While application vendors still refuse to share the burden of integration with their customers, services vendors are learning that by sharing it, they can not only pump up their consulting revenue but their software revenue too. For example, Computer Sciences Corp. (CSC) already has such a pain-sharing program for the insurance industry called Virtual Development. Customers get a copy of the software source code that they can modify but only with the help of CSC consultants. CSC agrees to incorporate all customizations into the next version of the software, relieving a huge workload for customers. No more costly rewrites of customizations each time the vendor upgrades the software. By incorporating all the changes, CSC builds a software package that could become an indispensible industry standard (or an ungodly mess if not managed carefully). Customers are protected from becoming overly dependent on CSC because they can take the source code to someone else to run it for them.

With its huge advantage in services and outsourcing, IBM could complete the hat trick by acquiring enterprise software vendors such as Siebel Systems and Oracle, and bundling guaranteed integration and upgrade services with the software. Whether the Department of Justice would agree remains to be seen. For CIOs, it would mean one great big throat to choke. If this happens, pure application vendors such as SAP and Microsoft will be at a tremendous disadvantage against companies that combine software and services together under one roof.

Innovation Dries Up

Of course, this is just consolidation on a broader scale and does not resolve the issue of integration. Software and services vendors don’t just eat their own anymore?they become omnivorous, and the line between software and services blurs completely. Will a services vendor that owns lots of software have any more economic incentive to create a set of universal integration technologies than a standalone software vendor? Probably not.

By 2010, there will be fewer vendors taking more corporations hostage. The unsolved problems of integration and IT complexity will drive acquisitions of smaller software vendors by bigger vendors eager to create one-stop shops for CEOs who want to outsource IT.

Such hyperconsolidation will probably not end IT complexity but will hide it in the shadows of fewer dinosaurs. That will do little to foster IT innovation. With CIOs locked in to services vendors that also offer a stable of software solutions, it will be even harder for small vendors to get a meeting. The dotcom bust taught CIOs a hard lesson about investing in startup vendors with good ideas and lousy balance sheets. Likewise, venture capitalists are much more leery about simply throwing money at anything that has the word technology in the business plan. We predict that a handful of companies will control more than 70 percent of the Fortune 500 IT budget in 2010. Small vendors will play to small companies exclusively ?to the great disadvantage of big companies that won’t have access to the innovative technologies that startups are developing. Small companies will be happy to nibble away at chunks of software rented to them over the Internet for a reasonable monthly fee. After all, neither vendor nor customer has to worry about integration.