Business Applications and Infrastructure Entwined

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1 Markets, S. Hayward, B. Burton, J. Comport, Y. Genovese, T. Bittman Research Note 9 July 2003 Business and Infrastructure Entwined Oracle's bid for PeopleSoft encompasses more than applications. It illustrates the pressure for vertical consolidation of application functionality and the supporting infrastructure stack. Core Topic ERP II, Supply Chain & Manufacturing: ERP II Strategies, and Technologies Key Issue How will ERP II vendors and markets evolve? Strategic Planning Assumptions Through 2006, most large and midsize enterprises will support multiple software stacks, despite the additional staffing and integration costs (0.8 probability). Through 2006, new software built using Web services will operate 80 percent of the time on a homogeneous infrastructure (0.7 probability). Oracle's bid for PeopleSoft is avowedly aimed at Oracle's increasing its scale in the market for business applications and becoming a more effective competitor against SAP. Oracle's core strategy remains to avoid integration of disparate product ranges and to build applications only on the Oracle platform thus delivering an entwined application and infrastructure stack. Although Oracle has been aggressively explicit in this strategy, it is by no means alone. We are so used to Microsoft adopting this approach that it passes without conscious recognition. SAP's NetWeaver strategy is also very similar. In general, there are powerful forces that suggest that success in the application market increasingly depends on vertical integration of applications with the underlying software stack (see Figure 1) or infrastructure platform (see "Megavendors Will 'Handcuff' Your Enterprise Architecture"). Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Figure 1 Trend: Renewed Battle for Infrastructure Control File OS Hardware Infrastructure Depth SAP's Siebel s' Oracle's Technology Stack IBM's Technology Stack Microsoft's = application platform suite = database management system OS = operating system Source: Gartner Research (April 2003) The core IT decision within an enterprise is that concerned with the software infrastructure. One can change hardware, one can select best-of-breed application functionality but one cannot readily switch software infrastructure stacks. The moves by major vendors to bind applications and stacks ultimately benefit customers because they reduce integration costs, facilitate extensibility and improve robustness. The price is: More-constrained choices for applications Reduced leverage in negotiations Limited choices for support Increased risk associated with migration, support and integration of further market consolidation (see "Consolidation: A Reality That's Not Always Good for Users") Because of the legacy of independent infrastructure and packaged-application purchases, diversity of infrastructures is today's reality. Through 2006, most large and midsize enterprises will support multiple software stacks, despite the additional staffing and integration costs (0.8 probability). However, the market dynamics are driving vendors and users to more consolidation. Despite the rhetoric of Web services as a basis for integration between heterogeneous applications and infrastructures, these capabilities will be used primarily to enable 9 July

3 reuse of legacy systems and ease of integration within a single infrastructure platform. Through 2006, new software built using Web services will operate 80 percent of the time on a homogeneous infrastructure (0.7 probability). Gartner previously noted the linkage of enterprise resource planning (ERP) II vendors with a limited number of platforms. By 2007, application platform suites (s) from IBM, Microsoft, Oracle and SAP will emerge as the technology foundation for more than 70 percent of ERP II products (0.7 probability). So this trend is not new it is simply becoming more visible. ERP II vendors' offerings fall into four distinct layers: business collaboration, business applications, enterprise knowledge foundation and the. Convergence within these areas, like the cycle of assimilation for functionality, will continue. Convergence will first be found at the level, with ERP II vendors choosing a core competency of developing business application products and relying on other providers for the technology foundation. This will be true for most ERP II vendors with clear exceptions in the cases of Microsoft, Oracle and SAP. Microsoft will leverage the.net platform. Oracle will retain its own technology foundation, now integrated as 9iAS. SAP offers its newly branded NetWeaver platform. The other significant vendor will be IBM, with WebSphere. As the mass of ERP II vendors align with one (or more) of these s, the technology foundation of the products will no longer be a differentiator. Differentiation will be focused on business application functionality, in terms of both breadth and coverage of the requirements specific to vertical industries. As the platform for applications becomes more extensive, the economic feasibility of retaining independence from the stack diminishes. All the larger vendors are moving to create a comprehensive platform combining the (application server, integration broker and portal) and smart enterprise suite (SES portal, collaboration and content management). SAP has extended the portal acquired with Top Tier to a full SES and has also developed a full. This is now being delivered as the NetWeaver platform. This infrastructure stack is as extensive as those offered by IBM, Microsoft and Oracle, with the exception of the database, which SAP is trying to commoditize (see "SAP Products' Impact on Enterprise Architecture") by creating a data interface independent of any specific product, and by supporting MySQL as an open-source alternative to proprietary products. The resultant platform control and stability should prove attractive to many application customers. SAP 9 July

4 recognizes that the primary domain of competition going forward is defined by IBM and Microsoft, not other application vendors. Microsoft is as committed to its own stack as Oracle. However, we believe Microsoft is torn between continuing its traditional strategy of relying on third parties to deliver applications vs. taking control of at least major applications in major markets via Microsoft Business Solutions. The focus on the small and midsize business market has enabled Microsoft to avoid the issues of market dominance that are so visible in its infrastructure businesses. However, the emerging strategy to deliver a comprehensive application customization and deployment platform is clearly aimed at tying application partners ever closer to Microsoft technology and building barriers to competitive solutions. IBM is not ambivalent about its application strategy. IBM prefers to focus on infrastructure hardware (especially pseries and xseries) and software (especially WebSphere and DB2). However, if the consolidation of enterprise application vendors by the major infrastructure stack vendors continues very rapidly, IBM could be forced into making its own enterprise application acquisitions. IBM's preference would be for a slow consolidation or no consolidation at all allowing IBM's On Demand concept to mature in the market and increase IBM's middleware opportunity as a solution for business process fusion. Siebel s illustrates most clearly the tension involved in positioning as an infrastructure-neutral vendor. Its Universal Application (UAN) strategy is an attempt to build an equivalent ecosystem to that of infrastructure vendors, without in fact owning or delivering infrastructure. In Siebel's case, the ecosystem depends on creating value by defining and delivering comprehensive solutions for business support, and enabling a loose coalition of best-of-breed vendors to achieve comparable market presence to the dominant integrated suite vendors. Whether there is enough added value in this arrangement for it to be sustainable over the long term is debatable previous coalitions driven by limited common interest (for example, among Unix vendors) have not been long-lasting. Siebel is also attempting to maintain parity between Java 2, Enterprise Edition (J2EE)-based and.net solutions. As these platforms increasingly diverge, this will become impossible without creating two distinct code bases (one in Java and one in C#) or creating a common higher-level framework for developing applications, which would then be deployed to one or the other platform. This would, in practice, be Siebel's stack. Application vendors have no option other than to align with a 9 July

5 stack vendor if they are unable or unwilling to invest in creating their own stacks. These trends do not imply that best-of-breed applications are dead. There will continue to be many areas that can only be addressed economically by best-of-breed vendors (such as vertical-focused applications or specialized application modules). The point is that these vendors will be increasingly aligned with one of the major vendors that control both the infrastructure stack and core application areas. The resultant market will be one in which enterprises make a primary choice from a top tier of vendors IBM, Microsoft, SAP, Oracle (if it is successful) and maybe a few others and then from a secondary market of specialized vendors. This structure is reminiscent of the IT industry in the period of dominant mainframe vendors; the control point has just moved from hardware and system software to middleware and the application platform. For those enterprises that do not wish to become beholden to a core IT infrastructure vendor, the alternative will be to opt out of this debate and use hosted solutions. Of course, this has not escaped the attention of the core vendors, and IBM and Oracle are aggressively building their hosting capabilities. Microsoft has so far focused on building its hosting capability for the consumer market. However, this infrastructure can readily be turned to enterprise solutions as market opportunities develop and Microsoft creates channels to serve them. It is already experimenting with specialized offerings, such as location services (MapPoint) and Web conferencing (via its acquisition of PlaceWare). SAP has yet to move in this direction but can be expected to do so if Oracle is successful with its hosting solutions. Acronym Key application platform suite ERP enterprise resource planning J2EE Java 2, Enterprise Edition SES smart enterprise suite UAN Universal Application Bottom Line: Whether or not Oracle succeeds in its bid for PeopleSoft, the attempt focuses attention on the trend toward the "megavendors" creating an entwined application and infrastructure stack, and the difficulty of creating a sustainable business in best-of-breed applications without control of the underlying software infrastructure. It will become increasingly difficult to purchase applications independent of infrastructure choices. However, enterprises will live with the legacy of past application choices for many years to come. It is important for enterprises to understand the strategic direction and focus of their major vendors. Enterprises must use this understanding to properly position themselves in their ongoing application portfolio strategies, and they should use it to their advantage during negotiations and support interactions. Vendor partners need to understand the strategic road maps of their key partner vendors and to continually reassess their cooperative and competitive positions with these partners. 9 July