Consolidation of the software industry has seen mega vendors continuing to expand and dominate the market for horizontal application suites. Smaller vendors have had to differentiate their products by building specialised, niche applications targeted at specific industries or vertical markets.
At the same time, the industry has witnessed the emergence of new technology that allows traditional applications to be broken down into highly specialised, granular components that can be easily deployed and delivered to customers through Web services.
What future impact will these developments have on the buying patterns of corporate customers of software, and how should resellers and software vendors position themselves in the new, evolving channel to maximise their chances of business success?
Two approaches
In the past there were two approaches to software selection: acquire an integrated suite, or take a "best-of-breed" approach. The suite vendors advocated the value of "an integrated solution" and the reduced complexity of only having to deal with a single vendor. Niche vendors argued that competitive advantage could only be maintained through precisely matching the software solution to a particular business problem, and pointed out the lack of depth of the suites in critical business processes. The software reseller channel typically aligned itself with one of these approaches and packaged the value proposition to the CIO or IT manager accordingly.
However, the recent evolution of technology that now allows highly granular software solutions to be deployed as a service will in all probability radically change the message of the vendors and the way software is bought in the future.
The barriers to entry on Web deployment and Web services have been reduced, and the actual distribution of software has become less of an issue.
Gavin Halse, MD of ApplyIT
For smaller software vendors, ongoing differentiation from the mega vendors is vital, and the new service-oriented technologies provide them with more opportunities to do this than ever before. The barriers to entry on Web deployment and Web services have been reduced, and the actual distribution of software has become less of an issue. As these vendors look to new ways of deploying their specialised solutions to corporate customers in their chosen vertical markets, they will be less concerned about selling many hundreds of thousands of "shrink-wrapped boxes with a CD and a manual", and therefore less reliant on the traditional reseller channel.
The small, new-generation solution vendors are facing different constraints to those of their predecessors. They need to maximise the value proposition to the client in a changed world where the Internet is an enabler of many business drivers. Many of them plan to do this by packaging professional services on top of the software solutions they offer. In other words, these vendors want to develop a services-oriented channel, based around their offerings.
In vertical industries such as mining and manufacturing, finding a vertically focused reseller which can combine professional services with software solutions is not easy. It is a reality that the more focused or specialised the target industry, the fewer skills available in the market and the more difficult it is to build critical mass in the channel.
Establishing an ecosystem
In practice, I believe the new services-oriented channel will be a combination of a few value-added resellers and an ecosystem of professionals and practitioners consulting around specific business areas. Software vendors realise they have to market themselves and their offerings as strongly to this ecosystem as they do to end-users. It is clearly in their interest to build up their own focused ecosystems, and the tools of the Web make this possible and relatively easy. These vendors will actively build loyalty in these communities and strongly market their differentiated service-oriented solutions to this group. The consulting practitioners then have a set of tools and software services provided and supported through the Web that empower them to increase their consulting business.
This service-oriented channel as it pertains to software is certainly going to impact in some form on the traditional "box-dropper" reseller model. Licensing models will change to accommodate the new channel. While there will be a role for the traditional reseller in the future, the value proposition to customers will be reduced and the margins will stay low. These resellers then need to increase volumes to stay in business; a model suited to retail and end-consumer software, and not readily to the corporate market.
From a corporate customer perspective, these developments are significant in the opportunities they provide for value creation. Corporate customers can look forward to a greater variety of specialised and empowered consultants who can create more tangible business value by introducing and implementing relevant software services into businesses. The value proposition therefore increases for each party: the customer, the consultant and the vendor.
As can be seen, this new model will introduce complexity, particularly for the IT manager or CIO. They will have to accommodate a multitude of service-based software offerings, supported by specialised consultants with in-depth business knowledge. Managing these vendor relationships and technical interfaces will increasingly become a key competence of the CIO. This service-oriented channel represents the best-of-breed philosophy taken to the extreme, and many CIOs who have placed their unwavering faith in the mega application vendors to eventually create the necessary functionality in their suites will probably have to adapt the most.
What is exciting about this evolution of software is that there are many opportunities for vendors and consultants alike to create and drive value in their chosen vertical industries. From a corporate customer perspective, provided the complexity can be managed, there will be ongoing opportunities to derive value from their IT investments.
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