The End of Enterprise Software is Close Now

Today’s email newsletter from AMR Research includes some scary numbers – scary that is for anybody making a good living out of Enterprise Software.

Month’s ago we asked in this blog “Is this the beginning of the end for Enterprise Software” – not a popular topic at the time. Not surprising given that the only people interested in that stuff are those making very good money out of it – vendors and internal support techies. As we know turkeys are not very interested in Thanksgiving.

But now even AMR which normally focuses on helping clients understand what’s happening in the big vendors (why should that be necessary?) is suggesting the party is over.

Here’s a quote from the newsletter:

Even though I’ve only presented one quarter’s worth of data, I also looked at the previous quarter and earlier periods too. Since the start of economic downturn last September, on-premises vendors have been harder hit than their cloud brethren. This is especially true for ERP providers.

While the largest enterprises may be the last to replace their financial applications and the bulk of their ERP systems with a cloud offering, it will happen, but only when the largest vendors endorse it, or companies like NetSuite and Workday are viewed as viable replacement products. The economics for buyers are too compelling, which is a theme we’ll explore in future editions of First Thing Monday.

The publicly-traded vendors have more of a challenge, though. Software as a service and cloud represent entirely different business models. Although this is especially true in the shift from large, upfront deals to subscription fees, it also shows up in the company’s business model.

Look at QAD, for example. In its 2009 annual report, the company noted that it had 1,500 employees, including 625 in services and support, with 400 consultants in 23 countries and 15 support centers. It also noted it had 350 developers in R&D centers in the United States, India, China, Ireland, Australia, and Belgium. Some of this comes courtesy of acquisitions, but how many services and support people, trainers, developers, and sites will QAD need if the new business shifts to mostly cloud sales?

Finally, Epicor and QAD are on the top of many private equity firms’ acquisition wish lists, despite the challenges of actually completing a deal.

In addition to appealing to customers, there are also shareholders to consider. As I write this, NetSuite has the highest market cap of the three at $882.06M. Epicor is valued at $397.54M, while QAD trails at $132.24M. The valuations are based on the closing price on Thursday, August 27.

Since the first trading day of the year, NetSuite’s share price is up 41.4%, Epicor 26.7%, and QAD 4%.

The central point here is the cost advantage enjoyed by cloud computing fundamentally changes the point of competition, moving the level of acceptable cost down below one at which those bloated software companies can get prices to break even.

There are lots of other advantages to cloud computing – all related to the value users get out of it when they’re freed from the grip of those techies.

We’ll discuss those in a later post. For the moment Wall St. understands, even AMR begins to acknowledge, that Enterprise Software as we know it is in serious decline.