Emergent Business Networks

NOTE: THIS ARTICLE WAS WRITTEN  IN LATE 2002 FOR A LONG FORGOTTEN SITE. IT IS HISTORY. I AM WRITING A RECAP VIEW FOR RWW

This is a receding Tsunami.

Thousands of companies rode this one to fortune, but it is now crashing on the beach and the backwash is pulling a lot of companies underwater.

We are still in the early stages of the enterprise software consolidation and the most sensible option is to sell out for the best price you can get. Then you can find another wave that is growing. Or you can get out of the industry as thousands of talented, experienced executives have done in the last few years.

For those who love the industry but hate the idea of working for one of the gorillas, this article highlights how to find a reasonably protected niche market.

First a definition; enterprise software is the core, mission critical stuff that manages transactions, accounting and management information. The industry has been doing this for decades and there really are only so many ways you can slice the cake.

Of course it is a huge industry and is not going away. The issue is whether this is an environment conducive to start-ups. Look at the things that customers are now focused on such as data center consolidation and integration. These require big companies. The “IP everywhere” rollout is exactly that, an implementation of proven technology by big vendors. Attempts to hustle up big new growth waves within enterprise software have failed. Wireless is a simple another delivery option and “real time enterprise” is a fancy name for what the industry is gradually evolving towards.

These are add-ons to existing products from big companies. What is driving this consolidation?

• The proximate cause is the after effects of the bubble bursting. Massive over-investment and the dramatic drop off in demand puts the buyer in control.
• The buyer has always hated the traditional enterprise software model; too many small vendors blaming each other for projects that don’t deliver business results. In a buyer’s market, they get what they have wanted for a long time.
• Investors demand the earnings visibility that comes from a recurring revenue model. When customers and investors both demand the same thing you can be pretty confident that it will happen.
• The return of the single vendor stack. IBM, Sun and HP are putting together complete solution stacks that look suspiciously like the pre-Wintel proprietary solution stacks provided by hardware vendors such as IBM, DEC, Data General, Olivetti, Burroughs, Univac, Wang and other dinosaurs that once ruled the earth.
• ASPs with solutions engineered from the ground up for the Net, such as SalesForce.Com and Intranets.com are getting real traction and proving that it is possible to deliver real solutions over the Net for a monthly fee.

So will all the customers simply plug into a few giant Con Edison style utilities? Is our only option to work for/invest in these utilities?

Thankfully the answer is an emphatic no. The utility analogy can be stretched too far. IT has a far bigger impact on a company’s profitability than electricity and there are a lot more variables.

So how can smaller independent companies prosper in this new world?

• Leverage the stack for your own high growth niche.
• Offer the total solution on-line for a monthly fee. This reduces the buyer’s risk and thus enables start-ups to get that critical early traction.
• The good news is that it is now much easier and cheaper to put together a total solution from a mix of outsourced data centers, open source frameworks and offshore developers. All you have to do is find an emerging growth market.
• Operate right at the top of the stack where you are dealing directly with end users (aka a vertical market solutions focus). Look for business sectors that are growing fast but that are small enough today to fall below the radar screen of the gorillas.
• Web Services based “features”. Experienced venture builders look at most new ventures and say, “that is not a product, it is simply a feature”. The best that can happen to these “companies” is that they get sold for R&D value. It is possible – but not yet proven – that Web Services will enable small companies to thrive by offering these features on a pay as you need basis over the Web.
• Mine the backwash. There is a lot of money in maintaining old systems, catering to the conservative customers and forgotten niche markets. These forgotten markets last much longer than you would think from listening to industry analysts. This is low on the glamour stakes but if you are in business to make money it is worth remembering the old saying “there’s brass in that old muck.”
• Private label commodity providers. This is another low glamour business, suitable for low cost operators. You sell your product through other solutions providers without your brand being visible. Of course you may eventually pull off the “Intel inside” trick and move up the stack, but even pure commodity players can make good money if the market is big enough and you focus on efficiency and being the lowest cost provider. You will need to bundle excellent support and show that your TCO is lower even than open source.

This a good time to take stock and get ready for the recovery with a new positioning. Markets will recover and IT will remain central to business. But don’t expect it to be like it was before. Prepare for dramatic change and find where you can add the most value.