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The New Business Model for Enterprise Software Companies

Published
  • September 30 2004, 1:00am EDT
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The enterprise software industry is changing, but that's not new. For years, the major stabilizing force in the industry has been change. What is interesting today is the direction of the change.

Even a casual observer can tell you about the seemingly ceaseless procession of new companies that emerge into the marketplace year after year. We have seen shifts in platforms and operating systems, new paradigms and standards, and different application types gain ascendancy over time. But what may be happening now affects the industry at its structural foundation.

At the heart of change is the Internet. Many of us figured that once the Internet was installed as the newest transport mechanism, its influence would recede to a background level, but more than 10 years after initiation of commercial use, it is still causing profound shifts in commerce and industry as well as technology.

Two changes that we can see evolving in front of us include the emergence of a new class of applications that I call Web-necessary and a reorganization of the software industry from one that is hierarchical and vertically integrated to one that is far more decentralized and modular.

Web-Necessary Applications

Earlier hosted applications were considered Web friendly because they were built to operate in browsers and handle many more users than conventional applications. I have called the new paradigm "Web-necessary" to distinguish these applications from "Web-friendly" applications that essentially use the Internet as a transport medium. Web-necessary applications can be very different from one another in terms of the business processes they support, but they share three important characteristics:

  1. They involve the Internet as an active part of the value proposition.
  2. They support innovative business processes that in most cases could not be easily supported any other way.
  3. They are collaborative, bringing together people from disparate roles, geographies and organizations to participate in what in many cases are new business processes.

The Web-necessary model is ideal for capturing customer feedback or the "voice of the customer," but it is also a great way to deliver services too. Whether one wants to perform a survey, run a focus group, keep tabs on an indirect sales channel or any of a number of activities that require a degree of multiple inputs and information exchange, the Web-necessary application model is a good fit.
Increasingly, people who care about capturing the voice of the customer tell me that, rather than automating people out of the business process, Web-necessary applications enable organizations to bring the right talents to bear in support of the customer - and that means in sales and marketing not just customer service. Those talents might come from inside an organization or outside of it. And because customers and outside talent can live and work anywhere, Web-necessary applications' ability to capture information asynchronously can be a big plus.

Decentralizing Enterprise Software

The second change will be largely organizational but it will have profound effects. Virtually every other major industry from automobile manufacture to movie making has deverticalized in the last few decades. The enterprise software industry is the big exception. Software vendors still research, develop, market, sell and service their own applications mostly because they have to due to technology constraints.

And integrating disparate applications has never been easy, but it may have become prohibitively difficult in the last decade as untold numbers of major corporations struggled to deploy ERP, supply chain and CRM systems.

Until recently there was no clean way to separate the functions and still have functional applications, but the growing acceptance of Web services and associated technologies such as integration servers suggest a path forward. Vendors that can build applications to integration standards will have an important advantage over others and with that change we can expect the organization of the work of the software industry to change.

With the availability of better integration as well as hosting, look for vendors to begin to specialize. Specialization will result in a two-tier industry in which some vendors focus on software development while others specialize in sales, marketing and some aspects of service. Business process optimization will get new life as third parties offer unique services that work off standard software packages.

Large vendors, also called "publishers," will be able to organize their significant installed bases into sales channels. Smaller vendors or "developers" who decide against investing in redundant sales and marketing functions will license their applications through the larger publishers - all in an effort to provide a seamless environment for end-to-end processes.

More Work Ahead

A lot of work needs to be done before this two-tier model becomes a reality but there are significant clues in the market today that the groundwork is being done. Companies such as salesforce.com and Siebel are deploying architectures that enable the kind of development and integration suggested here.

Interestingly, salesforce.com recently announced that through its Sforce product/program, there are currently more than 100 independent software development companies and 3,000 developers building applications that integrate with the company's core technology. The attraction for the developers is a homogeneous customer base all using the same core technology - a ready market. Most importantly, although these developers work for the ISVs, salesforce.com receives a significant benefit.

Of course all the work needed to make this idea a reality is not localized on the technology side. Business models need to be worked out as do issues of ownership and copyright, compensation, branding and a lot more. But resolution of these issues can proceed in tandem with technology development.

There will also be spillover effects. For example, what happens when new companies don't need as much funding because they forego the effort to develop full-fledged sales and marketing departments? How will investors value a company that receives a smaller but more predictable revenue stream?

For now we have more questions than answers but participating in this change will be anything but dull.

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