The enterprise software industry is not yet mature and may not even be maturing, but here are signs it is growing up. More demanding customers who have more choices than ever, consolidation and new competitive pressure on old business models and a set of new business opportunities are pushing the industry through a transition and transformation as radical as any in the industry's history.

Customers are not happy with their enterprise software vendors. Most customers do not use 80% of the applications functionality they buy. They cannot (or will not) modify their business processes to use all the capability of the software or find that much of it is just not relevant to their business. Yet they suffer from the complexity - and the too frequent updates - that goes with all that functionality.

Customers' infrastructures are too complex and, hence, too fragile and costly to maintain and operate. Standards have helped but vendors' efforts to differentiate have kept customers invested in multiple platforms.

For the first time in a long time though, though, customers are discovering an opportunity to simplify - open source infrastructure and custom development on an open source stack. 2005 may well mark the year that customers began to take back control of their IT destiny from the vendors.

On the supply side, scale is becoming more and more important. Larger companies can provide the level of global service and sales coverage that customers demand and they can afford the R&D investment needed to innovate. The capital markets increasingly are shifting investment dollars to the biggest companies.

However, bigger is also more complex. The acquisitions by the largest companies have allowed some savings in the overheads and go to market operations but not in the software platforms. The largest companies have a dozen or more incompatible code bases that will be difficult, expensive and risky to integrate. Even when integration is feasible, supporting important customers with older versions will be a challenge.

At the same time focused competitors are developing business models that spend less than 10% on R&D leveraging Indian and Chinese developers. This given them a ten percentage point advantage over the traditional leaders. Vendors offering hosted solutions and other "internet based business models" also have substantial cost advantages in service support and customers' total cost of ownership.

What will be the result of all this pressure for change?

First, winning vendors will take more responsibility for designing and driving the change in customers' business processes. They will get paid for these services and the domain expertise behind them. And, they will focus on those processes that are messiest and most ad hoc. Complex customer and supplier interactions and innovation processes that cross organizational boundaries are good examples.

Second, the product offering will consist of modules that can be mixed and matched to create 50% or so of the finished product with the rest being custom developed. Web services and service oriented architectures will be crucial technologies to enable this product evolution.

Third, vendors will offer a menu of ways to buy. They will offer hosted or premise based deployments and a choice of perpetual or term licenses or subscriptions and will vary the ratio of license to service costs.

It will take real innovation and hard work for the industry to move in these directions. But that is what will be needed to get the industry moving again.

Mike Nevens recently retired from his position as managing partner of McKinsey & Company's Global High Tech Practice. He currently serves on several high tech boards as well as the board of the Mendoza School of Business at the University of Notre Dame where he also lectures on information technology and corporate governance.