Software 2005 Conference: Software Industry Confronts Mid-Life
Thanks to M.R.Rangaswami, the rich agenda of top industry execs, CIO’s and pundits at this year’s Software 2005 conference delivered a bird’s eye view of our $50 Billion industry.
The big picture that emerged for me was of an industry in transition. Not an industry shrinking, but one struggling to accept modest growth instead of meteoric growth. Again and again the themes that came through were customers rationalizing technologies and vendors protecting profits or searching for business models that actually work. In one session, industry analysts took turns predicting what percentage of software vendors will disappear over the next few years. Estimates ranged from 60%-80% failure rates from Gartner and Aberdeen. The only good news here in my view is that the analysts may consolidate even faster than the vendors.
CIO’s railed against quality problems, greedy vendors and the pain of an “annuity model” (i.e. paying 15% maintenance every year) for software vendors. They were clear that their main interest these days is not the next big innovation but rather making what they already bought work together. This is probably the 10th CIO session I have heard like this over the past few years. They also admitted to rising budgets and that they are trying some new things, even from startups. For their part, the big vendors all pitched stability, security, integration, etc, allowing us all some time for naps. Gone are the days of big vision.
As expected, Software as a Service (Saas) and Open Source Software (OSS) were the most interesting new directions. Still, the CIO’s were hesitant to endorse either, instead putting toes in the water. “A few experiments going” or “makes sense, so we are studying it.” Big vendors paid SaaS and OSS some lip service and were lucky to not get the tougher questions on the implications long-term. Still, these areas hold promise for the CIO’s and analysts. Unlike past years, no one (vendors, CIOs or analysts) was betting against SaaS or OSS.
There were some signs of industry impact from OSS. The low-end app server is already “gone” according to Forrester’s John Rymer. Everyone builds on Jboss or something free. Unilever runs an entire country’s operation on an open source stack…and it works. BP did a huge Linux server conversion and saved big bucks. I perceive that we are were close to some adoption tipping point on this topic. Only last year, the tone was more hesitant, with most vendors and CIO’s waiting for someone else to make the first move. Now they all seem a bit defensive that they are not doing more toward the OSS vision. Look for more motion here. Once the fashion leaders move, the lemmings follow quickly.
To the surprise of no one, off-shoring was another enduring trend in the industry. Aberdeen claims that 90% of firms surveyed are doing some work in China. Forrester sees the trend only just beginning. Look for more and more software companies to do more and more outside the US, while IT shops do the same.
The CEO panel was a good microcosm of our industry. The discussion centered on such entrepreneurial topics as SOX compliance, M&A for success, ensuring profitability and employee retention. These were not fun, but show that this industry is maturing just as it should. Big players are getting bigger (I think this was what Chuck Phillips took an hour to say in his keynote, but I might have dozed off), and the customers are trying to avoid being locked in and continue to look to new vendors for new capabilities. One survey cited said that only 35% of customers would trust their current large vendors to add new components.
In all, middle age may not be all that bad for the industry. We all knew somewhere in the back of our heads that markets don’t double every year for to many years. Maybe the world never really needed the 300 supply chain management companies the VCs spawned. But now that there are only a 30 or 40, perhaps some can actually make money…
The big picture that emerged for me was of an industry in transition. Not an industry shrinking, but one struggling to accept modest growth instead of meteoric growth. Again and again the themes that came through were customers rationalizing technologies and vendors protecting profits or searching for business models that actually work. In one session, industry analysts took turns predicting what percentage of software vendors will disappear over the next few years. Estimates ranged from 60%-80% failure rates from Gartner and Aberdeen. The only good news here in my view is that the analysts may consolidate even faster than the vendors.
CIO’s railed against quality problems, greedy vendors and the pain of an “annuity model” (i.e. paying 15% maintenance every year) for software vendors. They were clear that their main interest these days is not the next big innovation but rather making what they already bought work together. This is probably the 10th CIO session I have heard like this over the past few years. They also admitted to rising budgets and that they are trying some new things, even from startups. For their part, the big vendors all pitched stability, security, integration, etc, allowing us all some time for naps. Gone are the days of big vision.
As expected, Software as a Service (Saas) and Open Source Software (OSS) were the most interesting new directions. Still, the CIO’s were hesitant to endorse either, instead putting toes in the water. “A few experiments going” or “makes sense, so we are studying it.” Big vendors paid SaaS and OSS some lip service and were lucky to not get the tougher questions on the implications long-term. Still, these areas hold promise for the CIO’s and analysts. Unlike past years, no one (vendors, CIOs or analysts) was betting against SaaS or OSS.
There were some signs of industry impact from OSS. The low-end app server is already “gone” according to Forrester’s John Rymer. Everyone builds on Jboss or something free. Unilever runs an entire country’s operation on an open source stack…and it works. BP did a huge Linux server conversion and saved big bucks. I perceive that we are were close to some adoption tipping point on this topic. Only last year, the tone was more hesitant, with most vendors and CIO’s waiting for someone else to make the first move. Now they all seem a bit defensive that they are not doing more toward the OSS vision. Look for more motion here. Once the fashion leaders move, the lemmings follow quickly.
To the surprise of no one, off-shoring was another enduring trend in the industry. Aberdeen claims that 90% of firms surveyed are doing some work in China. Forrester sees the trend only just beginning. Look for more and more software companies to do more and more outside the US, while IT shops do the same.
The CEO panel was a good microcosm of our industry. The discussion centered on such entrepreneurial topics as SOX compliance, M&A for success, ensuring profitability and employee retention. These were not fun, but show that this industry is maturing just as it should. Big players are getting bigger (I think this was what Chuck Phillips took an hour to say in his keynote, but I might have dozed off), and the customers are trying to avoid being locked in and continue to look to new vendors for new capabilities. One survey cited said that only 35% of customers would trust their current large vendors to add new components.
In all, middle age may not be all that bad for the industry. We all knew somewhere in the back of our heads that markets don’t double every year for to many years. Maybe the world never really needed the 300 supply chain management companies the VCs spawned. But now that there are only a 30 or 40, perhaps some can actually make money…
Software as a Service
I have been watching software pricing models struggle from my time on the Oracle pricing committee in the late 80's to being a CEO with a subscription model in 2000, to being a VC looking for SaaS investments today. I think this is both a very promising area for investment and also an area that requires careful selection.
1. The vast majority of enterprise software does not lend itself to SaaS pricing. I wish it did, but it doesn't. My thought is that the only time you are likely to succeed with a use-based model is when the vendor is continuously delivering new value and service beyond the traditional software upgrades. Many enterprise apps categories don't really do this. Companies buy an app, customize it to their unique needs, and try not to change it. This applies in general to Supply Chain (too much custom integration here to use a vanilla app) and ERP (also the need for secrecy and security favors a behind-the-firewall model). Why has CRM succeeded for SalesForce? Because the best practices sales process is very similar across many companies AND the hosted architecture is a natural for geographically distributed sales teams. I have bought SalesForce for 3 companies now and barely had to modify it ... perfect for SaaS. Other software types which do not favor SaaS are all forms of middleware or many infrastructure products like Network Mgmt.
2. The cheapest alternative for the customer is often a license. When selling subscription software, I have often been told by CIOs that "we can start off on a subscription, but if this thing really takes off, I will need to bring it in-house." This is due to both security issues as well as a realization that if the CIO can lock in a price one time, he will likely pay less in the long run. Hell, this is the way CIOs have been buying software for the last 20 years, so don't expect them to easily accept a perpetual stream of payments forever - especially when many subscriptions are set to one third of typical perpetual license prices. That math is pretty easy. CIOs often say that they simply need to have perfect cost visibility over time. While I understand all the arguments against this view, most still feel uncomfortable signing up to big annual subscription payments that will inevitably lapse and set up a renewal renegotiation wherein the vendor has too much leverage.
3. All this will change, but slowly. I have been looking for investments in SaaS over the last 3 years and have seen a few areas that truly do favor a subscription model. I have seen a few lead management companies like Blue Roads in San Mateo that offer a hosted system to track and distribute leads to partners. The hosted service is a perfect architecture for this problem, since the IT group really doesn't want 10,000 partner sales reps all tunneling through their firewall to get to their internal CRM system. There is high value in Blue Roads running this system 24 x 7, and for it, one pays a subscription fee. Similar stories apply to hosted PLM companies that allow design partners or supply chain partners to collaborate on products or bills of material. Our newest investment for WaldenVC is a company called Palamida. Every night, the Palamida system spiders the Internet to find more new software components, many of them open source. It then allows software developers to identify what components they have in their own code bases and what licenses might apply. As we all know, the dirty little secret of enterprise software is that no one really knows exactly what is in a large code base. Now there is a way to find out. Like an anti-virus system, the value of Palamida is only realized with a continuous process to audit code and look for newly added components. Thus, the system is purchased as a subscription just like anti-virus. Again, the architecture fits the SaaS model ...
I hope I see more markets start to accept SaaS, but progress will be slow, since many companies own their software outright and have fear about cost visibility or value. Look for SaaS to take off where it makes sense and in new areas where old investments are not still being depreciated.
1. The vast majority of enterprise software does not lend itself to SaaS pricing. I wish it did, but it doesn't. My thought is that the only time you are likely to succeed with a use-based model is when the vendor is continuously delivering new value and service beyond the traditional software upgrades. Many enterprise apps categories don't really do this. Companies buy an app, customize it to their unique needs, and try not to change it. This applies in general to Supply Chain (too much custom integration here to use a vanilla app) and ERP (also the need for secrecy and security favors a behind-the-firewall model). Why has CRM succeeded for SalesForce? Because the best practices sales process is very similar across many companies AND the hosted architecture is a natural for geographically distributed sales teams. I have bought SalesForce for 3 companies now and barely had to modify it ... perfect for SaaS. Other software types which do not favor SaaS are all forms of middleware or many infrastructure products like Network Mgmt.
2. The cheapest alternative for the customer is often a license. When selling subscription software, I have often been told by CIOs that "we can start off on a subscription, but if this thing really takes off, I will need to bring it in-house." This is due to both security issues as well as a realization that if the CIO can lock in a price one time, he will likely pay less in the long run. Hell, this is the way CIOs have been buying software for the last 20 years, so don't expect them to easily accept a perpetual stream of payments forever - especially when many subscriptions are set to one third of typical perpetual license prices. That math is pretty easy. CIOs often say that they simply need to have perfect cost visibility over time. While I understand all the arguments against this view, most still feel uncomfortable signing up to big annual subscription payments that will inevitably lapse and set up a renewal renegotiation wherein the vendor has too much leverage.
3. All this will change, but slowly. I have been looking for investments in SaaS over the last 3 years and have seen a few areas that truly do favor a subscription model. I have seen a few lead management companies like Blue Roads in San Mateo that offer a hosted system to track and distribute leads to partners. The hosted service is a perfect architecture for this problem, since the IT group really doesn't want 10,000 partner sales reps all tunneling through their firewall to get to their internal CRM system. There is high value in Blue Roads running this system 24 x 7, and for it, one pays a subscription fee. Similar stories apply to hosted PLM companies that allow design partners or supply chain partners to collaborate on products or bills of material. Our newest investment for WaldenVC is a company called Palamida. Every night, the Palamida system spiders the Internet to find more new software components, many of them open source. It then allows software developers to identify what components they have in their own code bases and what licenses might apply. As we all know, the dirty little secret of enterprise software is that no one really knows exactly what is in a large code base. Now there is a way to find out. Like an anti-virus system, the value of Palamida is only realized with a continuous process to audit code and look for newly added components. Thus, the system is purchased as a subscription just like anti-virus. Again, the architecture fits the SaaS model ...
I hope I see more markets start to accept SaaS, but progress will be slow, since many companies own their software outright and have fear about cost visibility or value. Look for SaaS to take off where it makes sense and in new areas where old investments are not still being depreciated.
The Online Advertising Opportunity
A good story on NPR's Morning Edition about the shift in advertising dollars from traditional to online media.
Rx for Online Adverting - BlueLithium
BlueLithium has received a great deal of press attention around its recent funding announcement. We are pleased to be working with our partner 3i on this very exciting deal.
Subscribe to:
Posts (Atom)