innovation power of an ecosys- tem of partners — each with its own skills, customer relationships and entrepreneurial spirit. To control destabilizing developments, an orchestrator creates a web of interde- pendency with its ecosystem of com- plementors. By positioning itself as the gravitational center of a universe of vendors, an orchestrator wants to ensure its sustained relevance and extend its control over broader market dynamics. But do platform strategies make sense in today's markets? At a high level, they do. We believe platforms will more effectively address the increas- ingly disruptive influence of the Internet on the sector — disruption that includes the forced reinvention of the entire enterprise software value chain, creation of opportunities for new business models such as utility computing, and lowering of barriers to entry through the adoption of open standards and common architectures. Successful platforms, with their broad ecosystem of partners, will be able to sustain or co-opt the disruption — or for some, capitalize on the disruption — better than any single vendor. One important caveat: Because enterprise software is hardly homogeneous (with its three sub-sectors of applications, systems management, and application development tools and 60 or so spe- cialized segments) conditions must be assessed specifically for each vendor. Several vendors now are positioning themselves as new platforms — most notably perhaps SAP and Salesforce.com. The application space is first in line to experience the new industry dynamics: the simultaneous confluence of segment maturation and Internet-based disruption. Other spaces likely will follow. Vendors that consider a platform strategy will need to meet stringent requirements for success. Key requirements of platform strategy success For a platform strategy to succeed, it must create value for three key par- ties: customers, complementors and the platform vendor itself. Winning the customer: the strategic value framework Customers ultimately decide the fate of any platform strategy. Therefore, the value proposition of the combined platform ecosystem must be suffi- ciently attractive to customers. In other words, the vendor and its com- plementors, working together, must do something significantly new, bet- ter or cheaper — or all of the above — to resonate with customers. It is insufficient for the vendor to simply define product interfaces and create useful facilities and services that help its complementors build on top of the supposed platform. Without an over- arching strategic value framework- which articulates how the combina- tion of the platform's components generate greater customer value than each of the components separately — the vendor only succeeds in making its product a more convenient, but contextual, piece of the stack. Winning the complementors: the soft and hard power of the plat- form vendor For a platform to be attractive to complementors, several elements must be in place. First and foremost, complementors must be convinced of the platform's relevance to customers and staying power. A platform is a cheerleader of the industry; it must sell a big vision to attract comple- mentors to its ecosystem. Without that, there's no incentive for comple- mentors to participate. Beyond that, however, there must be a set of strategic objectives shared between the platform vendor and complementors (such as shared mar- ket opportunities and competitors). Lack of strategic alignment with key complementors is a major issue, for example, in the application infrastruc- ture area. Here, the likes of IBM and BEA are denied platform status by their natural complementors, the application vendors such as SAP and Oracle, which have no incentive for collaboration. Market position also is critical. A plat- form vendor with a large and loyal installed customer base, dominance of a market segment, strong brand and robust value chain relationships will find it much easier to convince poten- tial complementors to join in its net- work. Yet dominance of a core space is not an absolute requirement for winning complementors. Sun's posi- tion as a software vendor was mar- ginal when it introduced Java. But it based its platform strategy on its strategic value framework and powerful alignment with its comple- mentors — united against Microsoft. At a more technical level, a platform interoperability scheme also has a major impact on how enthusiastically complementors join the network. Complementors look to the platform vendor to offer a strong and conve- nient foundation for their own prod- ucts — providing, for example, a robust and stable product foundation, convenient interfaces and necessary facilities and tools. With the maturing of certain product categories and the broad acceptance of Web Services standards (among others), the techni- cal conditions for defining platforms are improving.
    • 25 Finally, there must be an inherent bias within the network toward value cre- ation and value sharing. All else being equal, complementors will be drawn to platforms that demonstrate the ability to create value and share the winnings among all participants. Creating Value for the Platform: Keeping Control To benefit themselves, platform ven- dors must ensure they remain the hub of their network — or at least a highly relevant constituent. That requires continually creating value for their complementors and maintaining con- trol of the strategic value framework. Microsoft does both with Windows. In contrast, Sun did not keep control of Java, which was deliberately posi- tioned as an open platform (and a key reason for its success). Java created enormous value for complementors such as BEA and IBM, as well as the rest of the Java community. But its benefit to Sun's hardware business was short-lived, and Sun never man- aged to create a strong position in software for itself. For vendors focused on direct value creation, control requires proprietary ownership of a required component of the value network. This component is usually technical (proprietary code or a proprietary data model), but it also can be business components (such as a transaction or a commerce platform, or customer relationships). The Ultimate Platform: The Internet As if these requirements for success were not sufficiently challenging, would-be platforms also will face for- midable competition in their quest for platform status from none other than the Internet (see figure 4-1). The pull of the Internet on the industry is growing by the day, and an ever- increasing array of standards is being developed for Internet-based comput- ing. Architectures such as SOA that will be shared by vendors everywhere are being perfected. The Internet is rapidly becoming the foundation upon which vendors can innovate and build their business. In other words, it is becoming the ultimate platform. As more and more elements of the com- puting model are defined for open, Internet-based computing, the gravi- tational pull of the Internet will increase, leaving new proprietary platforms a reduced opportunity space to address. However, the platform candidates have one thing on their side: At this time, open standards define mostly lower-level, base functions of the computing model. They focus primari- ly on interface and communication rather than business logic, and they have yet to succeed at defining a shared syntax for enterprise applica- tions. Ultimately, though, the stan- dards will spread. With no new "big wave" of growth coming to the sec- tor, one segment after another will soon find its customers reluctant to upgrade to newer versions of soft- ware products when installed versions work adequately — the "good enough" crisis that ultimately drives the segment's maturation. Open source often will act as the commodi- tization engine addressing these spaces, which will result in open standards or approaches spreading from one category to the other. For prospective platforms to succeed in such an environment, they will need to carve out a space they can defend and then move quickly. They also must avoid competing head to head with standards and open source efforts and, instead, elect to co-opt them. Finally, they must form their network and enable it to create supe- rior value for customers before their opportunity space can be addressed by the Internet and open standards. The window for creating the next proprietary platform in enterprise software is closing. Only a few will make it. Utility Provider Applications OS Open Source Content Provider (e.g., Google) The Internet System Management Figure 4-1: The Internet: The New Platform Landscape Source: Accenture
    • 26 The current competitive environment in the enterprise software industry can be particularly tough on best-of- breed vendors, especially mid-sized companies with traditional business models. These companies must assess a potential double threat: at the top, vigorous challenges by the mega-ven- dors bent on further consolidating the market; and at the bottom, disruptive challenges by software-as-a-service (Saas) providers or open source ven- dors introducing innovative new busi- ness models. For traditional best-of- breed vendors, the most destructive scenario, or the "perfect storm," is one in which both challenges materi- alize simultaneously (see figure 5-1). As the enterprise software sector grapples with an era of slower growth, the "perfect storm" appears to be brewing for an increasing num- ber of vendors — especially those in the business application arena. What should these companies do to prepare for the tempest? Accenture believes several options are available to them, including a reinvention of the value chain, diversification into comple- mentary markets, and a move into services provision. Which avenue is best largely depends on each compa- ny's specific competitive, economic and market position. The Perfect Storm Scenario There is no doubt that the enterprise software sector faces a number of challenges in generating demand for their products. After years of robust gains in market share and revenue, vendors now find themselves facing three distinct crises that have effectively stifled demand for several years. The "good enough" crisis Enterprise software marketers face a key obstacle: their own legacy. In many segments of the sector, vendors have a difficult time convincing cus- tomers to upgrade to newer versions of their products when installed ver- sions work adequately. While this cri- sis has yet to reach some segments (for example, security, where one can always count on the bad guys' cre- ativity to create new customer needs), it has reached many — as evi- denced by overall modest growth pro- jections of around 8 percent per annum for the enterprise software market overall. The consequences of "good enough" are fundamental. With customers essentially happy with their existing systems, the pace of product upgrades slows. But even more criti- cal is the fact that such satisfaction typically reduces the impact of prod- uct-based innovation as a differentia- tor for software vendors — thus sub- stantially changing the basis of com- petition across the sector. The "IT does not matter" crisis Much like enterprise software ven- dors, CIOs have been caught in post- bubble finger pointing: Too many pro- jects have cost too much and V. Avoiding the Perfect Storm
    • 27 delivered too little. Businesses have moderated their expectations of the value and returns that IT generates, in many cases, justifiably so. Hence, two years after Nicholas Carr's much-debated May 2003 Harvard Business Review article, "IT Doesn't Matter," technology buyers remain cautious. Their diminished appetite for spending and risk creates additional challenges for enterprise software vendors. For starters, a greater pro- portion of purchases are now under centralized control, often with over- sight from the finance or procurement functions. Risk avoidance pervades purchasing as companies favor indus- try standard capabilities over differen- tiated or leading-edge capabilities. Furthermore, the number of large, multimillion-dollar projects has fallen dramatically, and those projects that are launched are subject to much greater scrutiny (often by other deci- sion-makers besides the CIO, such as the CFO and CEO). The "complexity" crisis In most organizations, years of IT investment without active rational- ization have yielded complex infra- structures that mix multiple genera- tions of architectures and data mod- els: hence the "complexity" crisis (a term coined by IDC). Customers leery of the complexity of their IT infra- structure want IT that can be easily purchased and consumed. As a result, they tend to eschew what they view as large, complex enterprise software implementations in favor of pre- integrated solutions or even utility- like models for software delivery and consumption. While these three crises are all signif- icant inhibitors of growth for enter- prise software vendors, the "good enough" crisis may be the most intractable. Vendors can use innova- tions to address the complexity of legacy environments, and customers' crisis of confidence may be tempo- rary. But there is little that vendors can do if they indeed have overshot actual needs. Where that is the case, vendors are now in a lame-duck posi- tion, exposed to traditional competi- tors, and perhaps more critically, to vendors with different business mod- els that offer a more attractive value proposition. When the "good enough" crisis hits a segment of the market, the basis for competition changes considerably. At the top of the market, a consolidator enters (either through organic means, acquisitions or a platform/comple- mentor play) with a sufficient offer- ing and leverages its distribution advantage-for instance, its ability to bundle offerings. It then positions its product as a solution pre-integrated with other offerings (thus neutralizing the "complexity crisis") and positions itself as trusted, industry leader (play- ing to the "IT does not matter" crisis). As a result, the vendor captures a share of the large deals and ultimate- ly segment leadership. “Good Enough” Crisis Incumbent vendor (e.g., best of breed) Mega Vendor Challenge at the Top End Consolidation Orchestration Disruption SaaS and Open Source Disruption and Orchestration Disruptor Challenge at the Bottom End “IT Does Not Matter” Crisis “Complexity” Crisis Vertical Solutions Market Challenge Market Opportuntiy Small and Medium Businesses International Markets Figure 5-1: The Perfect Storm Scenario Source: Accenture
    • 28 At the bottom of the market, Accenture sees the scenario as being symmetrical. A disruptor (either using Saas or open source) gains a hold at the bottom-end of the market and per- fects its offering to the point at which it meets the needs of the mainstream market. Touting ease of use, ease of consumption and speed to value (elimi- nating the "complexity" crisis in the case of Saas providers), the disruptor puts forth a value proposition based on a lower total cost of ownership (thus minimizing the "IT doesn't matter" cri- sis in the case of both Saas and open source providers) — and eventually expands into the market mainstream. The most prominent example of this scenario is in the CRM market, where the incumbent segment leader Siebel found itself simultaneously fighting the attacks of mega-vendors SAP and Oracle (and previously PeopleSoft) and those of Saas pioneer Salesforce.com. After several years of struggles, Siebel determined its future as an indepen- dent provider was sketchy at best and agreed to be purchased by Oracle — which, with this transaction, becomes a CRM behemoth with formidable scale hoping the combined entity will pro- duce high performance results. But CRM is just the beginning. This sce- nario likely will repeat itself across more segments of the enterprise soft- ware sector as the "good enough" crisis opens the door of one market after another to the consolidators and dis- ruptors. Defending One's Market For companies caught in what will be the rapidly diminishing middle of the enterprise software sector, defense of the core market is the natural de-facto strategic option. As long as the "good enough" crisis has not set in, vendors can mount successful defenses against either consolidators or disruptors through continued focus and innovation. When it does set in howev- er, or preferably before it does, vendors must seek other remedies to protect their turf. To defend against the large consol- idators, vendors can attempt to strengthen their position through acquisitions themselves — by pur- chasing direct competitors in their core market. For example, Adobe's acquisition of Macromedia allows Adobe to strengthen its position in graphic and Web design tools, a space where the "good enough" threat may be moderate. In this case, the acquisition is doubly beneficial because it also improves Adobe's abil- ity to innovate at the edge — in the field of rich user interfaces, a space where much innovation has yet to occur. To combat the Saas disruptors, ven- dors can follow the established best practice: create a relatively indepen- dent business unit that will ape their competitors' business models. However, history shows us this is usually a difficult move to make suc- cessfully. Most on-premise vendors' attempts to deal with past disruptors' incursions by creating their own Saas offering have fallen short. The reason is that Saas is a business model in its own right, one that is not learned overnight and that bestows some competitive advantage to first- movers. That's not to say that on-premise vendors should not make such a move. But it shouldn't be the only response to consider. Several other alternatives offer on-premise vendors a route to competitive advantage that may be more consistent with their legacy, culture and existing business models. Reinventing the value chain One way vendors can improve the attractiveness of their existing on- premise offerings is to reinvent their value chain — which has effectively become the Achilles heel of tradition- al enterprise software vendors in their competition against disruptors with business models based on open source and utility computing. For most vendors, value chain reinven- tion will hinge on the adoption of Service Oriented Architecture (SOA) as a new "production blueprint." SOA is critical because its defining character- istic is the built-in interoperability of software components. This may not mean much to a business user, but to a producer of IT solutions, this is gold- indeed, it provides the opportunity for a new production paradigm for enter- prise solutions. With interoperability, tasks can be decoupled and distributed, and can be assigned most efficiently to local and offshore labor. Web services "factories" all over the world can pro- duce, in parallel, the new components that will make the customer's solu- tions. Software assembly and testing time can be radically reduced. The net benefit of these changes — a benefit that does mean something to business users — is a dramatic improvement in time-to-value and total cost of ownership (TCO). Using SOA, vendors can dramatically improve the speed and agility of upstream value chain activities by scaling and decoupling the product development process and building col- laborative development models to maximize the speed of innovation. Downstream, vendors can achieve value chain efficiency (as measured by the customers' TCO and time to value) comparable to that of utility comput- ing by using SOA as a blueprint for scaling and decoupling the integration, customization and maintenance of software — thus, effectively "industri- alizing" downstream activities to dra- matically improve the speed and eco- nomics of software delivery. Diversification Vendors also can reduce the impact of the consolidation or disruption threat by diversifying away from it. Acquisitions are again a tool of choice — as illustrated by Symantec's purchase of Veritas, which enables Symantec to diffuse its exposure to the threat of a Microsoft play in security and broadens Symantec's enterprise
    • 29 portfolio (which should create the same type of economies of scope and higher corporate performance pursued by the consolidators). As with the consolidation strategy, this strategy may be attractive to vendors with strong distribution capability. Vendors whose main offerings are in the stable "core" also may use acquisitions to give them an opening at the "edge," thus further strengthening their growth prospects. Forward-integration into services Capturing increasing amounts of ser- vices revenue is not a very popular goal among software vendors. Unlike many hardware vendors that see ser- vices as high-margin endeavors with strong synergy with the product busi- ness, most software vendors typically want to avoid "polluting" their earn- ings with an increasing mix of lower- margin services. In fact, a growing services-to-license mix typically is seen as a sure sign that the compa- ny's core growth engine is dying, and that it no longer can spur growth through product innovation. Because growing services revenue also would create conflict with a vendor's channel partners, the reluctance to develop services capabilities is understandable. However, for some vendors, this thinking is dated and should be re- evaluated. First, some vendors clearly no longer are seen as high-growth companies anyway, and thus should not constrain their business model with expectations from a previous stage in their history. Second, there are real opportunities to generate solid cash flow from services — and by services, we mean more than the basic implementation and support offerings that have been the staple of the industry. The increasingly blurred line between software and service should spur a wave of innovation in this area. New generations of service offerings will likely seamlessly com- bine labor-based and automated value delivery. Some vendors will have opportunities to leverage their intel- lectual property, and customer rela- tionships, to forward-integrate beyond the delivery of technical ser- vices and as far as business process outsourcing — in essence, offering a complete business solution to their customers. Seeking a complementor position As vendors assess the threat of mega-vendor platform plays, they may decide that a complementor role will allow them to focus on their core specialty. These vendors will face the decision of shrinking their scope of activity and becoming inter- dependent with one or several plat- form vendors. Clearly, choosing the right platform and friendly partner becomes a "bet it all" proposition. Re-invention or graceful exit Accenture sees that for many ven- dors hit by the perfect storm, rein- vention or exit will be a distinct pos- sibility. Exiting the market would most likely involve selling to a con- solidator (as Siebel has done) or pri- vate equity firm. But many vendors enjoy strong maintenance and sup- port cash flows that they may be able to leverage to transform them- selves (into Saas vendors, for exam- ple), so reinvention is another option. To be sure, reinvention or exit clearly are drastic steps, and thus should be undertaken only after careful assess- ment of the competitive and market dynamics. Conclusion The enterprise software industry long has been defined by constant change, remarkable innovations and explosive growth. Yet as the sector approaches 40 years of existence and growth slows, many companies that have been a vital part of the indus- try's past now face a wholly uncer- tain future. This is especially true of companies in the middle of the mar- ket — those lacking the scale of the mega-vendors and the efficiency and nimbleness of the disruptors. For most of these vendors, encountering the "perfect storm" is not a matter of if, but when. With the sector at a major crossroads, business as usual will cease to be a viable long-term strategy for tradi- tional vendors. On the contrary, now is the time for vendors to deeply assess the market and their current and prospective positions in it, and select the strategy that makes the most sense for the company and its shareholders — whether that strategy is industrializing the value chain, diversifying, moving into services, becoming a complementor, or exiting the market altogether. As Accenture's research shows, developing and flaw- lessly executing a strategy that clear- ly articulates a company's unique market focus and positioning is a vital building block of high perfor- mance. Failure to move now will impede vendors' ability to achieve high performance — and likely result in unpleasant consequences when the gale finally hits.
    • 30 Philippe Vincent is a Partner with Accenture's Communications and High Technology, and one of the leaders of its Software Strategy prac- tice. His work with Software vendors covers a broad array of market facing strategic issues as well as organiza- tional and operational issues. Philippe also spends significant focus across the High Tech industry, on issues that center around the rela- tionship between IT and Business. He holds an MBA from the Harvard Business School, a MS in Mechanical Engineering from the University of California at Berkeley, and a Diplome d'Ingenieur from Ecole Nationale Superieure d'Arts et Metiers, Paris, France. He is based in Palo Alto, California. Tim Jellison is a Partner with Accenture's Communications and High Technology Strategy practice. He advises companies seeking to create new products and services, develop competitive strategies, improve operational processes, and manage complex change. Tim focuses on strategic issues facing high tech clients, including software vendors, computer companies, and semicon- ductor manufacturers. For the past five years, he has focused exclusively on software. He holds BS (with Highest Honors) and MS degrees in Mechanical Engineering from UC Davis and an MBA from Stanford University. Tim lives in San Francisco. Bart Hughes is a Partner at Accenture and is currently managing Accenture's North America Media & High Tech Strategy Practice. Bart brings over 17 years of experience in a variety of industry leadership and consulting positions. His focus has been on strategic planning and busi- ness architecture design/ implemen- tation for a range of technology-ori- ented organizations. Bart currently serves as a Foundation Board Member for the Chabot Space & Science Center in Oakland, CA. He holds an MBA from Tuck Business School at Dartmouth and a BSEE from San Jose State University. He is based in Palo Alto, CA. Philipp Stauffer is a Senior Manager with Accenture’s Communications and High Technology Strategy practice. His work in the software and internet industry covers both the enterprise as well as the consumer space in corpo- rate and competitive strategy, corpo- rate development, organizational design as well as operations on an international basis. Philipp has a signif- icant focus in technology convergence areas as well as market and customer facing disciplines such as marketing, channels and sales. He holds an MBA from the Wharton School and a MA in Economics and Marketing from University of Applied Sciences, Zurich, Switzerland. He is based in San Francisco, California. About the Authors
    • 31 Methodology Accenture interviewed 30 industry leaders for this research: CEOs, board members, and other senior executives at enterprise software companies, large and small, as well as venture capitalists and other private equity actors in the space. Our team also surveyed 25 chief information officers across industries in North America, for their perspective on evolving soft- ware trends. We wish to thank all of our participants for their invaluable contribution to this effort. Economic analysis was based on a compilation of 5 years of market and company data across all enterprise software segments, for over 300 public soft- ware companies. Finally, our research leveraged Accenture's deep business and technology expertise in areas as diverse as Mergers and Acquisitions, Service Oriented Architectures, Next Generation IT Delivery Models, etc. About Accenture Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture col- laborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 123,000 people in 48 countries, the company generated net revenues of US $15.55 billion for the fiscal year ended Aug. 31, 2005. Its home page is www.accenture.com.
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