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Sunday, August 14, 2005

Enterprise Applications - Stronger Demand For Some Medium Sized Players

We recently covered Bryan Stolle's view on market consolidation, wherein he sees new business models and technologies are taking hold across the software vendor landscape and points out that software is not a homogenous market. Since the market is heterogeneous there is no strong case for a market future with consolidation leading to a handful of players, he argued. As different enterprise software segments have very different maturation cycles in each market segment - the market lifecycle model espoused by Geoffrey Moore and others applies. There is still much innovation to be done, especially as the market gets more and more vertically focused. Software is a very broad category and reminds that we are a long, long way from a Global 5000 enterprise going to one company, and saying, "automate all my business processes." Talking about consolidation without digging deeper ignores tremendous opportunity

Forbes reports about SG Cowen's recent survey of North American enterprise application users wherein the results points to improved prospects for enterprise players, driven by pent-up capacity demand among existing users and some new customer expansion. This may bode well for the major application vendors, including Microsoft, Oracle, SAP and Salesforce.com, among others. SAP and Microsoft "are showing the strongest customer spending and share momentum trends," but the research firm noted that half of all users "are looking to reduce or cancel maintenance contracts, a key source of vendor profits." Interest in hosted applications seems to be high and rising - The strong adoption trends bode well for Salesforce.com and the nascent efforts at Siebel Systems and other larger vendors & also notes that oracle mergers and acquisitions, integration strategies have customers feel satisfied.
Investors should not ignore medium sized players in the enterprise software sector, as these are poised to outgrow the big fish over the next few years. SG Cowen report says business software makers like Lawson Software, Epicor Software, SSA Global and QAD which sell to midsized companies will outperform the market in the next five years. The report also adds, customer spending with smaller ERP providers to grow faster than overall software spending from 2006 to 2011. Midmarket companies have courted customers largely ignored by larger companies. Reaching them and catering to their unique needs is not easy. Software spending is different among midsized companies- for one; the average deal sizes are smaller. Because the companies have smaller information technology budgets, they concentrate on easy-to-deploy and easy-to-use applications that address specific business needs instead of large blockbusters with lots of bells and whistles. The midmarket vendors also adapted to the unique spending climate by creating applications that require minimal oversight, and selling products incrementally to work with existing installations. There are more than 75,000 midsized customers in the U.S. alone. It's worth questioning who is best suited to serve them. The consolidation game is not going to be easy – we are going to see not only a tiered set of players, but also vertical/segment/geography specialized players.

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