Paul Bleicher

Few companies today would consider building their own general accounting ledger system or a customer relationship system—even if their core business was software development. High-quality, reliable, and sophisticated software exists for all major types of enterprise corporate functions and is designed to be customized and integrated with other systems while still being commercial, off-the-shelf software (COTS).

For the record, I am not trying to imply that such software is always ideal or bug and frustration free. But it is generally available in a robust and scalable form that is a good match for the needs of customers. In addition, the last few years have brought an additional question: Should we rent?

Going back a few decades, corporate IT in large companies may have considered a buy vs. build decision for just about any software contemplated. At the time, COTS may have been difficult to use, prone to problems and data loss, and somewhat limited in functionality and customization. The alternative—to direct an internal team or external consultants to build a customized product with exactly the functionality needed—seemed a very attractive alternative.

Some home grown systems functioned quite well for many years in corporate environments. However, the systems would often require ongoing maintenance and expansion to meet the growing needs of the business, and eventually those systems became a source of significant corporate expense and user frustration. In a scenario that repeated itself from industry to industry, from application to application, a few COTS applications in each area would eventually emerge as being modern, robust, and fully featured.

While the COTS might not have had exactly the functionality desired or exactly fit the process being used, it was compelling enough to purchase and deploy. Often, it would take several major upgrades until the COTS application was "perfect" for the organization, and sometimes it simply required an evolution from users who were accustomed to the old, custom system to new users without any previous experience.

In the end, the elimination of internal maintenance, support, and development—as well as user frustration—typically made the migration from a custom software system to COTS a winning proposition for the company.

Evolutionary improvements

While each industry is different, the general evolution of software deployment is very similar between them, though it may drastically differ in the pace and timing. As we have already seen, software may arise from internal projects, consulting engagements or commercial offerings with limited functionality and flexibility.

Some companies will build their own solutions (occasionally more than once!) and passionately feed and care for them. Other companies will pilot one or more of the existing solutions, finding none satisfactory. If the software has a large market and/or is horizontal (i.e., applicable in many industries), vendors will invest in and continue to improve their software. And for a time, many vendors may appear with competing solutions. Eventually, a few products/vendors will emerge from the competing vendors as the choice for most of the buyers.

Over time, this lead may shift from company to company, and disruptive technologies/companies may emerge from the pack and take the lead. The major theme, however, is consolidation and concentration of the market, which creates the level of customer support necessary to sustain these companies.

The concentration that occurs is almost universal because it is driven by recurrent market forces. Buyers focus on the companies with the best combination of features and services and look for products that are used by many other companies. These companies have more money to develop and expand their product, and thus become even more attractive to the buyers.

The focus on two or three products in a market is a winning proposition for almost everyone involved. The buyers get richer products and better services, especially if there is meaningful competition. The vendors can grow their companies, always staying alert for the competition. The only ones who lose are the companies that are not one of the leaders or acquired by a leader.