Who Drives Software Innovation? The “Best-of-Breed vs. Giants” Debate

I got an e-mail from a client earlier this week who asked if I’ve ever written about whether more innovation comes from the Goliaths or the best-of-breed vendors. 

I’ve been studying the software industry for nearly 30 years, and have spent the last 21 specifically focused on the enterprise applications market. I’ve certainly talked about this subject, but have never written about it. Until now.

In every case, market sectors were created or developed by small companies. Look at supply chain planning, warehouse management, human resources/human capital management, enterprise asset management, customer relationship management, sourcing and procurement, applications-as-a-service, and the nascent energy and emissions management markets. 

While we can debate whether SAP created the ERP market or has been the primary beneficiary over the last 18 years, it’s important to remember that SAP was a modest-sized company back in 1991 when it launched R/3. It closed 1990 with $313M in revenue. 

Call me cynical, but I believe today’s large vendors are more interested in commoditization than innovation. Ideally, they want to be able to sell a generic version that will appeal to customers across dozens of verticals, hundreds of countries, and tens of thousands of customers. For them, true breakthrough innovation doesn’t scale.

The real software innovation will continue to come from smaller vendors. And they will continue to be attractive acquisition targets for the Goliaths.

Comments

[Kevin Potts]

Bruce - after we talked at the AMR Supply Chain Conference last month, when you questioned whether anyone reads this blog and I told you that I for one did, I thought I would finally post a comment to "put my money where my mouth is." While I agree with your assessment, the question is what do the end user clients of AMR think. I recall reading a survey AMR did in the fall of 2006 which was shared with clients in early 2007. The topic was similar. AMR was asking what was happening to ERP vs. Best of Breed investments. What I recall from that analysis is that respondents said, "Established IT projects” were frozen, and the end users saw the real growth in “best of breed” investments for the following reasons (I am paraphrasing customer sentiment below):
- “ERP won’t provide value to get to next level”
- "We are looking for more value but we can't wait for next ERP release"
- "Our company doesn't want to do a major system upgrade to access the functionality"
- "Our strategy is to bolt on “best of breed” technologies because adding innovative technologies provides greater value in short and long term."

It reminds me of an article Lora Cecere wrote in early 2007 based on an interview with Heinz, one company that has been successful at maintaining a competitive edge using the bolt on approach.

http://www.forbes.com/2007/02/07/amr-heinz-europe-biz-logistics-cx_lc_0207heinz.html

Kevin Potts
VP of Marketing and Product Management
Emptoris

[Nina Baker]

Bruce,

I agree with your assesment of the ERP industry - "Ideally, they want to be able to sell a generic version that will appeal to customers across dozens of verticals, hundreds of countries, and tens of thousands of customers. For them, true breakthrough innovation doesn’t scale."

As a small, niche player in the ERP marketplace, our company constantly comes up against the Goliaths who can drastically undercut us in price, but who cannot provide the industry-specific tools, personal service and knowledge that we can. Many of our contemporaries have succumbed to acquisition by these firms and their customers have suffered - by increased support costs for lower quality support and generic tools that don't apply to their industry.

Many of our customers are those that were previously with a large vendor and became unsatisified with the lack of support and input into the direction of the software.

Those of us who are smaller, niche-oriented software providers will continue to be at the forefront of innovation, because our customers are actively involved in the direction of our product.

Nina Baker
Sales & Marketing Coordinator
Tribute, Inc.
Software for Fluid Power & Automation Distributors

Bruce, small correction. The bigger vendors are interesting in commoditizing their costs, not their prices. As a fashion client of mine marveled - "if we could charge prices like this 10 years after product introduction. Heck even 6 months!"

On my other innovation blog New Florence. New Renaissance www.florence20.typepad.com I have cataloged over 1,500 examples of innovative tech or its applications. SAP, Oracle, etc have an open invitation to send me examples, and it is been disappointingly low. Microsoft and IBM and HP show up in consumer areas or areas ofr aw research but for their size you would expect many more mentions.

The other thing that drives me batty is vendors do a poor job showcasing innovation at their customers. It's usually brag about their core products - in the end customer success shows so much better

[Dave Kasabian]

Bruce,
Great topic and lots of interest from both sides. I agree that innovation tends to come from the smaller more nimble vendors but I do believe that the big gorillas can drive innovation if they learn from the companies they have acquired. I've expanded on that thought a bit further on my blog at http://blog.pervasivepm.com/

Keep the great topics coming.
Dave Kasabian

[Bruce Richardson]

Dave, thanks for the post. By the way, I love your PervasivePM blog. It's must reading for people interested in the future of BI and performance management.

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