Application Growth Returns, but Questions Remain

The Issue: AMR Researchs annual Market Analytix Survey indicates that after three years of very lean application investment, application spending will rebound to 5 percent in 2004 and 6 percent in 2005. In the next five years, technology executives will spend an additional $14B on enterprise applications, and the total market should reach $60B globally. While this indicates that there are some bright spots of opportunity, continued cautious spending and smaller deal sizes will inhibit faster growth, as exhibited by many of the recent 2Q04 earnings announcements. Heres a look at what is in store for each segment.

Enterprise Resource Planning (ERP) gets boost from upgrades, extensions

The severe slump in new ERP projects the past several years has created a pent-up demand for system replacement that should begin driving new license growth for core ERP modules by the second half of 2004. Overall, ERP vendors are expected to grow at 6 percent through 2008, with traditional ERP applications in manufacturing and finance growing at 3 percent. ERP vendors now own large market share positions in strategic extension segments like Customer Relationship Management (CRM) and supply chain. Long term, ERP vendors will grow these new businesses at an average rate of more than three times that of traditional core ERP applications.

Procurement and sourcing look to outsourcing, other new areas for growth

After hitting rock bottom in 2002, the procurement and sourcing market eked out 2 percent growth in 2003 because of continued buoying by the top three ERP vendors and from professional services revenue demanded by resultsoriented procurement managers. Demand for services such as procurement Business Process Outsourcing (BPO), low-cost country sourcing, compliance management, supplier management, analytics, benchmarking, and data management services will help prime the pump for 8 percent market growth during 2003-2008.

Supply Chain Management (SCM): Execution takes the lead

Overall, SCM vendor revenue will grow at 5 percent, with Supply Chain Execution (SCE), at more than 6 percent, outpacing Supply Chain Planning (SCP), at over 3 percent, through 2008. Consolidation is accelerating, particularly among SCE vendors, although it remains fragmented compared with other segments. ERP vendors continue their climb into the top ranks of the SCM market, and ERP vendors will grow their supply chain business at a 10 percent clip the next five years, and further consolidate their market share gains in this segment.

Customer management: Matching customer needs with product pushes market along

Growth returns to the customer management applications segment, as revenue rebounded from 2002s flat growth rate to 4 percent growth in 2003 and an expected 6 percent uptick in 2004. Misalignment between what buyers want to buy and what vendors want to sell continues to plague the space, and the days of double-digit customer management growth are over. The overall market will experience incremental growth through 2008 with a five-year compound annual growth rate of 8 percent, and certain application segments like pricing management, marketing automation, marketing analytics, and field service will experience faster growth.

Human Capital Management (HCM) draws dividing line

The HCM market will grow at a modest 6 percent through 2008, as slower growth in the larger administrative and operational applications is offset by newer, faster-growing strategic applications aimed at line-of-business users. Two distinct vendor segments are emerging to support the HCM application segment. The first, dominated by ERP suite vendors, focuses on operational and administrative applications that manage basic employee data and support Human Resources (HR) operations. The second is a strategic set of applications typically supplied by best-of-breed vendors, and used by line-of-business managers rather than HR to help optimize and align workforce performance with business goals. The biggest share of budget continues to go toward implementing and maintaining core HR applications. However, employee performance management will be a highly prioritized investment in 2004- 2005, as companies strive to improve performance and productivity and support corporate governance initiatives.

Product Lifecycle Management (PLM) continues rise

Overall growth is expected to top 5 percent in 2004, although true PLM products like collaborative product design, customer needs management, and portfolio management will grow at a much more rapid 13 percent annually. The gains come at the expense of the traditional Computer-Aided Design (CAD) market, which will shrink by roughly 3 percent annually through 2008. Our overall outlook for PLM technologies remains bullish, as the recovering economy spurs concerns about how to create and launch new products and generate new revenue streams. As companies review their IT strategies and consider what, if any, strategic new investments they will make in enterprise software, PLM gets attention as the category most likely to foster growth by speeding time to market for new products. We expect PLM applications to add more than $4B in total revenue to the enterprise applications market.

Five big questions that we will be asking the next year

• Will the pendulum swing back to favor best-of-breed vendors? For the past 36 months, larger organizations have increasingly standardized on a fewer number of large suppliers, and this has clearly benefited the incumbent ERP suite vendors.
• What application areas will support the next wave of startup, venture-funded innovation? Our bet: Watch technologies that support the New Product Development and Introduction (NPDI) process, and supply chain technologies that support Demand-Driven Supply Networks (DDSNs), to get this funding first.
• What will the massive foreign investment in emerging markets like China and Eastern Europe mean? Will the next major global software vendor come from these emerging markets and threaten todays global players, all of which are placing big bets in these regions?
• How rapidly will hosted business systems take off? Hosting accounts for a miniscule 2 percent of market revenue today, but it is expected to be the single fastest-growing revenue stream through 2008, and should add well over $1B to the market the next five years.
• Is Small and Midsize Business (SMB) the next big market? Every major application vendor has placed enormous bets on winning big among SMB customers. Recent AMR Research survey data shows that IT spending levels are higher and growing faster among SMB companies than their enterprise-class counterparts. The opportunity is there. But meeting and exceeding the unique requirements of buyers in this market, and supporting the right channel strategy, have always eluded most of the larger application vendors.