COTS spending and costs both increasing

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Despite a slowing global economy, some software vendors are raising prices and enjoying strong, 70%, margins.

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Even in the face of a global economic slowdown, the enterprise software market spending is expected to grow at a CAGR of 12% through the end of 2023.

According to Forrester’s Global Software Industry Forecast 2022, spending on commercial infrastructure and application software, the two categories that make up enterprise software, will top $400 billion by 2023. The report does not include spending on in-house software development.

“In the U.S. … the share of custom software has come down from 44% in 2010 to 39% in 2019, so overall a big shrinking market with pre-packaged software cannibalizing the share of custom software,” said Forrester Analyst and report author Himank Joshi.

Cybersecurity, database management, tech operations management, vertical software and cloud based front- and back-office applications will all see robust growth. The current project growth rate is a slight slowdown over 2021’s numbers, the report said.

Costs increasing

Because software is so vital to the day to day operations of most organizations today, some software vendors are increasing prices and enjoying robust margins, the report said. “Leading software vendors can raise prices consistently without losing demand, resulting in high and stable margins,” the report said.

Compared to other tech, the price for applications keeps going up, the report said. Software vendors average gross margins are 70%. This allows them to protect margins during hard economic times while increasing them when things turn around.

“This indicates that macro-economic headwinds will have a relatively modest impact on revenue growth compared to other technology sectors,” the report said.

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Application software sales

While not a significant deviation from the 12% average, the application software market is forecast to grow at a slightly slower pace of 11.4% CAGR in 2022 and 2023, exceeding $400 billion.

Front-office apps, such as CRM, and custom industry-specific applications, are forecast to grow the fastest. Cloud-based back-office software, such as  financial management applications and human resource management (HCM), also are seeing robust growth as companies replace legacy apps, the report said.

Driven by the popularity of cloud, vertical industry-specific SaaS pure-plays “ … have a big opportunity to replace legacy custom-built software with modern cloud applications,” the report said. The market cap for vertical software companies has exploded in the past decade, growing from $71 billion to $650 billion.

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Infrastructure software sales

Infrastructure sales are forecast to grow at a CAGR of 12.6% in 2022 and 2023. Security software is expected to grow the fastest in this segment at 15.4%. Cloud-based security vendors such as CrowdStrike, Okta, Proofpoint, SentinelOne and Zscaler are growing faster than legacy and hybrid vendors, the report said.

At 13.1% GAGR, technology management software is the second fastest growing segment as organizations continue to invest in serverless architectures and  microservices.

“The need to run infrastructure in dynamic environments has converged application monitoring trends toward observability, pure-play cloud-based monitoring, and application performance management (APM),” the report said.

Database management software comes in third at 12.8% CAGR as real-time analytics “are revolutionizing database management software,” the report said.

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