The Death of Packaged Apps?
Most enterprise software vendors are ignoring their biggest competitive threat: the trend toward "building" rather than "buying" applications. It's time to re-tool strategies in order to be ready to compete with this invisible "enemy."
By Erik Keller, Wapiti LLC
May 26, 2006
Build vs. buy. It's a tug-of-war that has gone on in IT executives' minds throughout the history of enterprise software. While over the past 10 to 15 years, "buying" packaged applications has been the prevailing preference, a significant shift is occurring today: IT buyers are increasingly deciding to build - rather than buy - enterprise software.
Build is back.
Many factors are contributing to this shift. Foremost on the list are the adoption of service-oriented architectures (SOA), the availability of open source and the ability to offshore development with high-quality, lower-cost results. Add these technological and economic benefits to the typical level of customer dissatisfaction with software vendors and the case against "buying" becomes pretty compelling.
And the trend towards "building" is only poised to accelerate. This shift in philosophy has major ramifications for enterprise software vendors and threatens any type of broad-based licensed application recovery in the foreseeable future.
As a competitor, "Build" is missing from the radar screens of most analysts, vendors and service providers today. Yet as the case for building enterprise applications becomes increasingly compelling, software vendors must understand the benefits of "building" - and develop product and marketing strategies for an IT environment where "building" is an attractive option.
"Build" on the Rise
With a déjà vu-type of irony, the desire to build key enterprise-software functionality rather than buying it stems from the same list of factors that spurred companies to buy rather than build software in the early 1980s with the advent of minicomputers. (This dynamic is also causing buyers to seriously examine software as a service (SaaS), which too is cannibalizing traditional software license revenues.) These factors are:
Considering these developments, it should come as no surprise that buyers have slowed their desire to buy software and are reexamining custom packages. Hard evidence is piling up which shows that for the first time in 30-years, the trend towards investment in custom, internally-built software is gaining significant steam (see chart below).
Business Investment by Type of Software
Prior to 2000, the trend was toward increasing buying software at the expense of building it. By 2004, less than 30 percent of all capitalized software was prepackaged. Interestingly, expenditures on software developed by external providers have been dropping both in absolute terms and as a percentage of total software capital expenditures. Price cuts due to offshoring and post-bubble economics are the most likely reasons for such a drop.
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Build is back.
Many factors are contributing to this shift. Foremost on the list are the adoption of service-oriented architectures (SOA), the availability of open source and the ability to offshore development with high-quality, lower-cost results. Add these technological and economic benefits to the typical level of customer dissatisfaction with software vendors and the case against "buying" becomes pretty compelling.
And the trend towards "building" is only poised to accelerate. This shift in philosophy has major ramifications for enterprise software vendors and threatens any type of broad-based licensed application recovery in the foreseeable future.
As a competitor, "Build" is missing from the radar screens of most analysts, vendors and service providers today. Yet as the case for building enterprise applications becomes increasingly compelling, software vendors must understand the benefits of "building" - and develop product and marketing strategies for an IT environment where "building" is an attractive option.
"Build" on the Rise
With a déjà vu-type of irony, the desire to build key enterprise-software functionality rather than buying it stems from the same list of factors that spurred companies to buy rather than build software in the early 1980s with the advent of minicomputers. (This dynamic is also causing buyers to seriously examine software as a service (SaaS), which too is cannibalizing traditional software license revenues.) These factors are:
- Slow time to market: Like the mainframe-oriented IT shops of 1980s, many of the largest enterprise-software vendors find it difficult and expensive to quickly incorporate the latest technology into their products in a timely and innovative fashion. They also tend to have limited experience with the latest tool sets.
- Poor quality: Internal IT groups often used to fail when they attempted large, complex projects. Over the last 15 years, buyers have found that most enterprise software vendors and systems integrators are no better and actually less accountable than their internal capabilities.
- High expense: With large upfront charges and on-going maintenance fees hovering around 20 percent of list price, enterprise software has taken on the same bad characteristics of inefficiently managed internal IT staffs.
Considering these developments, it should come as no surprise that buyers have slowed their desire to buy software and are reexamining custom packages. Hard evidence is piling up which shows that for the first time in 30-years, the trend towards investment in custom, internally-built software is gaining significant steam (see chart below).
Business Investment by Type of Software
Source: Bureau of Economic Analysis
Note: Prepackaged software are license fees that are capitalized; custom-external is non-maintenance, non-repair oriented creation of or changes to software tailored for the business that is done by non-employees; custom-internal are the same operations done by employees.
Prior to 2000, the trend was toward increasing buying software at the expense of building it. By 2004, less than 30 percent of all capitalized software was prepackaged. Interestingly, expenditures on software developed by external providers have been dropping both in absolute terms and as a percentage of total software capital expenditures. Price cuts due to offshoring and post-bubble economics are the most likely reasons for such a drop.
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