Innovation Dries Up

Of course, this is just consolidation on a broader scale and does not resolve the issue of integration. Software and services vendors don't just eat their own anymore--they become omnivorous, and the line between software and services blurs completely. Will a services vendor that owns lots of software have any more economic incentive to create a set of universal integration technologies than a standalone software vendor? Probably not.

By 2010, there will be fewer vendors taking more corporations hostage. The unsolved problems of integration and IT complexity will drive acquisitions of smaller software vendors by bigger vendors eager to create one-stop shops for CEOs who want to outsource IT.

Such hyper consolidation will probably not end IT complexity but will hide it in the shadows of fewer dinosaurs. That will do little to foster IT innovation. With CIOs locked in to services vendors that also offer a stable of software solutions, it will be even harder for small vendors to get a meeting. The dotcom bust taught CIOs a hard lesson about investing in startup vendors with good ideas and lousy balance sheets. Likewise, venture capitalists are much more leery about simply throwing money at anything that has the word technology in the business plan. We predict that a handful of companies will control more than 70 percent of the Fortune 500 IT budget in 2010.Small vendors will play to small companies exclusively --to the great disadvantage of big companies that won't have access to the innovative technologies that startups are developing. Small companies will be happy to nibble away at chunks of software rented to them over the Internet for a reasonable monthly fee. After all, neither vendor nor customer has to worry about integration.

CIO as Contract Manager

Hyper consolidation won't help the CIO role, either. Reducing CIOs' strategic options makes CIOs less strategic and more like vendor managers. Vendor consolidation will pull power and strategic control away from the CIO and make the role seem less defensible to skeptics inside the company. With fewer vendors taking over bigger pieces of the IT infrastructure--and outsourcers vying for the rest--strategic knowledge and future technology planning will increasingly reside outside the company. CEOs and CFOs may wonder why they can't simply meet with the few remaining vendors themselves instead of having a CIO do it for them. And any arguments that CIOs make about maintaining multiple vendor relationships to avoid lock-in will fall on deaf ears. Without universal integration technologies to open up software to true price competition, what's the difference between paying steadily rising fees to separate vendors or simply giving it all to a services company?

In this kind of environment, open source will be the only economic weapon CIOs have for keeping the lid on big vendor prices and contract terms. CIOs should set aside portions of their budgets to fund open-source pilot projects inside their companies if for no other reason than to create a negotiation tool to hold over the vendors' heads. CIOs who invest the time and money necessary to assemble low-cost open-source alternatives to enterprise software packages could win back the hearts of skeptical CFOs and CEOs. It will be along, slow process that stretches well beyond 2010, but top CIOs will no longer be unaware of how much open-source software they have in their infrastructure. Open source will move from bottom-up to top-down.