the future of enterprise software - how software companies can achieve high performance in an era of...

The Future of Enterprise Software: How Software Companies can Achieve High Performance in an Era ofDisruptive Change and Uncertainty

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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: 18Gateway 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

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The enterprise software industry, after sev-eral years of declining growth, stands atthe verge of what promises to be a tumul-tuous time. Just as the Internet wasresponsible for the last explosion of growthin the industry in the past decade, it is nowlaying the groundwork for dramatic changethat will sweep across the software sectorin the coming years. Indeed, we alreadyare seeing some of the first waves ofchange making their mark in the form ofgrowing acceptance of open standards andthe development of open source and soft-ware-as-a-service, which at the momentare competing for attention with theindustry’s move towards consolidation.

To shed light on the nature and extent ofthese changes and how they will affectthe industry, Accenture recently conductedcomprehensive research involving softwarecompany executives, venture capitalists,CIOs and other technology leaders inmajor corporations, and Accenture’s ownexperts. We believe our findings andanalyses — which are detailed in thispaper — will provide software companyexecutives with valuable insights that theycan use as they shape their strategies forachieving high performance and marketleadership in the dynamic and uncertainyears to come.

Introduction

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In the mid-1990s, a seminal eventoccurred in the life of enterprise soft-ware: the industry met the Internet.At the outset, the event triggered thenext — and likely last — great wave ofgrowth in the sector. Hence, 10 yearslater, with no next wave in sight, theindustry is maturing and consolidat-ing. But just as the industry now istrying to settle into a more permanentand stable structure, it is about to betransformed again — as the Internetunleashes forces that are driving tra-ditional enterprise software vendorstoward the next step in their evolu-tion: the industrialization of theirvalue chains. Today, pulled betweenthe traditional dynamics of the com-puting industry on one hand, and therapidly growing disruptive influence ofthe Internet on the other, enterprisesoftware is on the verge of a meta-morphosis.

Waves of GrowthTo understand where enterprise soft-ware is today, it is helpful to remind

ourselves of the role of software inbusiness. Enterprise software has twoprimary roles: to inform and to auto-mate business activity. Hence, itachieves growth via two mainavenues: addressing new businessactivities, or improving the way itsupports activities already addressed.In the first 30 years of the industryboth avenues were used, but the for-mer has triggered the largest wavesof growth.

Since its inception in 1968, when IBMdecided to un-bundle its hardwarefrom its software, enterprise softwarehas grown in a succession of bursts(see sidebar 1-1). Each platform shift— from mainframe to minicomputerto client/server — delivered a newtype of user to enterprise software,one whose business activity andinteractions were fundamentally dif-ferent from that of the previous usergroups. With each new user type, new“use cases” for software could be cre-ated to support these new activities

and interaction models. Hence eachplatform shift sparked a new round ofgrowth. The move from mainframe tominicomputer meant computingpower that previously was theprovince of a select few in corporatefinance now could be tapped by otherkey departments across the business.For instance, software such asComputer-Aided Design — devised forengineering departments on a mini-computer platform — had little incommon with the mainframe-basedpayment processing software used inlarge banks. The introduction ofclient/server and local area networksin the 1980s further democratizedcomputing, as any company employeetheoretically could benefit from theuse of PCs and enterprise applications.

By the early 1990s, computing wasbecoming 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 ofEnterprise Software: How the Internet is Driving the March of Change

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changed when the Internet arrived onthe scene. In a single burst, the fullhierarchy of participants in businessactivities — every kind of company,department, employee, customer andconsumer — could at last be on thesame network, collaborating and trans-acting with each other. Like previousplatform shifts, the introduction of theInternet served as the impetus forgrowth in the enterprise softwareindustry. But the size and scope ofexpansion driven by the Internet wasunlike any seen before. Across applica-tions, system management and devel-opment tools, vendors invented newuse cases (e.g., customer self-service)and re-invented old ones (e.g., ordermanagement) for the new networkedworld.

Oddly, however, while the Internetspawned such massive advances in theindustry, it also marked the end of theplatform shift as a primary growthmechanism. To be sure, there are stillplenty of users left to bring to theenterprise software value network andnew platforms yet to be developed.However, there is no new type of usersleft, which inherently limits the num-ber of fundamentally new activitytypes and the impact that any newplatform or users can have on theindustry. For instance, there certainlyare businesses in China and India thatwill be joining the value network in thenear term as those countries’ industrialmight continues to grow. But from asoftware use case point of view, thosecompanies share many characteristicswith their Western counterparts — theystill need order management, email,security and the like.

Similarly, the current explosion ofmobile or convergence platforms pri-marily will extend the existing usecases by ensuring that users can be onthe network anytime, anywhere. It like-ly will create great opportunities forcontent or service providers, as well assome for software providers. But noneof these will be as rich as the opportu-nity to improve business productivity

that arose the first time these userswere brought to the network.Therefore, none of these developmentswill spur the kind of sector-widehyper growth observed in the past bigwaves. With no new categories ofbusiness participants to add to thenetwork, the industry will have towait quite a while-until the edge ofthe business network is pushedbeyond humans to billions of appli-ances and sensors that will silentlyparticipate in business activity — forthe next big wave of growth.

As a result, 10 years after enterprisesoftware met the Internet, some ofthe product categories born of thatwave (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 verylarge “core” of mature software tech-nologies. As one product categoryafter the other matures, the market isundergoing a phase of rationalizationand consolidation — a classic patternfor the tail end of a wave. This time,however, there is a twist: With no bigwave in sight, many industry observersbelieve that an industry structure forthe long run is being created.

The greater impact: industrializationof the value chainYet, while the Internet has led to mar-ket maturation and consolidation —and winners are busy claiming theirstake of this maturing market — acomparatively silent revolution hasstarted: The Internet has begun re-writing the rules of the enterprisesoftware game-and, indeed, the verydefinition and design of the softwareproduct — 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 allvendors

2. Acceleration of a re-architecture ofsoftware using Service OrientedArchitecture (SOA)

To be sure, these are no smallchanges. Proprietary standards anddesigns long have been fundamentalto the business model and the eco-nomic rents of software vendors. Thesenew approaches to software certainlywill level the playing field — and, insome cases, open the door to highlydisruptive business models. In fact, theindustry already is seeing the firstwave of these disruptors — the soft-ware-as-a-service companies (theprogenitors of utility computing) andopen source vendors — emanatingfrom the new Internet-enabled envi-ronment. And that is not the end of itby any means. Accenture sees theInternet setting the stage for a raft ofnew market entrants with innovativetakes on enterprise software. Armedwith open standards, SOA and theInternet as their distribution mecha-nism, a global cottage industry ofsmall software developers will packageand distribute useful intellectual prop-erty (IP) as application services (manyof which will complement offeringsfrom the large vendors). Serviceproviders with re-usable knowledgewill backward-integrate into applica-tion services to extend the reach oftheir IP. Other companies will use ver-tically integrated models spanningfrom application services to businessservices to serve the needs of specificcustomer segments. Hence, just as thetraditional vendors are eagerly consol-idating the sector, the Internet isbuilding a global bridge to the seem-ingly unlimited masses of developmenttalent around the world, inviting themto enter the market.

The net result of these changes is amonumental shift in how vendors cre-ate and deliver software. As theInternet’s reach and transparencygrow, and pressure mounts on vendorsto achieve dramatically higher levelsof efficiency, vendors are forced tosystematically reallocate tasks andresources to their most efficient com-bination. In short, the Internet is theimpetus behind the industrialization ofthe enterprise software value chain.

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In an industrialized value chain, SOAis a critical element — the “produc-tion blueprint” — due to its built-ininteroperability of software compo-nents. This may not mean much to abusiness user, but to a producer of ITsolutions, this is gold — indeed, itprovides the opportunity for a newproduction paradigm for enterprisesolutions. With interoperability, taskssuch as design, development andtesting can be decoupled and distrib-uted, and can be assigned most effi-ciently to local and offshore labor.Web services "factories" all over theworld can produce, in parallel, thenew components that will make thecustomer's solutions. Software cus-tomization, assembly and testing timealso can be radically reduced. The netbenefits — a benefit that does meansomething to business users — is aradical improvement in time to valueand total cost of ownership (TCO).

What does this mean in practice forvendors? Consider that the traditionalvalue chain was designed to maxi-mize the value a vendor could createthrough proprietary product innova-tion. Upstream in the value chain,product development, the crownjewel of the company, typically isclosely held and controlled — or"tightly coupled." Downstream, activi-ties such as installation, customiza-tion and management of the softwaresolution throughout its useful life aredesigned for maximum, unencum-bered delivery: They are handled inde-pendently by channel partners andthe customer's IT department. Inother words, they are "un-coupled."

However, as markets mature and asmore shared standards and architec-tures are adopted, the game changes.Value shifts from proprietary productinnovation to TCO and speed to value.And so the design criteria for thevalue chain must be revised:Downstream activities, which tradi-tionally can account for 50 percent to90 percent of a customer's TCO andcan define much of the customer's

overall experience with the product,become critical. Improving the effi-ciency of these activities oftenrequires some "re-coupling": a coor-dination of the parties involved inthe installation, customization andmanagement of the software solu-tion. Hosted delivery models, forexample, achieve this at the extremeby bringing all these activities inhouse. Boosting efficiency alsorequires a product architecture suchas SOA that is specifically designedfor easy and efficient installation,customization and maintenance.Upstream, in product development,the source of value also shifts awayfrom proprietary innovation to speedand efficiency — i.e., how quickly andinexpensively a vendor can get a newproduct to market. To increase speedand efficiency, vendors must, andcan, open up their developmentprocess and distribute it. A distrib-uted and open product architecturesuch as SOA is again a key enabler.

Industrialization, of course, is not anew concept. Interoperability ofproduct components was the basis ofthe great waves of industrializationof the 20th century, beginning withHenry Ford's reinvention of the auto-motive business in the 1920s. BeforeFord, automobiles were assembledout of custom-finished and -assem-bled parts by highly skilled, highlypaid craftsmen. Cars could take yearsto build, were unreliable and onlyaffordable to the wealthiest — notunlike some of today's enterprisesolutions. Ford's interoperable partsystem allowed him to decomposethe car manufacturing process intoseries of discrete but reliably inter-connected steps — to specializelabor, develop the moving assemblychain, and create a new, massivelymore efficient and faster productionparadigm. In less than a year, Ford'sproduction innovations dramaticallyreduced production time and — TCO,and in the process created the massmarket for automobiles.

The Internet is enabling a similar rev-olution. It is becoming the heart of anew paradigm for the production anddelivery of software. With its globalreach, the Internet is the conveyorbelt or moving assembly chain bring-ing the work to a global workforce ofdevelopers, and serves as the distrib-ution system and backbone of themaintenance system. With its trans-parency, it is the market-makingmechanism driving resource alloca-tion decisions. Its standard architec-ture — SOA — is the interoperableparts system, and its open standardsare the measuring gauges that ensurethat every component is assessedagainst a universal reference.

Is this really happening? The skeptic may point out that suchsweeping reinvention of the valuechain is unlikely because there is aninherent inertia in enterprise comput-ing that protects the establishedmodel. To some extent that is true.Change will not happen overnight.Some customers still are ordering oldclient-server versions of products,and many mainstream customers lacka strong business case for yet anoth-er re-architecture of their infrastruc-ture. But traditional software vendorsshould not find too much comfort inthese thoughts. One reason is thatpreserving the mainstream will notbe 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'senterprise value is based on marketexpectations of growth. Take awaythat expectation, and enterprise soft-ware vendors will see their marketcapitalizations plummet and theirCEOs looking for work.

Another reason is that preserving themainstream simply may not be possi-ble. As with any classic disruptionpattern, the Internet's impact onenterprise software has begun at thefringe of the established markets, sopreservation of the core still seems

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Sidebar1-1: Traditional Patterns of Growth for Enterprise Software

Since the 1960s, enterprise software grewwith the rest of the computing worldthrough a series of expansions in user base.The minicomputer introduced departmentalusers. Client/server introduced process par-ticipants. Finally, the Internet broughtcomputing to every type of business,department, employee, customer and con-sumer in developed economies.

As IT democratized, each burst in the userbase brought about new use cases. Whilethe economic value of each new use casemay have been lower on average than thatof the previous use cases, the great expan-sion in the number of uses more than madeup for it (Figure 1-1a). The Internet, in par-ticular, greatly magnified the size of thenetwork by adding hundreds of millions ofusers and setting the stage for massivevalue creation. Every burst in user base sizerequired dramatic gains in affordability,because each new constituency could onlyplace a smaller value on software. Softwarewas helped in this affordability race by twoother industries, computing hardware andtelecommunications, that are still governedby Moore's law of exponential gains.Through these successive bursts, enterprise

software growth far outpaced averageeconomic growth over this 40-year period.

Today, the hierarchy of (human) businessparticipants is complete (Figure 1-1b)— itwill only expand again when automateddevices of all kinds are added to the busi-ness network and silently participate inbusiness transactions. The completion ofthe business hierarchy is a key reason forthe maturing sector we see today and forwhat we believe to be the lack of a nextwave of hyper growth.

Software innovation throughout the first40 years followed a cyclical pattern ofreinvention of the stack (Sidebar 1-1c). Atany point in time, the market can be char-acterized by two parts:• The edge: new and emerging end user

needs, characterized by high rates ofinnovation and high fragmentation.Purchasing at the edge is often decentralized, driven by end users ordepartmental buyers. This means thatspending is not as highly scrutinizedand can proceed relatively unencum-bered by otherwise tough corporatestandards and controls.

• The core: known and understood needs,characterized by technological stabilityand concentration. The products in thecore provide the foundations for inno-vation at the edge. Spending at thecore is centralized and controlled bythe IT and finance departments; assuch, it is rarely allowed to grow inexcess of company growth.

After innovations are perfected, the "goodenough" crisis sets in. What used to be atthe edge becomes part of the core. Newcycles of innovation then can proceed asmaturing edge segments are rationalizedinto the core. At times, innovation at theedge provides benefits so important thatit triggers a reinvention of technologies atthe core. This was the case with the plat-form shifts. The move to client server, aswell as the move to net-centric comput-ing, created benefits so large that theyresulted in the re-writing of the old usecases. In each case, the supporting sys-tems management and development toolcategories also experienced high growthas new software was written to manage, optimize and secure the newarchitectures.

Architectures

New Uses

New Users

HostMainframe

Financial andaccountingoperations

Seniorexecutives & accountants

In financialinstitutions

Mini-Computer

Computer AidedDesign, ShopFloor Automation

Departmentalusers (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 ArchitectureHosted modelsConvergence devices

Enterprise mobilityUniversal portalsTBD

Every type of company, employee, customer, consumerAnytime, anywhere

In most economies

Ubiquitous broadbandAny-to-any architecturesUbiquitous devices, sensors

Real timeenterprisesOthers, to be invented

Every type of company, employee, customer, consumer

Every deviceAnytime, anywhereIn every economy

1X60s

10X70s

100X80s

10,000X90s

2005 Infinite Number of Uses

EconomicValueof EachNew UseCase

e

Sidebar Figure 1-1a: A Model for Enterprise Software Growth

Source: Accenture

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possible. But the reach of theInternet, the ideal nature of softwareas both product and information, andthe inefficiencies of the traditionalvalue chain create an opportunitythat is simply too great to be ignored.

In fact, much already has beenaccomplished 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, arenow successfully disrupting marketslike customer relationship manage-ment with purpose-built, SOA-enabled products

• Open source has produced whatmany thought no single companycould have created: a crediblealternative to the most complexproduct in enterprise software, inthe most dominated market — theoperating system. There are nowmore than 100,000 open sourceprojects in progress, and the num-ber of open standards and potential product categories isgrowing rapidly.

• Software vendors are increasinglydistributing product developmentacross the world

• The valuation of Google — a con-tent service provider — is greaterthan that of any software vendorsave Microsoft

The Upcoming Metamorphosis ofEnterprise SoftwareThe end of the old platform-basedexpansion mechanism and the begin-ning of the industrial age of enter-prise software are nothing to lament.Quite the contrary, they mean thatthe industry can coalesce aroundshared approaches to enterprise com-puting and finally get IT right. Ofcourse, the industry has plenty ofwork to do. In addition to the notori-ously under-served expansion markets(international, and small and mediumbusinesses), there remains a greatdeal of opportunity in the core mar-kets. In large enterprises, many

The "good enough" crisis is a fixture of theindustry which, in time, reaches everymarket segment after an innovation cyclehas run its course. The onset of the "goodenough" crisis in a given market segmentis often the tipping point for the re-struc-turing of this segment. As such, the "goodenough" crisis is one of the defining ele-ments in the evolving structure of theindustry. 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 evenrecently seen as immature, including busi-ness applications. A new part of the"stack" is now being carved out: the ITServices and IT labor markets, which arenow the focus of innovation of a differentkind: 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 inventedto leverage the newinnovation — new entrants typically lead in the early days, particularly if theinnovation is aimed at new user markets

The good enough crisis sets in. Dominantvendors 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 andInnovate

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

Mainstreamusers, corporatebuyers, Mainstreamusers

Sidebar Figure 1-1c: The Cycle of Reinvention of the Software Stack: the Core and the Edge

Source: Accenture

Banks –payment processing

Engineering –CAD

CRMOfficeApplications

CustomerSelf ServiceeCommerce

Host MainframeCorporate

Large InfoIntensive

U

B

Type of User

Type of Business

U

B

Mini-Computer

Departmental

Corporate

Large InfoIntensive

Large

U

B

Client Server

Departmental

Corporate

Large InfoIntensive

Process

SmallLarge

U

B

Net Centric

Departmental

Corporate

Consumer

Large InfoIntensive

Process

SmallLarge

U

B

Source: Accenture

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processes have yet to be automated,or automated well, and most have yetto be truly transformed. In addressingthese opportunities, software will behelped as always by technologicaladvances in computing and network-ing technology, which still are gov-erned by Moore's law of exponentialgains. Software will leverage theseadvances to become increasinglyintelligent and adept at integratingvast amounts of information, at relat-ing to humans and, increasingly, atmaking decisions. Software also willbe helped by a new industrializedvalue chain that will allow it toaddress every opportunity efficientlyand will greatly expand software'saudience. Together, these advanceswill position software more than everas one of the great transformationalengines for business innovation.

But to realize that potential, theenterprise software industry will haveto undergo a metamorphosis. Andbecause of the confluence of tradi-tional industry dynamics and theInternet's influence on the sector, theways in which the industry trans-forms will seem consistent at timesand downright paradoxical at others.

At a high level, the computing modelappears relatively clear: Applicationservices anywhere on the Internet,beyond the firewall and within thefirewall, will inform and automatebusiness activity anywhere.Composite applications will combinethese services seamlessly into uniqueor personalized applications.Information will flow fluidly from anydevice on the network to any other(server, PC, appliance, PDA and manyothers). Software will confer evergreater intelligence and insight intobusiness activities. Increasinglysophisticated tools will be required tomanage, optimize, and secure thisnew, highly distributed architecture.

The industry structure however, willbe paradoxical, at least for a while.Like anything shaped by

contradictory influences, it will morphinto a hybrid.

Concentration and fragmentationOn one hand, the maturation of thecore markets and resulting vendorconsolidations will produce a moreconcentrated sector; large vendorswill become even larger. On the other hand, the Internet and its level-ing influence will introduce a flurry ofnew entrants of all stripes: myriadsmall software vendors across theworld — essentially any company withre-usable intellectual property. The result will be an "hourglass"industry, marked by a discernablepolarization at the ends and a disappearing middle.

On-premise computing and utilitycomputingThe reinvention of the value chainwill create opportunities for chal-lengers that will create innovativenew business models to expand theaudience for enterprise computingand disrupt the mainstream. But tra-ditional vendors will not stand still,and they as well will industrializetheir value chain. This war of thevalue chains will smooth out the dif-ferences between utility and privateenterprise computing, making usercompanies' decision of one versus theother a matter of specific circum-stance rather than overall policy. Inthis new world, utility and privateenterprise software models will coex-ist, with no one model assumingprevalence.

Vertical integration and horizontallayeringFinally, vertical integration will reap-pear in the industry, challenging thehorizontal layering of the stack thatwas so successful at producing thefirst 40 years of growth. As vendorsre-invent their value chain, some willforward-integrate into IT or businessservices to solve customer needs morecompletely and directly.

Symmetrically, IT or business service

providers will backward-integrate intoapplication services. Utility providerswill integrate across applicationinfrastructure, applications and ser-vices, while traditional vendors also,to a lesser extent, will integrate vertically across product layers (suchas with SAP's move into applicationinfrastructure or even EMC's foray into document managementsoftware).

What Vendors Should Do Of course, how, when and how muchthese dynamics will affect enterprisesoftware vendors will vary signifi-cantly from company to company;thus, every vendor should assess thedevelopments from its specific van-tage point. After all, with its range ofmore than 60 highly specialized seg-ments, enterprise software is hardly ahomogeneous market. Yet while thespecifics will vary, Accenture believesthat at the highest level, every sizableenterprise software vendor is facingtwo types of corporate wars.

The first type of war could bedescribed as "regular warfare." It isgoverned by traditional industrydynamics, and involves going head tohead with well-known competitorsover the maturing core of the sectorwhile positioning to participate in thehot edge of the market where productinnovation will still be rewarded.Vendors on this path often will mergewith or acquire companies to achievethe size and economies necessary tocompete or to diversify away frommaturing markets. They also mayaggressively pursue "platform status" for their products to margin-alize competitors.

The second type of war could bedescribed as "guerilla warfare." It isgoverned by disruptive, Internet-cre-ated dynamics, and will involve ven-dors competing against companies orentities with business models theystill may not comprehend. These arethe wars of the value chains. For theInternet-based disruptors, perfecting

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their value chain innovation will be akey to success. For traditional ven-dors, reinvention of the value chainwill be a required defensive move.What will this reinvention look like?

Upstream in the value chain, tradi-tional vendors must dramaticallyimprove the speed and agility of theirproduct creation process. They can dothis by:• Adopting SOA and using it as a

blueprint for a new product-cre-ation paradigm

• Copying open source: Building col-laborative development models tomaximize the speed of innovation,so as to help diversify away fromcommoditized spaces

• Co-opting potential disruption byorchestrating an innovation net-work of vendors around them

• Leveraging open source: Includingopen source components into theirproducts and focusing their owndevelopment investment on creating truly differentiating functionality

Downstream, traditional vendors mustachieve value chain efficiency (asmeasured by the customers' TCO andtime-to-value) comparable to that of utility computing. Vendors can dothis by:• Adopting SOA, this time as a blue-

print for a new software deliveryparadigm

• Orchestrating delivery activitieswith channel partners and cus-tomers to operate under a shared,highly efficient model

To win the value chain wars andachieve high performance, traditionalvendors will need to change theirmindset and approach to their busi-ness model. They will be tempted tolook upon SOA as yet another oppor-tunity to innovate on the product-something SOA clearly will be.Arguably, SOA is still quite new andhas a long way to go, hence seeing itas a product innovation to be per-fected is understandable at this time.But vendors should not overlook

SOA's transformative impact on theirvalue chain. They must inject both anew mindset and a new disciplineinto their business: The mindset is afocus on the full solution, its totalimpact on the customer experience,and its total cost of ownership; thediscipline is a systematic reengineer-ing of the value chain, downstreamand upstream. Vendors that adoptthis perspective will be much betterpositioned in the coming years toboth defend their core market andexpand to other markets (such asinternational and small businesses)that their current business modelshave not allowed them to tap.

The Future Begins NowTo be sure, competing on two vastlydifferent fronts at once is no easytask, especially when each requiresunique approaches and skills. Butvendors simply do not have a choice,as the future belongs to those highperformance companies that can suc-ceed at both.

Although enterprise software and itsvalue chain will most likely morphand adapt in ways few people canforesee, one thing is certain: The next10 years promise to be fascinating forany observer of the industry. The con-solidators are busy consolidating themature core of the market, andInternet-based disruptors are nippingat their heels. For enterprise softwarevendors, standing by is not a goodstrategy. It's time to act.

In the following sections, we willreview in more detail how variousenterprise software vendors canrespond — or are responding — to thechallenge as they pursue high perfor-mance in these uncertain times.

II. "Perfecting a Disruptor: TheReinvention of Software-as-a-service"assesses the impact of Saas on enter-prise software, and outlines keys tosuccess for Saas providers.

III. "Consolidation in the Enterprise

Software Sector: Gateway to Growthor Path to Pitfalls" takes the perspec-tive of those vendors seeking to con-solidate their segment.

IV. "Orchestrating the Future ofEnterprise Software: Growth andControlled Disruption" addresses theopportunity a few vendors have toaccelerate growth and co-opt disrup-tion in the market via a platformstrategy.

V. "Avoiding the Perfect Storm" pro-vides insight into how to recognizeand avoid a scenario many traditional"best of breed" vendors may faceeventually where they must simulta-neously compete with aggressivemega-vendors and fend off disruptors.

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After four years of squeezing budgets,closing ranks and sticking with thetried-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 theyare not asking for IT's permission.After the PC, the Internet, theBlackberry and countless other inno-vations, business users in the enter-prise now are embracing Software-as-a-service (Saas) as a genuinealternative to traditional packagedsolutions. The new-generation Saasproviders have much on their side,but some skeptics still see them aslittle more than a distribution orfinancing alternative for enterprisesoftware, confined to the small andmedium business markets.

This is complacent and wishful think-ing on their part. But it does remindSaas providers that the key to theirability to achieve high performance,and to the demise of their critics, is

their wholesale re-invention of thebusiness model. In fact, the most suc-cessful of the emerging Saasproviders will not be simply alterna-tive software companies, but ratherservices providers that happen to bepowered by software. From their bat-tles with traditional vendors willemerge a reinvented software valuechain — at once more agile and moreefficient — and a computing worldthat will be one step closer to afuture as a utility.

The New Generation of SaasUtility computing was all the rageduring the Internet boom. Businesseswere funded to rent anything fromstorage to processing capacity toapplications. Most flopped in spectac-ular fashion, while others barely sur-vived. Today, utility computing isenjoying a revival, with Saas its lead-ing light. Yet, significant skepticismremains about Saas's viability in theenterprise and its ultimate businessimpact. The skeptics' argument is

twofold. First, they believe that in theenterprise, the economic model ofutility computing is not inherentlysuperior to that of private, on-premise computing. They argue thatmost large enterprises should havesufficient scale to run their own ITplant efficiently, especially as the costof key inputs into enterprise comput-ing (labor now available globally, andprocessing and storage are still gov-erned by Moore's law) continues todrop. Second, they believe that thevalue proposition of utility models inthe enterprise still will fall short onseveral key attributes, including theability to fit specific customer needs,customer's desire for control overtheir applications, and security risk.

Indeed, skeptics can point to the fail-ure of the first generation of utilityproviders as evidence of the challengeand indication that Saas will remainlimited to the small to mid-size busi-ness markets. Accenture believes thisthinking 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 thenew generation of Saas differs fromearlier pioneers in three importantways.

Strength of value propositionThe first generation of ASPs providedtraditional on-premise software in ahosted environment. Their valueproposition centered on the cost sav-ings and payment flexibility offered tocustomers. In return, customers hadto accept a lower quality of experi-ence, as the software was not easilytailored for specific needs. Where cus-tomization and integration with het-erogeneous backend systems wereneeded, they could be achieved, butwith methods — and resulting costand time — similar to that of the on-premise world, which defeated thepurpose. The first ASPs, like many ofthe initial dot-coms, expected toomuch from the reach of the Internetalone, and were short on actual pro-prietary value.

In contrast, the new generation ofSaas providers was designed from theground-up to provide an outstandingcustomer experience. Instead ofassembling off-the-shelf packagedsoftware from leading applicationvendors, current Saas vendorsdesigned their own with the user andhosted paradigm in mind. The valueproposition of the new Saas providerscenters on speed to value and ease ofuse as much as it does on total costof ownership (TCO) — a situationstemming from the providers' incor-poration of the latest architecturalthinking and standards, such asService Oriented Architectures (SOAs)that allow them to tailor their offer-ing and integrate efficiently withbackend systems. Salesforce.com andNetSuite, for example, offer customdevelopment platforms to their cus-tomers and partners. Furthermore,these vendors leverage their customerintimacy advantage, effortlessly monitoring individual usage patternsand driving feedback into feature

design to further enhance their valueproposition.

A different business model built onscope advantages, more than scaleOn the surface, previous-generationASPs and new ones share the samebusiness model: hosted softwaredelivery. In reality, first-generationASPs and the new Saas providerscould not be more different. The ASPssaw software as the product to bedelivered, and relied on scale in theirdata center operations to positionthemselves as highly efficient distrib-utors of software. Thus they spenttheir engineering expertise andresources on optimizing the deliveryand business infrastructure of theirservice. However, they lacked controlover two key elements: the applica-tion software they distributed, whichwas sourced from a third-party soft-ware vendor (or from another busi-ness unit in cases where the ASP wasowned by a software vendor); andtheir pricing, which was negotiatedwith the software vendor.

In contrast, the new generation ofSaas 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 isthe business, but it is not the product.Hence the new vendors are verticallyintegrated: They own their softwareand can shape it to improve theircustomers' experience and the effi-ciency of their own operations.Furthermore, their SOAs confer anumber of advantages, includinggreater adaptability and efficiency inboth product development and opera-tions; ability to tailor their offering toindividual customer needs; a blueprintfor industrial-strength operations inwhich modules can be maintained,updated and replaced without holisticre-writing and re-testing of theapplication; and the operation withall of their customers on a singlecode base, which reduces engineeringand customer support burdens. Inshort, software is their control point

for both the customer experience andoperational efficiency.

Timing and market conditionsThe first ASPs reached the market dur-ing the greatest expansion in enter-prise software spending of all time.Counter-intuitively, this timing wasunfavorable, as the ASPs' then bare-bone offerings did not stand a chanceagainst the premium on-premise offer-ings with class-leading features forwhich businesses were rushing to pay.In contrast, the new Saas providershave reached the market at the perfecttime, a time of the confluence of thethree crises of IT:• The "good enough" crisis: A situation

in which product-based differentia-tion is no longer rewarded, thustriggering the maturation of everyproduct category. Ten years after theInternet, and 20 years afterclient/server and the PC, manyenterprise software segments havebeen hit by the "good enough" crisis.

• The "IT does not matter" crisis: Ageneral disillusionment with IT (cap-tured by Nicholas Carr's May 2003Harvard Business Review article)that has produced a conservativespending environment for the pastfour years.

• The "complexity" crisis: A desire forsimplification and reluctance tointroduce new technologies in anenterprise environment alreadystruggling to deal with the legacy ofdecades of IT experimentation (aterm 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 thenew generation of Saas companiesnow increasingly are recognized as"good enough" to meet enterprise cus-tomer requirements. The fact that theiron-premise competitors' offerings arestill undeniably more featured is moot:Customers do not care. Meanwhile, thebasis for competition is shifting ascustomers seek lower-cost solutions (acontinuation 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 overallquality of experience are now thebasis for competition, and in thesethree areas, Saas shines.

Will Saas Disrupt or Merely Extendthe Enterprise Software Markets?At this time, the impact of Saas ismost evident in horizontal business-application segments, where the mainstrengths of Saas are speed to valueand the displacement of labor-inten-sive integration and managementtasks. But CRM is only the first majorbattlefield for Saas. Saas vendorsalready 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 impactof Saas centers on a key issue:whether Saas will disrupt the main-stream markets or merely extend thesoftware markets to new users suchas small and medium businesses thatcould not afford these solutions in theprevious on-premise paradigm. Theimpact of Saas should be assessedcategory by category, as it will differfrom one to the other. For any prod-uct category, we propose framing thisissue with two assessments:

First, what will be Saas's ability tomeet large enterprise requirements?Saas relies on a sufficiently genericand stable set of requirements, sharedby a broad base of customers, to beviable. The higher the complexity,specificity and variability of a givencustomer's needs, the worse the fit

for Saas. Many of the machine-to-human interactions that make upstandard business processes (such asCRM and HR, for example), can besupported successfully by Saas mod-els that leverage SOAs for flexibility.Indeed, that is quite a large section oftoday's application world. But even inthe age of the "long tail," no modelcan be infinitely segmented toaddress every market requirementeconomically. For instance, the coreprocesses in financial services compa-nies (straight-through processing) ortelecommunications organizations(billing and activation) are not strongcandidates for Saas-although theirsupporting processes are. In the longrun, industry trends favor furthergrowth for Saas as more enterpriserequirements stabilize (reflecting thecontinuation of the "good enough"crisis) and the sophistication of Saasarchitectures and models improves.

Second, what will be the value oppor-tunity for meeting large enterpriserequirements with Saas? The opportu-nity for Saas depends on the relativeinefficiency of on-premise alterna-tives. In other words, the greater theshare of resources and time devoted

to downstream activities (such asinstallation, configuration and maintenance of the on-premise appli-cation), the more attractive Saas will be.

Given the preceding assessments,Accenture categorizes the impact ofSaas 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 mediumbusinesses and international users),and it also disrupts on-premise ven-dors in the mainstream markets.This will happen in situations whereSaas is capable of meeting enter-prise requirements and the valueopportunity is large. The CRM cate-gory is a prime example.

• Market extension: Saas only extendsthe market for a category, but failsto disrupt incumbents. This willhappen where Saas cannot meettrue enterprise requirements butcan significantly improve theaffordability of a solution, making aSaas solution attractive to newusers such as small businesses. Thislikely will be the case for the ERPcategory.

Ability of Saasto Meet LargeEnterpriseRequirements

Sufficient

Low High

Insufficient

Opportunity: Relative Inefficiencyof Traditional Value Chain

C. DistributionAlternativee.g., InfrastructureSoftware

A. Market Extension and Disruption e.g., CRM (Sales, Customer Support, Marketing), HR Mgt., etc.

D. No Impacte.g., industry-specific custom large enterprise processes

B. Market Extensione.g., ERP

Figure 2-1: Categorizing the Potential Impact of Saas in a Given Product Category

Source: Accenture

15

• Distribution alternative: Saasbecomes an alternative to estab-lished distribution. It is adopted byincumbent companies, as well asnew entrants, which leverage Saasto facilitate their market entry. Thiswill happen where Saas can meetenterprise requirements but doesnot significantly improve theaffordability of solutions-such as isthe case for many infrastructuresoftware categories.

• No impact

Identifying disruption patterns is,indeed, possible. Salesforce.com, thetrailblazer among the new breed ofSaas providers, is the poster child fora Saas disruptor. As should be expect-ed, the first adopters ofSalesforce.com's offerings were smalland medium businesses, as well asdepartmental business buyers in theenterprise using their own discre-tionary authority (sometimes unbe-knownst to corporate finance or theIT departments). These customers pur-chased something that was easy tobuy, use and procure rapidly, and thatmet most of their needs — a first inthe enterprise. After purchase, thesecustomers were satisfied by a userexperience that was intended forthem. As word of mouth spread,Salesforce.com rapidly built itsdepartmental beachheads in theenterprise by its ability to providevalue added high performance tools.Today, a small but growing number ofits deals are corporate-wide dealsthat involve the finance and ITdepartments, a testament to itsincreasing mainstream status, to anddisruption of on-premise vendors.

Building on the successes of compa-nies such as Salesforce.com, the Saascategory is growing at an averagerate of 25 percent per annum — orabout four times average sectorgrowth. This is strong growth, but nothyper-growth. A key reason for this,besides the relatively low price perseat charged by Saas providers, is thatSaas does not offer anything radically

new to enterprise customers. On thecontrary, it supports the same usecases, albeit in a simpler, easier andcheaper package. Hence, Saas doesnot create a strong rationale forenterprise customers to replace thesolutions they already have — in otherwords, it does not trigger the upgradeor replacement decision. Instead, Saaswins its deals when customers mustreplace existing solutions for internalreasons, such as a merger, theredesign of processes or the obsoles-cence of their existing solutions. As aresult, the overall revenue impact ofSaas on the enterprise softwareremains modest. However, incumbentproviders should not take much solacein this, as the impact of Saas on theirmarket valuations can still be consid-erable. In today's low-growth applica-tion markets, Saas is absorbing muchof the net market growth. And for atypical vendor — with between 50percent to 80 percent of its valuebased on expectations of futuregrowth — exclusion from the growthopportunity can be disastrous.

The Competition for Saas Supremacy The mega-vendors have taken noticeof this. At the time of this writing,SAP and Microsoft are signaling theirupcoming 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 sidehas distinct advantages on which theywill seek to capitalize, passing on high performance benefits to theirend users.

Today's Saas vendors can count onseveral factors in their favor:• The reluctance of market leaders to

compromise their core businessmodels, which will affect the tim-ing, nature and vigor of theirresponse

• The learning curve for the newbusiness model. Companies such asNetSuite, Salesforce.com and otherseach have more than six years of

experience perfecting their businessand offering, while mega-vendorssuch as IBM-which have evengreater tenure in the space, but adifferent approach-still have tobreak through with their ownofferings

• The Saas providers' existing cus-tomer franchise, which they mustcontinue 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 themsome time to learn from the Saaspioneers

• Their resources to acquire any seri-ous disruptor at the opportunemoment

• Their ability to catch up on SOAand improve the attractiveness oftheir on-premise offerings

A Saas Provider's Imperative forSuccess: Continuing to Innovate theBusiness Model

To succeed in the upcoming races,Saas upstarts must continue to leadin perfecting their innovation: thebusiness model. They have a fewopportunities to do so.

Continue to lead the re-inventionof the value chainThe Saas versus on-premise races arereally a competition between valuechains. On-premise vendors, whetherthey adopt Saas or not, will be forcedto reengineer their value chain. Today,Saas vendors have an early leadthanks to their vertical integrationand early adoption of SOA. But thatlead may be short-lived, as every ven-dor eventually will catch up withSOA. Therefore, Saas providers mustfind new ways to drive ever-greateroperational leverage in their valuechain. The Internet is their friend inthis pursuit, allowing them to reachcollaborators worldwide that canaugment or perfect the Saas

16

providers' offerings. Here again,Salesforce.com is showing the way bymaking its custom development plat-form available to the masses of devel-opers around the world and position-ing itself as the center of a globalecosystem of application servicedevelopers and providers. Vendors alsocan participate in open source pro-jects. Driving this effort is a uniqueperspective among Saas providers: Thecustomer experience, not return onproprietary intellectual property, isparamount. Thus, Saas providers typi-cally have more freedom than theiron-premise competitors to leverageopen source.

Foster a passionate customer service cultureEarly in the life of a Saas provider,much of the effort centers on thesoftware development efforts requiredto build the service. During thesetimes, vendors may be tempted toallow a typical product engineeringculture to dominate. This would be amistake. A key advantage Saasproviders have over most on-premisevendors is an opportunity to develop apassionate culture of the customer. Acore service purpose should drivethese vendors' investment strategy,the development of their offerings,the design of their business processes,metrics and reward systems, andrecruitment of staff.

Master the incremental improvement gameSaas vendors must continuallyenhance the customer experience sothat existing customers will remainloyal and adopt new offerings, andnew customers will join. Unlike on-premise vendors, they do not seek toreplace their offering outright, butrather, to enhance and expand. Onceestablished, with a core offering and asignificant customer base, they canupdate their offerings incrementallybased on observed customer needs(which minimizes risk). They can testcustomer responses to ideas and con-cepts rapidly, directly and in detail.

Enterprise customers no longer see Saasas a small and medium business offering.Most of the CIOs Accenture surveyed seeSaas 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 enterpriseOn-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

Relativestrength

Relativeparity

Relativeweakness

Sidebar Figure 2-1b: Enterprise Customers Perceive Speed to Value First and TCOSecond 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 tovalue and TCO are the key differentiatingattributes for Saas, while security andcontrol are the potential deal breakers.

Source: Accenture June 2005 survey of larger enterprise CIOs, Accenture analysis


17

And they can segment their customerbase with great refinement and bringa science to their product marketingand management activities that on-premise vendors never had. Saas ven-dors that excel at this discipline willchange the risk profile of the businessand create a business model that,though steeped in software engineer-ing, will have the economic, businessprocess and cultural characteristics ofa high-margin service business.

Maintain ownership of the customerSaas vendors must be cautious indesigning their channel route to retainaccountability for customer success.As they expand in the enterprise, emu-lating the distribution model andchannel management practices of tra-ditional enterprise software playerswould be a bad idea. Whether throughorchestration of third parties orthrough direct influence, Saas vendorsmust maintain control of the customerexperience. Vendors may have to tem-porarily trade off some initial growthfor quality of customer experience asthey perfect their channel model inthe enterprise. But in the long run, itwill pay off in the form of strongerand more profitable relationships.

Software-as-a-Service: A FirstSuccessful Stage for UtilityComputingUltimately, the names of the winnersmatter relatively little. The significanceof the competition lies in its potentialto transform the industry's prevailingbusiness model as it drives vendors toaddress the key remaining issues withthe business model:• Technical paradigm: Today's SOAs

are immature, and many issues suchas manageability and securityremain.

• Product development paradigm:Collaborative models — in particular,those based on creating a mutualeconomic opportunity — have yet tobe perfected.

• Customer-centric, service designparadigm: This is quite an innova-

tion for enterprise software. Newskills, behaviors and organizationalmodels will be required to make ithappen.

• Industrialized delivery: Vendors arejust beginning to realize how theycan reinvent and optimize downstream delivery activities inan SOA world.

Vertical integration will help today'svendors address these issues and per-fect the model within a controlled,well-coordinated environment.Hence, scope will pay off for a whilein the race for business model inno-vation. Eventually, ownership of theapplication may no longer be neces-sary, as any application will bedesigned to be available "on tap."More generic forms of utility com-puting will become possible. Scalewill again become a key driver ofoperational leverage and a wholenew cast of candidates aspiring tothe title of Enterprise InformationUtility provider will appear. Theseproviders 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 forcustomers

• Superior efficiency, based on massive scale, industrialized management of operations, andpurchasing power

• Global customer reach that willinclude the ability to serve cus-tomers locally as needed

• Global reach to large masses ofdevelopers that will include theability to operate a marketplace forthe monetization of their intellec-tual property

• Ability to leverage collective orpublic sources of knowledge orintelligence for the benefit of theircustomers

No player yet exists that combines allof the preceding attributes. Systemintegrators and outsourcers, largehardware vendors, telecommunica-

tions services providers, online marketplaces such as eBay, and informationservice providers such as Google allbring a part of the edifice. Hence, onecan expect some interesting corporatemoves as the future of utility com-puting evolves. In the meantime, thecompetition for Saas supremacy takescenter stage.

18

Playing the consolidator role in anindustry in the midst of a metamor-phosis can be risky business. One doesnot want to be left consolidating yes-terday's world when a new world ison the way. Hence, assessing thenature and timing of the new world isobviously critical. We agree with themany supporters of enterprise soft-ware consolidation that there is nonew major wave of hyper growthcoming to the sector any time soon.But there is a new order ahead, oneshaped by the Internet's increasinglydistorting influence on the sector.Therefore, consolidation should not bea vendor's only strategy. When theydo consolidate their markets, success-ful vendors will pursue economies ofscope not scale, becoming great dis-tribution umbrellas for a broad prod-uct portfolio. And to ensure theiracquisitions are worth more thantheir acquisition premium and thecost of the complexity they will intro-duce, we advise acquirers to dosomething that software companies

rarely do: relentlessly pursue andachieve synergies.

To Consolidate — or NotAs we discussed in the chapter "TheMetamorphosis of EnterpriseSoftware," the enterprise softwareindustry today faces a future withouta development that will spark unbri-dled optimism and widespread growth.Ten years after enterprise softwaremet the Internet, vendors haveencountered the "good enough" crisis-a situation in which customers arereluctant to upgrade to newer ver-sions of software products wheninstalled versions work adequately.This crisis is a major factor in the con-servative spending on enterprise soft-ware that prevails among customersand the projected overall sectorgrowth of about 8 percent per annum.Furthermore, reduced rates of innova-tion have weakened the position ofbest-of-breed vendors, depressingtheir capitalizations and making themtargets for acquisition. Add to this the

fact that roughly one-third of themarket's segments remain highly fragmented (Figure 3-1) and one has a recipe for a market ripe for consolidation.

However, vendors that decide tobecome consolidators must considertheir timing and approach carefully.While there is no big wave in sight,there is and always will be a hot edgeof 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, althoughmuch of the sector may be maturing,it is also transforming under the influ-ence of the Internet. Disruptive busi-ness models (open source and utilitycomputing are two prominent exam-ples) are reinventing the softwarevalue chain. They are precisely target-ing maturing segments where effi-ciency, not product innovation, is thebasis for competition.

III.Consolidation in theEnterprise SoftwareSector: Gateway to Growth or Path to Pitfalls?

19

At the same time, the Internet is low-ering the barriers to entry into theenterprise software markets. By forc-ing vendors to adopt common openstandards and driving the adoption ofService Oriented Architecture, theInternet is paving the way for theglobal masses of developers and awhole new cast of participants to jointhe party. These dynamics, whileseemingly distant for some, are rele-vant for a key reason. They affect,positively or negatively, the mostimportant component of any vendor'svaluation: growth. About 50 percentto 80 percent of an enterprise soft-ware vendor's value is based onexpectations of cash flows above andbeyond current cash flows that thevendor will capture in the future(Figure 3-2). Hence in the long run,positioning for growth, and addressingpotential disruptive threats to growth,is likely to have greater impact on avendor's valuation than seeking toachieve greater economies of scale orscope via consolidation (Figure 3-3).

Finally, customers are on the fenceabout the prospect of consolidatingofferings in the hands of fewer largecompanies. While they clearly desireless burdensome, more integratedsoftware purchased through fewervendors, they are also quite aware ofthe risks that consolidation brings.(see Sidebar 3-1).

Conditions for SuccessGiven these issues, can a consolidatorstrategy be successful? Theoretically,yes. Back-office and overhead func-tions such as finance, humanresources, IT and facilities — as well ascustomer-service activities — can sup-port increasing volumes of businesswithout a commensurate need toscale. Selling and marketing activitiescan be made more efficient as well, ascompanies expand their product portfolio and sales people can bundle products, extracting morevalue out of each customer relation-ship. Product development expensestypically 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

ConcentratedHHI*>1800

ModeratelyConcentrated1000<HHI*<1800

FragmentedHHI*<1000

Growth Rate (’03-’08 CAGR)5% 10% 15%

*Herfindhal-Hirschman IndexKey: 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 stockprice as of July 31, 2005, plus long term debt as ofend of FY 2004.

Excess cash based on balance sheet cash and shortterm investments at end of FY 2004, minus operatingcash (assumed to be 2% of revenues)

Enterprise value equals market value less excess cash

Current value of Operations defined as NOPLAT/WACCand represents the present value of current operationsin 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 shouldbe achievable.

Dispensing with the theoretical, is big-ger always better? In analyzing publiclytraded enterprise software vendors overa three-year period, we found thatlarge vendors do perform better onaverage than their smaller competitors(see Sidebar 3-2). However, our analy-sis also produced a few counter-intu-itive findings and caveats — one ofwhich is that there is great variabilityof financial performance within eachcompany and across companies that isnot explained by size of company. Forexample, some vendors with revenue inthe $100 million to $500 million rev-enue range are as profitable as vendorswith revenue above $2 billion. Otherfactors — such as market structure andvendor position, the company's invest-ment strategy, competitive dynamics ormanagement performance — clearlyaffect results.

We also found good evidence ofeconomies 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 millionthat report their research and development expense invest a fairlyuniform average of 16 percent to 17percent of their revenue in researchand development. Investment policyand reporting policy may help explainthis uniformity (companies may simply be conforming to market expec-tations of what is required to fundfuture growth), but we think there ismore to this. We believe the opportuni-ties for economies of scale in researchand development simply are not as evi-dent as they are usually accepted tobe. We can suggest two explanationsfor this.

First, the structure of the softwaremarket, with its myriad micro-seg-ments, does not in general lend itselfto very large scale. While Microsoftand Oracle enjoy exceptional

OperatingMarginImprovement(’01-’04)

>5%increase

>5% increase >5% decrease

>5%decrease

Revenue Growth (’01-’04)

Avg. TRS = -13%N-13SD = 81%

Avg. TRS = +31%N-14SD = 29%

Avg. TRS = -80%N-3SD = 18%

Avg. TRS = +10%N-3SD = 17%

Figure 3-3: Growth Trumps Profitability When it Comes to Shareholder Value2001-2004 Total Return to Shareholders (TRS) vs. Margin Improvement andRevenue Growth Acceleration (Public Companies with $100M or more Revenue)

Vendors often justify their acquisitionstrategies with statements of the cus-tomer's desire for doing business withfewer and larger vendors. We believe thecustomer's supposed positive view ofmergers 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 themWill result in better integrated, less cumbersome software infrastructure

Will help reduce our cutomer’s vendor management burden

2. …But will not solve all problemsWill 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 customerssee some benefit to mergers, they alsoexpect significant drawbacks. Overall, wefound them to be neutral, with only aboutone-third seeing mergers as a clearly positive development.


Sidebar 3-1: What Enterprise Customers Think of Mergers


21

economies of scale in the very largeoperating systems and relational data-base markets — where they respective-ly reap $14 billion and $6 billion inrevenue from a single product line-they are the exception. These two mar-kets, at $20 billion and $15 billion insize, respectively, dwarf the other 60or so segments, whose median size isonly about $1 billion. With muchsmaller markets to address, and there-fore much smaller scale achievable inany of them, other vendors must relyon diversification to grow, whichrequires new products to be developedevery time. Hence, while these vendorscan achieve economies of scope, asevidenced by lower selling and market-ing expense ratios for example, they donot succeed in increasing returns ontheir engineering investment.

Second, the product developmenteffort required to address a given mar-ket is not as fixed as generally accept-ed. To sustain their revenue within thesame market, vendors must updatetheir products frequently, all the whilemaintaining multiple legacy versions oftheir products over time. Some vendorscan spend one-third or more of theirproduct development resources onsuch updates. Hence, vendors continueto invest in product development tosupport existing revenue streams inmarkets they already have addressed.

In sum, while size matters in enterprisesoftware, evidence suggests that ven-dors eager to improve the economicsof the business through consolidationshould look to back-office, selling andmarketing functions as their targets.

What Vendors Should DoGiven these findings, we believe thatconsolidators should define theiropportunity primarily as combining abroad product portfolio under a robustand efficient sales and marketingumbrella. Their greatest claim to syner-gy is to aggressively capture economiesof scope in back-office operations andselling and marketing activities,

Sidebar 3-2: Economics of Software Vendors

Larger vendors perform indeed better onaverage than their smaller counterparts.Economies of scope in G&A, selling andmarketing appear to be the most strikingadvantage of larger vendors. With theexception of Microsoft and Oracle, largervendors do not seem to realize significanteconomies of scale or scope in R&D, con-

Sidebar Figure 3-2b: Selling and Marketing Expense of Publicly Traded Enterprise Software Companies vs. Size

Sidebar Figure 3-2a: Operating Profit

Sidebar Figure 3-2c: G&A Expense of Publicly Traded Enterprise Software Companies vs. Size

Sidebar Figure 3-2d: R&D Expense of Publicly Traded Enterprise Software Companies vs. Size

34% 35%30%

23%

39%

11% 11% 9%6%

16%

17% 16% 17% 17%

23%

Average S&M Expense/Revenue

30%

40%

50%

0%

10%

20%

Company Size

$0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+

$0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+

OperatingProfit

Mean+/- 1 Standard Deviation




Company Size

Average G&A Expense/Revenue

15%

20%

25%

0%

5%

10%

Company Size$0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+

Average R&D Expense/Revenue

25%

30%

35%

0%

15%

10%

5%

20%

Company Size$0 - 100M $100M - 500M $500M - $1B $1B - $2B $2B+

0%

20%

40%

60%

-60%

-40%

-20%

9%16% 12%

24%

-14%

trary to popular belief. The software sectoris a collection of many specialized segments (more than 60 recognized by IDC with a median size of only about $1billion). This specialization and small aver-age market size inherently limits the scaleachievable by any player on a particularsegment.


22

effectively positioning themselves asgreat distribution companies withsuperior market access. With selling,marketing and back-office activitiesrepresenting by far the largest com-ponent of a vendor's cost structure-typically 40 percent to 60 percent ofrevenue — net efficiency gains can besignificant. Following this approach,consolidator companies will be greatdistribution organizations that, inaddition to excelling at merger plan-ning and integration, will competeprimarily 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 relentlessfocus on realizing synergies, which isnot the typical custom in the soft-ware sector. Acquired vendors oftenare given a high degree of organiza-tional autonomy to preserve theirmarket focus and their talent pool.While this approach may work withacquisitions of small vendors pur-chased for their products or intellec-tual property, it does not deliver theeconomies of scope and scale soughtby consolidators making large acqui-sitions. A synergy-creating disciplinewill dictate swift action to consoli-date simple back-office activities. Italso will require consolidators to becreative in addressing the new prob-lems they no doubt will introduce asthey become larger and more com-plex. For example:• Sales force and channel partners

may become overloaded with a verybroad product portfolio and morecomplex account managementapproaches

• Customers may become confusedby products with overlapping func-tionality, or by an excessively broadand vague value proposition

• Collaboration and knowledge shar-ing between groups may suffer

• Architectural integrity of solutionsmay be weakened by introductionof acquired products

• Accountability for the customerexperience may become dilutedacross multiple groups

ConclusionWith these potential pitfalls in mind,vendors pursuing a consolidationstrategy must be sure they have madethe right assessment of the state ofmaturity, and potential for innovationor disruption, in their core markets.They also must avoid overpaying fortheir acquisitions by being realisticabout their synergy opportunity. Oncethey have made acquisitions, theyneed to immediately focus on realiz-ing synergies by quickly reorientingtheir key market-facing capabilitiesand slashing unnecessary back-officecosts. Finally, consolidators mustunderstand the level of complexitythey are introducing into the organi-zation with each acquisition and havea plan in place to eliminate or mini-mize it. Vendors that successfullyaddress these issues will be muchbetter positioned to achieve the syn-ergies that so typically elude mostcorporate mergers.

23

Achieving true platform status is oneof the greatest feats for an enterprisesoftware vendor. It all but guaranteesentrenchment into a sustainable lead-ership position and the marginaliza-tion of competitors while grantingvendors some ability to control orinfluence market and technical devel-opments that take place around them.In today's market, marked by theintensifying consolidation of maturesegments and the increasingly disrup-tive influence of the Internet, platformstrategies are more relevant than ever.Yet, the requirements for success arestringent and competition significantand intense. Only a few will likely suc-ceed in building the next proprietaryplatform before the Internet and openstandards render the issue moot.

A Strategy For Market LeadershipPlatform strategy has been a staple ofthe computing world ever since IBM in1968 decided to un-bundle its soft-ware and hardware, in effect settingthe stage for the layering of the com-

puting stack. Initially a technical term,a platform in the modern sense maysimply be a technical and businessfoundation upon which others inno-vate. At the heart of the concept isthe realization of the implicit interde-pendency among vendors and of theneed and opportunity for some to pro-vide the foundation for the industry'sapproach to a particular challenge.The test of a true platform is the exis-tence of a vibrant, healthy innovationnetwork around the vendor — a testvery few actually pass. Microsoft, withWindows, is a classic software plat-form company.

There has been a renewed focus onplatform strategy lately for two mainreasons. The first is that, as growth inthe enterprise software sector slowsand major segments of the softwarestack mature, companies are moreeager to enhance their importance inthe market. As we discussed in chapter"The Metamorphosis of EnterpriseSoftware," the enterprise software

industry today faces a future withouta development on the horizon thatwill generate the type of unbridledoptimism and widespread growthunleashed by the emergence of theInternet in the 1990s. Without such aspark, vendors look to platform statusas a way to draw more customers,partners and developers to their"orbit." Arguably, one could conceiveof platforms in domains as distinct assystem management, security, stor-age, business applications, applica-tion infrastructure, and businessintelligence.

The second reason that platformstrategy is gaining in popularity is theemergence of Service OrientedArchitecture (SOA) as the de-factoarchitecture for enterprise software.As vendors increasingly adopt SOA,they find that they now have thecapabilities to more effectively posi-tion themselves and their products inrelation to an ecosystem of comple-mentary vendors, present or potential.

IV. Orchestrating theFuture of EnterpriseSoftware: 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. Theyshare this objective with the othercandidates for market leadership inthe segment: the consolidators. Therethe similarity ends. Where a consol-idator sees a mature and stable indus-try, an orchestrator sees the potentialfor growth that it wants to captureand destabilization that it wants tocontrol. To capture growth opportuni-ties, an orchestrator is willing to giveup some scope and rely on the collec-tive innovation power of an ecosys-tem of partners — each with its ownskills, customer relationships andentrepreneurial spirit. To controldestabilizing developments, anorchestrator creates a web of interde-pendency with its ecosystem of com-plementors. By positioning itself asthe gravitational center of a universeof vendors, an orchestrator wants toensure its sustained relevance andextend its control over broader marketdynamics.

But do platform strategies make sensein today's markets? At a high level,they do. We believe platforms willmore effectively address the increas-ingly disruptive influence of theInternet on the sector — disruptionthat includes the forced reinvention ofthe entire enterprise software valuechain, creation of opportunities fornew business models such as utilitycomputing, and lowering of barriers toentry through the adoption of openstandards and common architectures.Successful platforms, with their broadecosystem of partners, will be able tosustain or co-opt the disruption — orfor some, capitalize on the disruption— better than any single vendor. Oneimportant caveat: Because enterprisesoftware is hardly homogeneous (withits three sub-sectors of applications,systems management, and applicationdevelopment tools and 60 or so spe-cialized segments) conditions must beassessed specifically for each vendor.

Several vendors now are positioningthemselves as new platforms — most notably perhaps SAP andSalesforce.com. The application spaceis first in line to experience the newindustry dynamics: the simultaneousconfluence of segment maturationand Internet-based disruption. Otherspaces likely will follow. Vendors thatconsider a platform strategy will need to meet stringent requirementsfor success.

Key requirements of platform strategy successFor a platform strategy to succeed, itmust create value for three key par-ties: customers, complementors andthe platform vendor itself.

Winning the customer: the strategic value frameworkCustomers ultimately decide the fateof any platform strategy. Therefore,the value proposition of the combinedplatform ecosystem must be suffi-ciently attractive to customers. Inother words, the vendor and its com-plementors, working together, mustdo something significantly new, bet-ter or cheaper — or all of the above —to resonate with customers. It isinsufficient for the vendor to simplydefine product interfaces and createuseful facilities and services that helpits complementors build on top of thesupposed platform. Without an over-arching strategic value framework-which articulates how the combina-tion of the platform's componentsgenerate greater customer value thaneach of the components separately —the vendor only succeeds in makingits product a more convenient, butcontextual, piece of the stack.

Winning the complementors: thesoft and hard power of the plat-form vendorFor a platform to be attractive tocomplementors, several elementsmust be in place. First and foremost,complementors must be convinced ofthe platform's relevance to customersand staying power. A platform is a

cheerleader of the industry; it mustsell a big vision to attract comple-mentors to its ecosystem. Withoutthat, there's no incentive for comple-mentors to participate.

Beyond that, however, there must bea set of strategic objectives sharedbetween the platform vendor andcomplementors (such as shared mar-ket opportunities and competitors).Lack of strategic alignment with keycomplementors is a major issue, forexample, in the application infrastruc-ture area. Here, the likes of IBM andBEA are denied platform status bytheir natural complementors, theapplication vendors such as SAP andOracle, which have no incentive forcollaboration.

Market position also is critical. A plat-form vendor with a large and loyalinstalled customer base, dominance ofa market segment, strong brand androbust value chain relationships willfind it much easier to convince poten-tial complementors to join in its net-work. Yet dominance of a core spaceis not an absolute requirement forwinning complementors. Sun's posi-tion as a software vendor was mar-ginal when it introduced Java. But itbased its platform strategy on itsstrategic value framework and powerful alignment with its comple-mentors — united against Microsoft.

At a more technical level, a platforminteroperability scheme also has amajor impact on how enthusiasticallycomplementors join the network.Complementors look to the platformvendor to offer a strong and conve-nient foundation for their own prod-ucts — providing, for example, arobust and stable product foundation,convenient interfaces and necessaryfacilities and tools. With the maturingof certain product categories and thebroad acceptance of Web Servicesstandards (among others), the techni-cal conditions for defining platformsare improving.

25

Finally, there must be an inherent biaswithin the network toward value cre-ation and value sharing. All else beingequal, complementors will be drawnto platforms that demonstrate theability to create value and share thewinnings among all participants.

Creating Value for the Platform:Keeping ControlTo benefit themselves, platform ven-dors must ensure they remain the hubof their network — or at least a highlyrelevant constituent. That requirescontinually creating value for theircomplementors and maintaining con-trol of the strategic value framework.

Microsoft does both with Windows. Incontrast, Sun did not keep control ofJava, which was deliberately posi-tioned as an open platform (and a keyreason for its success). Java createdenormous value for complementorssuch as BEA and IBM, as well as therest of the Java community. But itsbenefit to Sun's hardware businesswas short-lived, and Sun never man-aged to create a strong position insoftware for itself.

For vendors focused on direct valuecreation, control requires proprietaryownership of a required component ofthe value network. This component isusually technical (proprietary code ora proprietary data model), but it alsocan be business components (such asa transaction or a commerce platform,or customer relationships).

The Ultimate Platform: The InternetAs if these requirements for successwere not sufficiently challenging,would-be platforms also will face for-midable competition in their quest forplatform status from none other thanthe Internet (see figure 4-1). The pullof the Internet on the industry isgrowing by the day, and an ever-increasing array of standards is beingdeveloped for Internet-based comput-ing. Architectures such as SOA thatwill be shared by vendors everywhereare being perfected. The Internet israpidly becoming the foundation uponwhich vendors can innovate and buildtheir business. In other words, it isbecoming the ultimate platform. Asmore and more elements of the com-puting model are defined for open,Internet-based computing, the gravi-

tational pull of the Internet willincrease, leaving new proprietaryplatforms a reduced opportunityspace to address.

However, the platform candidateshave one thing on their side: At thistime, open standards define mostlylower-level, base functions of thecomputing model. They focus primari-ly on interface and communicationrather than business logic, and theyhave yet to succeed at defining ashared syntax for enterprise applica-tions. Ultimately, though, the stan-dards will spread. With no new "bigwave" of growth coming to the sec-tor, one segment after another willsoon find its customers reluctant toupgrade to newer versions of soft-ware products when installed versionswork adequately — the "goodenough" crisis that ultimately drivesthe segment's maturation. Opensource often will act as the commodi-tization engine addressing thesespaces, which will result in openstandards or approaches spreadingfrom one category to the other.

For prospective platforms to succeedin such an environment, they willneed to carve out a space they candefend and then move quickly. Theyalso must avoid competing head tohead with standards and open sourceefforts and, instead, elect to co-optthem. Finally, they must form theirnetwork and enable it to create supe-rior value for customers before theiropportunity space can be addressedby the Internet and open standards.

The window for creating the nextproprietary platform in enterprisesoftware is closing. Only a few willmake it.

Utility Provider

Applications

OSOpenSource

Content Provider(e.g., Google)

The Internet

SystemManagement

Figure 4-1: The Internet: The New Platform Landscape

Source: Accenture

26

The current competitive environmentin the enterprise software industrycan be particularly tough on best-of-breed vendors, especially mid-sizedcompanies with traditional businessmodels. These companies must assessa potential double threat: at the top,vigorous challenges by the mega-ven-dors bent on further consolidating themarket; and at the bottom, disruptivechallenges 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 destructivescenario, or the "perfect storm," isone in which both challenges materi-alize simultaneously (see figure 5-1).As the enterprise software sectorgrapples with an era of slowergrowth, the "perfect storm" appearsto be brewing for an increasing num-ber of vendors — especially those inthe business application arena. Whatshould these companies do to preparefor the tempest? Accenture believesseveral options are available to them,

including a reinvention of the valuechain, diversification into comple-mentary markets, and a move intoservices provision. Which avenue isbest largely depends on each compa-ny's specific competitive, economicand market position.

The Perfect Storm ScenarioThere is no doubt that the enterprisesoftware sector faces a number ofchallenges in generating demand fortheir products. After years of robustgains in market share and revenue,vendors now find themselves facingthree distinct crises that have effectively stifled demand for several years.

The "good enough" crisisEnterprise software marketers face akey obstacle: their own legacy. Inmany segments of the sector, vendorshave a difficult time convincing cus-tomers to upgrade to newer versionsof their products when installed ver-sions work adequately. While this cri-

sis has yet to reach some segments(for example, security, where one canalways count on the bad guys' cre-ativity to create new customerneeds), it has reached many — as evi-denced by overall modest growth pro-jections of around 8 percent perannum for the enterprise softwaremarket overall.

The consequences of "good enough"are fundamental. With customersessentially happy with their existingsystems, the pace of productupgrades slows. But even more criti-cal is the fact that such satisfactiontypically 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" crisisMuch 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 PerfectStorm

27

delivered too little. Businesses havemoderated their expectations of thevalue and returns that IT generates, inmany cases, justifiably so.

Hence, two years after Nicholas Carr'smuch-debated May 2003 HarvardBusiness Review article, "IT Doesn'tMatter," technology buyers remaincautious. Their diminished appetite forspending and risk creates additionalchallenges for enterprise softwarevendors. For starters, a greater pro-portion of purchases are now undercentralized control, often with over-sight from the finance or procurementfunctions. Risk avoidance pervadespurchasing as companies favor indus-try standard capabilities over differen-tiated or leading-edge capabilities.Furthermore, the number of large,multimillion-dollar projects has fallendramatically, and those projects thatare launched are subject to muchgreater scrutiny (often by other deci-sion-makers besides the CIO, such asthe CFO and CEO).

The "complexity" crisisIn most organizations, years of ITinvestment without active rational-ization have yielded complex infra-structures that mix multiple genera-tions of architectures and data mod-els: hence the "complexity" crisis (aterm coined by IDC). Customers leeryof the complexity of their IT infra-structure want IT that can be easilypurchased and consumed. As a result,they tend to eschew what they viewas large, complex enterprise softwareimplementations in favor of pre-integrated solutions or even utility-like models for software delivery andconsumption.

While these three crises are all signif-icant inhibitors of growth for enter-prise software vendors, the "goodenough" crisis may be the mostintractable. Vendors can use innova-tions to address the complexity oflegacy environments, and customers'crisis of confidence may be tempo-rary. But there is little that vendors

can do if they indeed have overshotactual needs. Where that is the case,vendors are now in a lame-duck posi-tion, exposed to traditional competi-tors, and perhaps more critically, tovendors with different business mod-els that offer a more attractive valueproposition.

When the "good enough" crisis hits asegment of the market, the basis forcompetition changes considerably. Atthe top of the market, a consolidatorenters (either through organic means,acquisitions or a platform/comple-mentor play) with a sufficient offer-ing and leverages its distributionadvantage-for instance, its ability tobundle offerings. It then positions itsproduct as a solution pre-integratedwith other offerings (thus neutralizingthe "complexity crisis") and positionsitself as trusted, industry leader (play-ing to the "IT does not matter" crisis).As a result, the vendor captures ashare of the large deals and ultimate-ly segment leadership.

“Good Enough” Crisis

Incumbent vendor(e.g., best of breed)

Mega VendorChallenge atthe Top End

Consolidation Orchestration

Disruption

SaaS andOpen Source

Disruption andOrchestration

Disruptor Challengeat the Bottom End

“IT Does Not Matter” Crisis“Complexity” Crisis

Vertical SolutionsMarket Challenge Market Opportuntiy

Small and Medium BusinessesInternational Markets

Figure 5-1: The Perfect Storm Scenario

Source: Accenture

28

At the bottom of the market,Accenture sees the scenario as beingsymmetrical. A disruptor (either usingSaas or open source) gains a hold atthe bottom-end of the market and per-fects its offering to the point at whichit meets the needs of the mainstreammarket. Touting ease of use, ease ofconsumption and speed to value (elimi-nating the "complexity" crisis in thecase of Saas providers), the disruptorputs forth a value proposition based ona lower total cost of ownership (thusminimizing the "IT doesn't matter" cri-sis in the case of both Saas and opensource providers) — and eventuallyexpands into the market mainstream.

The most prominent example of thisscenario is in the CRM market, wherethe incumbent segment leader Siebelfound itself simultaneously fighting theattacks of mega-vendors SAP andOracle (and previously PeopleSoft) andthose of Saas pioneer Salesforce.com.After several years of struggles, Siebeldetermined its future as an indepen-dent provider was sketchy at best andagreed to be purchased by Oracle —which, with this transaction, becomesa CRM behemoth with formidable scalehoping the combined entity will pro-duce high performance results. ButCRM is just the beginning. This sce-nario likely will repeat itself acrossmore segments of the enterprise soft-ware sector as the "good enough" crisisopens the door of one market afteranother to the consolidators and dis-ruptors.

Defending One's MarketFor companies caught in what will bethe rapidly diminishing middle of theenterprise software sector, defense ofthe core market is the natural de-factostrategic option. As long as the "goodenough" crisis has not set in, vendorscan mount successful defenses againsteither consolidators or disruptorsthrough continued focus and innovation. When it does set in howev-er, or preferably before it does, vendorsmust seek other remedies to protecttheir turf.

To defend against the large consol-idators, vendors can attempt tostrengthen their position throughacquisitions themselves — by pur-chasing direct competitors in theircore market. For example, Adobe'sacquisition of Macromedia allowsAdobe to strengthen its position ingraphic and Web design tools, aspace where the "good enough"threat may be moderate. In this case,the acquisition is doubly beneficialbecause it also improves Adobe's abil-ity to innovate at the edge — in thefield of rich user interfaces, a spacewhere much innovation has yet tooccur.

To combat the Saas disruptors, ven-dors can follow the established bestpractice: create a relatively indepen-dent business unit that will ape theircompetitors' business models.However, history shows us this isusually a difficult move to make suc-cessfully. Most on-premise vendors'attempts to deal with past disruptors'incursions by creating their own Saasoffering have fallen short. The reasonis that Saas is a business model in itsown right, one that is not learnedovernight and that bestows somecompetitive advantage to first-movers.

That's not to say that on-premisevendors should not make such amove. But it shouldn't be the onlyresponse to consider. Several otheralternatives offer on-premise vendorsa route to competitive advantage thatmay be more consistent with theirlegacy, culture and existing businessmodels.

Reinventing the value chainOne way vendors can improve theattractiveness of their existing on-premise offerings is to reinvent theirvalue chain — which has effectivelybecome the Achilles heel of tradition-al enterprise software vendors in theircompetition against disruptors withbusiness models based on opensource and utility computing.

For most vendors, value chain reinven-tion will hinge on the adoption ofService Oriented Architecture (SOA) asa new "production blueprint." SOA iscritical because its defining character-istic is the built-in interoperability ofsoftware components. This may notmean much to a business user, but to aproducer of IT solutions, this is gold-indeed, it provides the opportunity fora new production paradigm for enter-prise solutions. With interoperability,tasks can be decoupled and distributed,and can be assigned most efficiently tolocal and offshore labor. Web services"factories" all over the world can pro-duce, in parallel, the new componentsthat will make the customer's solu-tions. Software assembly and testingtime can be radically reduced. The netbenefit of these changes — a benefitthat does mean something to businessusers — is a dramatic improvement in time-to-value and total cost ofownership (TCO).

Using SOA, vendors can dramaticallyimprove the speed and agility ofupstream value chain activities byscaling and decoupling the productdevelopment process and building col-laborative development models tomaximize the speed of innovation.Downstream, vendors can achievevalue chain efficiency (as measured bythe customers' TCO and time to value)comparable to that of utility comput-ing by using SOA as a blueprint forscaling and decoupling the integration,customization and maintenance ofsoftware — thus, effectively "industri-alizing" downstream activities to dra-matically improve the speed and eco-nomics of software delivery.

DiversificationVendors also can reduce the impact ofthe consolidation or disruption threatby diversifying away from it.Acquisitions are again a tool of choice — as illustrated by Symantec'spurchase of Veritas, which enablesSymantec to diffuse its exposure to thethreat of a Microsoft play in securityand broadens Symantec's enterprise

29

portfolio (which should create thesame type of economies of scope andhigher corporate performance pursuedby the consolidators). As with theconsolidation strategy, this strategymay be attractive to vendors withstrong distribution capability. Vendorswhose main offerings are in the stable"core" also may use acquisitions togive them an opening at the "edge,"thus further strengthening theirgrowth prospects.

Forward-integration into servicesCapturing increasing amounts of ser-vices revenue is not a very populargoal among software vendors. Unlikemany hardware vendors that see ser-vices as high-margin endeavors withstrong synergy with the product busi-ness, most software vendors typicallywant to avoid "polluting" their earn-ings with an increasing mix of lower-margin services. In fact, a growingservices-to-license mix typically isseen as a sure sign that the compa-ny's core growth engine is dying, andthat it no longer can spur growththrough product innovation. Becausegrowing services revenue also wouldcreate conflict with a vendor's channel partners, the reluctance todevelop services capabilities is understandable.

However, for some vendors, thisthinking is dated and should be re-evaluated. First, some vendors clearlyno longer are seen as high-growthcompanies anyway, and thus shouldnot constrain their business modelwith expectations from a previousstage in their history. Second, thereare real opportunities to generatesolid cash flow from services — andby services, we mean more than thebasic implementation and supportofferings that have been the staple ofthe industry. The increasingly blurredline between software and serviceshould spur a wave of innovation inthis area. New generations of serviceofferings will likely seamlessly com-bine labor-based and automatedvalue delivery. Some vendors will have

opportunities to leverage their intel-lectual property, and customer rela-tionships, to forward-integratebeyond the delivery of technical ser-vices and as far as business processoutsourcing — in essence, offering acomplete business solution to theircustomers.

Seeking a complementor positionAs vendors assess the threat ofmega-vendor platform plays, theymay decide that a complementor rolewill allow them to focus on theircore specialty. These vendors willface the decision of shrinking theirscope of activity and becoming inter-dependent with one or several plat-form vendors. Clearly, choosing theright platform and friendly partnerbecomes a "bet it all" proposition.

Re-invention or graceful exitAccenture sees that for many ven-dors hit by the perfect storm, rein-vention or exit will be a distinct pos-sibility. Exiting the market wouldmost likely involve selling to a con-solidator (as Siebel has done) or pri-vate equity firm. But many vendorsenjoy strong maintenance and sup-port cash flows that they may beable to leverage to transform them-selves (into Saas vendors, for exam-ple), so reinvention is another option.To be sure, reinvention or exit clearlyare drastic steps, and thus should beundertaken only after careful assess-ment of the competitive and marketdynamics.

ConclusionThe enterprise software industry longhas been defined by constantchange, remarkable innovations andexplosive growth. Yet as the sectorapproaches 40 years of existence andgrowth slows, many companies thathave been a vital part of the indus-try's past now face a wholly uncer-tain future. This is especially true ofcompanies in the middle of the mar-ket — those lacking the scale of themega-vendors and the efficiency andnimbleness of the disruptors. For

most of these vendors, encounteringthe "perfect storm" is not a matter ofif, but when.

With the sector at a major crossroads,business as usual will cease to be aviable long-term strategy for tradi-tional vendors. On the contrary, nowis the time for vendors to deeplyassess the market and their currentand prospective positions in it, andselect the strategy that makes themost sense for the company and itsshareholders — whether that strategyis industrializing the value chain,diversifying, moving into services,becoming a complementor, or exitingthe market altogether. As Accenture'sresearch shows, developing and flaw-lessly executing a strategy that clear-ly articulates a company's uniquemarket focus and positioning is avital building block of high perfor-mance. Failure to move now willimpede vendors' ability to achievehigh performance — and likely resultin unpleasant consequences when thegale finally hits.

30

Philippe Vincent is a Partner withAccenture's Communications andHigh Technology, and one of theleaders of its Software Strategy prac-tice. His work with Software vendorscovers a broad array of market facingstrategic issues as well as organiza-tional and operational issues. Philippe also spends significant focusacross the High Tech industry, onissues that center around the rela-tionship between IT and Business. Heholds an MBA from the HarvardBusiness School, a MS in MechanicalEngineering from the University ofCalifornia at Berkeley, and a Diplome d'Ingenieur from EcoleNationale Superieure d'Arts etMetiers, Paris, France. He is based inPalo Alto, California.

Tim Jellison is a Partner withAccenture's Communications andHigh Technology Strategy practice. Headvises companies seeking to createnew products and services, developcompetitive strategies, improve

operational processes, and managecomplex change. Tim focuses onstrategic issues facing high techclients, including software vendors,computer companies, and semicon-ductor manufacturers. For the pastfive years, he has focused exclusivelyon software. He holds BS (withHighest Honors) and MS degrees inMechanical Engineering from UCDavis and an MBA from Stanford University. Tim lives in San Francisco.

Bart Hughes is a Partner atAccenture and is currently managingAccenture's North America Media &High Tech Strategy Practice. Bartbrings over 17 years of experience ina variety of industry leadership andconsulting positions. His focus hasbeen on strategic planning and busi-ness architecture design/ implemen-tation for a range of technology-ori-ented organizations. Bart currentlyserves as a Foundation BoardMember for the Chabot Space &

Science Center in Oakland, CA. Heholds an MBA from Tuck BusinessSchool at Dartmouth and a BSEE fromSan Jose State University. He is basedin Palo Alto, CA.

Philipp Stauffer is a Senior Managerwith Accenture’s Communications andHigh Technology Strategy practice. Hiswork in the software and internetindustry covers both the enterprise aswell as the consumer space in corpo-rate and competitive strategy, corpo-rate development, organizationaldesign as well as operations on aninternational basis. Philipp has a signif-icant focus in technology convergenceareas as well as market and customerfacing disciplines such as marketing,channels and sales. He holds an MBAfrom the Wharton School and a MA inEconomics and Marketing fromUniversity of Applied Sciences, Zurich,Switzerland. He is based in SanFrancisco, California.

About the Authors

31

MethodologyAccenture interviewed 30 industryleaders for this research: CEOs, boardmembers, and other senior executivesat enterprise software companies,large and small, as well as venturecapitalists and other private equityactors in the space. Our team alsosurveyed 25 chief information officersacross industries in North America,for their perspective on evolving soft-ware trends. We wish to thank all ofour participants for their invaluablecontribution to this effort. Economicanalysis was based on a compilationof 5 years of market and companydata across all enterprise softwaresegments, for over 300 public soft-ware companies. Finally, our researchleveraged Accenture's deep businessand technology expertise in areas asdiverse as Mergers and Acquisitions,Service Oriented Architectures, NextGeneration IT Delivery Models, etc.

About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company. Committed todelivering innovation, Accenture col-laborates with its clients to helpthem become high-performancebusinesses and governments. Withdeep industry and business processexpertise, broad global resources anda proven track record, Accenture canmobilize the right people, skills andtechnologies to help clients improvetheir performance. With more than123,000 people in 48 countries, thecompany generated net revenues ofUS $15.55 billion for the fiscal yearended Aug. 31, 2005. Its home pageis www.accenture.com.

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