David Menninger's Analyst Perspectives

With the ongoing spate of mergers and acquisitions in the software industry, I’d like to offer some perspective on what these acquisitions mean to software-purchasing organizations. Think of the software industry as a thriving ecosystem, with large software companies at the top of the food chain. Small companies are formed and, if they have an interesting idea and some good marketing, they grow. The really good ones may continue to grow and be independent, but most of the good ideas eventually get bought by larger, more established companies. It happens this way for several reasons. Most larger companies can’t innovate at the rate smaller companies can. They are too constrained by large installed bases and lengthy release cycles. I’ve witnessed three-year release cycles, and former colleagues have told me of similar or longer release cycles. If you couple that with the typical adoption curves of the Global 2000, it easily can mean five years or more from the conception of a new innovation or product feature until it is actually helping the customers it is intended to benefit. By contrast, in the span of five years a successful venture-funded enterprise software company could have created a new product from scratch and sold it to hundreds or thousands of customers. Large companies “outsource” or plant seeds of innovation by shedding some of their best and brightest employees who tire of the big-company environment. Sometimes it happens with the blessing of and perhaps even investment backing from the former employer. In most of the cases I’ve observed, however, it is born more out of frustration than cooperation. Individuals just get fed up with trying to get their ideas to market. Software developers take pride in seeing their products being used by customers. The deferred gratification offered to developers by the largest software companies doesn’t work for some individuals. These individuals go out on their own or with a few colleagues to build their better mouse traps. Many, but not all, of these individuals were part of a smaller entrepreneurial environment in the past and prefer to operate in that world. For them the long hours and lousy pay are more than offset by a refrigerator full of free soda and many nights of free pizza or Asian take-out. Some of these ideas have merit and begin to take hold in the market among early adopters looking for a competitive edge. Witness the analytical database market from which I’ve recently come. Despite established offerings from the largest vendors, companies like Aster Data, Greenplum, Infobright, Kognitio, ParAccel and Vertica have all enjoyed some measure of success in the market. Eventually, big companies are compelled to compete with these new technologies. For example, Oracle recently began offering hybrid columnar compression to compete with the columnar methods that most of the emerging vendors use. In other cases the big companies buy rather than build these new technologies – often after a period of attempting to compete with the new technology. IBM’s recently announced agreement to acquire Netezza, which my colleague analyzed, is a prime example. In either case the upstart has advanced the industry – either by creating something new that gets a larger distribution channel following its acquisition or by prodding the bigger vendors to do something new. What does all this mean for the IT organization that has to consider whether to use new technology now (from a smaller vendor) or wait until the bigger vendor offers it? I’ve been both bigger vendor and smaller vendor with respect to this issue, and I saw three general categories of software purchasers: 1) Big organizations 2) Fast-moving small or midsize business or divisions of larger organizations that need a technological advantage or have a specific technological challenge 3) Conservative organizations whose competitive advantage is based on something other than technology. Let’s dispose of the last and easiest one first. Conservative organizations that have found a competitive advantage based on something other than technology, such as offering superior customer service (such as Nordstrom’s) don’t need to rush to adopt the latest technology until it has been proven by others. There are always risks involved when working with smaller vendors and newer technologies. So they choose to let someone else bear those risks. The second category above is nearly as easy. These sizes of organizations are ideally suited for new technology. Think, for example, of the social gaming companies such as Zynga that have to tackle technical challenges that most other organizations have never even encountered. They had no choice but to consider newer technologies such as cloud-based ones and analytical databases to meet their business requirements. The least obvious category is large organizations. Clearly, they can’t “bet the farm” on some new technology. They have a fiduciary responsibility to act in a prudent manner. However, to completely ignore newer technologies is not prudent either. They could be passed by a competitor (small or large) that adopts a new technology faster. Think of Blockbuster getting “NetFlixed.” In this case, a portfolio-based strategy makes sense; that is, a portion of the IT budget should be earmarked for newer technologies. In the same way that new technology vendors prompt established vendors to offer better, more competitive products, bringing a new technology into an established IT organization can prompt a little healthy competition. You will probably also find that the new technology meets business requirements better than the existing technology in some (but not all) respects. Regardless of where you fit in the new-technology adoption cycle, push your vendor to pursue new technologies that look promising. Believe it or not, software companies (the good ones at least) will listen to their customers. If you see something in the market that can benefit your organization, ask your vendor reps what they plan to do to address this new category or capability. You may be pleasantly surprised, and in any case you’ll learn something about the vendor. Let me know your thoughts or come and collaborate with me on Facebook, LinkedIn and Twitter . Regards, David Menninger VP & Research Director

It’s Alive!: A Look at Why the Software Ecosystem Matters to You.

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