Sept. 11 Attack Deepens Ongoing Shakeout, Changes Application Software Industry

The terrorist attacks on Sept. 11 have already deepened, accelerated and intensified the ongoing shakeout started by the economic slowdown. Businesses, in general, are moving into survival mode, focusing IT spending only on mission-critical or revenue-generating projects. More than 15 percent of the public application-software companies face delisting, with valuations looming around one dollar.

Company CFOs have moved into key decision-making roles, increasing the marketing challenges for the remaining software vendors as a whole. In addition, the timing of the attacks--before the fourth quarter--will severely impact the industry, as most vendors rely on the seasonal kick of new sales. This will affect--and is of great importance to--solution integrators (SIs) and service providers who align with software vendors. Application software often leads the opportunity trail for SIs and service providers.

Pure-Plays Vs. Titans
In the current environment, software companies with large cash reserves, strong revenue, a profitable business model with no reliance on investment monies, solid business management and a good ROI proposition will fare best. Vendors that rely heavily on investment funds and immature revenue and profit models will be prone to either rapid closure or acquisition.

During the past several quarters, software titans--or vendors who are market leaders that span across software market sectors--were performing better than software pure-plays--vendors that focus on one market, often best-of-breed. Market share owned by the pure-plays has been shifting to the titans. The current economic events will further intensify this trend due to the value of integrated solutions of critical core functions vs. point solutions, especially when the titans offer unbundled entry points.

The Fallout
The current economic challenges will affect specific software markets because of today's business climate and demand-side survival mode.

ERP has been trending downward on the revenue-growth scale and will take a lower priority within enterprises where it does not apply to immediate mission-critical efforts. ERP was projected to grow roughly 5 percent over 2000 prior to Sept. 11. But this mature software market may be in for tougher times when IT budgets are diverted to more survival-based areas, as they were in 1999 when growth dropped drastically due to the Y2K efforts.

Human resource systems' growth will slow, based on the lack of priority from the enterprise for employee-based investments. Existing applications will be considered adequate for most users during these trying times.

CRM will continue to grow at positive rates, however, now set at 15 percent due to the Sept. 11 attacks, down from the original 42 percent forecast made in August 2001. Enterprises need to continue their focus on customer retention and acquisition, especially in hard economic times. However, CRM software vendors will have to utilize more stringent ROI models, which can be difficult, at best, for CRM projects.

Supply-chain management (SCM) is expected to continue positive growth rates. Set at 29 percent for 2001, the rate is down from 72 percent for 2000. Supply-chain network topologies must be continually designed or modified to accommodate regional disruptions, especially in times of potential global upheaval or war. Global trade and sourcing will become more difficult as transportation modes become affected. SCM solutions will yield high value to these prioritized efforts and will allow the SCM software market to sustain projected growth rates.

Only the Strong Survive
The attacks have intensified the weeding out of weak software companies. Cash flow will be king again. Where the Y2K dilemma diverted and increased IT spending, the attacks have caused fear and uncertainty, resulting in diverted and delayed IT spending. SIs and service providers must be cautious with regard to training investments and market focus and should take great care in application-software vendor selection and reevaluation.