3 Reasons Why Custom Enterprise Software is Growing
The latest Forrester Survey says, “Enterprises spend about the same on custom-developed business applications as on packaged business software.” Link here
While the article makes no mention of trends in either categories, we see a strong growth in organizations adopting custom enterprise software, because of the following 3 mega-trends:
1) Change in Client Type: In 1980, manufacturing contributed to 20% of the US GDP. In 2012, the contribution was 11.9% (Source: www.bea.gov). That’s a whopping 40% reduction. Manufacturing was the first big market for enterprise software such as ERP. Structured pre-packaged products for various segments such as steel, automobiles, FMCG etc. made sense in the 90s as the business logic within an industry was somewhat bounded. The software systems had to manage raw materials, inventory, assets, and production capacity. As the North American market moved away from manufacturing towards services, the same pre-packaged concept doesn’t make sense anymore in the growing innovating service oriented market. The pace of innovation in the service oriented economy is too fast for pre-packaged software to catch up. Moreover, the business logic within the services market varies largely even within the same vertical. For example, no two clinical contract research organizations have the same workflow even though they may be operating in the same sub-segment of Oncology, making a strong case for custom enterprise software adoption.
2) Change in the Customer Size: Adopting enterprise software in the 90s was a large undertaking requiring IT departments to spend tens of millions of dollars. Naturally, the Fortune 500 were the first to open their purses. Pre-packaged software packages like SAP came with thick textbooks about ‘Business Process Re-engineering’ — which is really a fancy term for changing your organization’s business processes to suit the requirements of the software. The other quasi-technical term used to sell pre-packaged enterprise software was/is “Best Practices” — which really meant “the processes we designed into our software are best for you”. In the early days of ERP adoption, the IT departments at Fortune 500 companies didn’t mind being sold-to using this jargon. The longer the ERP project implementations lasted, the bigger the IT department budgets grew. However, as profitable organizations of the next tier size looked into adopting enterprise software, they couldn’t quite re-engineer their processes the same way as the large organizations were able to, or at least claimed to. Many successful mid-size service organizations grew by leveraging their internal processes as a competitive advantage. They aren’t quite convinced about the so called benefits of “Business Process Re-engineering” and “Best Practices”. Changing their internal processes is not a viable option in many cases. The other option of buying a pre-packaged software and then spending heavily to customize it is not palatable either. Hence as the next wave of technology adoption is driven by mid-size organizations, they are increasingly turning to custom enterprise software in order to map their business logic into the software, instead of changing their internal workflows.
3) Advance in Software Technology: One of the reasons why pre-packaged software applications did well in the early days was that it was a daunting task for any organization to do their own custom application development. Application development in low-level languages such as C and Cobol involved the laborious tasks of writing, debugging, and maintaining millions of lines of code. So it made sense to let the large enterprise software vendors centralize these tasks and release upgrades ever so often to fix existing bugs and offer enhancements for all companies in a segment. Software technology has now progressed to the level of Axpert, where no coding is required to develop large complex database applications. Such cutting-edge technology makes it easy to build and maintain custom enterprise software for each organization individually.
Combination of the #3 with the market trends of #1 and #2 above ensures that custom enterprise software will continues to grow its share of the enterprise software market, especially in the mid-size market segment. Comments? Thoughts?
