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September 3, 2002

The Software Spending Shift

Business managers, not IT, will fuel the next wave of software purchases

by Joshua Greenbaum

Just how bad is the market for enterprise software? Everyone agrees that the bottom began to fall out in late 2001. Seasoned executives told me at the time that they'd never seen a tougher selling environment. And then it got worse. The first quarter of 2002 was a bloodbath, and subsequent quarters haven't improved matters significantly, causing widespread gloom and an expectation that the fabled 2002 turnaround is no more than a fable.

Or is it? I think a subtle shift is taking hold in the enterprise software market that is redefining how companies buy software — and that shift, in turn, is redefining how enterprise software is sold. That means a turnaround is already in the works. Although it may not be the turnaround that software vendors and analysts have been expecting, it's one that bodes well for how companies buy and use enterprise software.

Fueling the skeptics are a series of reports that have been credited with codifying the doom and gloom fears of the industry. The reports are as blunt as they are pessimistic: IT budgets aren't expected to increase, regardless of whether the economy turns around. Things such as security and Web services are looking for some reasonable upside, but the mainstay ERP, supply chain management, and other three-letter acronyms that have sustained the growth of the market are looking like yesterday's soggy toast.

The New Spenders

Although you can't argue with how IT spends its apparently shrinking dollar, you can argue with the conclusion that the growth in the enterprise software market is over. That's because most of these reports are based on a flaw that the researchers keep repeating as a matter of reflex and habit. The flaw is simple: Researchers are talking pretty much exclusively to IT management — CIOs and other members of the IT cost center. The answers that are coming back — the doom-and-gloom scenarios we're unfortunately hearing too often — tell us a lot about how a well-established buying pattern is running its course, perhaps permanently.

But do these reports foretell the future of software spending in the enterprise? I contend that the flaw of talking only to IT management has produced a classic case of formerly useful analysis gone bad.

I believe a new buying pattern is emerging that's removing IT management from center stage and placing line-of-business management — with its profit-and-loss responsibility — at the epicenter of software purchasing. At the very least, a divide is growing between what IT management and line-of-business management can buy. If the trend continues, this line-of-business spending could represent the thin edge of growth that industry insiders are looking for.

IT spending has undoubtedly slowed down significantly, and IT managers in general are being told to hold the line on spending, or else. I think a lot of this line holding makes tremendous sense: Companies have made an enormous investment in IT infrastructure software over the last four years — first from the run-up to Y2K and then in the run-up to the e-business market. Although both Y2K and e-business never really panned out as good excuses for the wholesale adoption of vast quantities of enterprise software, many companies ended up nonetheless with new infrastructures, new functionality, and a whole lot of untapped potential in the IT department.