If 2007 was any indication of what’s to come, the one thing companies using expensive enterprise applications—ERP, CRM and supply chain management systems—is that more change in vendor alliances, pricing schemes and software innovation is on the way in 2008.
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On top of that, gloomy economic forecasts for 2008 could have significant financial consequences for CIOs and their IT budgets.
So with an uncertain financial outlook, it appears that CIOs will (again) be asked to do even more with even less next year. And nowhere is that more critical than with a company’s core enterprise applications and software platforms.
“Globalization, rapid market change, a changing workforce and regulations have turned the desire for more agile and usable applications into a business imperative,” says Sharyn Leaver, research director of business process and applications at Forrester Research. “The result: process and applications professionals are on the hook to deliver more agile and usable applications.”
In addition, Jeff Woods, a research vice president at Gartner, says that mounting pressure from the business side to get “real business benefits” from enterprise systems while also taking advantage of advances in technologies such as SOA to stabilize computing environments leaves CIOs to “make strategic decisions that are more important than the ones they had to make pre-Y2K.”
Here are six areas that will have a big impact on CIOs’ 2008 enterprise plans.
More Application Vendor Consolidation Ahead in 2008
IBM buys Cognos. Oracle gobbles up Hyperion. SAP swallowsBusiness Objects. HP acquires Opsware. And Microsoft buys a number of software makers.
This past year will be forever known as the year of enterprise software consolidation and acquisitions. Billions were spent by the big boys (SAP, Oracle, IBM, Microsoft) on smaller competitors that offered tantalizing application sets.
So what should CIOs expect in 2008? According to a survey from technology consultancy The 451 Group, people in the software industry expect more mergers. More than 85 percent of corporate development professionals at companies that have acquired other companies within the year said that they “expect to maintain or increase current-year levels of merger and acquisition (M&A) activity in the coming 12 months,” with half of the companies expecting to increase M&A spending. The survey polled corporate development and strategy professionals from companies that collectively have spent more than $150 billion to acquire nearly 500 target companies during the past five years. Less than 10 percent of the respondents said they expect their acquisition volume to decline.
A survey by Duke University and CFO Magazine found that 40 percent of U.S. companies plan to acquire assets in 2008. One-third of those plan to buy a company or companies, and 22 percent plan to acquire assets of another company but not the entire company.
Forrester’s Leaver says that she expects 2008 will see more consolidation, primarily in industry-specific niche application sets, adding: “I don’t think it’ll be as big as 2007. It terms of the really big offerings, there aren’t that many left.”
The Rise of the Vendor Ecosystem
Before you roll your eyes at the sight of another vendor buzzword like “ecosystem,” at least consider the logic and potential importance of the New World Order of vendor management in 2008.
As a natural extension of all the consolidation, and with fewer midsize and bigger players to choose from (which is relatively speaking, of course; there are thousands of smaller software vendors out there), CIOs will have fewer options to choose from. That said, the enterprise vendors realize that innovation and their future success is all tied to their relationships with smaller players, business partners and developer communities.
So while CIOs may be buying an SAP or Oracle software package on the surface, they should also do their homework and figure out who are the businesses and alliances that are a part of SAP’s ecosystem, for example, and how they match with the CIOs’ enterprise technology strategies. “The ERP system is basically a platform for an ecosystem to develop around,” says Gartner’s Woods. “This is the way you have to look at sourcing your ERP today, and the trend will only become more dominant in the future. “
Forrester’s Leaver stresses that CIOs need to become less of an “observer” with their application investment strategies (for instance, letting one or two of the large vendors drive their strategy). In fact, CIOs need to be more proactive about determining which vendors’ ecosystem synchs up best with their own long-term ERP strategy.
This is critical because if your vendor’s ecosystem includes industry-specific applications (say you’re in the retail industry) that meet your long-term needs, you will have an easier time identifying and integrating the next killer application into your ERP backbone.
The differences in the major vendors’ plans are obvious, Woods says. Oracle, for example, has bought or developed in-house industry-specific apps, such as in the retail or telecom space, whereas SAP has relied on its platform and its partners to develop its future killer applications, he says.
The importance of what each vendor’s ecosystem can deliver shouldn’t be overlooked by CIOs. “Remember, without a killer app, ” Woods says, “a platform doesn’t live very long.”
Fierce Competition Continues
While the competition in this space has always been intense, CIOs can expect more hand-to-hand combat among enterprise application providers. “I don’t see, at this point, any relaxing of the competitive intensity of this industry,” says Woods. And that’s one piece of good news for CIOs.
Even as the enterprise vendors accumulate more areas of expertise and technology platforms (through organic development or acquisition) and become economies unto themselves, there still is plenty of vendors to play against each other during negotiations, say analysts. That’s because “there is so much margin on the line,” Woods says.
The advice for CIOs: Don’t be afraid to play the vendors against one another. “The vendors are getting smarter about when to compete and when to coordinate—what’s worth fighting over and what’s not,” Woods says. And if your business is worth fighting over, you should be able to get a sweet deal in 2008.
In addition, with all of the freshly minted mergers and acquisitions, adds Ray Wang, a principal analyst at Forrester, now is as good as time as ever to negotiate longer maintenance contracts and buy new modules at significant discounts. “In the history of post-merger announcements,” he says, “sales reps typically will be offering sweetheart deals to close out the quarter and status as an independent company.”
We Know About the Goliaths. Don’t Forget About the Davids
The goliath enterprise vendors aren’t known for their innovation. But smaller vendors are. “The fact is [smaller vendors] can provide dynamic applications pretty quickly,” Leaver says.
In the future, those small vendors will be building applications with greater flexibility and “plug and play” adaptability than what comes out of the bigger companies’ R&D departments.
For example, Leaver notes that most small vendor apps are being built so that they can run on top of IBM Websphere, SAP NetWeaver and Oracle middleware products so that IT departments can “configure it and change it on the fly.” And with these applications, IT people have to worry less about architecture decisions, and just base their purchases on the relative usefulness of the application itself.
In addition, Albert Pang, IDC’s director enterprise applications research, notes that all this innovation will lead to more Web 2.0 and consumer-flavored applications for enterprise users. “It will not be long before business users are able to take advantage of tools from vendors such as Serena Software that essentially allow them to create mashup content on the fly,” he says.
For example, Pang notes that business mashups could jumpstart financial accounting applications that allow users to incorporate external variables (such as weather forecasts or environmental impact studies) into their financial planning, forecasting and reporting processes, not to mention the risk assessment of their investment returns.
The overriding message for CIOs, according to Pang, is that they “need to balance their systems landscape in a way that doesn’t allow any one vendor to have undue influence over their strategies,” Pang says. “When that happens, they can play them against each other, and they can take advantage of all these development efforts going on.”
What’s to Come of Enterprise License Maintenance Fees?
It seems like CIOs have forever complained about the sticker shock of enterprise software maintenance fees. The costs, which historically have averaged right around 22 percent a year for enterprise implementations, are a huge financial hit for many IT departments.
“When the vendors emphasize tactical improvements as the primary value delivered by maintenance, that has caused people to say: ‘What am I getting for my maintenance dollars?'” says Woods.
During the last year or so, many CIOs have either looked into or completely turned over their ERP or CRM systems maintenance to a third-party provider such as TomorrowNow or Rimini Street. But the lawsuit that Oracle slapped upon TomorrowNow (and SAP, which owns TomorrowNow) and SAP’s missteps in handling the situation at TomorrowNow has cast a shadow on the third-party maintenance business model.
Even so, third-party maintenance has piqued IT executives’ interest and will continue to do so in 2008. “What TomorrowNow is is a manifestation of the market questioning the value of maintenance,” says Woods. “Almost everyone asks the question, Can we rethink our maintenance approach? Now is that third party, or going off maintenance altogether, or stabilizing the system? That’s a big question right now.”
One of the big reasons for CIOs’ frustration is that some vendors arent doing a good enough job articulating their path to the next generation of enterprise tools, Woods says. “It’s a tricky and complicated decision, and there are not easy answers for it. It has to be linked to the business strategy and risk portfolio.”
Of course, maintenance fees are infamous for their 90 percent margins. Which makes vendors loathsome to even talk about them, let alone consider making some significant changes. Leaver, however, says that could start to change in 2008. If they want to keep their current customers happy, she says, “the application companies are going to have to rethink their pricing schemes and maintenance fees.”
The Supply Chain Gets Even More Wireless—and Dangerous
Wireless technologies will continue to influence the future of the supply chain. At the forefront and gathering much of the attention is RFID, which, while still nascent, will continue to expand in 2008, say analysts.
But it is other advances in the supply chain, such as increased use of wireless technologies for data transmissions and operational transactions in distribution centers, that have made supply chains even more efficient.
Analysts point out, however, that wire-free does not mean risk-free. A recent report from Retail Systems Research (RSR) details the growing dependence on wireless technologies and monumental risks posed by the new breed of devices in the supply chain and beyond.
RSR analyst Steve Rowen describes the current situation as this: Wireless attackers, who now have motive and technological savvy, have identified companies’ “lackadaisical treatment of data flow as a viable opportunity, extending well within the reach of highly organized crime factions,” Rowen writes. “Theft of retailers’ customer data is no longer just for ‘hacks;’ it has become very big business.”
Rowens first piece of advice for 2008: Elevate the conversation. “The most successful security programs are those which gain the interest of C-level executives—early on,” he writes. “This process will slightly vary from one retailer to another, but is commonly bound by a joint presentation of the company’s current—and needed—security status to the board of directors.”