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The Death of Innovation

  Article published in DM Direct Newsletter
January 9, 2004 Issue
  By Andy Hayler

Since the excesses of the dot-com boom, there has been a well-documented backlash on the software industry by buyers of enterprise software. No longer being swept along by the e-business hysteria, they have taken their revenge on the software industry that profited so well out of them in the late 1990s. (August 2001 was the first month ever recorded when IT expenditure not only stopped growing quickly, but actually shrank). Unfortunately the backlash has had an unhealthy side effect: innovation is being stifled as buyers retreat to the supposed safe haven of the software giants.

But just how safe is this haven? It is entirely understandable that customers, having invested millions in e-commerce software from vendors that disappeared shortly after the IPO fees cleared, need to look at company viability as an important criterion when selecting vendors. This was always the case, but somehow became overlooked in the dot-com madness of the late 1990s. However, buying a software product from a giant vendor does not guarantee a long life for that software, let alone ensure happy customers.

Giant vendors frequently retire software products that don't fit with their strategic direction. For example Oracle can be certain to look after its core database business, but whatever happened to some of the products that Oracle bought? For example IRI Express had a rapid demise into the cemetery that vendors demurely call "functionally stabilized" (translation: there are no developers working on this product any more). I personally recall that bastion of safety, IBM, rationalizing its 4GL products in the late 1980s and dropping its previously "strategic" ADF product in favor of CSP.

It is important to understand that big software vendors usually grew large on the fruits of one excellent or expertly sold product, and that is where their heart and soul is. Their commitment to non-core add-on products is by no means guaranteed. Worse, the key developers all want to work on the premier product, not some unglamorous add-on; e.g., if you were a star Oracle developer, you want to work on the database kernel not some obscure side-line product. Consequently large vendors rarely break out successfully from their core area - Tom Siebel had to leave Oracle to set up CRM company Siebel as he couldn't get buy-in internally.

Consequently, innovation tends to happen outside the giant vendors by innovative start-up companies that can see product gaps in the market. An excellent example of this is salesforce.com, which has very successfully grown even in the downturn, ironically at the expense of Siebel. The problem is where future salesforce.com's will come from given that the flow of money into early stage start-ups has dried up with the collapse of the IPO market. With no public offerings to generate high returns, venture capital firms have retreated to safer "later stage" vendors or indeed closed the till entirely on start-ups. From its peak in 2000, when $29 billion was invested in start-ups, venture capitalist investments have declined for 12 straight quarters. In early 2003 the number of companies receiving funding was the lowest since 1996. Given that innovation rarely comes from industry behemoths, the result is an innovation gap in the industry.

The pendulum needs to swing back. Customers need to realize that software products don't last forever, whoever is selling them, and if a product can genuinely deliver a complete payback in six months, then it matters little if that vendor is going to be around in ten or twenty years time. What is the sense in deferring a purchase of a product that has a six-month payback that works today in the hope that a lumbering industry giant will produce something usable in a few years time, if indeed that ever happens? Such flawed decision making creates major opportunity costs. If the technology is genuinely good, then in all likelihood the company will either become successful in its own right or, if independence becomes unfeasible, be bought by a larger player, e.g., the purchase of CrossWorlds by IBM and its technology being integrated into WebSphere.

The optimum approach is to have a "two-speed" technology architecture. For core infrastructure where the software is mature, by all means standardize away and reduce the number of vendors. For example, how many different databases do you really need in a company, and who can really tell the difference between the leading brands any more? On the other hand, in software applications areas with fast business payback don't lose opportunities by agonizing for a year over the longevity of vendors who can genuinely demonstrate complete payback (including cost of exit) in a matter of months. Recent events have shown that size is no guarantor - even vendors as large as JD Edwards can become acquired; and even their acquirer can itself become a target. You cannot completely anticipate future industry consolidation. The key is to establish a lifetime view of software procurement, planning for an exit the day that a new package is acquired, but making sure that the business benefits are rapidly attained. A "safe" strategy of buying only from industry giants will cause genuine opportunities to create business value to be missed and instead cause "under the radar" developments funded by frustrated business users. You want a secure electricity national grid, but you don't want the electricity companies to tell you what products you can plug in the wall.


For more information on related topics visit the following related portals...
Strategic Intelligence.

As chief strategist for Kalido, Andy Hayler is responsible for guiding the company's future direction and championing the customer. He also acts as spokesperson for the company at industry events. Hayler founded Kalido as an independent software company after originally setting up the software venture within the Royal Dutch/Shell Group of Companies (Shell). In previous roles at Shell, Andy led a 290-person global consultancy practice of Shell Services International, and was technology planning manager of Shell U.K. Oil. A 15-year veteran of data modeling, warehousing and integration projects, Hayler was named a Red Herring Top 10 Innovator in 2002.

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