The worldwide enterprise applications market topped $193 billion in 2015 and it is projected to only edge up 1.5% to reach $208 billion by 2020, a modest rise that foretells its many opportunities as much as its myriad of structural and business challenges.
As shown in our market overview, the enterprise applications market has endured a decadelong expansion fueled by relentless innovation and cheap capital. All signs are pointing toward an even more radical market transformation as conventional on-premise software products, which have been sold as big-ticket licenses upfront, give way to Cloud applications that are mostly priced on a per-user subscription. The result is a decelerated pace of growth for years to come.
In addition to the business model changes, the biggest shift in the enterprise applications market could be the replatforming of the enterprise – meaning that many of the companies are literally jettisoning their long-held business processes with the advent of the Cloud, pervasive use of mobile devices and growing popularity of all kinds of analytics tools that form the basis of commercial transactions.
There are many examples of such enterprise-wide replatforming.
- GE Digital, a unit responsible for digital strategy for the conglomerate, now counts on Predix, its own Platform As A Service product, to better connect with its trading partners. One implication is the sharing with its suppliers via the Cloud-based Predix critical maintenance information from the running of GE aircraft engine to the tunes of one terabyte of data for every two hours of flight time, a collaborative process that would have been unthinkable in the past.
- A 140-year-old whiskey maker is confronted with the task of capturing and transferring the tribal knowledge of its 3,000 employees with more than half over the age of 50. Developing a new HR and learning system that accelerates the training of new employees and reskilling the current ones for different functions is the crux of enterprise replatforming at the distilleries.
- Then, there is Hewlett-Packard, the technology pioneer that saw the spinning off its software and services unit into HPE in 2015. Because of the separation, 350,000 offer letters had to be signed by individuals who basically had to be rehired on the spot. Without the use of electronic signatures, HPE would have a rough time meeting its compliance requirements. More enterprise replatforming is expected as HPE is in the process of divesting its services division to CSC.
These examples are consistent with the results generated from our regular surveys of our database of over 100,000 companies including many struggling to run their business without overhauling their internal systems.
While it has become less frequent for anyone to replace its back-end ERP systems on a wholesale basis, a project that could cost hundreds of millions of dollars for a multinational, big enterprise applications deals are still being signed. For example, Salesforce, the poster child of Cloud Computing, announced another nine-figure deal in May 2016 after signing two more in the previous quarter. In other words, Salesforce could receive hundreds of millions of dollars in incremental revenues just from these three accounts over the next few years.
At a recent conference sponsored by Cloud Foundry, an open source cloud computing platform, Allstate, an insurance company with 85 years of history, said it plans to invest $30 million in 2016 for a variety of Cloud platform and applications projects, up from $5 million in 2015. Allstate’s Cloud development unit Compozed, which has developers in multiple US and European cities, prides itself as a high-tech startup within a conservative company that aims to change everything relating to its business processes despite operating in a highly-regulated industry steeped in rules and rigid policies. Changing business processes means studying how legacy apps are being used. As one Allstate Compozed product manager pointed out that only 13% of its users have used three specific data fields in one such existing tool, she concluded that the need to convince the team to replace the tool with one that better addresses requested functionality, while boosting overall usability. In other words, Allstate is willing to change everything in order to become not just a digital company, but one that meets its present and future needs amid stiffening competition.
Not every company has the budget or the resolve of Allstate, customers across the 21 verticals that we track are experiencing little or no growth in their applications spending over the next five years. Most are spending the bulk of their budget on maintenance, rather than investing in new projects. As competitive pressures intensify, increased demand for new applications, or better delivery of insights, mobility solutions as well as decision-support tools, becomes a widespread phenomenon across a growing number of industries. When they make such a move, Cloud-based systems, mobile apps development efforts, along with collaboration tools that come with predictive analytics capabilities top their agenda.
The following exhibits form the basis of our projections for the enterprise applications market through 2020.
Exhibit 1: Worldwide Enterprise Applications Market Forecast 2015-2020, By Revenue Type, $M
|Revenue Type, $M||2015||2020||CAGR, %|
Source: Apps Run The World, May 2016
With continuing declines in traditional license sales, much of the growth in the enterprise applications market over the next five years will be coming from Cloud subscriptions, as shown in the above table. Maintenance revenues are expected to stay fairly stable, thanks to the switch to the subscription model that is becoming increasingly common among vendors like Adobe, AspenTech, Autodesk, Intuit and Sage. A fair amount of their revenues is still derived from term-based license and maintenance sales, but they are mostly aggregated and recognized ratably over a subscription period that spans from monthly to multi-year contracts. As such, these recurring revenues are classified as Maintenance/Recurring Revenues in our market sizing model.
Exhibit 2 shows our projections for the enterprise applications market by vertical segment, based on the buying preferences and the customer propensity to invest in new software within those industries as they continue to upgrade and replace many legacy industry-specific applications that have been identified and tracked in our Buyer Insight Database.
Exhibit 2: Worldwide Enterprise Applications Market Forecast 2015-2020, By Vertical Industry, $M
Exhibit 3 shows the enterprise applications market forecast by vertical in a numerical format with the addition of buying trends.
Exhibit 3: Worldwide Enterprise Applications Market Forecast 2015-2020, By Vertical Industry, $M, Trends
|Vertical Market||2015||2020||CAGR, %||Trends|
|Aerospace & Defense||2065||2189||1.2%||Legacy replacements could spur growth in the A&D market, but cybersecurity risks may prevent A&D firms from embracing the Cloud in its current form. Still GE Digital is pushing ahead with Cloud initiatives like Predix to reshape the A&D market with device connectivity solutions for predictive maintenance.|
|Automotive||6329||6614||0.9%||Analytics could be the baseline for next-generation automobile apps not just for PLM to manufacture personalized cars, but also self-driving models that redefine transportation. Still supporting operations of global OEMs with unified systems will be top priority for apps vendors.|
|Banking and Financial Services||23753||24466||0.6%||As banks come to terms with low or negative interest rates, their apps spending pattern centers around tailoring services for target clients, optimizing yields through tiered services in a new world where a host of fintech startups could give new meaning to payment processing, peer to peer lending and virtual currency.|
|Communication||8778||9392||1.4%||OSS and BSS replacements are likely to grow modestly as communications firms are slow to embrace 5G and the Cloud. New network management tools, subscription models and apps that enable carriers to better monetize their subscription base may see higher growth.|
|Construction and Real Estate||7745||7958||0.5%||Consolidation wave among ISVs that specialize in construction will limit options for buyers. The latest is Oracle buying Textura for building information management. A robust rental market will help drive apps that better manage properties for landlords and REITs.|
|Consumer Packaged Goods||9509||10080||1.2%||PLM systems are gaining traction among CPG firms, the same applies to compliance and risk management. Better use of agriculture technology systems as well as Internet of Things could transform the food industry.|
|Distribution||6062||6214||0.5%||Mobility forms the basis of next-generation supply chain systems, while distributors are increasingly gravitating to the Cloud for reductions in total costs of IT ownership.|
|Education||5422||6060||2.2%||Large-scale projects to implement new student information systems continue unabated as the global education market embraces the convergence of mobile learning, international testing standards as well as online instructions.|
|Government||9295||10225||1.9%||e-Government is the catalyst for new system purchases especially among developing countries. Apps designed to improve tax revenue collection will continue to take precedence over other front-office systems.|
|Healthcare||16524||19008||2.8%||Consolidation among national healthcare providers will accelerate system standardization, while reimbursement cuts especially by the US government will prompt regionals to do the same in order to drive costs down. New E-Prescription rules, medical procedure code changes, health record systems will have profound impact on workflow and revenue cycle management.|
|Insurance||10818||12110||2.3%||Big Data analytics will be one of the key investment areas for insurers aiming to capture and gain more insights on their customers, while stepping up Cloud developments for tighter collaboration with agencies and brokers in moves that could redefine how insurance is being sold in the future.|
|Leisure & Hospitality||4906||5537||2.4%||Mobile and Cloud apps will become more pervasive among hotels, entertainment venues as resorts and sports arenas aim to deliver more personalized experiences to better differentiate their services against Airbnb and home-entertainment options.|
|Life Sciences||5990||6827||2.7%||Compliance, risk management and PLM apps will continue to play a key role in life sciences vertical with CROs assuming more functions previously held by big pharmaceuticals companies, which are wrestling with revenue model changes as drug prices could fluctuate widely with the advent of smart medications in small dosages.|
|Manufacturing||20655||21123||0.4%||A loss of talents could rise as current managers retire in droves, prompting manufacturers to invest in systems for capturing and retaining domain expertise and tribal knowledge.|
|Media||4131||4535||1.9%||As online and mobile delivery becomes the norm across the media landscape, front-end investment to capture incremental and recurring revenues will become more important than ever. Tools for ad retargeting, audience development and subscription management are expected to fare well.|
|Non Profit||3426||3830||2.3%||As online fund raising enters the mainstream, new operating models will emerge as nonprofits experiment different out-reach programs to attract, retain and strengthen ties with donors, volunteers and their key constituents.|
|Oil and Gas||7361||7679||0.8%||Despite slumping oil prices, long-term outlook is promising as the industry shakeout will increase pressures to contain costs through automation, while advanced project management apps could become more important than ever. Buoyed by low oil prices, chemical makers and downstream distributors will boost IT spend. Cloud migration for some may be slow in areas with bandwidth limitations.|
|Professional Services||16007||17900||2.3%||Professional services firms invest heavily in new tools that boost collaboration, CRM and HR best practices aided by a mix of new entrants from industrial ERP space namely Roper as well as Cloud startups like FinancialForce, all of which aim to accelerate legacy system replacements across different segments including AEC, business and IT consulting firms.|
|Retail||14458||15759||1.7%||Multichannel retailing led by eCommerce will dominate the IT agenda of retailers as the capturing and analysis of real-time customer and inventory data will help facilitate better planning and demand forecasting.|
|Transportation||7094||7768||1.8%||Airlines, cruise operators and rails will continue to invest heavily in Customer Experience apps, while a new generation of mobile devices and sensors could remake the trucking vertical, especially in such areas of fleet management, scheduling and environmental health and safety.|
|Utility||3098||3175||0.5%||Smart grid investment will begin to taper off and the vertical could see more upheavals as utilities anticipate the fallout from the decision of some of their largest customers to replace conventional electricity with alternative energy sources. Internet of Things could usher in a new set of maintenance management apps.|
Source: Apps Run The World, May 2016
Exhibit 4 shows the enterprise applications market by functional area. The highest growth functional markets revolve around smaller segments like eCommerce, Enterprise Performance Management, Sales Performance Management and Treasury and Risk, where first movers remain less established than those that for decades have been entrenched in functional areas like ERP, CRM and PLM.
Exhibit 4: Worldwide Enterprise Applications Market Forecast 2015-2020, By Functional Market, $M
More mature markets like Content Management and ERP will show little or no growth through the forecast period. While Cloud products like Office 365, Adobe Creative Cloud and Workday’s Cloud ERP will continue to do well in content management and ERP markets with double-digit revenue gains in 2016, their robust showing will come in at the expense of their on-premise counterparts. The erosion of on-premise implementations, which have been in place for decades, will certainly curtail near-term growth for the overall market. Such displacements of existing recurring revenue streams primarily in maintenance by new Cloud sales are largely responsible for the 2015 drop of the enterprise software revenues of Microsoft, Oracle and IBM, as shown in our earlier report.
Exhibit 5 shows the enterprise applications market forecast by functional market in a numerical format.
Exhibit 5: Worldwide Enterprise Applications Market Forecast 2015-2020, By Fucntional Market, $M, Trends
|Functional Market||2015||2020||CAGR, %|
|Analytics and BI||11615||13666||3.3%|
|Customer Relationship Management||24004||26151||1.7%|
|Enterprise Performance Management||2212||2803||4.8%|
|ERP Financial Management||26865||28055||0.9%|
|ERP Services and Operations Management||54256||56043||0.7%|
|Human Capital Management||12500||14875||3.5%|
|IT Service Management||1643||2004||4.0%|
|Product LifeCycle Management/Engineering||17362||18203||1.0%|
|Project Portfolio Management||2520||2715||1.5%|
|Sales Performance Management||782||985||4.7%|
|Supply Chain Management||6574||6926||1.0%|
|Treasury and Risk Management||2655||3375||4.9%|
Source: Apps Run The World, May 2016
Regardless of whether new Cloud deployment or expansion of on-premise implementations, the 1.5% projected increase of the enterprise applications market – amounting to a net gain of $15 billion – does have a few things working in its favor.
Macro Drivers Propel Apps Development
Despite geopolitical volatility or the possibility of another financial crisis(prompted by Britain’s vote in June 2016 to leave the European Union, negative interest rates elsewhere plus an oversupply of oil and other commodities), the macro drivers are conducive to further growth in the enterprise applications market. The onslaught of structured and unstructured data generated either by aircraft engines, social media or even Google alerts has put many companies in a bind, forcing them to develop new tools or run off-the-shelf software packages to capture and make sense of the flood of information.
The rise of the millennials, coupled with a wide array of legacy systems companies have been running for decades, pose significant challenges for not just the IT shops, but also Line-of-Business executives who find their organizations ill-equipped to connect with a new generation of users, a shortcoming exacerbated by their continuous reliance of outdated systems. The old adage of if it ain’t broke, don’t fix it may no longer remedy the situation.
For example, a US bank recently decided to migrate its payroll system to the Cloud after a lengthy review discovered that the risks of doing nothing would actually be hard to miss because it was running a 25-year-old software package tethered to a 35-year-old printer, while relying on local payroll service providers that had reached their limits in terms of handling any European headcount growth at the financial institution with more than 150 years of history.
Agile software development, along with consumerization of IT as well as the affordability of Cloud Computing(exemplified by low-cost platforms like Amazon Web Services) mean that the enterprise applications landscape could go through fundamental changes without requiring the companies to invest an exorbitant amount of capital, while still reaping the benefits. Some of the companies in our Buyer Insight Database are deploying every week as many as 4,000 microservices or apps through agile development.
Against such backdrops, the type of applications and the vehicle through which enterprises are running them are emblematic of how companies of all sizes are in the midst of a relentless quest for better workflow as well as the underlying business processes, all in the hopes of staying one step of the competition.
Vendors Instigate Apps Investments
Enterprise applications vendors are pulling out all the stops to boost adoptions for their new products. SAP, for example, is galvanizing support for S/4HANA, its latest ERP suite, among its installed base of 25,000 customers. Even with over 3,200 customers that have signed on for S/4HANA, the vendor has laid out a conversion path for the remaining 22,000. In May 2016 SAP chairman Hasso Plattner was unequivocal about the benefits of such conversion – namely better workflow, performance boost with the help of embedded in-memory database, as well as tight integration to Cloud extensions like Employee Central for Core HR and other popular apps like Ariba, Concur and Hybris. He also implored its customers to dismiss the idea of running S/4HANA along with legacy ERP systems like SAP ECC, a co-existence approach that SAP had for years lauded as a pillar of its non-disruptive strategy.
While SAP has stopped short of declaring a forced upgrade strategy, others such as Ellie Mae have made it clear that its on-premise products would no longer be supported after May 2016. While the majority of Ellie Mae’s 136,167 users have already migrated to the on-demand version of Encompass apps for mortgage processing, those still running the on-premise version of Encompass would have no choice but to upgrade to the Cloud release if they want to continue to receive software updates and technical support from the vendor.
Some of the most widely used releases like PeopleSoft 9.1 from Oracle will see end of extended support in 2017, essentially making it difficult for hundreds of these customers to run them effectively.
Over the past year, major vendors including IBM, Oracle, and SAP have stepped up auditing of customer usage of their applications. Some of these customers responded during our regular surveys that their applications spend could soar as these vendors have become more vigilant than ever enforcing and charging those who access data generated from their apps. The rules could cover external users who might not have been considered regular users in the past.
Then there are the price increases from a host of vendors including Salesforce’s up to 20% fee hike and Upwork’s decision in June 2016 to double its fees for some users out of a pool of millions of contractors around the world that have been running its contingent labor management apps.
All these amount to a systematic use of market and pricing power to drive incremental revenues as vendors continue to transform how enterprise applications are being sold and used.
Musical Chairs Presage Market Reboot
Similar to the rapid changes to the consumption pattern of music over the past decade, enterprise applications have gone through one transformation after another.
While it’s not clear whether streaming music services will mark the demise of radio, CD or record labels, the move from client server computing to on-demand Cloud software has not been kind to many of the key stakeholders in the enterprise applications market.
As shown in the main piece of our Apps Top 500 report, 44% of the world’s 500 largest enterprise applications vendors have vanished due to M&A and failures since 2006. Even among the current crop of top 500 enterprise applications vendors, many of their founders, CEOs and other high-level executives have come and gone. In fact, at least 50 of the Apps Top 500 vendors have seen a major corporate restructuring over the past year and 17 have ushered in a new management team during the period, according to our survey.
Musical chairs have always been a constant reminder of how enterprise applications are being played out. But the fallout could become more striking – or devastating as illustrated in the bankruptcy filing of Aspect Software – now with the increasing influence of private equity firms and activist investors in the tech space.
Over the next five to 10 years, our assumption is that the enterprise applications market is expected to become more negative toward vendor’s under-performance within their peer group, less tolerant of ill-conceived expansion plans and me-too business models, and unambiguous about the time needed to reach certain profitability targets.
Few things may happen when the music stops:
- Rising debts among a growing number of enterprise applications vendors – after years of leveraged buyouts by private equity firms – will leave many in worse shape than before.
- Customers, many of which have replaced internal development with packaged applications, will ramp up custom projects because of the ease to build Cloud apps and microservices, perhaps ending up competing with the same vendors they buy software from.
- Target markets for enterprise applications will morph with trends such as self-driving cars, online education and sharing economy. For vendors that cater to transportation, higher education and hospitality verticals, their ability to differentiate and raise barriers to entry could set them on a path to either success or failure.
The harsh reality is that the enterprise applications market – having been feasting on spectacular license sales and dependable maintenance fees for past decades – could be entering an extended period of volatility as top 10 vendors in any given market are battling competitors on all fronts. Competitive wins and losses could be attributed to surprise moves by incumbents, startups, customers and erstwhile partners.
What matters is ensuring enterprise applications vendors and their customers not squandering any opportunity to reinvent themselves before the music actually stops.
Our upcoming reports will profile the top 10 vendors in each of the above 37 markets, offering in-depth analysis of the market dynamics, vendors’ Strengths, Customers, Opportunities, Risks and Ecosystems as well as their ability to gain Shares(SCORES) within their respective space. We will also offer win-loss analysis of the quarterly wins of these top vendors and whether incumbents and upstarts pose any real threat to their standing amid shifting market requirements and user preferences.
Each year our global team of researchers conduct an annual survey of thousands of enterprise software vendors by contacting them directly on their latest quarterly and annual revenues by country, functional area, and vertical market. We supplement their written responses with our own primary research to determine quarterly and yearly growth rates, In addition to customer wins to ascertain whether these are net new purchases or expansions of existing implementations.
Another dimension of our proactive research process is through continuous improvement of our customer database, which stores more than one million records on the enterprise software landscape of over 100,000 organizations around the world. The database provides customer insight and contextual information on what types of enterprise software systems and other relevant technologies are they running and their propensity to invest further with their current or new suppliers as part of their overall IT transformation projects to stay competitive, fend off threats from disruptive forces, or comply with internal mandates to improve overall enterprise efficiency.
The result is a combination of supply-side data and demand-generation customer insight that allows our clients to better position themselves in anticipation of the next wave that will reshape the enterprise software marketplace for years to come.