Break the application chains

During the 1990s, many organisations spent millions of pounds on enterprise applications – such as enterprise resource planning (ERP) and customer relationship management (CRM) systems – that brought a degree of automation to previously paper-based business processes.

Much of the 2000s, however, were spent trying to integrate those systems, and to adapt them to changing circumstances. As the years wound on, businesses began to wonder whether the monolithic software stacks they had built at such great expense had become straightjackets that might cost just as much to escape as they had done to design and deploy.

That sinking feeling came into sharp focus in 2009. On the one hand, IT spending cuts forced most organisations to reduce their application investments.

A recent survey of UK businesses conducted by the National Computing Centre (NCC) found that one quarter had put all enterprise application projects on hold as a result of the economic climate, while a further 41% said at least some application projects had been put on ice.

That inability to make significant changes to the application estate could not have come at a worse time. Businesses found themselves in a rapidly changing environment, with market conditions, supplier networks, staffing levels and more in near-constant flux; but thanks to the freeze on application investment, they were forced to make do with systems and processes designed for a growing economy.

This dilemma helps to explain why software-as-a-service (SaaS) application vendors, whose pay-monthly licensing reduces the need for capital outlay in IT procurement, had a strong year in spite of the economic downturn.
On-demand CRM pioneer, for example, enjoyed revenue growth rates of at least 20% for each quarter during the past 12 months. The company expects full-year revenue to be $1.3 billion, up 20% from 2008. Other SaaS vendors including RightNow, NetSuite and Workday also enjoyed strong revenues during the year (although profitability remains a sore point for this corner of the industry).

That said, adoption was limited among respondents to the Effective IT Survey: only 26.8% have so far deployed SaaS, and 14.6% intend to do so in the coming year. The strategy was described as either effective or very effective by 63.8% of respondents and 71.1% said the strategy had delivered the expected ROI, these figures earning the strategy a mid-table ranking by both measures.

The success of the SaaS vendors, in spite of relatively low adoption among the Effective IT Survey respondents, might be explained by the concentration of those respondents in the UK: SaaS adoption is more pronounced in the US. It may also be that business users have deployed SaaS tools without their IT department knowing.

Towards flexibility

In contrast to the SaaS providers, traditional application vendors suffered an annus horribilis in 2009. SAP – the poster child of the ERP boom – endured three consecutive quarters of revenue decline. In January 2009, the company announced plans to cut 3,000 jobs – around 6% of its workforce. Arch rival Oracle’s application business fared a little better, but like SAP saw double-digit declines in new licence revenue throughout its 2009 financial year.

With luck, there should be greater demand for enterprise applications in 2010, as businesses seek ways to improve the efficiency and flexibility of their business processes in order to adapt to new economic conditions. However, customers will remember the lessons of the past, and will not adopt technologies that they think will constrain their ability to innovate in the future.

SaaS proponents argue that the on-demand model reduces the cost of innovation. Functionality upgrades to SaaS applications, they point out, are deployed for all customers automatically, without the disruption associated with traditional software upgrades. It is therefore reasonable to expect that SaaS vendors will continue to disrupt the applications industry in 2010, especially in functional areas that are peripheral to the business’s core processes, such as CRM and HR.

But for many enterprise organisations, the backbone of the application stack is the core of business operations, and not something that can easily be replaced.

Many of the traditional application vendors have launched initiatives to provide their customers with more flexible applications, initiatives that have mainly involved baking service-oriented architecture integration functionality into the application software. This supposedly allows customers to build new applications functionality quickly and easily and even, it has been claimed, to empower non-IT employees to build such functionality themselves.

Whether this has proved to be the case is as yet unclear. According to Altimeter Group’s enterprise software analyst, R ‘Ray’ Wang, SAP’s NetWeaver SOA initiative counts among that company’s many innovation projects that have yet to live up to their promise. Meanwhile, Oracle’s next generation of applications, named Fusion and built entirely around SOA, have still yet to be released five years after they were first announced.

There are signs, however, that SOA is beginning to meet with mainstream adoption, not least of which being the Effective IT Survey itself. It may be too soon, therefore, to write off the on-premise approach to software. Meanwhile, on-demand products launched by traditional suppliers have yet to seriously trouble the established SaaS vendors, but that too could change: lessons learned from early failures may lead to more successful second attempts.

Furthermore, and in a repeat of the best-of-breed versus suite wars of the past two decades, adopting best-of-breed SaaS tools could revive familiar integration problems, which the suite vendors could turn to their advantage.

Clearly, the coming year will be a critical period for the traditional enterprise applications vendors. If they can grant their customers the flexibility and freedom of innovation they require, they may well be repaid with continued loyalty. If they cannot, however, the appeal of going ‘on-demand’ will grow.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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Enterprise Applications