Web, Schweb - Enterprise Predictions for 2006

Over the last couple of weeks it has been good to see so many bloggers make their forecasts about 2006.  But - most  are about Web 2.0 - Google this, Flickr that. Of course, with Apple and amazon.com enjoying a bumper holiday season, the focus on consumer technologies is only accented.

Much as I love Google, it cannot process BOMs for the average manufacturing company. Much as my daughter loves her iPod, it will not process insurance claims. Whoever does whatever with AOL will not improve supply chain logistics at UPS.

As we did in the last Internet Bubble, we risk making the Web and consumer technologies the center of the technology world. It’s the Gates/Plattner scenario again I wrote about earlier. As I wrote in Florence during the Renaissance, innovation is happening in a number of other areas which CIOs are actually much more excited about - especially at amazing new price points. Also as I have said over and over again this year, many elements of enterprise technology spend are grossly overpriced.

So, here’s my forecast for next year - good and bad - with more of an enterprise focus:

1) SAP, Oracle and Microsoft (around enterprise software) will have poor years as pricing pressure intensifies on core products and particularly on maintenance revenue streams. SAP will de-emphasize its web services talk and go back to focusing on applications and business payback. Oracle will go the other way and talk more about architectures as it masks the enormity of rationalizing its various application acquisitions. CIOs will increasingly question if all they are doing is subsidizing Microsoft's focus on Google.

2) We will see version 2.0 definitions of  CRM,  SCM,  HRM etc emerge which will a) redefine process coverage (e.g. CRM is more than SFA and call centers) that the market leaders have chosen to define the categories as and b) utilize appropriate, newer technology building blocks  - GPS,  RFID, RSS in the category re-definition process.

3) CIOs in many non-manufacturing verticals will tire of waiting for robust software solutions for their major engines (claims processing, trading systems) and more aggressively look at BPO options to support these processes. These CIOs, especially in financial services verticals, will pioneer attempts to leverage web 2.0 driven discovery and social networking tools with their enterprise applications.

4) An infrastructure vendor - likely Dell or Sun (as it tries to redefine itself) - will introduce infrastructure outsourcing at aggressive, "utility" price points to cover a wide range of network, database, desktop and other services. In its hype cycle for outsourcing Gartner defines infrastructure outsourcing as one of the most mature. As systems management automation and offsite, shared labor models mature, an efficient services "supply chain" becomes much more viable.

5) A generation of “appligators” will emerge - small systems integrators which specialize in innovation areas like web services or telemetry and willing to work with clients in small, intense teams. We will not be able to tell till 2007 if they are of a more modest breed than their predecessors, the Scients, Viants around the ebiz boom in late 90s.

6) Large US and European outsourcers (EDS, Accenture and by extension IBM, HP etc) will find themselves squeezed between a) private equity firms who want to take their valuations from 1 or 2X revenues to close to 10X many of the Indian vendors enjoy and b) CIOs who want price points much closer to what Indian vendors can quote. This will force these outsourcers to finally get serious about becoming much more efficient with automation, global delivery models etc. They will find Indian vendors expanding into horizontal process consulting and BPO (finance, HR) beyond their traditional IT competencies.

7) China will look beyond hardware and start to flex its muscle around software and services.  Chinese firms in these categories will start to raise significant capital and make small acquisitions in the US and Europe to acquire customer channels.

8) SaaS models will come under increased scrutiny from buyers about stringent SLAs and business continuity plans. In 2001, after the India/Pakistan nuclear war threat, Indian vendors  went through a similar spike in scrutiny. After last week's well publicized outage at salesforce.com, this will become a required due diligence step in evaluating SaaS options. The scrutiny helped Indian vendors mature - it will similarly increase corporate confidence in SaaS.

9) CIOs will do serious "spend management" around storage (due to proliferation of volume demand) and telecommunications (due to proliferation of mobile, broadband and other products) investments.

10) CEOs will start lobbying Congress to back off on the compliance burden and pressure their CFOs to significantly streamline and justify compliance spend. The SOX gravy train for software vendors and auditors will slow down.

This plus 6 quarters may buy you a cup of coffee at Starbucks! A version customized by Zodiac signs is planned soon...

Author Note: Sandhill.com carries a slightly modified and expanded version of my 2006 Enterprise IT projections here.

Comments

[Jason Busch]

I'm curious about any additional insight and thoughts you might have on Oracle / SAP maintenance price pressure in 2006 ... are we talking about a .5-1% drop in average maintenance fees for new agreements, or do you think this is something bigger? ALso, how will this impact best of breed competitors who have already shifted to an on-demand model like Ariba and SF.com. Last, a prediction I might add to your list as well is that the challenge will be not just to traditional software pricing models, but the structure of how companies buy software themselves (e.g., will 2006 be the year of greater creativity on the financing side of software deals?)

[Phil Patterson (be email to Vinnie Mirchandani)]

Vinnie, great material, thanks for sharing. I think one area you might have missed the the 'digitazation' of the supply chain as more sensors, GPS, and RFID devices are deployed to monitor business processes. The sensors/GPS/RFID devices will move us ever closer to the much discussed and desired 'real-time' enterprise - both in commercial businesses and in military applications. A great amount of data will be generated from these devices as IT literally moves to the shop floor, warehouse, sales floor, battlefield, vehicles, etc. Enterprises and military units that can take this data and apply traditional and break-through analytics to make sense and understand it all will be able to make process and inventory changes on the fly which should provide a first mover competitive and tactical advantage to those that get it right.

[From a CTO of a $ 3b company (via email to Vinnie Mirchandani)]

Regarding Oracle/Peoplesoft and their focus on architecture, I agree they are going to need to start truly articulating what Fusion will look like, from an architecture and projected upgrade (tactical) perspective. Most of us are very skeptical of Oracle's ability to integrate the two platforms in the timeframe they have spoken about. Most of us just think that, having spent Millions upgrading to the web version of Peoplesoft a few short years ago, now we'll be forced to do another multi-million dollar upgrade to Oracle Fusion. We also expect that Oracle's answer, as was Peoplesoft's during their major last upgrade, will be to hire tons of consultants to help with the upgrade, rather than providing any tools to handle data conversion, process conversion, etc. Most of the CIO's I know will utilize this 'upgrade notice' to go to RFP and see what SAP, Microsoft (for smaller mid-size businesses) have to offer. With SAP giving license-credit, it becomes a wash from an upgrade cost perspective, so why not look closely at your alternatives?

As for how most of the CIO's I know are handling maintenance, we're either not paying it, paying only a portion of it (only certain modules), or we are going to 3rd party maintenance providers like TomorrowNow, and saving multiple hundreds of thousands in the process. It is no longer worth the money vs. the risk to pay for maintenance on products which are not (1) customer facing, or (2) regulatory required. Anything back-office is open to cutting/changing the model. Obviously your financials, for a public company, are very critical from a SOX perspective, but that doesn't prevent you from going to a 3rd party maintenance firm.

Lastly, I hardly know any large firms (5000+ employees) today that are paying for Software Assurance from Microsoft. With the amount of patching, network upgrades, security/intrusion deployments, server & pc lockdown practices, server consolidation, et al, we all just don't have time to be doing wholesale upgrades to our large customer base for Microsoft Office/OS during the timeframes for which Software Assurance requires. It's not actually the rollout, it's the training of our user base that is the limiting factor. With the average corporate user probably only using <5% of the functionality of Outlook/Office, why upgrade to get 1000+ new features, of which the average user will use <50. Worse, we still have to do extensive training of everyone to enable a user to be able to do the functions they previously performed in Outlook/Office, because Microsoft changes previous features with every new release. Combine that with trying to train everyone on the new features, and you can see why this isn't a corporate imperative for anyone I know. The productivity loss in year one is certainly not made up by the productivity gains of going to the new suite of software, at least not in the opinion of myself and most people I trust.

[Louis Columbus]

Vinnie, your enterprise predictions for 2006 are great and got me to thinking about how transitional the coming year is going to be. SAP, Microsoft, Oracle and many other enterprise software companies will start relying heavily on ERP extensions to make up for the shortfall in maintenance revenue, including CRM,Supplier Relationship Management(SRM), Product Lifecycle Management(PLM), in addition to several others.
On your second prediction of version 2.0 definitions and the use of newer technology building blocks for CRM, SCM and HRM, adding analytics to the mix makes sense as it’s becoming foundational to many business processes and strategies. From the CIOs and business owners I’ve spoken with, analytics is quickly becoming a must-have for them, as the need for knowing what’s going on in their supply chains, distribution channels and cost variations is driving their application spending.
I think you hit on a major market dynamic in your third prediction. It’s clear that Indian outsourcers could acquire smaller companies with services vertical focus to accomplish the unmet needs you describe.
Relative to your prediction on China becoming more software and services focused there’s much work going on by Infosys as it announced earlier this year plans to hire 6,000 employees, up from just 250, and invest $65M in a development center.
Clearly the pressure for outsourcers to get their valuations up to nearly 10X is driving the European BP market specifically. Fujitsu Services’ strategies throughout the UK and Europe is an example of one outsourcer trying to bring valuation and competitiveness up relative to global competition.
Vinnie, I hope you and your family have a Happy New Year and thanks for the excellent content your blog delivers. It’s great reading!

[Vinnie Mirchandani]

Jason, I think the CTO comments above summarize the trend. If a buyer believes he does not need future upgrades (or does not believe the vendor is developing worthwhile stuff), then all they are willing to pay for is bug fix and help desk whihc is only 5 to 10% value (compared to 17, 22% and higher vendors want). Another negotiating technique I have used is to tie maintenance to dicsounted software license list and negotiate hard for the initial disocunt, which reflects in future lowered maintenance

As far as SaaS type pricing - yes it is harder for buyers to decompose that. But again the market finds a balance. Too many softwsre companies are built with Adobe in mind - 90% plus amrgins. Economics 101 tells us when there are "super-normal" profits, more competition moves in...if not in core product, then in competing third party maintence or in case of SaaS an easy port to someone else's offering. The vendor lock in with SaaS is typically lower than with behind the firewall, installed software.

[Vinnie Mirchandani]

Phil, great point - with data on the 4 physical dimensions - 3 on space and 1 on time, with near real time feeds, who knows what budding Einsteins or even ordinary corporate folks will be able to do with the data...louis, it takes you point on analytics to another level...

having said that privacy advocates always fret at the amount of electronic data the governement has access to on us. My answer to that is we emit so much data every time we use a credit card, use the web, use the phone, go to the doctot etc that frankly we have a shield around us. I think that much data actually overwhelm us in the short term...

[Vinnie Mirchandani]

Jeff Nolan of SAP have been bantering on his blog about my forecasts...

http://sapventures.typepad.com/main/2005/12/web_schweb_ente.html#comments

[Jason Wood]

Vinnie,

I thoroughly enjoyed the thoughts, particularly because there aren't enough voices focused on enterprise software in the blogosphere.

While I don't agree with all of your points, I can't question the logic behind any of them. All the best and happy new year.

[vinnie mirchandani]

thanks Jason, just help me win that bottle from Jeff...write your congressman to amend SOX!

[Sadagopan]

Vinnie you are spot on about the web2.0 hype - when we look at the disproportionate coverage that Google/Web 2.0 compared to the more important enterprise space, it is clearly at odds. My comments on your well thought out and articulated predictions for 2006. In general, buyers are more cautious and would not easily get sucked in vendor speak – lot more detailed evaluations and price negotiations, clarifications can be expected – the average sales cycle may also increase for enterprise players – not shorten as expected due to consolidation effects.
Point 1 – Agreed on the marketing fronts– But I expect a much more renewed aggression from SAP in the marketplace and Oracle sharpening its focus given that the whole world is looking at how they are going to move forward – I believe that both SAP & Oracle shall be forced talk more about architecture in the new year – Agreed Oracle’s emphasis could be a heard more. In fact I expect Web Services/SOA to get more pronounced inside enterprises – but these need not be just centered on SAP/Oracle.
Point II – Integration of RFID,RSS & GPS would certainly happen – but not sure if we shall see Ver 2.0 now – the fatigue of enterprise s/w overspend is still felt by CIO’s at all levels.
Point 111- Fully agreed- BPO shall see more and more push. Already financial services are beginning to look at leveraging social networking media aggressively
Point IV – Not sure – may not happen that fast – not in 2006
Point V – Agreed – we shall see the re-emergence of small super specialists – The world would see more of the E2opens and likewise new model consulting & service firms.
Point VI – Fully agreed – If I may add customers would begin to demand the benefits of offshoring /global delivery that these yesteryear big guys so eloquently talk about. Indian headquartered vendors would be moving/growing faster then ever into newer arenas.
On the rest of the points : China would see more of global / Indian HQ big players leveraging it for supply – but volume growth may just be gradual – am skeptical about chinese service firms making acquisitions oversees and growing – certainly not in 2006. On SaaS – I find that the vendor offerings would improve –the movement has succeeded in creating mindshare amongst buyers - now is the time for the SaaS players to step up aggression – many of them have not scaled up in terms of their reach and may need to be step up engineering and sales efforts much more significantly to tap the opportunity. Storage management, asset digitization would see lot more spend in 2006. Compliance management and benefits are getting debated already – but are bound to become more shrill – with so much money going in there – Surprising that enterprise vendors and service firms are not visibly lobbying for its continuation/making it more tight – given that they are the best beneficiaries of this. I also see the consolidation efforts amongst small software product players ( some of them walking dead) continuing to happen in the new year and some consolidation happening in the mid to tail of the Indian headquartered offshore service vendors and small product vendors leveraging offshore lot more aggressively for engineering works. New technology absorption/offerings in the enterprise space shall continue to be felt at the small product player levels before the big guys begin to embrace- to that extent the ecosystem shall remain vibrant.

[Vinnie Mirchandani]

Sadagopan - thanks for all the time and energy you put in to your own blog and generously those of others!

[Marcia Loughry (posted by Vinnie Mirchandani)]

see her comments at

http://randomthoughtbistro.blogspot.com/

[Bill McNee]

Nice job, Vinnie. As it concerns your first prediction -- recent research with corporate CIOs (in the US and Europe) suggests that most of customer bases of both SAP and Oracle aren't quite ready for SOA (even though it clearly is a dominant long-term trend). Only the very largest of enterprises (with very complex integration requirements) are on board and willing to make the necessary investments around SOA -- and in fact, many of these enterprises are well down the road with both advanced trials and early deployments, virtually all business rather than technology led.

Given this, I think your SAP comments are spot on -- as SOA just isn't selling with shops that have less than a couple of billion in revenue (the "smaller-large"), let alone true mid-size and smaller enterprises. A refocus around the business value of SAPs solutions, and less around ESA would make strategic sense.

As Oracle further fleshes out and attempts to sell its Fusion vision, our research indicates that it may be sailing into a major headwind -- as most of its customers are both nervous about its integration plans, and frankly think of SOA as something that will be brought to them, rather than something they put in place themselves (especially mid-size enterprises). The big exception here is the large-enterprise segment of the PeopleSoft customer base that is on board with SOA.

As such, this could be a very big year for SAP, unless Oracle navigates its architectural transition carefully -- and promotes a vision and business framework that embraces the customer prior to the release of its next generation offerings. The last thing that Oracle needs is to push disgruntled smaller-large to large enterprise application customers into the arms of SAP, or mid-size application customers into the arms of savvy SaaS players.

Let me wish you and your family the very best of the New Year.

Bill McNee
Saugatuck Technology

[Anita Campbell at RFID Weblog]

comments from a supply chain perspective

http://www.rfid-weblog.com/50226711/whats_in_store_for_enterprise_applications_during_2006.php

[Chiranjeev Bordoloi]

Your "appligator" commentary is right on the money. Only, in addition to niche technology expertise (web services, telemetry etc.) it should be extended to include specialized knowledge of niche business processes or highly profitable market segments.

You will find this interesting. Having delivered $265 Million in annual run-rate savings for a big bank's technology infrasructure group, I figured I wanted to build something creative and exciting (instead of just optimizing large IT organizations).

I beta-launched a new offering called "Concept to revenue in 30 days" in October 2005 and have recieved an overwhelming response, especially for web applications to be delivered in an on-demand model. The offering targets smart, experienced, idea-generating hamsters who have deep domain knowledge of a niche, highly profitable, market segment and/or business process, but have trouble taking their ideas from concept to fruition. It also targets organizations that want to reward their high-achievers with a modest budget to experiment with a "pet-project". In addition to executing on original ideas, I encourage people to apply Kawasaki's advice in "Art of the Start" -- Copy Someone. Only, I ask them to think of ways to make it exponentially more effective.

I invest heavily by making sure they get dedicated development and PM expertise for $500-$1000/month and ask for 25% equity in the project. Then I apply agile development & PM methods to break down the launch cycle into very tiny value-generating modules in 30-60 day release cycles. Essentially, I stand to make my returns when the entrepeneur's idea generates revenue. The $500-$1000/month is just to make sure people have some skin in the game i.e. they just don't drop their world-changing idea on my lap after 10 beers and don't remember it the day after! Results so far? Went from a team of 1 - 6 in 2 months and have experienced exponential growth in revenue. It is a super, high-risk model for me that is panning out well so far.