Cloud adoption trends will change business software
The cloud delivery model has been around for decades and is the main option in most software markets. This model is used across several markets, from customer relationship management (CRM) and sales to human resources (HR) or talent management, as well as project management and enterprise resource planning (ERP). Cloud providers promised customers cost reductions, flexibility, increased usability, and the freedom to cancel their subscription anytime. This new delivery model allowed new players to enter markets traditionally dominated by large vendors, such as ERP or supply chain management. This meant buyers had more options, in theory, this would create healthy competition between vendors.
The reality is quite different. Due to their different functionality, most new software products aren’t reliable alternatives to accounting software or ERP systems. Billing and invoice management is an example of an easy to use, cheap software; however, this software doesn’t replace accounting, not even for small businesses. Billing software is generally used by small companies and freelancers who outsource accounting. Invoice management software helps process invoices; without this software, lots of manual work is required. Furthermore, some software vendors specialize in specific types of invoices, such as sales (accounts receivables) or purchasing (accounts payables). These specialized point solutions can be extremely valuable for companies that need to process tens of thousands of AP or AR invoices.
While some software markets experience an explosion of point solutions, others follow the opposite trends: consolidation. An example of this phenomenon is sales, where traditional order management software is now frequently absorbed into e-commerce software products. Before online commerce, order management software was used to track B2B sales orders. Since this can be done online, and most companies also sell to consumers, it makes sense to use one software solution for B2B and B2C.
Finally, the cloud allows vendors to create online platforms that companies can use to replace software. For instance, supply chain business networks connect companies with manufacturers, suppliers, and logistics providers through an online portal. While these alternatives are still in the early stages of development, they have the potential to replace software such as inventory control, warehouse management, or supply chain suites.
Let’s take a look at how these trends will impact various software market segments in 2020 and beyond.
The project management software market is messy, it will get worse before it gets better
In 2020, traditional vendors will work to make their product more flexible and easy to use while providing robust features. Additionally, small vendors will try to develop their products further, but few will successfully compete with large vendors.
As mentioned above, new technologies like the cloud allowed small vendors to create new products to manage tasks and projects. While all these products are usually labeled as “project management,” there are substantial functional differences between them and traditional software. New products can be buggy, confusing, or lack features. The image below describes some of the issues users face when they adopt new project management software.
These issues have an essential impact on adoption, and companies with more complex needs have the lowest adoption levels. Only 32% of 19,000 users who reviewed project management software on our site fully adopted the product. Adoption is slightly higher for small businesses (40%) but much lower at the enterprise level (17%).
Enterprise users mentioned that old systems provide robust functionality but can be clunky and outdated, while new products frequently lack the features needed to manage complex projects:
“I don't love the way subtasks are handled and usually simply end up making them individual tasks, which can be frustrating for a complicated project.”
The main benefit of new project management tools is the ease of use. As one reviewer put it, they offer “Caveman ready interface” which explains why 75% of reviewers gave high and very high ratings for the ease of use metric. Project management software is also easy to deploy—45% of reviewers said they went live in less than one day, 31% needed less than one month to go live.
At the same time, easy to use software can be basic, and reviewers mentioned that they need to pay extra for additional features and custom widgets that are standard in traditional project management software, such as Gantt charts.
This explains why, despite fierce competition, project management software isn’t exactly cheap. Most reviewers gave ratings of four and five for pricing, on a scale from one-seven (where one represents the lowest price and seven the highest).
Finally, many new vendors focus on the flexibility of their products, which is not always beneficial for users.
According to one user review of a product, “It’s so customizable that if one PM doesn’t do exactly what the others do, you’ll never find what you’re looking for.”
While project management users want flexibility and usability, oftentimes features are more important. Research shows that functionality is the main factor when purchasing project management software.
Since small vendors require funding for research and development, companies who don’t raise venture capital will focus on essential features or disappear (close or be acquired by competitors). Considering 90% of startups fail and the IT industry has the highest failure rate (63%) of all sectors, we expect the number of project management software products will decrease 20-30% in the next few years. The percentage could be even higher for task management software, which will evolve into project management or rely exclusively on small customers, which is not a sustainable long-term revenue model.
The cloud is changing ERP’s role
We estimate that half of mid-market companies replacing ERP in 2020 will choose another type of software, accounting as the first choice, followed by new project management tools. The change is harder to quantify for the enterprise where we expect companies to replace ERP software used by subsidiaries and departments, not their corporate ERP systems.
Traditional ERP systems were designed to provide features for almost all departments of a company. With the advent of cloud ERP, vendors adopted new strategies to stay relevant.
- Older vendors decided to focus on what they do best, such as functionality for manufacturing, distribution, or professional services. For front-office and back-office features, they realized that it’s impossible to compete with the main players in markets such as CRM or talent management. Since they couldn’t beat them, they decided to join them by integrating with the most popular products in these markets.
- New vendors like FinancialForce and Rootstock built ERP software using platforms like Salesforce. This allowed them to provide native integration with Salesforce CRM, and other software built on the same platform. While Salesforce customers benefit most from using these ERP products, companies that aren’t Salesforce customers can also benefit from the technology.
- Large vendors used the cloud to diversify their offering and appeal to companies of all sizes. New products for small and midsize businesses were developed, such as SAP Business ByDesign. At the enterprise level, multiple products have been packaged to provide industry-specific solutions, such as Infor Cloudsuites.
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At the same time, software products like accounting and project management are evolving by including both front-office and back-office features. These new options have the potential to replace ERP, especially for small and midsize companies that can’t afford multiple systems. A G2 analysis of 723 reviews revealed 38% replaced ERP with accounting. This means that users’ companies chose software that was too complex for their needs, or disliked ERP and looked for alternatives. Furthermore, mid-market companies represented the highest company size segment that preferred accounting software to ERP.
ERP alternatives will impact the already slowly growing market. In 2019, ERP software revenue was estimated at $84 billion; it’s expected to grow to $86 billion by 2022. By comparison, the total revenue in 2015 was $82 billion, this means the market will only grow about 5% in seven years. At the same time, IT spending on enterprise software was $457 billion in 2019 and will grow to $560 billion by 2021, an increase of 22%.
The discrepancy between ERP and enterprise software market growth can be explained by a decrease in overall satisfaction with ERP software. The number of reviewers who gave the highest score dropped from 32% in 2015 to 30% in 2019.
ERP will become more specialized and better serve users who need this type of software in 2020. For decades, vendors tried to create ERP offerings for everyone, based on the idea that companies prefer to use one system for most (or all) of their business needs. Cloud accounting and project management vendors are trying to do the same thing, but use a different strategy. Instead of scaling down monolithic ERP systems, they add features to their core products and expand their offering through integration, partnerships, and marketplaces of apps.
Consolidation or the demise of superfluous point solutions
We estimate that 50% of the users who need to manage sales orders prefer a standalone solution. By 2030, only 5% of users will prefer a separate software for order management software.
Order management software, purchasing software, and billing and invoicing software will lose their importance as standalone products and will be absorbed into larger systems or focus on niche markets. For instance, industry-agnostic billing and invoicing will be used less because most accounting software already includes these features. Billing tools for industries like telecom or utilities are not going away anytime soon because they provide features specific to these sectors.
The graph below shows the estimated changes in the importance of each type of software. Importance means the ratio of users who prefer a standalone product to features of another product.
The cloud allowed companies to switch from old systems or accounting tools to point solutions, to get better features for specific business needs such as order management software. Using an additional software product was a necessary evil that helped companies manage sales orders. A more recent trend is to switch to products that can handle multiple sales channels by merging e-commerce with order management.
|Below are a few reasons G2 reviewers cited when asked what they dislike about order management software:|
Similarly, purchasing software has been used for decades by companies to manage purchase orders when their other systems (accounting or ERP) did not include good functionality for procurements. This type of software will likely have a similar fate to order management software: It will be absorbed by accounting or procure-to-pay software, or specialize in niche markets.
Finally, billing and invoicing software is mostly used by freelancers and small companies that outsource accounting. This type of software might be used by certain departments to invoice customers. Since functionality to create and manage invoices is included in most accounting systems, even the basic ones, since standalone software for billing doesn’t make much sense.
No software is the best software
We expect to see more business platforms launched by both traditional vendors and new players. Their number could double in the next five years, but revenue growth is difficult to estimate due to the novelty of this type of offering.
Business platforms, which combine traditional software features with professional services, are a new alternative to business software. The mix of software and services isn’t new. What’s different is that everything is now available online. It’s a form of digital outsourcing, which means companies don’t need to look for and evaluate potential partners overseas. All the information they need to find the best contractor for their needs is available through business platforms.
Here are a couple examples:
- On-demand manufacturing platforms allow companies to upload CAD models into a portal and receive the final product without worrying who manufactures it.
- Fulfillment and delivery platforms allow companies to outsource (almost) all supply chain operations such as inventory and warehouse management, or logistics.
The interest for these platforms is growing—search terms such as “supply chain networks” are now more popular than “supply chain software” and “supply chain suites.”
Predictions such as Forbes' “2019 Will Be The Year Of The Manufacturing Platform” would present obvious benefits and opportunities if realized, but we estimate it will take at least five years for business platforms to become mainstream. The main challenges that hamper adoption include:
- The features provided by these platforms aren’t always as robust as the software they replace. For instance, fulfillment platforms require companies to ship their inventory to external warehouses, and they don’t repack products for delivery.
- The transition from legacy software to the cloud is a substantial investment, and companies won’t switch again soon. Business platforms are more likely to be used to complement, not replace, enterprise software.
- Privacy, security, and intellectual property are significant concerns that might slow adoption. While these platforms may be very safe, the high number of data breaches may increase managers’ fear of losing critical data. As for their intellectual property, companies want to make sure that it doesn’t fall in the wrong hands.
While this new market may not grow exponentially, we estimate it will take an important share of the enterprise software market in the long term. This option will probably become one of the top five most used platform types by 2050.