Could the recession be good for enterprise software?

The economic crisis is forcing software companies to adapt by offering more added value to their products and moving away from the model of selling massive suites

The recession has companies worldwide scrambling to rein in technology costs with desperate vendors responding in turn, offering deep license discounts, providing low-cost financing and proclaiming ever more shrilly that their products in fact save customers money.

But there is more than trench warfare going on, according to a range of observers. When the economy turns around, a number of changes, many that benefit users, will have come to the IT industry.

[ Special report: IT and the financial crisis. ]

For example, vendors that sell software that is critical to business but don't provide customers with a competitive advantage -- such as collaboration tools -- need to adopt simpler, cheaper pricing models or face the consequences, according to RedMonk analyst Michael Coté.

"It's not like Johnson & Johnson is going to crush Colgate because they've got better e-mail," he said.

The definition of a premium product has changed as well, he added. Value-added features, especially ones that provide customers with detailed insight into costs, such as a server's power consumption, will be a must: "If it just breaks less or runs faster, people are just going to take their chances with [what they have]."

Meanwhile, companies that do have money to spend on software may parcel it out in much smaller chunks than before.

The era of the big software deal "is on life support right now and whether it pulls through remains to be seen," said Frank Scavo, managing partner of the Irvine, Calif., IT consulting firm Strativa. "It may be the exception rather than the rule."

Even SAP, king of the major ERP implementation, is conceding that customers want a more flexible way to buy software. In launching Business Suite 7 recently, SAP emphasized that the product could be bought and installed by the module.

Of course, you could always buy SAP piecemeal, but the vendor never marketed it that way, Scavo said.

Companies like SAP, Oracle and Infor will have more success coaxing customers to make smaller investments in complementary products, he said.

Forrester Research analyst Ray Wang voiced a similar refrain.

Large corporations "have all the ERP they can consume or even digest. The era of the big suite really is all over for those companies," he said.

Customers are instead trying to invest more in SaaS and BPO (business process outsourcing), "looking for a constant stream of innovation" versus a periodic, big-bang upgrade, he said.

Overall, the recession has prompted many more companies to buy into SaaS products, and once the economy turns around, SaaS will be a significant part of the IT landscape, Wang said.

Software maintenance changes on the way?
Vendors derive a large and strategic piece of their revenue from annual maintenance fees, but the recession has more companies investigating lower-cost third-party maintenance options.

Rimini Street, which supports some SAP and Oracle product lines, recently announced that business quadrupled last year, with some $86 million in sales bookings.

Those numbers may have been helped in part by SAP's high-profile decision last year to shift customers onto a richer-featured but more expensive maintenance service.

Observers like Scavo say third-party maintenance options ought to be a given.

"If I have a Lexus I don't need to go through the dealer [for service]," Scavo said. "Vendors shouldn't be allowed to have that power."

It is unclear whether a large crop of additional third-party companies like Rimini Street will surface, said Wang. For one thing, some vendors attempt to restrict access to training on their products, he said.

But Wang did predict that customers will be much more selective in the future about which software lines they choose to keep on a maintenance plan at all.

And the rise of SaaS, with its subscription-based model, will also alter how much companies are paying in traditional maintenance fees.

Meanwhile, as corporate budgets tightened in recent months so did CIOs' influence on IT strategy, according to Rebecca Wettemann, vice president, research, at Nucleus Research.

CFOs are going to be pressing CIOs harder for answers to questions like "what am I getting for it" and "why am I paying for it," as well as taking a more active role in choosing technology, she said.

Wang agreed. "SaaS is one of those end-games, those end-runs around IT," he said. "It's the first sign of the business guys calling the shots. You can swipe it on a credit card."

IT department budgets will drop in coming years, but overall, technology spending will be the same or even increase because business units will "have more skin in the game," Wang added.

As for now, IT executives like John Glowacki are trying to maintain a pragmatic and positive attitude.

"You have to operate from the premise of, 'We will come out of this recession.' You can't just cut everything," said Glowacki, CTO of Computer Sciences Corporation (CSC), the giant systems integrator. "Given that premise, what's the future? What do we need to be planning?"

The recently passed U.S. economic stimulus bill, which includes money for expanding broadband infrastructure, is helping lay the groundwork for the future expansion of cloud computing and SaaS, he noted: "If you don't have the pipes it's just not going to work as well."

The recession is also helping companies like the large software vendor SAS Institute tighten up its IT operations.

SAS has historically had a number of regional systems and in recent years has been trying to work in a more centralized manner, according to CIO Suzanne Gordon.

"In this kind of economy, everybody's willing to do that," she said. "It's a great time to get people to cooperate and collaborate. ... When the money's flowing, everybody wants to do it their way."

Past recessions saw a similar dynamic play out at SAS, with IT operations "getting better with each iteration," she said.

The wave of IT-related layoffs in recent months could also spark a broader wave of innovation, said RedMonk's Coté.

Interesting technologies have been dreamed up by people who lost their tech jobs, with one example being the popular blogging platform Movable Type, he said. "That might be one of the bright sides of this."

Copyright © 2009 IDG Communications, Inc.

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