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Back to the Future: Joint Venture AD Returns in 2006 from Saugatuck

by Saugatuck Technology

Research provided by Saugatech ( ).

What Is Happening? As software and services vendors seek new avenues for growth, they are increasingly looking to bring innovative new products and services to market faster. This search is leading them to a not-so-new alternative source of ideas, products and services: their customers.

A quiet announcement made last month epitomizes this trend: as mentioned in Saugatuck's Research Alert on December 7, 2005 (RA-211, "Barbarians at the Gate: Business Service Providers Threaten Vendors"), independent vendor SOA Software announced that it was purchasing a Web services tool called X4ML that one of its key customers - financial giant Merrill Lynch - developed over the past four (+) years to make its legacy CICS transaction systems available as Web services. The product has been renamed SOLA by SOA Software.

Why Is It Happening? Saugatuck believes that the growth of component-based architecture will result in the reemergence of joint venture application development - a standard industry practice during earlier eras (See Note 1). By adding "assemble" as an alternative, Web Services and SOA are changing the "build versus buy" application decision -- which will result in the development of a market for granular components and/or packages of customer-developed components. As users choose to assemble their own applications, Saugatuck foresees both software and services vendors joining forces with innovative and large early-adopter customers to develop enabling software infrastructure, as well as application and business process-focused templates (often with an industry-specific flavor).

With limited R&D resources and even less time to bring new products and services to market, software vendors are viewing innovation and improved time-to-market as increasingly rare competitive advantages. Like their customers, some are leveraging offshore development resources in an attempt to get more "bang for the buck." However, this doesn't necessarily address the time-to-market issue. Purchase or licensing of a solution built with your own software by an early adopting customer, however, does both.

Similarly, services vendors will be working with their customers to develop or leverage unique vertically focused applications, looking wherever possible to joint venture models as a means to bring them to a broader market. This is also true of repeatable and vertically oriented business process offerings that might not be funded otherwise - where services vendors believe they might have a defensible asset.

Consider the advantages of using early-adopter customers as an extension of vendor Research and Development.

The customer bears much of the expense (and the risk) of the initial development. While the customer will want to make sure that future development continues to support their environment, shared risk/reward licensing arrangement can prove beneficial to both parties even if the product is substantially enhanced post-joint venture.

Because the customer is an early adopter, the application has a built in market among mainstream and late adopters.

The solution is typically already proven in production.

The vendor has a solution with an instant reference case, jump-starting marketing of the solution. (Further, in the case of a revenue-sharing arrangement, the reference case is motivated to cooperate in the sales effort.)

While arguments of reuse have been pursued for decade vis-a-vis CASE, object oriented technologies and earlier component approaches (e.g., MSFT), what is different today is the general consensus on standards, a growing market for on demand systems and the emergence of a new category of offering for companies to deliver components as services, and to become "solution" general contractors.

Market Impact: For software and services vendors, there are a number of implications of this trend. Chief among them are:

Vendors who sell to a disproportionate share of early adopters will have an advantage over those who do not, as they will have the opportunity to mine their customer base for potential product or solution acquisitions. Capturing the early adopter share will become even more important in the future.

The breadth of a vendor's network of potential partners is expanding dramatically -- to include all early adopter customers. Managing these relationships will become more important in the future than in earlier stages of IT Ecosystem evolution.

To be successful at this new approach to partnering, and make it a repeatable business strategy, a vendor will have to develop the following capabilities:

A flexible and equitable licensing/purchase approach for potential developer-partners.

Articulation of development and deployment standards for potential developer-partners.

A strong distribution network for these solutions, including a sales force adept at the "solution sale."

A further key to success for vendors will be in identifying software infrastructure, applications or business process that provides a utility, framework or platform that by themselves do not provide a competitive advantage to the customer. Otherwise, they will be reluctant to share it -- as the development of competitive advantage was the very basis upon which the software was originally funded.

User impact will be manifested in at least two areas:

Reduced risk upon implementation. Customer-developed solutions developed in this way will have been production proven (the Merrill Lynch application for example is already processing 1.5 million transactions daily).

A new source of funds for custom developed applications. "Bleeding edge" users now have an opportunity to recapture some of the costs of custom software development through sale or licensing of the technology. Perhaps more important, they no longer have to bear the costs associated with maintaining the resources required for ongoing maintenance and enhancement.

Note 1

Historical examples of software jointly developed by IBM and its customers as "field solutions."

CICS: Con-Edison

MVS: General Motors

TPF: American Airlines

Source: Saugatuck Technology

The authors invite your comments and inquiries on thisResearch Alert. Please contact Mark Koenig at

Saugatuck Technology is a strategic advisor to senior executives, leading information technology vendors and investors, providing strategy consulting, custom research and (C-level targeted) thought-leadership research programs focused on emerging technologies, key business/IT challenges and effective management strategies. Please visit their Web site at

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