Enterprise Software Bull Run Expected To Continue

According to a new Gartner report released earlier this month, global enterprise software spending surged up 8.5 percent to $453 billion in 2019, compared to a modest 0.5 percent increase to $3.74 trillion for overall IT outlay. The research firm forecasts this trend will continue with a 10.5 percent rise in software spending in both 2020 and 2021.

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Secular tailwinds appear to account for much of the upward spending trend currently enjoyed by enterprise software firms. Cloud-driven technology does more than replace current software offerings – it expands the user base considerably as new tools are introduced that increase worker efficiency. Innovations like workflow tools, collaboration software, and document management solutions will change how businesses interact with their employees and customers.

Some analysts believe the SaaS trend is still in its early to middle-stages – it currently accounts for an estimated 40 percent of the enterprise software market. The public cloud claims roughly 10 percent of the applicable $1.3 trillion global IT market. The SaaS market is also growing at an impressive 20 percent a year, and customer retention appears healthy. Jonathan Cofsky, analyst with Janus Henderson, points to the robust economic model that forms the base for SaaS firms: "These businesses are almost all characterized by recurring revenue, high switching costs, and relatively low customer churn."

Gartner doesn't believe the future will be quite so bright for hardware, however. As enterprise organizations cut their data center equipment expenses in 2019, researchers estimate the sector experienced a corresponding 2.7 percent drop in sales. Analysts believe the dip in spending can be attributed to large hyper-scale data center providers taking the year to work through excess inventory, primarily computer servers.

This year’s forecasts offer the hardware folk only a glimmer of silver lining with an expected 1.9 percent growth for the upcoming year. Cloud infrastructure spending is expected to grow much faster than this – market research firm IDC predicts that public cloud infrastructure expenditures will bump up almost 8 percent to $45.3 billion in 2020.

“Enterprises are [being] challenged with cutting costs and investing for growth simultaneously,” said John-David Lovelock, VP of Gartner’s research division. “Maturing cloud environments is an example of how this dilemma is alleviated: Organizations can expect a greater return on their cloud investments through cost savings, improved agility and innovation, and better security.”

According to the Synergy Research Group, 2019 was the first year that enterprises spent more on cloud infrastructure services than on data center hardware and software. A decade earlier and spending was almost nonexistent in this sector. While large organizations have dramatically cut their budgets for on-premise equipment, there is some speculation about whether enterprise-owned infrastructures are on their way out. Others maintain that businesses have many reasons for keeping systems onsite or in hybrid environments.

Some IT firms have been hit harder by these trends than others. Hardware providers like Dell, Cisco Systems, and Intel have been most impacted by macro trends like enterprise adoption of cloud infrastructure. In August, data storage giant NetApp downgraded its guidance from $1.315 billion and $1.465 billion to $1.22 and $1.23 billion for Q1 2020 (July 2019) – a 17 percent decrease from the same time last year.

Conversely, those companies with a strong presence in the software sector have fared better. Anaplan, Salesforce, and ServiceNow have sailed through China-US trade tensions, cloud-driven trends, and shrinking budgets. Microsoft, for instance, reported that it surpassed its September quarter estimates due to 14 percent revenue growth.