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

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

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.
Sidebar 3-1: What Enterprise Customers Think of Mergers

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
Sidebar Figure 3-2d: R&D Expense of Publicly Traded Enterprise
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
Mean
Mean
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.

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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