I've spent a lot of time on the phone and in meetings with financial analysts, investments bankers and others from the financial community over the last couple of weeks. No surprise there I suppose, they're all trying to figure out how the enterprise software markets and vendors will fare in our current environment. Not a new conversation for sure, something I've talked about with these same analysts for almost a year now. 9-10 months ago IDC lowered forecasts across technology 2-3 % points. This varied a great deal across all markets but all markets were impacted and in general we agreed that the impact would last 4-6 quarters after the market started to show slowing growth. In the past we've seen a pattern, hardware generally reacts first, starting to decline within 2-3 quarters of the initial crisis and software delays as much as another 2-3 quarters before showing signs of the decline in growth. That seems to be holding true in this crisis as well, so software should start to slow some as early as the first quarter of 2009. We're already seeing some signs of this. But that's not the whole story and certainly the dramatic worsening of this crisis over the last 2 weeks will accelerate some of the possible outcomes. Let's take a closer look...
When looking at the overall enterprise software markets there are several basic factors that are critical to keep in mind when analyzing the possible impacts of a financial crisis. First, enterprise software buying cycles are generally long, with companies often taking 12 - 18 months to reach a final decision. That means that deals that are closing now could have started as long ago as late 2006. Secondly, how do companies buy? There are 2 basic licensing approaches, up front lump sum payment for a perpetual license with an annual maintenance fee for support and upgrades or a subscription based licensing fee that is a monthly (generally monthly although the period could be quarterly or some other agreed interval) that includes use of the software, upgrades and any support. On premise software is generally licensed in the first model, SaaS or on demand in the second model. The key difference here is that the up front fee is treated as a capital expense and the subscription model is treated as operating expense. The third factor to consider is that capital expenditures are often financed through companies like GE Capital. And the forth factor to consider is the emerging development and business models around open source software (OOS). The most common model for OOS is to provide the software for free download but sell services like support to assist with the implementation and use of the product.
With these factors in mind what do I think will happen in the enterprise software business over the next 12-24 months?
1. Companies will avoid non critical software expenditures whenever possible. I believe the most obvious place to see cut backs would be in core ERP upgrades. I would not be surprised to see companies delay upgrades for the next couple of years and move the funding into more business critical software purchases. By business critical I'd expect to see vertical specific software do well in a tight financial environment where the ROI is more direct and more easily defined. Solutions like retail merchandising, telecommunications service delivery platforms, utility asset management, and enterprise 2.0 initiatives especially around social CRM will likely do well over the next few years. The long buying cycles of software play into this as well, companies that have spent 12 or more months on a project to select a solution have a lot invested and are not likely to shelve the project at this point.
2. Companies will start buying more subscription based SaaS software solutions in leu of on premise software because of the desire to consume software out of the operating budget rather than the capital budget. We have already seen an increase in growth in the overall SaaS forecast and that will likely accelerate. In the past, growth for SaaS software was greater in the small and mid market but this is shifting as enterprise companies shift to buying SaaS solutions. The enterprise size companies will lead SaaS growth in the months to come. (I hate to use the "cloud" phrase but the fact is, SaaS and cloud will benefit)
3. The credit crunch will impact companies ability to finance software purchases. In some cases the gap could be filled by large vendors who offer to finance their own software. This crunch will also drive more companies to SaaS solutions as an alternative to the lack of available credit.
4. Companies could start to look to OSS as a more cost effective alternative to purchasing traditional software. There are still a lot of market perceptions around risk among IT and CIO's specifically, but adoption of OSS is becoming more main stream and this current crisis might help accelerate adoption.
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