Strategic Analysis and Assessment of the IT Management Software Market

This paper is a strategic analysis of the IT Management Software (ITMS) industry in the United States as a whole, and BMC Software (BMC), one of the industry’s four ‘Megavendors’, in particular. The analysis is done through the lens of Michael Porter’s five forces model; it focuses on the attractiveness of the ITMS industry from an investment perspective generally, and on BMC’s competitive position within the industry specifically.  

Definitions, Landscape

According to Forrester Research, ITMS is generically defined as “all products that help monitor, detect, and identify any abnormal behavior of the IT infrastructure.”[1]  An ‘IT infrastructure’ is the network of hardware (e.g., servers, PCs) and software (e.g., tools, applications, operating systems) that forms the informational backbone of most modern organizations. To continue the metaphor, the information that drives the processes within the organization – e.g., work flow, or communications – is the spinal cord housed in this backbone, and ITMS is the brain that sits on top, both sending direction to, and receiving data from the spine.  ITMS is important to customers not only because it helps keep the businesses running as planned, but more and more because it can provide business intelligence to manage and prove the value of their own services.

There are two categories of ITMS: point solutions, and integrated solutions. Point solutions refer to software products that manage information for a specific technology within the overall infrastructure; they are narrow and deep in their scope and abilities, and an organization may use several. Integrated solutions collate information from these point solutions, to give a holistic perspective of the infrastructure. Integrated solutions – and specifically a sector called Business Service Management (BSM)[1] -- represent a major growth segment within the industry.[2]

There are three tiers of players in the industry. The four Megavendors – BMC Software, CA, HP Software, and IBM Tivoli – comprise the top tier, and concentrate mostly on integrated solutions for the large- to mid-range enterprise market; a half dozen tier-two vendors, including Microsoft and Symantec, focus on particular product segments for the mid-range market; and hundreds of smaller vendors cover mid- to small enterprise point solutions.[3] Together, the Megavendors own approximately 43% share of total ITMS spend.[4]

Industry Assessment

We consider one of Porter’s five competitive forces to be the most salient to the strategic dynamic of this industry: the Threat of New Entrants.[5] These are most formidable in terms of 1) barriers to entry, and 2) ever-changing threat conditions. 

1. Barriers to entry. The barriers to entry in ITMS are relatively high, specifically in the areas of cost independent of size, access to distribution channels, and product differentiation.

Cost represents two distinct challenges. First, the IT sector is driven by the quality of its intellectual property. The cost for developing this asset from scratch is simply too high for brand-new entrants, and this immediately thins the roster of potential entrants to a specialized subset already in the industry (i.e., Proctor & Gamble is an unlikely threat).  Entrepreneurs with significant intellectual capital (which may or may not be patented) could enter at the lower end of the food chain – point solutions – but this is not a threat to our candidate company, BMC, or to the Megavendors in general. A non-industry company could seek entry by acquiring a smaller vendor and its IP, but mismatch in cultures and core competencies compared to relative return on investment make this unlikely. IT companies that have their own IP and domain expertise – like Microsoft or EMC– and that also have the capital and ability to absorb complementary IP, are a higher threat to the Megavendors. This kind of consolidation has, in fact, been a continuing trend in the ITMS industry for the past several years,[6] with both Megavendors and others buying up smaller vendors to round out their service offerings, and keep pace with customer demand for solution integration.

Secondly, and assuming a new entrant had overcome the first cost barrier of IP, challengers to the Megavendors would need to contend with the learning and experience curves in creating, selling, and implementing BSM, which is the exclusive domain of the Megavendors. IP doesn’t exist in a vacuum, but requires people to implement it from a technical/infrastructure level.

If a new entrant were to overcome the twin cost barriers of IP and learning/experience curves, they would need to contend with the next set of barriers, finding access to distribution channels (namely, leveraging their sales force).

It is important to note that a sales force does not just bring domain expertise in selling a highly specialized product (ITSM), but also the added value of selling an emerging offering (BSM), to an established network of customers within an established partner ecosystem. A new entrant with capital, IP assets, and existing IT expertise would have to somehow (re)establish these relationships, by having to convince customers to switch. Selling to technical, highly-demanding IT professionals managing business-critical assets is a higher order of difficulty than marketing to consumers in industries with softer value propositions like packaged goods.

An Oracle or a Microsoft, with Market Capitalizations of $108B and $242B respectively, might buy these relationships by acquiring a Megavendor that isn’t part of a larger IT company. (Likely candidates would be BMC or CA. For some perspective, Yahoo!, currently being (re)courted by Microsoft, has a Market Cap 3-5 times larger than either company).[7] Still, acquisition is no guarantee of success, and could re-present another of Porter’s barriers to entry: the effects of learning and experience curves. As has been demonstrated by numerous examples in the technology sector, there’s no assurance of successful transfer of skill and knowledge, what transfer there is, is not necessarily accretive, and the people acquired often do not stay very long.

If the feet-on-the-street barrier is surmounted, there is another, more subtle barrier to an entrant interested in acquiring a Megavendor: brand equity. This overlaps with what Porter describes as the barrier of product differentiation[8], where a new entrant must overcome entrenched brand identification. In this case, the product and brand would arguably be the same, but the perception of that brand would change in the mind of the skeptical customer. In the customer’s mind, why buy something unproven and assume that risk? While brand equity may be the least tangible barrier to entry, it should not be underestimated. There was a trade ad some years ago that illustrates the strength of this barrier: “Nobody ever got fired for buying IBM.”  The implicit message is clear: name brand = experience and reliability. And the converse message is also stark.[9]

2. Changing Threat Conditions. The second factor facing new entrants is a rapidly evolving environment. If customers are tough to switch from the Megavendors because of existing relationships and brand equity, they are even more reluctant to as Megavendors redefine the direction of the industry.[10] These incumbents are proactively creating new products with high value: they are introducing new business models, like Software as a Service (SaaS) -- where customers effectively rent products -- and new process methodologies – like ITIL.[2] The Megavendors can then promise high ROI on purchase of their products. For example, customers might see a 20% cost savings on IT with the implementation of BSM.[11]  For a company like Toyota with a $1 billion IT budget, this is significant.[12]   

And where the Megavendors are not innovating or defining the conversation with the customer, they are fleshing out the scope of their portfolios through acquisitions (e.g., HP’s 2007 acquisition of Opsware for $1.6B).[13]

Much, if not all, of the evolution of the ITMS environment is just that: an evolution. A new entrant would have the challenge, even through acquisition, of having to create its own momentum and history to be a player.

Conclusion: Industry Attractiveness

For the near term, we would invest in a fund pegged to this industry over a money market fund for the following reasons. 

1.      The industry’s recent growth rate – 11% in 2007, 8% projected in 2008[14] -- makes it a more attractive investment than a Money Market fund with a 3% return.

2.      Product differentiation. The industry’s value propositions are strong, and relevant even in (or especially in) recessionary times. First, the industry promises significant operational cost savings that go straight to a company’s profit, and second, the business optimization that ITMS offers boosts client business competitiveness[15]

3.      The competitive forces relating to bargaining power, and threat of substitution favor of the Megavendors. As outlined above, we believe the relatively low threat of industry disruption – through barriers to entry, and high switching costs -- is favorable to investment.

4.      Changing market conditions also favor the Megavendors. The weak dollar, coupled with the fact that ITMS is dominated by American companies, makes their products even more attractive to overseas customers (and provides an additional barrier to entry for foreign competitors).[16]

BMC: Competitive Position within Industry

BMC is the smallest of the four Megavendors, but its position is stable within the top tier of the ITMS market.  There exist sufficient barriers to entry (e.g., economies of scale, capital requirements for R&D) for even smaller vendors to enter the market. Parallel competitors to the ITMS space could make an entry, but they lack ITMS expertise so this threat is also low. 

BMC’s main competition comes from the other Megavendors (see table below).[17] What it lacks in scale it must provide in strategic leadership (offerings and market direction) if it is to remain competitive.

Unlike the other Megavendors, BMC focuses exclusively on the ITMS market (in contrast, ITMS is a small component of HP and IBM’s overall revenues). As the pioneer in the ITMS market, BMC has introducing key strategic offerings centered on market direction versus specific product innovation.[18] BSM, a way to link IT services with business needs, and the industry’s major growth sector was introduced several years ago BMC. It then bought or built the necessary components to realize its BSM offering, and evangelized the new offerings to its customer base; resulting in the industry followed its lead. BMC was also the first to introduce a configuration management database – something now widely believed to be a cornerstone to any BSM offering. By being the first to define core elements of the market direction, coupled with a singular focus on the ITMS space, BMC has leveraged what Porter refers to as its experience curve. BMC has made BSM the focus of its differentiation. It is the maturity and breadth of this BSM offering that sets it apart from the Megavendors. As the BSM pioneer, BMC has a twenty-month head start on its competitors.[19] This first-mover status has also created a barrier to entry through brand identification. Being a pioneer has engendered a virtuous cycle for BSM: continual refinements on its offering, along with strong customer relationships, has provided a recipe for success. Furthermore, integrated solutions present a challenge for competitors who attempt to displace BMC with their BSM offering (an ITMS replacement decision is not a light one to make). Nevertheless, the other Megavendors are quickly building up their own versions of BSM offerings and messaging, so maintaining the lead garnered by being the first is not assured. As of today, BMC’s combination of first-mover status, product portfolio breadth (which allows it to cover all twelve major facets of the market), its strategic view of where the market is headed, along with its sales and marketing execution positions it as the market leader.

A fundamental challenge for BMC is the dynamic nature of the market. It is a young market, which is still being defined and subject to rapid (and even sudden consolidation). Consistent with the ITMS industry analysis above, BMC’s strategy focuses on a sweet spot for businesses –running IT as a well-managed service, which helps drive down costs and improving how IT supports the core business which is a value proposition that has appeal even in poor economic times. While BSM as a core strategy paints a powerful view for businesses in the short-term, what comes next is yet to be articulated. What comes after BSM? Elements evolving within the ITMS market could play to the strength of the competitors, not BMC. Of concern, HP and IBM are far larger and more diversified businesses that could decide that buying BMC is a quicker way to leap the rest of the Megavendor set. Any of these changes could bring a different situation from today’s reality and place BMC’s leadership at risk.

BMC: Performance

BMC recent performance supports the assertion that it is successfully executing in line with its market strategy. The following metrics support the fact BMC results reflect a company with momentum: individual category rankings, overall ITMS market share, industry analyst recognition and financial results.           

• Looking at the most recent industry analysis, BMC ranks as a Tier 1 vendor in ten out of twelve categories (listing as a Tier 2 vendor in end user experience management and missing the top two on network management). The strength of the portfolio lies in the quality of its scope.[20]
• In overall market share, BMC only trails CA in the ITMS industry at 10% (to CA’s 14%). The four Megavendors now comprise 43% of the total market. The top 10 own nearly 60%.[21]
• In 2007, Forester conducted an analysis of the leading vendors in the BSM space across 26 criteria in 3 categories (current offering, strategy and market presence).  In a tightly grouped market, BMC was rated as the overall leader (along with Managed Objects) - ahead of the other three Megavendors. A key determinant was BMC’s experience with its product portfolio.[22] Another analysis firm, Gartner has rated BMC among its leaders in the market.[23]
• Financials for BMC have been very strong. Revenues for the company in the past fiscal year reached a record high for the company ($1.732B) with 10% growth over the previous year. Since introducing BSM as the core of its overall strategy, BMC has gone from losing money (it lost $27M in 2004) to generating record profits ($314M in 2008). Revenues have risen from $1.4B. The market has also rewarded BMC’s performance with a 151% increase in its stock price since 2004. Over that same timeframe BMC has outperformed the three other Megavendors and the S&P 500.[24]

BMC’s future performance is dependent on staying ahead of its rivals. As a part of that effort, BMC has spent over $1B in acquisitions to flesh out its offerings to keep it at the forefront of the ITMS market. Its acquisitions have focused on fleshing out the gaps in its solution portfolio. Most recently, it has acquired BladeLogic - an $800M acquisition that will combine BMC’s BSM platform with BladeLogic’s award-winning data center automation solutions[25].

BMC: Distance from the Middle

As we’ve shown, the ITMS industry is highly dynamic. So we believe that of the seven factors Porter describes as a “jockeying among current contestants,”[26] none apply. That said, two are worth mentioning: high exit barriers, and the diversity of rivals. In terms of exit barriers, ITMS customers understand that ripping out one vendor for another is a costly and risky proposition. However, if another vendor’s technology offers greater cost savings, it can and does happen. In terms of diversity of rivals, ITMS growth is rapid and significant, as all major players seek to establish themselves as the most capable vendor. Nevertheless, despite best efforts at differentiation at the product level, even the solution level, there is growing technological and strategic convergence (i.e., moving from solution vendors to business technology vendors). The ability to integrate better than others, and thereby reduce the overall cost will become the approach for all vendors. 

References

[1] Business Service Management (BSM) dynamically links business-focused IT services to the company’s IT infrastructure.  It maps IT processes to IT resources, allowing for management of the entire IT system.

[2] ITIL (Information Technology Infrastructure Library) is a set of IT definitions developed in the UK in the late 1980s, and recently applied to the current IT environment. Its attraction is that it standardizes core processes, allowing for scalability and cost savings in development. 

[1]  Mendel, T., & Garbani, J.P (2007). The IT Management Software Market, Forrester Report, p 2.

[2] O’Neill, P. (2007). The SLM/BSM Software Market: Which Services Must Be Managed, Those of IT or Those of the Business? Forrester Report, p 1.

[3] Op cit., p 3.

[4] Garbani, J.P & O’Neill, P. (2008). The Megavendors in IT Management Software, Forrester Report, p 1.

[5] Porter, M. (1979). How Competitive Forces Shape Strategy, Harvard Business Review, Vol. 57, Issue 2: p 138.

[6] Grieser, T. (2006). Competitive Analysis: Worldwide Performance and Availability Management Software 2006 Vendor Shares, IDC Report, p 23.

[7]  Oracle, Microsoft, BMC, CA (company profiles, 2008). Retrieved July, 2008 from The Motely Fool financial web site.

[8] Porter, M. (1979). How Competitive Forces Shape Strategy, Harvard Business Review, Vol. 57, Issue 2: p 138.

[9] Toigo, J. (March 24, 2003). Retrieved July 2008 from ComputerWorld Storage web site.

[10] Mendel, T. (2007). The BSM Bet is Paying Off for BMC Software, Forrester Report, p 1.

[11] T. Wellington, Director of Sales for BMC Asia Pacific (Interview, June 17, 2008).

[12] Ibid.

[13] HP News Release, July 23 2007.

[14] Garbani, J.P., & Mendel, T. (2008). Market Overview: The IT Management Software Market in 2008, Forrester Report, p 4.

[15]  Ibid.

[16] Ibid.

[17]  Industry Statistics of the Megavendors (2008). Retrieved June 18, 2008, from http://finance.yahoo.com/q/co?s=BMC

[18] Mendel, T. (2007). The BSM Bet is Paying Off for BMC Software, Forrester Report, p 3.

[19] Collville, R., & Adams, P. (June 2007).  IT Service View: CMDB Vendor Landscape, Gartner Research.

[20] Mendel, T., & Garbani, J.P (2007). The IT Management Software Market, Forrester Report, p 13-14.

[21] Ibid, p 7.

[22] O’Neill, P., & Hubbert, E. (2007). The Forrester WaveTM: Business Service Management, Q1 2007, Forrester Report, p 9.

[23] Coyle, D. (2007). Magic Quadrant for the IT Service Desk 2007, Gartner Core Research, p 2-4.

[24] Industry Stock Performance of the Megavendors 2004-2008. (2008). Retrieved June 18, 2008, from http://finance.yahoo.com/q/co?s=BMC

[25] BMC News Release, March 17, 2008.

[26] Porter, M. (1979). How Competitive Forces Shape Strategy, Harvard Business Review, Vol. 57, Issue 2: p 142.