Perspectives
26 March 2021
After decades of being the preserve of large enterprises with deep pockets and skilled technicians, software has become both more affordable and accessible over the past few years. Once an avoid-wherever-possible sunk cost, it is now increasingly seen as a powerful way of managing the myriad of issues facing organisations.
Global software spending is expected to continue to outpace all other IT segments this year and grow by 6.2 per cent (against a category overall decrease of 3.2 per cent) to reach $US3.9 trillion1.
In this article, Tej Shah, Managing Director, Software & Services, Macquarie Capital, looks at five trends that he expects to see in the software space over the coming year.
One of the main catalysts of software spending continues to be the migration from on-site systems to remote, cloud-based alternatives, as organisations look to upgrade their digital capabilities and improve their competitive advantage.
Cloud-based software has been the lifeblood of organisations needing to adjust to the fast-changing circumstances of the past year. As well as facilitating communication and collaboration between disparate colleagues, it has allowed them to adjust operational processes to accommodate disrupted supply chains, distribution channels and workforces.
Accelerating trends already underway, COVID-19 forced organisations to undergo years of digital transformation in just a matter of months. Cloud was a key enabler of this and helped them adapt to and capitalise on the changes the pandemic brought about, without the need for expensive infrastructure or investment.
Gartner predicts that this transformation will need to continue and that plans will need to accelerate by a further five years over the next three years, if organisations are to survive – and thrive – in a world of hybrid working environments and digitally-driven customer journeys.
This presents growth opportunities for all cloud software vendors, but especially those offering Software-as-a-Service (SaaS) – so productivity and collaboration tools, customer experience and servicing solutions, and operational CRM, finance and HR systems.
And, as they become more accessible to organisations migrating to the cloud, virtual applications that increase data storage and interrogation capabilities offer new artificial intelligence and machine learning solutions, and that facilitate intelligent process automation, are also likely to see growth.
The culmination of this will be – according to Gartner – that cloud’s share of total global enterprise IT spending grows to 14.2 per cent by 2024, up from 9.1 per cent in 2020.
Blissfully found the average five-year SaaS spend by small businesses quadrupled between 2016 and 2019 to nearly $220,0002.
The escalating usage of cloud software combined with hybrid workforce arrangements has increased organisational dependency on remotely hosted data and applications, and is forcing them to reassess the implications on their cybersecurity defences.
New ways of protecting against unauthorised access to data and shared applications and systems has spawned an industry of monitoring and protection tools, which companies are expected to increase investment in by 10 per cent – spending a total of $US60 billion this year3.
Total spending will grow by 10 per cent to reach $US60 billion in 2021.
(Source: Canalys)3
The broad scale of threats enterprises face requires solutions to a range of potential vulnerabilities – including identity and access management, network security, endpoint security, cloud security and data security.
Zero-trust security models – whereby systems require authentication for every ongoing request, not just the initial network connection – are becoming more popular, supported by a ‘never trust, always verify’ philosophy, which means treating everyone and everything as potentially malicious.
This retreat from the legacy perimeter-based security model – which assumes that once verified and inside the network, your activities can be trusted – will act as a tailwind for cloud ‘Security-as-a-Service’ software vendors, identity and access management software providers, and AI-driven anomaly detection software suppliers.
Crowdstrike, which went public in 2019 with Macquarie as an underwriter, believes that a cloud native approach is essential to addressing the modern cybersecurity threat landscape. The need for integrated, data-driven, and automated ways of preventing attacks on or off the network will – in its view – spawn a new category of software: the ‘Security Cloud’.
By collecting, processing, analysing and correlating vast amounts of data across the entire threat lifecycle, and through the use of machine learning, its Falcon platform makes cloud-scale AI accessible to both small and large businesses alike. Opening up the market in this way is one of the reasons it sees spending on cloud security more than doubling over the next three years, to reach $US12.4bn by 20234.
By breaking down the barriers that long made the most powerful software off-limits to smaller organisations – namely cost and complexity – cloud-based intelligent automation tools are helping them reach new levels of efficiency, accuracy and productivity.
Through data-driven decisioning, these tools are expanding employee capabilities and increasing competitiveness by delivering better or differentiated digital customer experiences, more optimally structuring or automating workflows, and increasing the use of analysis and insight to make decisions more accurate.
One type of tool that can be used to achieve all three is low- and no-code platforms, which enable businesses to create and adopt mobile and web apps with minimal or no coding experience – removing the need for expensive on-site IT expertise. We expect these automation platforms to grow in importance as more organisations grapple with unifying increasingly remote workforces and revisiting how they retain customers more distracted and idiosyncratic than ever.
The digitisation of workflow processes, which can be especially strained by complex, multi-location workforces, will help businesses maintain operational continuity during prolonged periods of disruption and uncertainty, something many have been impacted by during the past year.
Software such as ServiceNow – a cloud platform that helps connect employees throughout an organisation to ensure a seamless customer experiences across touchpoints, even under the most disparate of remote working models – can drive growth and improved efficiency with limited or no-coding.
Demand is expected to grow the market size from $US13.2bn in 2020 to $US45.5bn in 2025, a 28 per cent CAGR over the 5-year period. (Source: MarketsandMarkets5)
Similarly, Nintex – a market leader in end-to-end process management and workflow automation – offers a ‘drag and drop’ cloud-based interface, and allows organisations to scale their use of its automation initiatives as they grow – something that once required costly upgrades or software replacement.
As the telecoms industry adjusts to keep pace with the evolving connectivity demands of today’s society, its deployment of 5G and rollout of fibre infrastructure is facilitating the growth of next-generation edge computing systems.
As one of the fastest-growing disruptive technologies behind the scenes, edge computing will leverage these high-speed, low-latency networks to facilitate a new wave of processing power capabilities and accelerate the use and adoption of data-driven software applications.
Valued at $US3.5bn in 2019, it could be worth $US43.4bn by 2027 (Source:IBM)6
Edge computing’s appeal lies in its ability to make data-based decisions faster and more efficiently by co-locating the data processing and decision-making closer to the point at which it is generated – rather than everything being sent to the cloud.
Doing so makes real-time data-intensive applications such as virtual and augmented reality (AR), machine learning, self-driving cars, artificial intelligence, and robotics – all of which require fast processing and response times – viable on a smaller scale.
For businesses, the benefits vary by industry and size, but can be significant. Everything from near-real-time operational monitoring and efficiency improvements, to more accurate and instantaneous insight-based decision-making, predictive maintenance and the use of digital twins, and the ability to offer more immersive, vivid and realistic augmented reality experiences that transform the customer experience will be in scope.
Poised to be one of the main growth engines in the technology space, the opportunity for software developers with edge comes in two forms. The first is accommodating the growth of new IoT (Internet of Things) and industry-specific uses for the data-intensive applications it enables. The second will be a fast-growing market for decision-making capabilities that process and act upon the data they are fed and make real-time decisions in operational settings.
Just as the rise of the smartphone brought with it a glut of consumer apps, the growth of cloud is and will continue to do the same in the fragmented software space. Freed from the constraints of an enterprise software market dominated by experienced, well-funded, and connected players, and empowered by the open distribution channels offered by the cloud, new software solutions have flourished.
But for many of those, scaling has proved incredibly difficult as larger players continue to leverage their existing distribution channels and broader capabilities to offer single holistic solutions that cater to a wider number of client needs. And promoting their offering as better integrating the front and back office and the use of data throughout the firm.
The expectation is that consolidation in the software space will be an ongoing theme over the next few years, with both SaaS marketplaces – where software is distributed via third-party providers – and standalone vendors looking to make strategic acquisitions to bolster their offering.
(Source: FE International)
Even those considered best of breed are unlikely to be immune from the difficulties of getting cut-through, and acquisition of start-ups will be central to larger companies moving quickly to expand their offering and retain customers within their product ecosystem.
Differentiation will be key to remaining relevant in the market. Identifying and focussing on a niche solution to a specific problem will continue to offer opportunity – if not protection from larger players looking to grow through acquisition. Growth in the space will continue, but it will be tilted in favour of consolidation.
Tej Shah is Managing Director, Software & Services, at Macquarie Capital and is based in San Francisco.
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