Followers of the enterprise software industry are likely now tired of the cacophony of predictions about the maturing (!) and rapidly consolidating industry. In reality, the race to serve the biggest of all opportunities that is currently hot vis-a-vis the mid-market/emerging market (SME) segments is helping different breeds of vendors to survive and gives a different face and color to the enterprise software industry.

In many ways such vendors hold the decisive swing influence in the changing face of the industry. The SME markets are all characterized by a different set of characteristics in technology selection and absorption. The distinctive factors between the aspirants, contenders and pretenders of the enterprise software industry trying to work in this segment are quite interesting to watch. The landscape of the enterprise solutions is still dotted by the all-rolled-in-one type of solution players to niche focused players with well defined solutions. The irony is that such players are running the risk of being marginalized - not just by the natural law of economic forces alone - but by the inelegant, self hurting greedy designs of the mega vendors/their stakeholders.

While the top-tier vendors boast of wide-ranging integrated functionalities with deep pockets and well-oiled organizational machineries spanning global coverage for sales & marketing, research & development with a well established customer base - the flip side of these players as seen by the SME segments are the undue complexity of the these mega vendor products and coming at high price levels - after all too complicated and overstuffed functionalities induces risks and makes the return & benefits out of such investments debatable/doubtful.

The set of vendors playing the role of "consolidator" is seen as growing by acquiring small, medium, low growth, fading enterprises - mostly surviving with their maintenance and service revenue streams. These are clearly risky for adoption from an integration perspective and the generally poor track records of data modeling capabilities make the task tougher, longer and cost ineffective - these do not and can not go unnoticed by potential customers.

Mergers facilitated by supplementary and complementary capabilities of the constituents like pockets of strengths as seen in geographical point of presence or vertical domain strengths or technology advances may seem to make a good case for coming together - these are facing integration challenges and are increasingly beginning to be seen as loose collection of solutions - an anachronism in the rapidly demanding world of global solutions. The set of vendors trying to grow organically adopting a focused growth approach by staying close to roots are also seen as becoming less and less financially robust casting doubts about sustaining their models of operation.

While the top-tier vendors boast of wide ranging integrated functionalities with deep pockets, specialized solutions like PLM, SRM, MDM, Content management, BPM, Document management, Compliance solutions, Vertical solutions coming from best - of - breed players continue to remain attractive to buyers of different spectrum. The mega vendors are trying to counter this competition with promises of rapid deployment methods and attractive packages of fixed time, fixed price based accelerated rollouts with templatized approaches. Again for reasons centered around concerns of integration and cohesion, even these options are proving to be seen less attractive by prospective buyers. Prefabricated/Cookie-cutter/fixed term/price - all look attractive on paper, in real sense these do not satisfy the prospects, despite these being SMEs. This forces onerous responsibility on the mega vendors to offer solutions that are not only cost effective, less complex and faster to implement but offer open solutions that can be extended over time and be amenable for efficient version and technology upgrades.

With all this - why is the consolidation fever repeatedly felt? Historically application vendors have grown by selling licenses by opening accounts - but alas this is not the trend any more. There are no more Fortune 1000 enterprises that have not bought/ implemented leading edge enterprise solution and so the message from the market is that the traditional approach of enterprise software vendors may not be relevant anymore. Their goals are shifting towards maximizing marketshare and begin to offer niche solutions - albeit integrated with their core offerings. The key choice available before the vendor is acquisition here. The revenue streams now shift from creating new accounts to up selling, cross selling, offering solutions across the stack, besides enhancing the reach of support and services - either case having a large and wider customer base becomes a sine qua non.

Wider reach, operational efficiencies, annuity revenues from large customer base besides some marginal revenue accruing out of acquiring the smaller firms operation, by definition would constitute the operational model for the mega vendors. The economy of scale (current indications - more than 20,000 customers) and the prohibitive switching costs for customers would be the key reasons that the mega vendors would continue to survive. The mega vendors have tasks cut out in front of them when they go in for acquisitions -integration, essentially the ability to develop technical frameworks, methodologies & tools to support varied business demands - all these need to happen quickly post acquisition. More often than not these vendors need to invest substantial time, money & efforts to make this happen. Just as switching costs are prohibitive for customers, integration costs are quite high for vendors - the money paid for acquisition is only one part of the cost. The invest, maintain and grow model for the acquired technology/solution too often sucks in more money from the mega vendors

Emerging markets shall continue to fuel the license growth rates for the mega vendors and with the near flat growth rates for the mega vendors in terms of license revenue growth, mega vendors shall begin to focus on innovation and new grade solutions. While these are the trends and approaches seen for a while in the enterprise software segment, what we need to notice is the trend that these consolidation are effecting more than reducing the number of players in the enterprise applications field, it is contributing to the widening the gap between application/infrastructure mega vendors and pure-play application providers.

Today the mega vendors have capabilities that span both the applications and the infrastructure that are needed to run them. Some best-of-breed players are leveraging this infrastructure and are beginning to offer components/solutions centered around them as well. Looking forward, the trend may get increasingly stronger. With such alliances getting stronger, those who have not joined such a bandwagon are increasingly feeling isolated - as this is more than likely to have a bearing on their competitiveness and business survival. This would mean that mega vendors may begin to focus more and more on infrastructure and less and less on applications given the fact that they have already invested heavily in applications and the other players in their ecosystem are more than willing to develop such applications. That's the conventional view but the downside is innovation and R&D for the applications are effectively outsourced (say the invisible/unconventional route) and such arrangements always come with associated risks - the principal in such an arrangement - the mega vendor can simply buy it out and integrate them into the already wide and big application suite(s). Of course this is akin to cutting the roots of the ecosystem - but the counterview is that in practice not everyone/everything gets acquired.

There is a crying need now for a new structure for the enterprise software ecosystem wherein the smaller members can participate and benefit in a fair manner from the opportunities that are arising in this space. Brutal waves of consolidation, investor reluctance to fund enterprise software startups, the not so firmed up patterns on corporate buying of enterprise software - all have gone to directly affect the prospects of a number of small software companies. This is ironic considering that invariably we have seen in the last several years that faster rollouts to market, innovation, specialized niche solutions all have come from this stable - making the software space a vibrant and progressive one. We are not seeing the growth of such firms focusing on "nichified" solutions and this is certainly not an encouraging trend. In the age of composites and SOA, these smaller firms are important constituents to make things roll. This is leading to a grave situation:

A. The mega vendors would find it increasingly difficult to keep rolling out/supporting specialized solutions and still feel satisfied about the investment returns

B. The customers may not find the terms of sale of such software/solutions to be reasonably priced and may find them inflexible in their approach.

Seen from a customer perspective, clearly they are not too enthused with the behavior of the mega vendors. While customers naturally would like to deal with vendors who are more stable and profitable, in reality they also want more choice. In the choice vs transactional costs debate, customer in general vote mostly for choice. Mega vendors seen to be restricting availability of wider choices are clearly losing the relationship value with their customers. Part of the reason that business looks at Open source, SaaS lay here - these provide choice and come from different set of players than they usually deal with.

The damage can go deeper - by more or less transferring the responsibility of application development to small players and begin to operate with the philosophy of throw money to acquire and progress, the mega vendors run the risk if not investing/fuelling in application development initiatives that could lead to innovation - the only long lasting license for survival. With limited ability to innovate in an applied way, they run the biggest of all the risks - losing their market share (the very core to their survival as we saw earlier). It would be impossible to gobble up every upcoming innovative firm (in some cases, these may also get funded by competitors to further complicate things) - these could foster the seeds for disrupting the existing industry structure. Rumblings are beginning to get heard along these lines already.

What all this could lead to: in the medium to long term, the leadership status that the mega vendors want to hold on to may slip away - faster than it took for them to build. After all being in touch with the application ecosystem, matching customer expectations are a basic requisite for enduring success and fostering innovations. Clearly, the enterprise software market will have to reflect and embark on an important restructuring and transformation to become more vibrant, broad based, innovative and bounce back as a serious contributor to the growth of the industry ecosystem and the business at large.


S. Sadagopan, heads consulting and eBusiness for Satyam in the Asia Pacific, Middle Eastern and African markets based out of Singapore. He has led several consulting and technology transformation engagements covering multiple industries cutting across a wide variety of technologies around the world. His blog is focused on emerging technologies & trends. These are his personal views.