Best of Breed Software Niches Deepen

Despite increased competition on several fronts, best-of-breed (BOB) software vendors are thriving. Most of these companies have achieved ongoing growth in revenue over the past year. They've done so by providing applications that solve specific business problems and by offering superior product quality and deeper functionality than their less-specialized competitors do.

"The ability of BOBs to maintain a quality edge over competitors is often due to their lead time," says John Hagerty, vice president of AMR Research in Boston. "When it comes to something like business performance management [BPM], it takes time for competitors to catch up to the quality level those best-of-breed BPM vendors have achieved, partly because those BOBs have been entrenched for so long and have extended their quality lead for a relatively long time period.

"However, when it comes to something like compliance management, in which lead time is not a particular advantage for BOBs because the compliance management space is relatively new, BOBs' quality gap hasn't had time to widen," Hagerty notes. In addition, the long lead times that historically have cushioned best-of-breed providers are shrinking, he says. And these vendors must now fend off challenges from IT platform providers -- IBM and Microsoft, for example -- as well as from ERP players such as Oracle and SAP.

Recognizing the need to adjust to the changing face of competition, best-of-breed vendors are stepping up their M&A and partnering activities. Their goal is to shore up product deficiencies and establish end-to-end functional capabilities.