Enterprise software sector's interesting predicament

The enterprise software industry is at an interesting crossroads. While there are prospects of logging the strongest growth in years, the industry itself is undergoing changes, both fundamental and structural.

It is evolving into a customer-driven, professionalised, economics-driven industry, characteristics typical of a mature industry, says a report by the SandHill Group and consultant McKinsey & Co.

After more than two years of tepid spending and scaled-back growth expectations, enterprises at last seem to be spending again.

While overall growth is likely to be modest, growth rates will vary significantly depending on specific technologies and verticals, the report said.

Also, explosive growth in consumer demand and penetration of new computing platforms such as smart phones raises the possibility that the most interesting new markets may not be enterprises at all.

Coupled with shifts in enterprise architectures such as utility based computing and offshore delivery, software firms must understand which growth vectors are open to their companies and which are most attractive.

Dwelling on how companies should manage the exponential growth of this industry, the report states: "Despite signs of the strongest growth in several years, the expectations built into most software company's stock prices still imply aggressive increases in profit margins. Productivity leaders within software companies will have to go beyond cost cutting expenses to driving sustainable productivity improvements that revive gross margins."

Commenting on how to respond to permanent shifts in customer behaviour, the report states that in spite of surge in spending, all indication suggest that many new buying patterns - smaller deals, fewer vendors, more 'pay as you go', are part of a permanent shift in customer behaviour.

"These trends suggest the need for more industrialised and professionalised approach by customer segmentations, similar to those developed by the financial services industry during its own consolidation," the report notes.

Summing up the agenda for the industry, the report states that no software company can remain successful without keeping part of one eye on the large-scale innovations that periodically act as catalyst for the industry.

"Ironically no major catalysts for innovation within the software industry have emerged recently. The increasing amount of software innovation occurring outside of the software innovation occurring outside of the software industry also make this a key agenda point for 2004," the report noted.