How Efficient is the Market for Enterprise Software?

What This Article Covers

• Why is the efficiency of industries not more questioned?
• Why don’t academic economists question economic efficiency more than they do?
• What are several requirements for an efficient market, and how does the enterprise software market stack up in each area?

Background

It is quite uncommon for the fairness or efficiency of industries and markets to be questioned in the US. Generally, people tend to enjoy simple answers that do not hold companies accountable for whether they produce positive outcomes, or even negative externalities. Americans generally consider their various industries, and labor under the illusion that most the economy is pretty efficient. This is a concept which is greatly endorsed by economics departments across the country. Most economists have learned to limit their criticism of the system in order to maximize their career opportunities and their ability to get tenure. Therefore they have retreated to rather abstract investigations of things like interest rates, and stay away from controversy as much as possible.

Enterprise Software

For some time it has been entirely too evident to me that the enterprise software market is highly inefficient. Companies overpay for major brands, and select software that is not even close to the best application for their needs. More on this can be read at this article. However, the very idea that companies are selecting the right software, is based on the concept that the market for enterprise software is efficient. An efficient market serves consumers and generally means that they more often than not receive good value for their purchases and don’t have much of a problem finding the best product for their needs. Interestingly, there is no evidence that this is the case. Below I have listed important preconditions for an efficient market and ranked the enterprise software market per each criteria.

1. Pricing is Easily Comparable: Not in the enterprise software market. Pricing is typically complicated and based upon how many users will be on the system among a host of other factors including how strategic the account is considered to the software company.
2. The Consumer or Buyer Can Effectively Compare the Alternatives: Absolutely not. The executives that make the purchase decision are never the same as those that use the software. Not being able to understand the distinctions between applications first hand they rely upon vendors sales representatives, and consulting companies (which are highly corrupt and regularly dispense false information to maximize their billing hours) and analyst firms, which the largest vendors essentially pay off to obtain high ratings.
3. Sellers Do not Have Monopoly Power: The enterprise software market is dominated by vendors with monopoly power. There is so little anti-trust enforcement in the enterprise software market that Oracle was allowed to purchase, and essentially dismantle PeopleSoft. SAP was able to purchase Business Objects. Neither of these purchases did anything to improve the software, and has mostly lead to either stagnation or elimination of the products of the acquired company. PeopleSoft’s product was killed. SAP has had three years to integrate Business Objects into their applications, and the only thing that has come from it has been increased prices for the product, falling support levels, and a front end which is designed to connect to the BW, which is so buggy it is unusable.

The Implications to Inefficiency

The enterprise software market is highly inefficient. This means that companies that buy enterprise software pay much more than they should have to. The industry mostly serves the needs to two powerful interest groups, monopoly vendors, and the major consulting firms. SAP perfected the hijacking of the advisory function of the major consulting firms, and since then, Oracle has tried their best to copy them. All of these facts seem to escape the interest of economists. They seem to have far more important topics to cover, like writing macroeconomic research for banks. A literature review on the topic of efficiency of the enterprise software market returned no results. This is a problem because the individuals with the training to effectively analyze this and make the case for enhancing efficiency don’t even seem to be aware of the problem. Again, the way to achieve success as an economist is to know as little as possible about the “real economy,” and to be unconcerned with things like market concentration, and instead to focus on the financial portion of the economy. It is amazing that such an important industry does not have economists who actively follow it or analyze it. Secondly, economists seem to not even inherently “get” technology, and seem to be as technologically challenged as attorneys. About as close as an economist will get is repeating press releases by the major vendors related to how moving to SaaS will improve the software availability — seemingly missing the point that major monopoly vendors have zero interest in opening their systems to greater competition. (These types of articles appear in the Economist magazine from time to time under a technology review edition, where economists practice misusing technology terms and clearly have no idea what they are talking about. The Economist loves quoting monopoly vendors like IBM and thinks that innovation in software actually springs from enormous firms, rather that from the best of breed vendors.) Extremely few technology workers have any familiarity with either economics or anti trust law, and have very little interest.

Conclusion

Because of the factors listed above, there are few champions pushing to do some very simple things to improve the efficiency of the enterprise software market. There are many things which could be done, including severely limiting vendor acquisitions, requiring more transparent pricing information, regulating the major consulting companies especially with respect to their overwhelming conflicts of interest. However, the understanding of these problems simply seems to not exist. Therefore, it is unlikely that these simple changes could occur. In order for change to occur at least the understanding of what is an efficient market, and how inefficient the enterprise software market actually is must be first understood.

Share

Tagged as: Business Objects, Oracle, SaaS, SAP