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In the computer software industry, few people are as outspoken as Oracle CEO and cofounder Larry Ellison. And, during his company’s lengthy battle to gain control of rival PeopleSoft, Ellison forecast that consolidation in the software business would mirror what happened in auto manufacturing more than 30 years ago.

"There will be far fewer companies," he says, noting that the auto industry was once dotted with many small, fragmented car producers. "Now, there aren’t that many auto companies in the world. There doesn’t need to be, nor will there be thousands of software companies."

Ellison isn’t alone in his projections. Gartner, a highly respected provider of research services to the IT sector, predicts that three of the top 10 PC manufacturers will be gone by 2007, and many industry observers believe both the hardware and business software markets are overcrowded with players competing for the same customers.

What do these trends mean to you? As an executive in a midsized company, it’s important for you to stay abreast of such changes, because they may affect support for software your firm currently uses, or change your strategy about investing in new products.

The changing software landscape
One of the fiercest battles in the IT world is being fought in the business software market. This includes applications programs, which automate functions such as supply chain planning, accounting, procurement and sales activity, as well as infrastructure programs, which serve as the "software glue" between systems, databases and operating systems.

Industry consolidation is happening for a number of reasons. For example, when Microsoft acquired Great Plains Software and Denmark-based Navision A/S, it removed two competitors that offered similar financial accounting products. On the other hand, when security software giant Symantec bought Veritas, a storage and data recovery software firm, the move was praised as a way to broaden the company’s access to new customers and increase its depth in the market.

In recent years, software product consolidation has also accelerated, largely due to increased unity in operating systems and recent changes in federal law. A decade ago, it was common for companies to maintain a maze of proprietary and purchased software applications across several different business units. Today, virtually every application a company might need is available in an application suite from one or two vendors. Product consolidation also got a boost from the Sarbanes Oxley Act of 2002, which required that financial reports have a verifiable audit trail. With a single suite of applications, all financial data originates from one source, eliminating the potential for consolidation errors.

What does a shrinking business software market mean to you? On the upside, midsized companies now can spend less time dealing with multiple vendors to set up and maintain a wide variety of systems. With today’s consolidated short list of software providers, IT pros can now do a better job of matching application suites with vital business and system requirements. Finally, experts generally agree that fewer — but stronger — players in the business software arena will reduce long-term risks for companies seeking product service and support.

For example, Oracle told customers that it will continue supporting the most recent versions of PeopleSoft products for the next eight years, assuming that companies take responsibility for "minor upgrades to stay current." And, after Microsoft acquired four smaller business software firms, it indicated that it will support all four software packages until 2013 — adding that migration tools to a new, combined product would be made available two to three years before that date.

The major downside to consolidation is reduced negotiating power on product pricing. With just a handful of firms serving the major business software niches, the number of product or price promotions has dwindled.

Tips for managing a changing market
Keep in mind that companies today change technology systems every five to 10 years, with most companies in the seven- to eight-year range. Even if you choose a vendor that is later consolidated, chances are the product will continue to be supported through its expected life cycle, and afterwards, it may be easier for you to migrate to your next system.

Here are a few tips on selecting a vendor in the changing market:

• Choose a company that has already been through consolidations, or has acquired one or more smaller firms. Firms in this category include Oracle, Microsoft or Sage, all of whom are large, established software companies with proven applications and thousands of users.
• For enterprise applications, stay away from smaller companies. The more specialized the vendor, the greater its potential to be an acquisition target two years from now. On the other hand, if your company needs a specialized "bolt-on" application not available in the standard application suites, consider a smaller software vendor if its product has proved compatible with your larger system.
• Go with the product or vendor that feels most comfortable. Because most experts believe the business software shakeout will continue, it’s better to choose otherwise equal vendors on the strength of a relationship, not a product.

If your software vendor is acquired:

• Review your contract. Find out what options your company may have to seek reimbursement for the costs of additional training, system migration or other issues that may arise during a transition.
• Ask hard questions about product support. Schedule a meeting with technical support representatives from the newly merged firm and press them about their long-term commitment to support existing products, plans for phasing out software applications and tools they will develop to aid client migration. If your vendor will not guarantee support, seek rights to the system source code, which gives you an option to continue your system until you have an opportunity to migrate. Based on all of this information, consider your alternatives.
• Expect short-term issues. Experts say that technical support from the newly merged vendors may suffer from quality issues for 12 to 18 months as staff get up to speed on new products and applications.
• Consider a hosted solution. A growing number of companies are going through third-party application service providers to lease offsite technology systems. The main advantage is this reduces your costs for system maintenance and technical support.

By following these tips, you can help your business navigate tricky service or support issues in a fast-changing business software market.