Enterprise software: a new beginning
The choice is there for manufacturers to build, buy, rent, or outsource applications of choice
By Erik Keller, Wapiti LLC -- Manufacturing Business Technology, 7/1/2006 12:00:00 AM
Common wisdom about enterprise software is just plain wrong. Buyers have more options than ever to build, buy, rent, or outsource enterprise applications.
Starting in the early 1990s, a booming enterprise-software market created many application players that became the new IT hammer to solve technology/business problems. Though many delivery mechanisms were possible, by the mid-'90s, buying a pre-packaged application became the preferred way to solve a process problem, such as order-to-cash.
During the '90s, the business problem of order-to-cash was solved by purchasing three types of applications, engaging in costly and cumbersome integration, and finally getting to a solution. While this approach solved the problem, it created others. The largest was the fact that buyers did not recognize the cost and expense of reconfiguring pre-configured applications to meet the needs of business. Nor did they recognize that application support and upgrades would consume increasingly large portions of the IT budget.
This cost and complexity, combined with the growing footprint of some large software providers, led to the late-'90s focus and strength of enterprise suites. But this did not solve all the aforementioned problems.
Our buying eyes
These issues—as well as market maturity and the emergence of a new generation of Web-based tools—have led the market to an inflection point today. In fact, in the eyes of many buyers, the same catalysts—e.g., long time-to-market, high expense, and low quality—that sent them scurrying in the early '90s from in-house, IT-led efforts to application providers is sending them today from large suite sellers to a new set of choices. When a buyer is looking to solve an order-to-cash problem today, many choices are available.
These are the four options available (also see table):
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Build. Interest is accelerating in building applications using new composite-application tools in-house or via an inexpensive, high-quality organization—e.g., "India Inc." In many nonmanufacturing industries, this approach continues to dominate.
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Buy. This has been the common approach for many years, either through the purchase of suites or best-of-breed (BOB) packages.
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Rent. This approach has been used for many years via hosting or an alternative provider. Emergence of new players and the buzz around software as a service (SaaS) is gaining market traction.
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Outsource. Some companies are opting to let others run key processes for them via business-process outsourcing or strategic sourcing.
Clearly not all of these choices will be used for the entire application portfolio. But this proliferation of choices dramatically alters market dynamics in that buyers have more, rather than less, choices than ever before when looking to automate key business processes. It is not yet well understood by the market whether a combination of new technology offerings and business-unit willingness to accept standardized processes is pushing buyers to consider all four options.
Change is in the air
In many ways it should come as no surprise that buyers have slowed their desire to buy software, and are reexamining numerous options. Perhaps the most "man bites dog" fact is that buyers have more readily turned away from buying applications toward building customized ones.
A buyer has two choices when deciding to build applications: The first is to build in-house, and the second is to use outsourced or offshore (again, such as India Inc.) resources. This second option is becoming more desirable due to service-oriented architecture (SOA)-based composite application tools; Web services; low-cost, high-quality labor; lack of cost-effective applications for new business processes; and supplier-customer diversity and reach.
For example, companies such as Cordys, founded by Jan Baan, are creating tool kits to build complete applications out of 70-percent solutions based on component applications using SOA technology. Such approaches complement the expanding resources and quality solutions available from India Inc.
Recent corrections to BEA numbers show the inflection point for build-versus-buy came in 1999. Prior to 2000, the trend was toward increasing buying at the expense of building. By 2004, less than 30 percent of all capitalized software was pre-packaged at the expense of rapidly growing investments of internal groups building solutions.
Interestingly, expenditures on external providers have been dropping both as a percentage and absolute of software capital expenditures. Price cuts due to offshoring and post-bubble economics are the most likely reasons for such a drop.
Downward BOB
The traditional category of purchased applications will undergo the largest change in buyer's eyes. There also are two choices in this category: companies can buy best-of-breed (BOB) applications, or a single suite, to solve a given problem. This is the status-quo choice that dominates the market today, which is threatened by other choices made available to the buyer.
Specifically, BOB solutions are under threat due to the increasing dominance of the suite vendors, and customized offerings from India Inc. Application sellers find that their selling model with high up-front license cost and long-term maintenance payments of 20 percent per year is being more highly scrutinized and rejected by buyers.
Thus BOB as a purchased piece of software will see fewer and fewer buyers. This is not to say that "niche" applications will go away, but rather that buyers will look at other less capital- and more expense-oriented ways to acquire niche functionality—unless they decide to build it themselves.
As consolidation shrinks the number of suppliers, these companies will find it more difficult to grow in the manufacturing sectors, as they are already penetrated with a large installed base of manufacturing suites. The opportunity for these vendors (and buyers) is to acquire application technology that resides around the edge of ERP and supply chain functionality such as price management, supplier management, and service management.
Renting you can live with
The two choices in this category are alternative service providers (ASP) and hosting; and SaaS.
Renting is confusing to buyers today as there is a pricing component of renting (subscription); and a technology component to providing software as a service.
From a pricing perspective, renting applications (or a service) is a licensing scheme that rents a product (via expense budget) rather than sells software (via a capital budget) to a buyer. This model has been used for decades for ASPs and hosting services, which can occur at the customer site or remotely. The software used for ASPs and hosting often is the same as used for companies that are buying applications.
On the other hand, SaaS involves the delivery of software over the Web or virtual private network (VPN) as a specialized service to the client, and uses a much different technology and approach than traditional applications. For companies such as Salesforce.com and RightNow, SaaS represents a new technical and delivery platform that is much simpler to maintain than traditional enterprise applications. Both the ASP/hosting and SaaS subscription models are gaining in popularity as they offer low up-front payments and risk since sellers are not paid until a system is installed and working.
The largest question vexing most buyers today is how far this option can go. It may be fine for focused functions and processes, such as sales-force operation, but when a wide variety of online and legacy data needs to be integrated and available, it is far from clear how well SaaS can grow. For buyers it represents a low-risk, short-term decision—but a higher-risk one longer-term.
Regardless, all enterprise software sellers are looking at renting as one of enhanced growth and offerings. The recent acquisition of sourcing vendor Frictionless Commerce by SAP is but one of many ways "traditional" software vendors are reexamining their delivery mechanisms.
Outsourcing finds favor
The final two choices are business-process outsourcing (BPO) and strategic sourcing. BPO is a popular choice for companies looking to cap IT expenses for a given business process. By ridding themselves of IT operational issues, companies believe that they can better manage the cost of key processes.
Strategic sourcing also is proving popular for outsourcing a procurement, HR, or manufacturing process to a third party. For this choice, the buyer has no need for software or a service that applies to that process.
The idea of focusing only on core processes and skills is gaining momentum. The associated movements of BPO and strategic sourcing are gaining revenue and share among providers as buyers realize that others can deliver processes with higher quality at a lower cost than they can.
Rather than a simple choice, software buyers now have four distinct avenues to review and deploy enterprise software. By picking the right combination and configuration of these choices, manufacturers will have the best of all worlds by enhancing and focusing IT investments where they are needed.
