Vendors of specialized applications protect the keystones of fusion

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1 Strategic Planning, M. Raskino, A. Kyte, W. Andrews, C. Abrams Research Note 19 January 2004 SOBA Offers New Hope for Niche Vendors of Business Software Niche vendors often fall prey to larger rivals that envy their specialist skills. To survive, they must work with the big vendors on service-oriented business applications. In fact, cooperation is in everyone's interest. Core Topic Internet Platforms and Web Services: Web Services Key Issue How will Web services create new, and transform current, business and consumerfacing applications through 2008? Strategic Planning Assumption By 2007, 60 percent of specialized business application software provided by niche vendors to large enterprises will be brokered through "megavendors" that offer frameworks for service-oriented business applications (0.7 probability). Vendors of specialized applications protect the keystones of fusion Many smaller application vendors create a niche by specializing in business processes that are important to a narrow market segment. These vendors rely on a deep understanding of these processes as their core value contribution. General ledger accounting and sales force contact management are examples of business processes that can be generalized into solutions and sold widely by the largest business application vendors ("megavendors") to many corporations in various industries and geographies. But the retail assortment management of apparel in North America or business travel management in Germany are areas that may be too specialized to be delivered successfully by the largest application vendors, so small and midsize niche vendors spring up to fill the gaps. However, business application buyers want joined up, comprehensive solutions not a patchwork of applications that interoperate poorly. Indeed, one of the biggest problems faced by many large IS departments is the enormous catalog of business applications they have to maintain. These applications drain IS budgets, due to the high proportion of operating costs, and prevent them from investing in valuable, new business change techniques. Everyone needs the capabilities of specialist vendors to thrive A megavendor that covers only common core-business processes, leaves gaps in the specialist process for the buyer to Gartner Entire contents 2004 Gartner, Inc. All rights reserved. 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 sort out. These gaps are not necessarily in the competitively differentiated areas of the buyer's core competencies, but might be in industry- or geography-specific processes, which are just a cost of doing business. So there may be little inclination to apply scarce in-house development resources and the pent-up demand remains for an external specialized solution for applications. Traditionally, this might be fulfilled by the large vendor's services arm (or partner) building a tailored application, or by going to one of the many small, niche application vendors. But often neither solution is wholly satisfactory. The services arm of the vendor may lack specialist skills in the business process area concerned or may bring those skills in on a temporary basis to fulfill the contract. This leaves doubt over future support and enhancements. A specialist vendor will have the detailed business process skills and understanding needed, but there may be risks and costs to the buyer. These include uncertainties over the niche vendor's longer-term business viability and continuity, the costs to the buyer of managing another service relationship, and the lack of skills and capital to keep up with the latest software architectures, standards, tools and techniques. More mergers won't help If megavendors buy niche providers to absorb their specialized skills and software, their customers could benefit from a "one stop shop" and be able to cover any gaps in their processes. But experience suggests that, in practice, when the software and the specialized business process knowledge is lifted out of context and placed inside a megavendor, it can be destroyed in the transition. The core competency may come down to a handful of individuals working within unique culture and team dynamics, which cannot be protected. By YE03, three years into the IT industry's general recession, many weak and unsustainable niche application vendors had either been assimilated or had folded. Most of the remaining vendors have important, viable specialisms, which are undersold to a few hardy corporations. These corporations have the skills, finances, and a pressing need to overcome the hurdles and to manage direct relationships with them. Properly harnessed service-oriented business applications will address the problem 19 January

3 Service-oriented business applications (SOBA) may offer a way forward (see "Service-Oriented Business Applications Show Their Potential"). This will be possible if small vendors are able to write niche application software to service-oriented architecture (SOA) standards and make those applications integrable with the mainstream business application offerings of the megavendors. For example, if SAP's xapps and NetWeaver architectures are open enough, niche vendors that complement the functionality of SAP could build specialized applications to fit in with the common application functions of enterprise resource planning (ERP). Likewise, users could take advantage of a two-tier vendor strategy with SAP at the corporate location, and with a niche vendor at a satellite site (for example, plant or distribution center). The meta tagging capabilties of SOA, based on Extensible Markup Language (XML), could enable activity tracking and allow usage-based pricing models to emerge. This will help to frame and economically operate the relationships between the megavendors and small, niche vendors. Symbiosis will be more powerful if a few templated models of commercial tradeoffs can be encapsulated within the models for services software architecture. The problems of complex upfront negotiations for licensing, which tend to marginalize small "partner" vendors in big deal powerplay, could be reduced. In this scenario, the customer would benefit from a more comprehensive solution at lower risk. The megavendor would increase the potential total value of its contract with any one customer, and the niche vendor would have a sustainable future and potential access to a broader market. In particular, complex and unusual projects for business process fusion could be enabled. The competitive business advantage and potential business value of fusion projects, which include specialized and niche processes, are likely to be higher than those that link only processes already found in mainstream ERP modules. In the past, IT vendors have often failed to take advantage of such opportunities as new markets emerge. The assumption that all market "battles" must be zero sum games may lead instead to suspicion and protectionism. The main risk is that fear and greed will cause the megavendor to include proprietary extensions and unpublished features of the architecture, and that it will remain hostile or uncooperative with the niche vendors. Advice to application megavendors You may be eradicating some troublesome midsize competitors, but be careful that you don't eliminate those with the potential to boost your future markets. You can never become expert in 19 January

4 every industry specialist process, and your chosen services providers cannot economically, or speedily, customize every requirement. As the real-time economy progresses, your ability to win contracts will often depend on your ability to work and integrate deeply with the functionality of small, highly specialized, niche vendors. Be prepared to sacrifice some of your own poorly specialized modules as the price for attracting the best niche vendors into your SOBA framework. Create standard platforms and collaborate on deals to make your applications more attractive to business process innovators. They will be key in shaping the many and varied vertical industry transformations that business process fusion brings. Advice to specialist niche application vendors Understand how the opportunities of business process fusion will change the market landscape. For your enterprise customers to see significant IT-enabled business improvement, the functional capabilities of your software will need to be deeply and seamlessly integrated with a variety of other disparate applications in long, end-to-end process chains. Eventually, stand-alone and point-integrated solutions will become impossible to sell. Plan for SOA or SOBA and aim for a higher level of integration between your software and the business applications of megavendors. Contact those megavendors that may have revenue-sharing models. Start negotiations to include you in their delivery frameworks and marketing strategies. Prepare for such partnering models in advance to repel any potentially aggressive takeover bid against you in 2004, which may be fueled by an IT market recovery. Advice to users Explore different scenarios for business transformation enabled by business process fusion and SOBA. Examine options that rely on including specialist business processes alongside more generic ones. Turbulent market conditions and further consolidation means that it remains risky for some of your business processes to be dependent on the smaller providers of niche applications. As a precaution, factor in the costs of custom builds whether they are internal or from a services provider. Look closely at the SOA or SOBA vision and development plans of the niche vendor. Check they are consistent with those of your chosen major suite vendors. 19 January

5 Challenge your chosen major suite vendors to explain their vision for fully integrating the niche applications that you need. Beware of megavendors' impending announcements for their own new niche functions and check their commitments and road maps thoroughly. Only rely on the megavendor to deliver the function you want if you can afford to do without it for two years. If you need it sooner, include the niche vendors in your plans. Bottom Line: Megavendors must open up interfaces to their applications by publishing at least a hundred Web services before YE04. Small vendors should stop looking for exit strategies and instead renegotiate a plan to boost profitability and dividends for investors, based on a sustainable niche. Users must stop demanding that only megavendors should be allowed to respond to requests for proposals. 19 January