BOSTON -- This year, the top 10 application vendors will generate more than 50% of the industry's revenue. The top five vendors will claim nearly 80% market share.
Is the fast and furious consolidation in the enterprise software industry stifling innovation in application development?
AMR Research Inc. analyst Jim Shepherd is worried. "You have SAP and Oracle moving into adjacent application spaces and cutting off the oxygen," he said. Shepherd was a speaker at AMR's recent Executive Leadership Conference, where ERP customers were in abundance. Asked if the Oracle Corp./PeopleSoft Inc. deal was a good thing, Shepherd's answer was an unequivocal no. "In the end it didn't benefit people for Oracle to get bigger. A lot is lost by being absorbed."
Meanwhile, the venture capital that poured into ERP software startups during the last boom is being funneled to other ventures now, from biotech to Web 2.0. Where will the new ideas come from?
Innovation tends to spring from small companies, Shepherd believes. The large ERP vendors say they are committed to innovation, but "development that is used to expand into new markets in order to fend off competitors," does not often translate into breakthrough applications, he said.
Mega players are "fast followers," Shepherd said. They scout the marketplace to see which niche applications have succeeded and either copy or acquire to fill that space, leaving little room in the ecosystem for other players.
This is the U.S.
Ray Barnard, CIO of Fluor Corp. in Irving, Texas, shrugged off Shepherd's application development concerns. "I don't believe innovation is dead. This is the USA, for chrissakes; it's not going to happen," said Barnard, who was on a conference panel billed as the "World's Toughest Customers." He was not worried about niche players being swallowed by the big guys. "If you're good, go hook up." In his view, Oracle is working hard to bring on the PeopleSoft and J.D. Edwards & Co. customers.
While Barnard has faith in American ingenuity, it's clear he takes a realpolitik approach to vendor relations. When IBM "outsold what they could do" on its on-demand offering, Barnard "restructured the contract and drove down costs," he said. Nor does he take any guff on maintenance. "I'm a maniac on maintenance agreements -- three years and negotiable every year, he said. "Hustling is a thing of the past. You can't hustle people who spend a lot of money."
He takes an equally hard-line approach to company operations. Fluor IT is willing to outsource "just about everything; nothing is sacred," he said, except architects. But he also insources when he becomes unhappy with a supplier's performance, as he did recently when he took back control of outsourced IT operations for Fluor locations in Australia and Chile.
Panel member Tom Fisher, vice president of IT at San Diego-based wireless provider Qualcomm Inc., takes a more jaundiced view of some recent ERP consolidations, such as Novell Inc.'s collaborative deal with Microsoft. "They're dead. They just got brought into the wolf's lair," Fisher said.
SOA to the rescue?
AMR's Shepherd was not all doom and gloom about the future of application development. The industry is transitioning from a monolithic architecture that achieved integration by building around a single database to moving "as quick as it can" to service-oriented architecture.
The changing paradigm might be friendlier to innovative vendors. "It should be easier to publish specifications and encourage third parties to build plug-compatible applications that look and feel like ERP applications," he said. But to really keep the ERP space rolling, suite vendors still must figure out how to go to market with their smaller suppliers, as have Dell Inc. or Mercedes-Benz, two companies where 70% of the content is made by someone else.
The definition of an "industry solution" grows narrower all the time, Shepherd said. Food is considered distinct from beverage, and even the beverage industry segments wine from beer. "I don't believe that any of these big resources -- even an SAP with $1.5 billion of research -- can build a suite with that kind of segmentation," he said. Or, for that matter, move fast enough to meet a new market demand, given that it takes at least 18 months to two years before a big ERP vendor can respond to customer requirements. The nimbleness is not there. "SAP cannot do everything themselves, despite great engineering," Shepherd said.
In fact, he's down on vertical integration, period. Owning the entire value chain puts companies in possession of a lot of overhead, as the heirs of Henry Ford discovered, he said. "Vertical integration fundamentally is not a sound business strategy. Application vendors need to face up to the fact."
Let us know what you think about the story; email: Linda Tucci, Senior News Writer.