Margin Compression Is Pernicious, Disruptive, and Exponential In Impact
Technologies for the enterprise have often been seen as enablers for disruption and change. Over the past five decades as one technology or vendor would come to prominence and dominate a market, challengers would apply new technologies or business models to topple the legacy market and create new markets. Silicon Valley built its credibility on these disruptive market entrants. This cycle would continue to repeat itself until the next challenger became the market leader and struggle to hold on to its lead while meeting the demands of investors and the market.
Across the board in almost every market and every industry, an inflection point on margin compression is here. Take the following examples:
- In the Persian Gulf, $100 drones are battling against $1 Million missiles.
- India's payment system, UPI, operates at pennies per transaction while SWIFT and other payment rails operate from $1 to $25 per transaction.
- Prescription drug prices in the United States are significantly higher than in other nations, with prices in the United States averaging 2.78 times those seen in 33 other nations, according to a new RAND report.
- Enterprise software vendor Zoho can deliver most capabilities a company under 500 employees needs at $100 per user per month vs $1000's with other providers
Recently, the impact on cloud and cloud economics have disrupted on-premises vendors. In the past the move from client-server to the Internet created new winners and losers. Today, AI and automation will play a key role in creating the new market leaders.
Technology Vendors Face Pressure To Meet Revenue Targets At Their Customer's Expense
Recent conversations with more than 100 CXO's in the Constellation Executive Network indicate that their satisfaction with technology vendors have reached an all time low. One CRM software vendor tried to propose a $20 million increase in licenses when the client was trying to reduce their spend by $20 million. Another executive dealing with an acquisition of a key virtualization supplier lost all of her executive contacts in the midst of the merger and contract renegotiation. In the case of a large global manufacturer, their ERP vendor attempted to use financial engineering jujitsu to convince them to upgrade to the cloud without success. Across the board, sales executives continue to push for increases in their total annual contract value to make quota at the expense of clients who are trying to reduce spend.
Customers seek vendors who can help them consolidate their vendor landscape AND reduce total spend across the board. With the mantras of exponential efficiency in full force and a hope for AI arbitrage driving exponential cost reductions, CXO's are under a lot of pressure from their boards to lower their overall spend. In a recent interview on Fox Business with Stuart Varney, three vendors who lead this charge were featured:
- ServiceNow. Customers confirm they are consolidating onto ServiceNow in order to drive down costs, build the last mile, and place an innovation and AI layer over their transactional systems in order to achieve AI arbitrage.
- Oracle. The full RedStack from Oracle Cloud Infrastructure to Database to Apps is providing significant cost savings for many customers using the Red Stack for margin compression.
- UIPath. From bots to AI capabilities, UIPath's customer are taking advantage of AI arbitrage to achieve exponential effiicency.
In addition, vendors such as Rimini Street also play a key role in driving down costs by cutting the cost of vendor maintenance and freeing up money for innovation.
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The Bottom Line: Vendors Please Lead Or Make Way For The Next Disruptors
With only two to three options in almost every industry, market, and category, switching between vendors has become more difficult. The intensity of market consolidation in a winner takes all market leaves customers with few choices. For example, cloud vendors were supposed to be the good guys in the market with pay as you go pricing, short term contracts, and flexible terms. Today, many cloud vendors are the enemy with vendor lock-in, price increases, and endless pressure to raise their ACV while making it difficult to reduce spend. The BPO market used to be a market of cost savings, but today the inability to move BPO operations to software based entities adds exponential cost to operations.
With so many opportunities for innovation, expect innovative startups to disrupt what was once the innovative companies who have now just become legacy.
Your POV
Which vendors are leading the way in driving margin compression and which are barriers? Let us know!
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