A Breed Apart

CIOs don't talk much about best-of-breed (BOB) IT strategies these days. But this doesn't mean that CFOs should neglect the offerings of BOB software vendors -- far from it. "There was a period of time when the strategy of assembling an integrated business solution from a bunch of independent pieces was a fairly popular alternative to the notion of a broad, integrated suite," recalls Jim Shepherd, senior vice president of research with AMR Research. "This seems to have changed quite dramatically; the majority of CIOs these days, I think, genuinely favor the broad suite approach. At some level, this has certainly had a negative impact on best-of-breed vendors. On the other hand, what we keep seeing is the large suite vendors and the infrastructure vendors like Microsoft or IBM out aggressively courting these BOB vendors and working with them much more closely and wanting to partner with them to a degree that we've never seen before."

Best-of-breed providers bring an array of strategies to the ongoing battle for market share, and some of them are not what you might expect. The large vendors want to be seen as platform vendors, Shepherd notes: "Part of this battle means that you need an ecosystem of third-party independent vendors to commit to your platform and explicitly or implicitly endorse it." Niche players that position themselves as plug-ins or add-ons can leverage the perceived size and stability of the larger providers. "Also, in many cases the niche vendors are able to leverage more than that; they're able to leverage marketing dollars and customer access. Increasingly, we're seeing the larger vendors resell these niche applications, and, of course, they've been buying up these smaller vendors at a rapid clip."

Does this consolidation point to a loss of innovation in the market? A few years back Shepherd thought so, but he's more optimistic now. "While consolidation continues, we are seeing new startup third-party vendors, and this is a very healthy sign. There was a period there during and coming out of the recession when there didn't appear to be much in the way of new startup vendors, and I thought that this was a danger, but we are seeing them again."

The Software-as-a-Service (SaaS) delivery model is on an upswing, and this may have boosted the specialized software providers' outlooks. "The financial community is enamored of it, so they are favoring companies that have SaaS as the core of their delivery strategy or as an option," says Shepherd. "And there's at least a perception, not necessarily fully proven, that this is an easier way to enter the market, that there's less resistance on the part of potential buyers because they don't have to go out and make a major capital commitment."

But perhaps an even bigger factor in the BOB providers' future prosperity will be the rise of service-oriented architecture (SOA), a method of constructing software that allows it to be resolved into component units and easily linked with other systems. "This ultimately will have a very significant effect for BOB vendors in a positive way," says Shepherd. "To the extent that it works, it will make it easier for end users to take a piece of software from vendor A and integrate it with software from vendor B, and make it easier for the vendors as well, of course. But, more important, one of the major selling points of SOA is as an IT phenomenon, and there are lots of interested parties. The big infrastructure vendors, application vendors, and consulting vendors are all out spending a fortune in marketing this concept. To the extent that it ultimately convinces companies that this is something they can actually do, it removes a huge barrier for the best-of-breed vendors."

Companies' compliance work, too, will continue to present opportunities across the BOB spectrum. "Increasingly, software is seen as a key to the compliance activity itself, so this is opening lots of opportunities," says Shepherd. "It's forcing companies to replace older pieces of software that predated the compliance obligation, and it's causing people to spend a lot of money on software to help them comply."