With all the disappointing headlines about the UK economy and, specifically, big IT spending cuts in sectors like banking and government, SIs may see a storm brewing. Instead, I see blue skies ahead.
Over the past year, our OEM business, in which SIs whitelabel our software to build bespoke applications for their customers, expanded 170 per cent. I'd like to say that was entirely by our own design, but it is more about market factors.
SIs large and small are realising, I think, that being able to sell software to their customers can grow overall margins at a time when service margins are being squeezed. This is especially true for custom integration work to connect older, proprietary, enterprise technology not designed to interoperate with other systems.
This custom integration work, on which much of the SI business was built, is never going to rebound.
New-generation enterprise technology products based on open source and the cloud are appearing in the market. These are far less expensive and much easier and faster to integrate, install and customise.
Many SIs, therefore, are redesigning their businesses to embrace customer demand for these new cloud, SaaS and open source applications. They aim to add value in other areas like business process consulting, training, change management, data integration and support services.
Increasingly, many are also developing their own bespoke software. We are seeing some of the larger SIs improve their ability to deliver shared services like HR, legal and IT by offering custom-built, complementary SaaS.
There is more good news: although integration services are on the wane, the data explosion is providing serious opportunities for SIs to help their customers with this extraordinary challenge.
I have read that IDC believes that the 'digital universe' will expand to 35 trillion gigabytes by 2020, well over 40 times its size in 2010.
SIs that offer custom software to aggregate, analyse and present massive structured data, such as HR or CRM, and unstructured data, such as social media, can help customers grow market share by enabling them to use the data to find new revenue opportunities, improve services and increase operational efficiency.
Before rushing into developing and selling custom software though, SIs should consider whether it makes sense for their businesses. If the SI works in a highly fragmented market across many industries and does highly customised work for each client, developing OEM software probably doesn't make sense.
Conversely, if an SI has built up a good-sized practice around one or several industries and has customers with similar requirements for interface design, data management and reporting, it can make a strong business case for offering a bespoke software application.
There also needs to be a willingness to ally with a specific vendor. The SI must be amenable to striking up an agreement with one vendor to co-develop the software. Some SIs want to present themselves as completely vendor-neutral to avoid compromising relationships with competing software vendors with which they may do business.
Time to market varies by the sophistication of the application and also how much user testing the SI may wish to carry out with key customers. However, the vast majority of our OEM partners bring out products in 3-6 months.
Find out what customers' preferred deployment model is; this can vary by vertical. More conservative services like accounting may have security concerns about cloud. On the other hand, cloud is doing very well in sectors like media, healthcare and retail. SMBs, too, are adopting cloud faster than enterprises.
Data protection laws also need consideration. UK financial services companies, for example, are obliged to store customer data in the UK. So for certain applications cloud may not be an option.
I believe that SIs are increasingly opting for commercial open source software rather than proprietary brands, not least because it is cheaper to license, increasing the margin for profit.
I believe it is also more malleable and doesn't lock them into a specific set of functionality. If the SI decides to extend an application later by adding data integration capabilities, custom reports and dashboards, it doesn't have to keep racking up more licence fees.
Much of it is built on Java – the main language used by SaaS applications in the cloud. SaaS applications are much easier to build with open source technology.
Ideally, SIs will get vendor support for software licensing, training for the development team, pre-sales support and maintenance over the life-cycle of their application.
Here is a genuine opportunity for those willing to adapt and innovate.
Davy Nys is EMEA and APAC vice president at Pentaho
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