Just before Christmas, Oracle announced its second quarter earnings which showed that revenue rose 2% against an internal forecast of between 5% and 9%. The company attributed the results to their customers delaying both software and hardware purchases. As one analyst said, “we haven’t seen a miss like this out of these guys in years.” The company’s stock price fell 9% and caused a selloff in other enterprise technology vendors such as SAP and IBM. Many speculated that this was the beginning of a category wide downturn.

Ah but wait, SAP announced their fourth quarter earnings last Friday the 13^th which showed a 12% increase in revenues from software and related services. Not only did they outperform their traditional rival but their results clearly challenged the assumptions of a category wide downturn. So what’s up?

While it’s true that one quarter’s results do not make a long term trend, are we perhaps beginning to see the initial impact of what my brother, Geoffrey Moore, calls the evolution of enterprise IT from systems of record (SOR) to systems of engagement (SOE).   Here is a link [ http://technology-alliance.blip.tv/ ] to a talk he gave last year on this subject.  Some have called this the consumerization of enterprise IT but he likes to call it the “enterprization of consumer IT.” By the way, SAP has adopted this framework as its core go forward technology and product development strategy.

At the heart of this evolution is the fundamental shift from the old vertically integrated, hierarchically organized business model to the new horizontally structured, business network model driven by an increased demand for communication, coordination and collaboration. Systems of record, SOR,  were well suited to support the old vertically integrated model, but now must incorporate systems of engagement, SOE, to support the new horizontal business network model.  As this transition is still in its early stages, companies like Oracle are still almost exclusively focused on delivering software and hardware solutions that support SOR’s not SOE’s.

The emerging reality is that every dollar invested in SOR supported software produces a diluted return to a company in terms of competitive differentiation as the life time value of these investments are in the latter stages of the product life cycle adoption curve. By contrast, every dollar invested in SOE supported software offer a much higher future revenue and profit stream potential because it is in the early stage of the product adoption life cycle curve.

We are still in the very early stages of this evolution and upcoming earnings results may rebound but it just might be possible that we are seeing the start of the shifting sands in the software business. Stay tuned.

What are your observations?  Can large companies quickly embrace this shift in the market?

Peter Moore