Will Traditional Software Vendors Disappear?

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Last month I wrote:

“Oracle, SAP and Microsoft really need to re-think their fee structures. On-demand applications, open source software and the growing repository of Web-based components will threaten existing software delivery models to the breaking point. Do the vendors really understand this – or are they in denial?”

Let’s dig deeper. Let me tell them what I really think and what they should do to become part of the solution – rather than the problem. While Oracle, SAP and Microsoft are of course on the list of usual suspects, there are many other enterprise software vendors – like IBM and CA – that also need to pay attention to the trends about to flatten them.

First and foremost, enterprise software vendors, acknowledge that the world has changed and will continue to change regardless of what you think should happen or what you want to happen. You are no longer controlling this playing field.

You have two broad choices: dig in your heels in and try to squeeze the last pennies out of antiquated software licensing models, or embrace the changes so enthusiastically that you begin to lead the software delivery revolution – which you have, incredibly, begun to cede to upstarts like Salesforce.com.

I realize that this is tough – like asking John McCain to admit that Iraq was incredibly stupid, expensive and pointless, or Barack Obama to say out loud that he rejected public campaign financing because he can raise so much more money outside the system than inside (and that John McCain would have done exactly the same thing if the fundraising abilities were reversed).

Enterprise software vendors need to admit change – not failure – but they need to do it proactively, aggressively, cooperatively and, yes, with wild enthusiasm.

We are at the end of the CAPEX technology era (CAPEX is capital expenditures). Huge, long-term investments in hardware and software are coming to an end. Listen up software vendors: a ton of CIOs and CTOs are past weary about maintenance and upgrade fees. Every year more and more technology buyers would like to expense their technology investments annually rather than spread their cost over many years. They also loathe being held hostage to processes – and bills – that they cannot control.

We are at the end of the proprietary software life cycle. CIOs know it; CTOs know it and even CFOs know it.It’s a new world in a new era. Pass it on. You all need to go somewhere to work all this out. Here’s what a summit should yield:

• A public commitment to rapidly evolve your business model away from CAPEX-driven enterprise software licensing to alternative delivery models. You all need to shout this message from your rooftops.

• Invest in software-as-a-service – not on a token basis but in a leadership capacity, directly challenging the business models of the SaaS vendors: why should these companies own this delivery model? Have you lost you minds? Why let them own this space? Are you still not sure the world is changing? Do you still think off-shore drilling will solve our energy problems?

• Proactively work with your clients to offer them migration paths to hosted, pay-by-the-drink delivery models. I realize that this is heresy, but wouldn’t you rather lead them somewhere than chase them later?

• Build templates for migrating from internally hosted applications to externally hosted ones. These pre-packaged configuration management tools would go a long way toward building your credibility and keeping your customers happy (and just plain keeping them).

• Embrace open source software. Sure, it’s the anti-Christ but it’s also the future. We all know that there will actually be proprietary open source flavors but the interoperability of these hybrids will be vastly superior to what we have today. You all need to think about becoming the Red Hats of your industry.

• Publish all the APIs you have – and support them. Make sure that they’re clean and secure and update them on a regular basis. Give them away free with a smile – and keep them coming.

• Redefine your relationship with your clients as partners – not adversaries. If you think you’re welcome in most enterprises then you probably thought U.S. troops would be greeted as liberators by the Iraqis. As you know all too well (perhaps after a few necessary glasses of wine) many of your clients really hate the vice you keep them in. The do not see you as a partner or a friend; they see you as someone trying to squeeze as many dollars as possible from their shrinking technology budgets. You really need to turn this around – and fast, lest you lose more and more of your long-suffering clients to alternative software delivery models.

The real challenge is the reinvention of your business while you simultaneously cannibalize the business model that made you billions of dollars over the past few decades. I know, I know, it’s hard to do these kinds of things, but, trust me, the clock is ticking. If you fiddle too much longer, you will trip into a free fall that will cost you billions over the next few decades.