That's why the term enterprise software is synonymous with business software.
This category includes all the software that's used to manage corporate data, resources, personnel, manufacturing, supply chains, customers and sales. The category is distinct from so-called office productivity software, desktop programs for e-mail, schedules and graphic design.
Companies large and small have come to depend on enterprise software as never before, and after 30 years in business, the industry is consolidating as it reaches a new phase of maturity.
A wave of mergers and buyouts is whittling down the glut of enterprise software makers. Oracle (ORCL) has led the way with $20 billion in acquisitions since early 2005.
In recent years, software vendors have also settled on new technology standards that let users easily share data and programs.
This change has ushered in an information technology platform known as a service-oriented architecture, or SOA. The shift enables companies to build new Web-based services.
Business is constantly changing, so business software needs to keep pace, says Peter Graf, executive vice president of product marketing for SAP. (SAP)
"Change is happening at an ever-increasing speed," Graf said. "Software is the way to codify or automate the business."
1. Business
For years, enterprise software customers have bought licenses for software packaged on disks. Such programs are installed on mainframe or server computers. Client machines, such as personal computers and laptops, then access the programs to perform business functions.
A fresh approach is now roiling the industry. Some vendors host software as a service from their own off-site data centers.
These on-demand software programs are delivered remotely over the Internet. Users need only a personal computer and Web browser to get going.
Young on-demand firms such as Salesforce.com (CRM) are growing quickly. In some ways, their new business model threatens established market leaders like Oracle, SAP, IBM (IBM) and Microsoft. (MSFT)
For starters, software-as-a-service can be cheaper than licensed software.
Users don't bear the direct costs or hassle of managing hardware or patching bugs. In addition, large upfront software license fees disappear. Users pay as they go.
The main strategy for vendors involves acquiring and keeping customers, says Jim Shepherd, an industry analyst with AMR Research.
"Once you get a customer the switching costs are very high, so it is hard for them to switch," he said. "That is why there's a sense that he who dies with the most customers wins."
Name of the Game: Building client relationships. Software is constantly evolving over time with new versions, functions and features. Software makers must cling to their installed base to sell future updates and other products or services.
2. Market
The $150 billion market for enterprise software is expected to grow nearly 8% per year through 2010, according to market tracker Gartner.
The hottest growth areas will most likely be software for business collaboration and security as well as programs to manage enterprise content, customers and IT operations.
This market is facing a "major technology and business model transition" that will last through 2011, according to a recent report by Gartner analyst Joanne Correia.
"The fundamental changes that are occurring in how software technology is being deployed, accessed and used mean that no software market or vendor will remain untouched," she wrote.
One big change involves an expanded view of the prospective market itself. Business software firms have long focused on selling to enterprise customers — the world's largest global firms.
Lately, however, more vendors are moving down-market. They're building less costly software with fewer bells and whistles.
The goal is to penetrate the vast but underserved group of midsize businesses that want full-fledged software, but not necessarily the full range of enterprise-level features, Shepherd says.
"The next opportunity involves hundreds of thousands of potential midmarket customers, and millions in the small business market," he said.
The enterprise software market is also being shaped in part by consumer software giants Google, (GOOG) eBay (EBAY) and Amazon. (AMZN) Such firms focus on simplicity for home users. Enterprise software makers should strive for that same kind of ease, says Bruce Francis, vice president of corporate strategy for Salesforce.com.
"Enterprise software needs to be as easy to use as buying stuff on Amazon or eBay," he said. "They have changed the computing experience for consumers, but our industry still has not changed the business experience."
3. Climate
Several years ago, Oracle Chief Executive Larry Ellison predicted a shakeout for the enterprise software field. He has helped fulfill that prophecy with an aggressive acquisition strategy.
Oracle has expanded its empire by scooping up such competitors as PeopleSoft and JD Edwards, Siebel Systems, Retek and many more. Archrival SAP has taken an alternative strategy based on organic growth.
At the same time, some private equity firms hope to create mini-Oracles by buying up collections of weakened software vendors and building new business suites.
With backing from Golden Gate Capital, Infor now claims more than $2 billion in annual revenue.
Another trend in enterprise software involves the rise of offshore outsourcing firms that leverage low-cost labor to undersell their rivals from North America and Europe.
India-based firms such as Infosys (INFY) and Wipro (WIT) are leading the way. New software outsourcing centers have sprung up in other nations, including China, Vietnam, the Philippines and Russia.
Overall, spending on enterprise software should outpace the 3% to 8% growth rate expected for the overall IT sector in 2007, according to Citigroup analyst Brent Thill. Some of his top software picks are Autodesk, (ADSK) BEA Systems, (BEAS) Symantec, (SYMC) Salesforce, SAP and Oracle.
"We believe that software will provide fertile ground for those looking for higher growth stocks in the New Year as the sector rebounds from pent-up demand," Thill wrote in a note to investors on Jan. 5.
4. Technology
Three technology trends are now having a profound impact on enterprise software. They include the new service-oriented architecture, or SOA; on-demand software delivery; and open source software that's shared for free.
The central focus for vendors today is the rush to offer a more services-based approach to software. An SOA blueprint makes it simple to integrate and reuse existing software code. Mixing and matching features from various services, customers can build new composite applications, also known as software mash-ups. (See related sidebar.)
In some ways, IBM can be seen as the emblem for this change. Over the past decade, the venerable computer maker has refashioned itself into the world's largest provider of technology services.
Likewise, Salesforce.com has pioneered the path to software-as-a-service. This on-demand software approach is already a big driver of sales growth.
It also has the potential to be a disruptive force for legacy software makers. Consider Gartner's prediction that one-fourth of all new business software will be delivered as a service by 2011.
Open-source software is gaining steam in the enterprise as well, changing the economics of software development.
Unlike most commercial software, open-source software is written collaboratively and shared freely. Users are free to examine, tweak and copy the underlying code.
That means in-house programming staff can build custom applications on a free Linux operating system that runs on low-cost commodity hardware. Creative firms are using this edge to gain a competitive advantage.
Oracle reinforced the open source trend last year by announcing new services to support a free Linux operating system from Red Hat. (RHT) Oracle also bought Sleepycat, an open-source database maker.
5. Outlook
Enterprise software makers are facing a period of wrenching change. New compliance regulations are spurring the need for closer management of corporate data and accounting tasks. That's driving new sales. Software buyers are also investing in new SOA platforms and upgrading their old software.
At the same time, these new models threaten business as usual for the whole software field.
Midsize vendors are perhaps most exposed, as they don't have the heft to create a broad ecosystem of software partners on their own. They'll either have to join the ecosystems of giants such as Oracle or SAP, or face an uncertain future.
Upside: In the years ahead, enterprise software firms can expect real growth opportunities among midmarket and small business customers. They can also capitalize on emerging technologies with new sales for SOA and on-demand software.
Risks: Established vendors will face daunting challenges due to those same shifting models for how software is built, sold and delivered.
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