by Andy Hayler

Andy Hayler: The innovation game

Aug 29, 20085 mins
IT Strategy

IT is an industry almost synonymous with innovation, yet it seems to me that few examples of this are to be found in enterprise software these days. The rise of the internet has enabled all kinds of new companies to appear, sometimes, as in the case of Facebook, creating great wealth in a remarkably short time.

Yet whereas in the 1980s the consumer could look to benefit from the spin-off effects of innovations in enterprise software, the boot has now shifted firmly onto the other foot. It’s always possible to think of the odd exception, but naming five exciting pieces of enterprise software that have appeared in recent years is as hard as naming five famous Belgians.

I believe that enterprise software is still suffering from the fall-out from the dot-com boom and crash, which has caused a couple of structural shifts in the industry: one in the buying community, the other in the funding arena. In the 1990s there was a flurry of new software companies, often promising ground-breaking changes that would shake up the old order. Siebel grew to be a billion-dollar revenue company by creating the customer relationship management category. Ariba and Commerce One gained dizzying stock market valuations creating electronic marketplaces. With the world transfixed by the rise of, eBay and the like, large corporations felt pressured to move into these and other new branches of software or risk being seen by analysts as corporate fuddy-duddies who “didn’t get it”.

The crash in 2001 sent this behaviour into reverse, with companies looking for someone to blame for their Commerce One investment that had become as valuable as a Christmas tree in February. Companies retrenched, pulling back software purchasing authority to much higher levels. A deal that previously needed one signatory now needed half a dozen, and none of those people wanted to be caught out again so they were far more cautious in their purchasing.

This buying environment led to a nuclear winter in the enterprise software market. The capital markets, which had been able to support bloated valuations for software companies with just a few million in revenues and no sign of profitability, dried up completely. This in turn meant that venture capital firms had one exit route for their portfolio companies firmly closed, and valuations tumbled even for trade sale situations. By 2002, incoming money for venture capital funds had dropped back to the level of 1994, and hardly any of that was headed into enterprise software. If you came up with an idea for a cool new social networking website then you could still raise money, but mentioning “enterprise software” to a venture capitalist was like asking to sleep with his sister.

This sea change in the industry’s funding structure is of great importance, since innovative software rarely comes out of giant corporations – indeed, Tom Siebel had to leave Oracle to start Siebel.

For the industry giants, the last few years have seen an orgy of acquisitions, by Oracle, SAP, IBM and Microsoft, of companies that came up with interesting technologies that had eluded the R&D departments of the industry behemoths. Indeed, given the lack of enthusiasm that capital markets are showing for software, an acquisition by Oracle or the like has become the exit written into business plans that used to have the line “and then we plan to IPO on Nasdaq”.

So what does this mean for enterprise software architects and buyers? Essentially, buyers’ violent retrenchment in buying patterns in 2001 and 2002 was good news for the software giants, who no longer had to compete with so many pesky smaller companies with better technology, and their profit margins remained very healthy. But for the enterprise itself it has meant a period of stagnation. What is the typical big-ticket company software project these days? A consolidation of ERP systems. One large oil company is spending $2bn to reduce dozens of SAP instances to four or five. Great work if you can get it as an ERP contractor or consultant, but hardly the stuff of which dreams are made.

It is hard to see this cycle of stagnation breaking any time soon. With venture capitalists shunning enterprise software startups as if they were lepers, there are far fewer innovative companies bringing new software to the enterprise. Talented developers want to work on cool things, and if you had a choice between a hot internet startup and a five-year project to reduce the number of ERP instances in a corporation, which would you choose? Enterprise software buyers in 2002 wished for a simpler, reduced set of large, safe software companies to buy from. As the opening line of the 1902 horror story The Monkey’s Paw says: “Be careful what you wish for – you may receive it”.

About the author

Andy Hayler is founder of research company The Information Difference. Previously he founded data management firm Kalido after commercialising an in-house project at Shell