On Demand and the Packaged Enterprise Software Market: Competitive Threats and Market Opportunities

Transcription

1 On Demand and the Packaged Enterprise Software Market: Competitive Threats and Market Opportunities An Enterprise Applications Consulting Market Report Joshua Greenbaum Fall, 2003 EAC 375 South Mayfair Ave. Suite 220 Daly City CA t el fax josh@eaconsult.com

2 Table of Contents Introduction... page 1 The Parameters of the Competitive Threat... page 3 Indirect Competition... page 4 Direct Competition... page 5 Recommendations for Action... page 7 Conclusion: Finding the Opportunity...page 11

3 Introduction IBM s On Demand market initiative is an unprecedented campaign by a market leader to redirect the public debate about the future of innovation in favor of a technology, hardware, and services approach that significantly favors IBM and disfavors a large number of companies, many of them long-standing partners of IBM. Enterprise Applications Consulting (EAC) believes that On Demand is nothing less than an attempt to build a case for total account control within the IT market in a way that hearkens back to IBM s glory days of the 1970s and early 1980s. In particular, this initiative severely threatens the market positions of the top packaged applications vendors, despite their almost universal status as official IBM partners. On Demand is based on a recognition that growth for IBM must come from enterprise customers that have heterogeneous systems and conflicting or non-existent loyalty to their existing, non-ibm software and services vendors. These customers require that innovation occur within the context of an established applications and middleware infrastructure (or infrastructures), and that innovation be undertaken incrementally and not require complex, big bang solutions. IBM has positioned On Demand in the software market to be the solution that transcends heterogeneity and the messy conflicts of the applications and middleware market by superimposing IBM s software and consulting services on top of an increasingly commoditized applications infrastructure. In this worldview, packaged applications from vendors such as SAP, Oracle, and PeopleSoft operate at a layer below business innovation or process automation, and are positioned on the commodity side of the business gap that IBM is trying to span with On Demand. In virtually all On Demand presentations that deal with the world of enterprise applications, packaged software is positioned well below the level of innovation and high-value that IBM accords the custom applications and process improvements that are part of the On Demand promise. The Basic Assumptions of On Demand vis-à-vis Packaged Software: Packaged Software is Infrastructure Innovation is Applications Infrastructure-independent and WebSphere Dependent High Value Innovation is Customized, not Packaged Copyright 2003 EAC 1

4 On Demand also threatens all enterprise applications initiatives that seek to capitalize on Web Services opportunities while preserving existing applications investments, and customers. Thus, SAP s NetWeaver and xapp initiatives, to cite SAP s answer to On Demand, are in direct, product-to-product competition with On Demand. Oracle, while less directly aligned against On Demand on the applications side, is also threatened by On Demand, particularly on the database and applications server side. Other vendor efforts, as they emerge, will also be competing directly with On Demand. WebSphere is increasingly positioned as an overall architecture, much like NetWeaver, that serves as the basis for composite applications and for support of heterogeneity, the hallmarks of a services architecture. The integration of the Rational and CrossWorlds product lines, and the ability of IBM to leverage DB2 as part of its competitive positioning, increases the significance of the direct threat to NetWeaver and other applications architectures. WebSphere s applications server installed base in the overall enterprise applications market makes it a major threat to those vendors as well: as the WebSphere brand expands, the upgrade/upsell opportunity for the more complete version of WebSphere makes it a serious contender for customers looking for a platform for innovation and consolidation. Nonetheless, in the long run, EAC believes that the threat to packaged enterprise applications is actually more in the perception, however indirectly delivered, that On Demand is the unique solution for next generation innovation. There is also a definable threat from having to fight a feature/functionality war between WebSphere and competitive platforms like SAP s NetWeaver and other comparable offerings as they emerge from other vendors. It is possible that the top-tier applications vendors could engage in a such a feature/functionality war, but those efforts will be fruitless if IBM continues to claim the innovation high ground as articulated in On Demand s top line messages. If IBM can keep the customer focused on its On Demand solutions, and its disparaging of the value of packaged software, the packaged software vendors advantage as the owners of that software will be gone. IBM will own the account, and the strategic advantage, and the packaged vendor will be just one of many suppliers for commodity applications services. It will be an ironic reversal of the positions that applications and hardware hold in the market today, and one that no doubt would be significant for all concerned. Copyright 2003 EAC 2

5 The Parameters of the Competitive Threat While the On Demand threat is couched in terminology that, for the most part, carefully avoids direct competition with packaged apps vendors, there is little doubt that much of the strategic positioning for On Demand in the applications world comes at the expense of packaged enterprise software. As such, the threat from On Demand comes in two forms: indirect competition and direct competition. For the most part the threat is indirect: IBM maintains a public stance that supports its relations with packaged software companies, an acknowledgement of the billions of dollars IBM earns from working within these vendors ecosystems. But, as we shall see, there are areas where the threat from On Demand is direct and focused on the packaged software vendors core business. For the purposes of this report, On Demand can be seen as two separate, but closely linked initiatives. The first is utility computing and its associated capabilities, such as grid computing and autonomic, self-healing systems. This aspect to On Demand is relatively benign from the packaged software standpoint, as it does not conflict with most vendors packaged software operations. At the point at which any applications vendor wishes to focus its services efforts on outsourcing as a significant line of business, then the outsourcing components of On Demand could become an issue. (This is mostly an issue for Oracle, which has maintained a significant outsourcing business). Regardless, much of the utility-computing aspects of On Demand are either the repositioning of existing capabilities in IBM s storage and server product line or in its outsourcing services, or, as in the case of autonomic computing, so far off into the future as to not be of any particular concern in the next five years, or longer. (In particular, transposing autonomic, grid computing from a hardware and systems software focus to the applications world would necessitate a significant re-architecting of the current generation of enterprise applications at considerable expense to customers, as well as software vendors. EAC believes such a reality, if it ever occurs according to IBM s present vision, is many years in the future.) Innovation through Services-Delivered Customization On Demand s other main focus, and the one that has immediate legitimacy in the applications market today, is on the foundation for technology and business innovation in the enterprise. This broad capability for On Demand encompassing WebSphere and other key software products (Rational, CrossWorlds, Tivoli, Lotus, and DB2) as well as Global Services consulting and outsourcing defines the indirect competitive threat to packaged applications and is the key to Copyright 2003 EAC 3

6 On Demand s brilliance as a marketing initiative. IBM is using the On Demand concept to define both a distant future (autonomic computing) and a very real present (innovation through servicesdelivered customization) that puts IBM, its products, and services, at the forefront of any discussion with any customer or prospect. With a deliberately broad On Demand message as its calling card, IBM sales reps can have a conversation with any executive at any-sized business about a present and future vision based on On Demand. That conversation, fueled by the effects of IBM s $700 million-plus marketing campaign for On Demand, allows IBM to set the agenda and define the parameters of innovation with any enterprise customer, including those of the packaged software vendors. Innovation, according to IBM, is defined not as coming from packaged applications but from custom-developed solutions built on top of an existing packaged applications infrastructure. That infrastructure be it from an SAP, an Oracle, or a PeopleSoft is neither as valuable nor as strategic as the custom applications that IBM will build as part of On Demand. IBM insists that it will continue to promote its partner applications in the market, particularly as part of its consulting and services offerings, and the company continues to do so at the marketing level. IBM s 10,000 software sales specialists, however, aren t compensated for sales of third party software, and therefore EAC expects, at the field sales level, that a consulting-lead development project would be favored over a project that placed a third party composite application instead. This field-level competitive effect will take place outside the public domain. Despite IBM s official position regarding partner, EAC expects this effect to significantly favor IBM services over packaged third party products. Indirect Competition On Demand s focus on innovation through services-delivered customization permeates IBM s marketing messages, and defines a competitive position that pits IBM s custom-developed solutions against SAP s NetWeaver-based xapps, and potentially, similar forthcoming solutions from other packaged software vendors. IBM s messaging regarding this aspect of On Demand, which at its core is about delivering services architecture-based composite custom-applications, has allowed the company to include a variety of current industry hot-buttons into the On Demand umbrella. This includes direct mention of the following concepts in On Demand presentations: Copyright 2003 EAC 4

7 The real-time enterprise Low-cost, improved asset utilization Bridging the gap between business transformation and IT Web services and services architectures Composite applications Process management and innovation In addition to these themes, the language of On Demand includes the terminology of cost control and total cost of ownership. Thus, On Demand presentations talk about such themes as ROI, productivity, revenue enhancement, lower costs, improved efficiency, and quality of service. One of IBM s singular achievements from a marketing standpoint is to roll up all these separate issues and terms into On Demand, and provide On Demand solutions as the answer to the questions posed by these issues. This is key to the indirect threat to packaged applications that is posed by On Demand. IBM has subsumed most of the major marketing themes in the enterprise software market under the On Demand initiative, and is able to engage customers on these themes and thus offer an IBM-centric solution. Indirect competition will also come through the partner channels that IBM has established for the various programs under On Demand. WebSphere poses the biggest threat here: in addition to Global Services, IBM Software is engaging major systems integrators like Cap Gemini Ernst&Young and BearingPoint to work with WebSphere. WebSphere Portal (see Direct Competition below) has more than 150 ISV partners. The WebSphere applications server more closely identified as a competitor of SAP and Oracle, with Siebel, PeopleSoft (and J.D. Edwards), among the many ISV partners for this product. Direct Competition IBM is careful to limit any public mention of direct competition with its top packaged software partners. In every EAC briefing with IBM executives, the strong relationship of On Demand to ISVs was emphasized. Nonetheless, there are a number of examples of the beginnings of direct competition. These can be seen in services offerings such as Application Management Services (AMS) as well as across the WebSphere product offering. Copyright 2003 EAC 5

8 AMS is an important example of the application of IBM s position regarding the commoditization of the enterprise applications market. The main focus of AMS is to help enterprises optimize and transform their applications portfolios, a laudable service that has been part of many systems integrators offerings. The specific competitive threat from AMS is twofold: account control and applications sunsetting, or rationalization. The AMS service, which IBM is rolling out through October 2003, is designed to give IBM consulting the power to transform and rationalize customers applications portfolios through a series of assessment, upgrade, and sunsetting services. This is to include both modern applications and legacy applications. The account control aspects are obvious: in the application transformation example presented to the analyst community at the announcement of AMS, the fictitious customer described by IBM had a series of COBOL applications as well as SAP s R/3. The rationalized environment after an AMS engagement still had R/3 in the portfolio, but the COBOL applications were replaced by other applications based on WebSphere, CrossWorlds, MQ, and other IBM technologies. EAC believes this highlights the direct threat from AMS: R/3 in this example is relegated to infrastructure and innovation is the purview of IBM technologydriven solutions. It is conceivable that IBM could also suggest decommissioning, or sunsetting SAP or other packaged software as part of an AMS engagement. The continuing evolution of WebSphere and its role at the center of On Demand highlight other aspects of the direct competitive threat to packaged software vendors. WebSphere Portal marketing has targeted SAP and Microsoft as the key competitors, according to a February briefing with analysts, and industry analysts were polled in July regarding, among other things, whether they believed that SAP and Oracle were competitors to the IBM Software Group. (BEA, BMC, Computer Associates, HP, Microsoft, and Sun were the other options.) EAC believes that this competitive positioning will only become more direct as NetWeaver evolves, Oracle and PeopleSoft announce similar initiatives, and the packaged software vendors infrastructures become more competitive with WebSphere. The greatest direct threat from WebSphere, however, comes from its positioning as the platform for composite application or xapp-like innovation. WebSphere Business Integration currently offers 48 solution templates for 11 industries, including some, like M&A and an automotive dealer system, that mirror actual or potential xapp offerings from SAP. WebSphere also comes with an unspecified number of accelerators that appear to be model-based templates. These solutions are described as sitting above the applications layer (consisting of packaged software Copyright 2003 EAC 6

9 products) and will compete directly with xapps and other composite applications. Needless to say, WebSphere, when combined with Rational, CrossWorlds, and new functionality within Tivoli (for deployment management) and Lotus (for collaboration), is positioned directly against NetWeaver and future services architecture offerings. EAC believes that, while both SAP and IBM s marketing efforts may continue to avoid direct competition between WebSphere and NetWeaver today, and other packaged applications vendors offering will be similarly positioned, it is obvious that there will be considerable competition in the field. Recommendations for Action From the user standpoint, all other issues being equal, the battle between IBM and the packaged applications vendors boils down to a decision about where the next piece of innovation will emerge, whether from NetWeaver-like platforms from the applications vendors, or IBM s On Demand (or a third party platform like Commerce One s Conductor, though this analysis won t touch on that issue.) This further focuses the competition for innovation between On Demand solutions and composite applications such as SAP s xapps or custom solutions derived from packaged applications. EAC expects customers to evaluate the two competitive offerings along the following parameters: 1. Overall Feature/Functionality 2. Adaptability to Specific Customer Requirements (Including Verticalization) 3. Time to Payback/ROI 4. Integration Complexity and Cost 5. Software License to Services Ratio Of these factors, the software license to services ratio is the single most important metric. Right now, IBM s early experiences building composite-like applications based on WebSphere Integration show a relatively high ratio and overall cost. For example, as of May, IBM reported having developed approximately seven custom retail distribution applications for its customers. The average cost for these applications was $1.3 million, which breaks down to $225,000 for the WebSphere Integration toolkit (WebSphere Integration Server, two collaboration templates, four adapters, and Rational modeling tool components) and $1.075 million for services. This license to services ratio of nearly 1:5 casts WebSphere solutions in a negative light, and should provide packaged applications vendors with guidance as to how to evaluate the relative value of their Copyright 2003 EAC 7

10 offerings. If, for example, a packaged composite application s total cost of ownership rivals these prices, it will be hard to fight against the appeal of high-value, customer-specific custom solutions driven by On Demand s market appeal. Lower license to services ratios, which should derive from lower integration costs and provide faster ROI, will make or break much of the relative competitiveness of composite applications solutions from packaged software vendors. In addition to paying attention to price, packaged software vendors must pay close attention to their installed base. IBM is uniquely capable of challenging these vendors in their installed base since there are a significant number of high-end accounts that are customers of IBM and the packaged software vendors. As this war will be mostly about installed base sales, everything the vendors can do to reinforce ties to those overlap customers will be significant. EAC recommends that more attention be paid to account management and customer loyalty programs as a way to combat the On Demand threat. In addition, EAC believes there are other possible courses of action based on packaged software vendors willingness to confront IBM more directly. These include the following: Fight On Demand Directly. The term On Demand, as far as EAC can tell, has not been copyrighted by IBM and could be used or even co-opted by packaged software vendors as part of their own messaging. (Oracle has already begun to do this with some success.) These vendors can do a lot to be more On Demand-like in their messaging and provide closer direct ties to On Demand through, for example, more direct support for the WebSphere applications server within their products. This is particularly germane for Oracle and SAP, which are competing directly with WebSphere. The packaged applications vendors can take much of the messaging that IBM uses to describe the software side of On Demand and show how well their similar offerings can meet those needs. Part of this effort would necessitate a more direct involvement in applications hosting: EAC believes that this is a key omission in the overall marketing messages of the entire packaged software market, with the sole exception of Oracle, and one that leaves these vendors vulnerable to an important part of the On Demand message. Increase the Pace of Composite Applications and Services Architecture Development. SAP s NetWeaver, the only viable services architecture currently being actively marketed by a major packaged software vendor, is nonetheless still a work in progress. Furthermore, despite a significant effort, the common perception is that SAP, as the perceived market leader in Copyright 2003 EAC 8

11 composite applications, has not put forth a critical mass of xapps nor, importantly, has SAP been able to broadly articulate the all-important license to services costs that will help describe the relative advantage of xapps over custom-developed composite applications. EAC believes that as SAP continues to bring forward NetWeaver as a bona fide development platform and articulate the specifics of the ROI for xapps, SAP will gain in the perception market, to the obvious detriment of its competitors, who currently lag SAP in this arena. SAP is far from having anything resembling a lock on the composite applications market, however, and the issues of which platform and what the expected total cost of ownership for composite applications are far from settled in the market. Indeed, the overall market still needs true leadership regarding cost, ROI, and the extent of the packaged software opportunity in services architectures. The more packaged software vendors can do to take leadership on these issues, the better their competitive position will be vis-à-vis IBM and each other as well. Move More Directly to Provide High-end Consulting Services. This is probably the most expensive and risky proposal here, but one worth articulating. IBM Global Services strength is due largely to the perception that it can provide not just technology consulting but high-end, business consulting as well. These business process-related services reflect the highest possible value proposition for the customer, and to a large extent are part of the shift from horizontal software to highly focused, verticalized or customized approaches. As long as packaged software vendors leave the very top of the business consulting world to others, they risk being marginalized as tool providers, instead of the business change leader or trusted innovator that these vendors envisions their roles to be. While the most extreme solution to this problem would be the acquisition of a major consulting company, there are other ways, such as tighter alliances with existing SI partners (including possible joint ventures) that could help maintain packaged software vendors position as the owner of the business level problems that its customers are trying to solve. Conclusion: Finding the Opportunity The threat of On Demand brings with it opportunity as well. IBM has defined a rich set of themes around On Demand that packaged software vendors could use to their own advantage, as most of what IBM can deliver today on the software side of On Demand can also be offered by these vendors either today (in the case of SAP, and to some extent Oracle) or in the near future. Assuming packaged software vendors options are limited to largely indirect competitive activity, Copyright 2003 EAC 9

12 EAC believes that these vendors could benefit by embracing On Demand and its capabilities while articulating a message of superior relative value. In other words, xapps, NetWeaver, and other possible solutions that can compete with On Demand must reflect the cost advantages that are assumed to be essential to a packaged software approach. This means that the pricing model for packaged solutions must ensure that the license to services ratio be kept low, while maintaining a high degree of functional or vertical specificity. EAC believes this in turn will require a large selection of packaged composite applications in the market. SAP and its packaged software competitors will need as large a third party composite applications market as possible in order to meet the innovation requirements of the large number of markets and functional domains that IBM is targeting. Though this may limit some of these vendors revenue opportunities in the short term, it is preferable to an alternative that pushes the packaged software vendors further down in the innovation stack. Having a potential On Demand consulting project end up as a third party packaged composite application deal would be much more advantageous to packaged software vendors than giving IBM a beachhead into an SAP, Oracle or PeopleSoft account that would allow the rest of the On Demand message and therefore IBM s hegemony to take hold. A successful packaged composite application deployment, even from a third party, would still give the packaged software vendors an important edge. Time is of the essence in this regard. There is evidence that the vaporware aspects of On Demand are beginning to be brought out (see, for example, IBM s New Hook, CIO Magazine, July 1, 2003), at a time when the broader marketing messages behind On Demand are gaining greater credence. EAC believes that timely action by packaged software vendors to indirectly engage IBM and use On Demand messaging for their purposes could yield important benefits just as the NetWeaver initiative is gaining critical mass. Regardless, to ignore the threat from On Demand would be a serious blow to the enterprise software market and the continued ownership of innovation by the packaged software vendors. Copyright 2003 EAC 10