It was a multi-billion dollar game of musical chairs. In early 2007, the business intelligence (BI) tools market was one of the last refuges for sizeable but independent software vendors. A year and $15 billion in acquisitions payments later, the three largest names in the industry (Hyperion, Business Objects and Cognos) had all been bought out by three ‘gorillas’ of IT (Oracle, SAP and IBM, respectively).

Given the market’s long history of healthy competition, the rapid succession with which major players sold out came as a real surprise, not least to customers. And that shows in confused and delayed purchases: the moves in the market and uncertainty of the outcomes has resulted in BI buyers reducing their spending plans, according to industry adviser Gartner, whose analyst Bhavish Sood pronounces, “the days of strong double-digit growth in the global BI market are over.”

The list of the remaining sizeable independent vendors is short. Actuate, MicroStrategy, Information Builders and, arguably, SAS Institute and SPSS have neither the scale and reach of mega-vendors, nor the flexibility and disruptive potential of the myriad local and vertical mini-vendors.

There is still an appetite among the user community to buy from independent vendors. After all, many demand BI tools that sit apart from any underlying application, database or middleware platform. But whether these vendors can continue to provide compelling offerings is being questioned by analysts and users alike.

Catalysts for consolidation

There are many accounts documenting the evaporation of the high-end BI tools segment during 2007.

For Dan Sommer, principal BI analyst at Gartner, the key trigger was Microsoft’s announcement early in the year that it would be entering the performance management space (a subset of BI) with its PerformancePoint Server product.

“That made a lot of the vendors think about whether they could remain independent,” he says. “Microsoft had entered a BI market before – the OLAP space [in the late 1990s] – and undermined the margins,” he adds.

“This time the acquired vendors all had a performance management story,” he explains. “The ones that are left do not.”

But many accounts point to a deceleration of innovation among the BI providers as a catalyst for consolidation.

Jack Noonan, CEO of statistical analytics software provider SPSS (which now distances itself from the pure BI market, citing deeper roots in statistical analytics), says the writing was on the wall five years ago, when BI vendors started to tailor their products for specific vertical industries.

“When software vendors can no longer differentiate themselves from functionality, they have to distinguish themselves using the relationship they have with their customers,” he explains.

“It happened with [CRM provider] Siebel just before it was acquired and it happened in the BI space.” Others see the same signals. “Once innovation stops, you either get acquired by one of the stack vendors or you fall behind,” says Gerry Cohen, CEO and founder of Information Builders. This, he says, had happened at the BI vendors that were acquired in 2007.

The death of innovation?

Once a vendor is acquired, customers can expect innovation to grind to a halt, echoes Rowland Adshead, UK managing director of MicroStrategy, the company that in 2007 became the world’s largest independent seller of BI software – although through no action of its own. Watch what will now happen to the R&D spending of the acquired companies, he warns.

“Suddenly, development budgets are directed to integrating software with the mega-vendor’s existing products,” Adshead says. The remaining independent vendors, on the other hand, will have to stay innovative, as they have no ability to lock customers into underlying software platforms, he adds.

Perhaps unsurprisingly, Frank Buytendijk, a former analyst who left Gartner to join Hyperion and is now VP for performance management at Oracle, takes the opposite view. “Consolidation is innovation,” he says. “In the 1980s, we had executive information systems with no connection to the transactional systems below and were of limited use as a result. Now our systems are so well integrated that we can expose back-office systems to our customers.”

As for innovation within the mega-vendors, Buytendijk argues that it is easier and faster than among the independents. “The independents have to deal with things like security and integration themselves, but at organisations like Oracle that is taken care of by the economies of scale,” he says. “BI developers can concentrate on BI.”

Reaching out

The consolidation of the software industry has – contrary to popular perception – made competition greater, Buytendijk argues: “If there are a few large software ecosystems in the world that have taken care of the basics, like the middleware and the database, it becomes incredibly easy for a small company to develop a disruptive product.”

The emergence of these software ‘ecosystems’ is less beneficial to BI vendors that have spent many years and many millions of dollars making sure their products can integrate with all manner of data sources, says Buytendijk. That investment no longer affords them much competitive advantage. “It means it has become harder for the remaining best-of-breeds that are not aligned to one of the ecosystems,” he adds.

Gartner’s Sommer observes that there are many ways in which this will benefit enterprise organisations: “BI has traditionally been seen as not actionable, but, if you can embed it into business processes, that will improve. Only 10% to 15% of the potential market that could benefit from BI is currently using it. But with the large marketing muscle and cross-selling opportunities the platform providers have, that could improve. BI could simply reach more people.”

“Thirdly,” he says, “BI has so far only been focused on structured content, but when it is integrated by vendors that have good search and good content management offerings, BI might become part of a larger story and better integrated with other technologies that have traditionally been siloed.”

Meanwhile, new entrants to the market are capitalising on the expanding mid-market opportunity. Up-and-coming QlikTech, for example, has combined a mid-market focus with a popular user interface – and a money-back guarantee. With revenues growing by 75% in 2007 to reach $80 million, QlikTech is knocking on the door of the more established independent vendors.

Further pressure in the mid-market comes from Microsoft’s BI offering and, most recently, from Google. The search giant and aspiring business software provider announced in March 2008 that it is to allow users of its Google Docs spreadsheet application to use BI functionality from another up-and-comer, Panorama Software, for free. Google has already made significant waves in the web analytics arena with its free offerings, and this move may allow it to repeat the trick with offline data.

The people’s choice

Independent players are under pressure from the platform vendors, who can offer enterprise customers easily integrated BI software, and from newer vendors who are unburdened by legacy integration businesses. Combine this with decelerating BI spend and the future for these vendors is less than optimistic.

But all is not lost. There are three factors indicating that there may yet be a rosy future in selling BI independently.

As Sommer points out, having best-of-breed technology still counts for something. “For example, Actuate and Information Builders have large production capabilities, and SAS has unbeatable deep analytics capabilities,” he explains. “MicroStrategy is the most scaleable and the most liked in the technical community. They still have some best-of-breed advantages, even after the consolidation.”

Furthermore, BI buyers do still favour buying from independent suppliers, even if their choices have been severely reduced. According to the polls conducted at Gartner’s BI conferences, the overwhelming preference among customers is still to buy from the best-of-breed providers, Sommer reports (see chart).

“Up until a few months ago, that was reflected in the market share figures,” he says. “I doubt that BI buyers have caught up with where the industry is at yet.”

And finally, Information Builders and SAS Institute are privately held, largely by their founders (Cohen and Jim Goodnight, respectively); and although MicroStrategy is public,

founder Mike Saylor holds sway over much of the voting stock. This probably explains why such companies are the wallflowers of BI – founders are typically reluctant to sell up. It could also mean that they are better able to withstand the widely predicted downturn in the US economy unpestered by results-driven shareholders.

Nevertheless, the greatest danger for these companies is that the industry profile that BI has built up over 20 years will simply fade away.

Further reading

Business intelligence spending to slow Consolidation leads to customer caution

Crowd-pleasing analytics The Royal Shakespeare Company’s data analysis project helps draw in the crowds

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