1. With direction and purpose, seldom is there lack of opportunity.
Enterprise software industry—
An industry in transition
Enterprise software industry
An industry in transition
A Frost & Sullivan Analyst Briefing
A Frost & Sullivan Analyst Briefing
July 2006
With direction and purpose, seldom is there lack of opportunity.

2. Contents Will investor “skepticism” be the harbinger of change?
Has the software industry’s fundamentals altered for ever?
Drawing Inspiration from Web 2.0
Future Trends
Predictions

3. Investor Perceptions
And
judgment

4. VC interest has dramatically reduced
CAGR ( ) of Investments = (28.1)%
CAGR ( ) of Number of Deals = (16.1)%
Please view this slide in Slide Show. We have animated it.
The average funding for each deal has stabilized at $5.8 M per deal ( )

5. M&A driving industry consolidation
CAGR ( ) of Deal Values = 56.3%
CAGR ( ) of Number of Deals = 48.3%

6. M&A, not an IPO is the favored exit option
Factors:
Easier option to exit
More niche players
Impatience to exit
Uncertainty

7. The Industry in Perspective
Top 3 companies dominate
“Walking dead”
Enterprise software top 40 companies
(Microsoft and IBM excluded)

8. Software Industry: A critical assessment

9. IT growth rate has been modest
Factors:
No major platform transition
CIOs trying to do more with less
The Maintenance albatross
Optimizing spend
No significant innovation

10. Non-license revenues sustains the industry
Enterprise software top 40 companies
(Microsoft and IBM excluded)

11. Overheads has gone overboard
Points to ponder:
Limited focus on innovation
No compelling proposition
Platform transition?
From growth to value
SG&A : R&D = 2.6 : 1
SG&A : R&D = 2.7 : 1
SG&A : R&D = 3.2 : 1
SG&A : R&D = 2.4 : 1
Enterprise software top 40 companies
(Microsoft and IBM excluded)
If hypothetically, this was a charity, would you contribute to it?

12. Wall Street’s assessment Of Enterprise Software
Net impact
NASDAQ ↑ only 1.4% in 2005
Software sector ↓10%.
Number of public software
companies ↓ 10%.
Size and value
Impact
Wall Street’s assessment
Of Enterprise Software
Software moving from
“growth” to “value”
No major platform transition
Limited innovation
Uncertainty about value
Drivers
Big players getting bigger
Emergence of platform players
License revenues decline
Limited innovation
Players and impact
Business results over technology
Earnings over revenue growth
Stability over options
Preference shifts

13. Good news: Growth opportunities exists
Key Markets: India, China and Japan
Major applications: BI,ERP, Security, Collaborative applications
Largest growth segment: SMB sector
Key Challenges:
Pricing pressure
Developing hybrid models
Subscription models

14. Many vendors not aligned to changing user expectations
F&S: CIO issues (on-going study)

15. Drawing Inspiration from Web 2.0

16. The Consumer Web has seen a paradigm shift
Syndication
Ajax
Wikis
Cost per click
Domain Name Speculation
Search Engine Optimization
Double Clicks
Stickiness
Screen scraping
Content Management
Napster
Page Views
Publishing
Participation
Will the Enterprise software industry follow?

17. The enterprise software model has to transition
Product architecture
Product management
Release management
Pricing model
Sales approach
Licensing model
Management approach
Customer support

18. Two roads diverged in a wood, and I --
I took the one less traveled by,
And that has made all the difference.

19. How is the industry likely to evolve?
Business
as usual
Adjust the overhead model
Get more out of your sales force
Foster innovation
Adapt the
business model
(tactical shift)
New pricing mechanisms
Software as a service (SaaS)
Not TCO, ROI, but POM
Change
the “Basics”
(strategic shift)
Create a “pull model”
Enable: “Do more, more quickly”
Cultivate users, just not buyers

20. Predictions The current business model is clearly unsustainable
Tumultuous years ahead for the next 3-5 years
Survivors will operate in an entirely new landscape
Partnerships– From opportunism to “Star Alliance”
The “outside in” approach will be the key to win
China and India will alter demand and supply formulae
Vendors would adopt SaaS albeit reluctantly
Focus on users, not just the buyers

21. Thank You
Doors of opportunity don't open, they unlock; it is up to you to turn the knob.