Sometimes you have to take a step back before you move forward.  Being in the high-tech industry, we’ve all experienced this.  When the market slowed down, we all had to take a step back and readjust.  Now, many of us are ready to move forward into growth mode.  As we move into renewed growth, we face a new reality in the high-tech world, and especially in the enterprise software market. 
 
Reality Bit #1
 
It is becoming increasingly difficult for small software companies to sell mission-critical solutions to large enterprises.  The enterprise software market is moving from the early adopter phase to a more mature state, and it is the gatekeepers that get to make the final purchasing decisions.  Vendor viability and ability to support are becoming primary decision criteria, while functionality and technology take the backseat.   “The technical people loved us, but we got killed in the financial review,” is a statement you hear from many smaller software vendors these days. 
 
Reality Bit #2
 
It is going to be a while before we see the next SAP.  A handful of large software vendors - such as Microsoft, Oracle, IBM, SAP, PeopleSoft, Siebel, Cisco, and Veritas - provide the majority of application infrastructure for the large and midsize enterprise.  This current generation of enterprise application infrastructure is not going to be replaced anytime soon.  Many of the companies that have purchased and installed these applications are still in the early stages of organizational adoption, and it will be a while before they are ready to take on a new generation of infrastructure applications.
 
Reality Bit #3
 
Best-of-breed software is not dead, but the barriers have been raised.  Point solutions that complement the existing enterprise infrastructure represent an opportunity for smaller software providers.  At the same time, each of the large enterprise software players has either acquired or developed significant portions of the functionality that was provided in the past by point solution vendors.  Examples are Siebel’s acquisition of BoldFish for e-mail marketing, Veritas’s acquisitions of Precise Software and Jareva, and J.D. Edwards development of demand forecasting functionality.  Many corporate buyers will settle for this functionality even if it is not the best of the breed, putting a squeeze on the smaller vendors.  
 
 
 
Does it mean there is no future for new and smaller enterprise companies?  No, although it does mean opportunities in the enterprise software market space are getting fewer and tougher to capitalize on.  What can a software company do to increase the likelihood of success in this new reality?  Here are a few things I can think of:
 
Match the size of your solution to the size of your company. 
Be realistic.  Just like a role player on a basketball team is not going to be trusted with the final shot in a tight game, the idea that a large corporation will entrust a small company with an ERP, CRM, or SCM system is not going to fly these days.  As a small company, your role is to fill the gaps in the functionality provided by the large enterprise players.  Buyers want to know that in the worst-case scenario that your solution doesn’t work out or your company goes out of business, they will survive without major hiccups.  By limiting the scope of your solution, you reduce the risk for the buyer.  As you acquire more references and increase your ability to support the product, the risk is reduced, and you can gradually expand your product offering to match these new capabilities. 
 
Leverage customer intimacy to develop and maintain domain expertise. 
Gaps in the functionality of the large providers are not as wide and obvious as they were several years ago, and smaller vendors have to be more diligent identifying these gaps.  The only way for a smaller vendor to compete is to develop high degree of customer intimacy and genuine, specific domain expertise, be it vertical or functional. 
 
Provide a business model that reduces risks for buyers. 
These days, IT buyers prefer the risk of doing nothing over the risk of an unproven solution.  Buyers of IT solutions face both financial risks – investing in a solution that will not pay for itself, and operational risks – implementing a solution that may not work, or even worse, disrupt existing company operations. Anything you can do to reduce the perceived risk for the buyer will go a long way to accelerate your sales.  Read more about it in our article Accelerated Proof.
 
Partner smartly. 
To be acceptable to the CIO, point solutions must be compatible with existing enterprise technology infrastructure.  Partnering with the larger players is not only a technical requirement; having the relationships in place, a large vendor can open many doors for point solution partners.  Such partnership can dramatically accelerate market traction for a smaller company, but leveraging on these relationships without developing complete dependency on the larger vendor requires careful management and timing (see our interview with Eyal Shavit for more on this topic).
 
Set the expectations for slower growth.
Slow and steady wins the race.  While I agree with the viewpoint that software can still be a high-growth business (see Philip Lay's The Next Big Thing? below), I think the definition of high-growth has to come down to earth.  20-50% annual growth is still rather phenomenal, and investors should be able to realize a good return on their money if they invest it more selectively and allow portfolio companies to take a lower-growth/lower-spend path.  
 
This is not what we have been used to in the high tech market.  Business models that expect a company to go public at ten times the investment value within three years do not provide a company with the time needed to develop domain expertise, foster customer intimacy, and prove the real value of the solution.  Instead, they force companies to look for shortcuts, which in most cases lead management to skip important steps in attempt to come up with the next “big bang”, “revolutionary”, broad market solution.  Read more about this scenario in Killing The Platform Legend below.
 
 
 
So where are the opportunities?
 
While Philip Lay offers his prediction for the ‘next generation’ of enterprise software applications based on unmet functional needs (see below), I would like to suggest where I see the opportunities for growth, based on the types of software solutions fit the characteristics we have just described:
 

• Optimization Point Solutions:  Realizing that benefits from recently deployed ERP and CRM solutions are hard to quantify, enterprises are now looking for point solutions that fit into the existing infrastructure and deliver proven, concrete, and quantifiable benefits.  Companies that deliver such solutions include Blue Pumpkin, ClickSoftware, Demantra, and Servigistics – all in prime position to capitalize on the quest for tangible ROI.  Rather than being a pure front- or back-office play, these companies provide solutions that optimize supply resources based on customer demand for products and services.  While such companies continue to be under pressure from the large enterprise vendors attempting to design out their best-of-breed partners, they typically possess highly specialized domain expertise that creates real technological barriers.  The challenge for these companies is to apply their expertise beyond their initial niche without compromising their best-of-breed position. 
• Vertical-Specific Solutions:  This seems to be a no-brainer, but it gets a little more complicated than it used to be.  Practically all of the large vendors have already begun to offer specific vertical solutions.  Many of these start out as nothing more than packaging with little functional depth, but it is only a matter of time before the functionality catches up to the promise.  The opportunities for smaller vendors are in serving ever more specialized vertical niches, such as RamQuest’s solution for the Land Title Industry.  The challenge for these vendors would be to execute in their niches and leverage this success into similar opportunities in other vertical segments (what Geoffrey Moore calls the “bowling alley strategy” in Inside the Tornado).
• Software as Service: In my mind, software as service is one of the true winning business models that have outlasted the dot.com era.  Companies that provide specific business solutions in a service model are finding success in virtually every area.  Examples are abound, starting with the well-documented salesforce.com and RightNow, and continuing with emerging vendors such as Eloqua and LeadGenesys for lead generation, iMakeNews for electronic newsletter publishing, and Paymaxx for payroll solutions.  I believe the model works because it combines the key success factors mentioned above: the solutions are limited in scope (even salesforce.com started small) and easy to get started with, dramatically reducing both financial and operational risks to the buyers.  Being a service provider forces these companies to develop and maintain customer intimacy.  Investors, sober from the bubble burst, are finally starting to realize the beauty of a recurring revenue model – a software company with real revenue visibility!

This is by no means an exhaustive list of where the opportunities are.  My real goal in this article is to get you thinking about the parameters that will drive your company from survival mode to renewed growth.  I’d be curious to know what you think.  Where is your company finding success?  Where do you see growth opportunities?  I look forward to your feedback!