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Installed Software Strikes Back
After years of software-as-a-service rising ascendant, economic pressures may be favoring on-premise software again.
Posted Nov 29, 2007
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One of the central arguments for the value of software-as-a-service (SaaS) may be losing at least some of its potency. In a research note published earlier this month, research firm Gartner outlined several trends that will, among other things, reduce software license fees over the next decade. The average applications vendor will find technology buyers looking to reduce software costs in the same way they have with hardware and services costs. Software vendors must therefore establish more realistic margins to guarantee long-term survival in what will become an increasingly competitive market, according to the document. "Up until now the unique nature of the software market has meant that buyers had very little negotiating power after the initial purchase of a software license," said William Snyder, research vice president at Gartner, and report author, in a statement. "We expect those dynamics to change considerably over the next five to 10 years giving chief information officers and software procurement officers more bargaining power while potentially reducing software vendor profit margins." Several factors play into Gartner's prediction. Low-cost development sites in China and India, coupled with burgeoning software demand in those countries and equally price-sensitive Brazil, combine to make a major dent in pricing. The emergence of services-oriented architecture (SOA) as a means of extending the usefulness of existing software deployments is another. Third-party maintenance services are on the rise, allowing an open, competitive market for upgrades, services, and support, which was previously impossible when software vendors monopolized the maintenance. Furthermore, growing interest in open-source software (OSS) enables the possibility higher-quality software at lower costs. "OSS solutions will compete directly with closed-sourced products in all software markets although their influence will vary significantly one from technology market to another," Snyder said. "Although it is never going to destroy industry giants such as IBM and Microsoft, it will put pressure on traditional software margin structures as these and other large vendors endeavor to counter this competitive threat." Gartner predicts significant interest in OSS in areas such as server, operating systems, development tools, and database technologies, but much less maturity in technologies such as ERP and CRM.
As if in response, business newspaper Barron's reported in its Tech Trader Daily blog that Goldman Sachs had downgraded its view of the software sector. The writer, Eric Savitz, posited that more power was likely to wind up in the hands of CIOs as they would likely hold off their purchasing decisions until later in 2008. "Software buyers need to realize that the pendulum is beginning to swing in their favor and there are an increasing number of alternatives in today's software market," Snyder said. "We would advise IT organizations to use BPO and open-source alternatives to improve their negotiating power with software suppliers as well as employing the emergence of third-party vendors as a means to reduce higher maintenance fees on older versions of software. Costing out the possibility of using offshore skills to build application functionality as Web services will also help negotiations with vendors." Related articles: Will the Sun Come Out for TomorrowNow? Employees gone, lawsuit still unresolved, but despite SAP and TomorrowNow's predicament, third party maintenance seems to be on the rise. Viewpoint: Is Hosting All It's Cracked Up to Be? It's popular, but not necessarily better. Double-Digit CRM Growth -- But Double-Digit Failures and Double-Digit License Limbo, Too Companies will shell out 16 percent more on customer management apps next year, but nearly one-third of companies have experienced failed implementations -- and 25 percent of all CRM licenses go unused. CRM's Expanding Horizon Gartner predicts CRM software revenue will grow 14 percent this year to exceed $7.4 billion, as SaaS, sales, and foreign markets continue to drive the market. CRM Numbers Grow, But Also Mislead The customer management applications market rose 8 percent in 2006, as it did in 2005; SAP and Oracle continue to lead, but their revenue figures don't tell the full tale. Oracle's Smaller Slice of CRM's Bigger Pie The worldwide CRM market grew 11.5 percent in 2006 to just under $6.5 billion in revenue; while SAP continues to dominate, Oracle Corp. sees both its revenue and its market share slip. Feature: Custom Fits Whether off the shelf, on demand, or built in house with open source software, companies will need to customize their SFA systems. The CRM Market Is Still Strong [March 2007] The market continues to expand, albeit at a moderate pace, as vendors achieve strong growth in SaaS applications and vertically focused solutions. CRM Expansion Continues [June 2006] Worldwide, CRM software realized about 14 percent growth in 2005; drivers include consolidation, vertical-market solutions growth and midmarket growth. CRM Investments: Working With What You've Got The market will continue to grow, but new license revenues will drop as companies focus on product enhancements and getting value from prior investments. Feature: Hosted or Housed? The decision to implement one or the other CRM-solution model is a complicated one--here, a rundown of significant financial aspects to consider.
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