The 5 pillars of digital transformation for software companies

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The coronavirus has caused an explosion in the adoption of remote work software, as companies have acquired the tools necessary to continue their normal operations. Collaboration and workflow solutions like Zoom (ZM), Microsoft Teams (MSFT), Slack (now owned by Salesforce.com (CRM)) and DocuSign (DOCU) flourished financially amid this booming demand.

We postulate that the next few years are likely to see a growth in the expanded set of technology tools for remote working, with hybrid work environments increasingly becoming the norm. Within our coverage, we believe the strong will get stronger and the biggest beneficiaries so far will remain the biggest winners over the next two years.

Going forward, not only are we optimistic about the continued use of remote working software, but we also expect the shift to remote working will accelerate digital transformation. We’re finally seeing spending on digital transformation increasing at a compound annual growth rate of 16% from 2020 to 2025, representing an opportunity of $ 1.8 trillion in five years.

Each leading tech company characterizes digital transformation differently, but we define it simply as the use of software to modernize business processes. We believe that the essential concept is that it involves both a technological element and a business process, or an operational element.

6 Ways Software Spending Will Evolve To Accelerate Digital Transformation

We believe that the next few years will be exciting for software vendors and their investors, as software spending evolves in several different vectors and will benefit from this evolution. Digital transformation was a favorable secular trend for the software industry, but COVID-19 has accelerated this trend in the short term and possibly also in the medium term.

We expect digital transformation spending to evolve over the next few years in six main ways:

  1. As modernization and digital transformation efforts continue and have even accelerated, demand will be delayed by about two years.
  2. IT budgets, which are generally stable, will see an overall increase in 2021, although growth in IT spending generally remains constant over longer periods.
  3. Software spending will increase in the IT budget mix. This trend is not necessarily new, but we expect the rise to continue over the next five years. We also expect software to exceed gross domestic product by a considerable margin over time as it solves critical business problems, enables higher revenue generation, and generates high returns on investment.
  4. In some cases, software spending will be pushed into functional areas of the business, which could mask true IT spending. We believe this point helps alleviate the pressure on IT budgets that might arise in our second and third points above. An industry could then use a preferred software platform and absorb the costs as well. In this case, the additional expense is likely to be found in the cost of goods sold for that segment. In other words, not all IT expenses are included in the IT budget.
  5. The explosion of remote working tools will evolve towards the retention and extension of these solutions to the customers who have implemented them. For example, we have already seen good monitoring of clients acquired by Zoom and DocuSign in the depths of the blockages caused by coronaviruses.
  6. Because it immediately exposed the problems with existing systems, the COVID-19 pandemic will ultimately accelerate digital transformation efforts.

This digital transformation will affect five main pillars, described below.

Cloud

Using a public cloud allows a business to downsize or redeploy IT staff while typically moving infrastructure to more advanced technological building blocks. This decision then cuts IT costs directly through lower initial hardware capital expenditures and lower ongoing maintenance requirements, which in turn helps reduce IT headcount or staff redeployments. It also translates into improved IT performance in many aspects, the most important of which are increased flexibility, faster performance and throughput, and better security.

Amazon.com (AMZN) Amazon Web Services is widely viewed as the leader in the public cloud. We see Microsoft’s Azure as the only other legitimate competitor, along with Alphabet (GOOGLE) Google Cloud Platform is a remote third party. However, we believe it is possible that over time Google or another competitor will improve their capabilities and expand their footprint to have a truly viable competitive position. We also think the market is huge and can accommodate three big competitors and maybe even a few smaller competitors.

Workflow and Automation

A wide variety of widely used software platforms contain no-code or low-code functionality to create rules to automate basic and repetitive tasks – and automation helps users work more efficiently, thereby empowering client businesses. to “do more with less”. This can be seen as an improvement in worker efficiency or cost savings – depending on whether the company is redeploying its workforce elsewhere or hiring less – strict cost savings, or just increased flexibility, which we tend to consider. as a driving force in contemporary strategic IT. the decisions.

We are offering Salesforce as a leader with its Initial Sales Force Automation Solution, or SFA. SFA has taken CRM software to a new level with new features and the automation of repetitive tasks, allowing users to focus on their priorities: selling and generating income.

Client experience

The customer experience has been well defined with some obvious major competitors, such as Salesforce; it also evolves rapidly as new tools have emerged, and it helps to retain existing revenue streams as well as promote upselling in the installed base. We remind investors that it is significantly cheaper for a software publisher to retain a customer than to recruit a new customer, which explains the particular emphasis placed on the customer experience.

There is also an element of modernizing the customer experience, which we see as driven by the need to meet customers where they are. In consumer-oriented businesses, this is increasingly online and mobile, and includes not only basic e-commerce, but also customer service by whatever means the customer chooses, whether by SMS, call. voice, Facebook or chatbot.

We see customer relationship management, marketing, e-commerce and customer service as an organic synergy and essentially extensions of each other, so we combine them all in our discussion. That said, we expect customer experience software to generate over $ 100 billion in annual revenue within a few years.

Artificial intelligence and analytics

Data has become the lifeblood of modern business, with decisions increasingly based on information measured against a growing set of key performance indicators. By using more sophisticated tools, businesses are better equipped to answer questions about their operations and their customers. Artificial intelligence, or AI, and analytics tools can be used to help make predictive decisions about which products to show consumers on e-commerce sites, as well as to recommend solutions to customer service situations.

They aren’t just for powerful platforms. Most of the companies covered by our coverage – from large caps to small caps – have some type of AI, machine learning, or analytics available to their users. We believe that AI and analytics can be integrated into other areas, such as automation, SaaS modernization, or even the cloud.

Based on our estimates, the AI ​​and analytics software market was around $ 50 billion in 2020, and we forecast it will grow to over $ 150 billion by 2025.

SaaS modernization

Software buyers don’t just want software as a service delivery: they also want the impact of the underlying modernization, which ranges from more intuitive user interfaces, clean and simplified source code, and better use of software. application program interfaces or APIs. On this last point, let us stress that we have heard for a long time about the desire of software buyers to be flexible and to avoid seller lock-in. APIs allow applications to interface smoothly and take advantage of functionality from other vendors. Today, we are seeing software companies using APIs extensively to provide flexibility to customers, which ultimately creates better relationships and improves customer retention.

SaaS has gone from a 0% share of software delivery in 1999 to a 22% market share in 2020 – and we see no scenario where SaaS does not stay on this trajectory and ultimately becomes the vast majority. softwares. As popular as SaaS is, we believe users and vendors will continue to rally around SaaS delivery until nearly all software is in use, which may take a few decades.


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