The Gartner Scenario for Application Software Providers Building

The Gartner Scenario for Application Software Providers: Building Digital Transformation in a Bimodal World Bianca F. Granetto, Chris Howard, Daryl Plummer, Claudio Da. Rold, Robert Anderson, Chad Eschinger, Joanne Correia, Nigel Montgomery, Jim Hare, Chris Pang, Neil Mc. Murchy January 2016 Primarily Written for Business Unit Leaders This presentation, including any supporting materials, is owned by Gartner, Inc. and/or its affiliates and is for the sole use of the intended Gartner audience or other intended recipients. This presentation may contain information that is confidential, proprietary or otherwise legally protected, and it may not be further copied, distributed or publicly displayed without the express written permission of Gartner, Inc. or its affiliates. © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Growth and Profit Will Come From Leveraging the Bimodal Dynamics Set in Motion by Your Customers Window of opportunity 2010 -2030+ Modernization Mode 1 The world in the making! Digitization The world we know Digitalization/ Digital Business Window of opportunity is open! 2015 -2030+ Mode 2 1 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Key Issues § Where Will the Growth Come From? § How Can the Application Software Providers Seize That Growth? – How will the buyers behave? – What do successful competitive and go-to-market strategies look like? – How can providers differentiate? Unique selling points? § Action Plan for Next Six Months: – Develop a bimodal strategy to leverage the dynamics being set in motion by your customers. 2 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Where Will the Growth Come From? 3 © 2015 Gartner, Inc. and/or its affiliates.

Key Competitive Factors: Analytics, Saa. S, SMBs, Digital Applications, Business Outcomes By 2020 Key Application Software Adoption Predicts: By 2020, 80% of enterprise application vendors will compete on the sophistication of advanced analytics offered in their solutions. By 2020, 60% of business users will be provisioned, in whole or in part, with office system capabilities from the cloud. By 2020, for the first time, cloud-based growth will propel North American small or midsize businesses (SMBs) to a leadership position over large enterprises in total ERP new product revenue. Digital Business: By 2020, 75% of application purchases supporting digital business will be "build, " not "buy. " By 2020, LOBs will drive 50% of new IT spending decision making, half of which will be expensed for software directly out of their budgets. 4 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

New Resources Are Being Mobilized for Digital § On average percentage of revenues being + x 3 spent on IT = 3. 2% § 2016 CIO Survey: +2. 2% average increase in IT spending § 17% of IT spending happens outside of the IT budget on average § 40% is directly influenced or paid for by LOBs § On average percentage of revenue that will be spent on digital business = 10%* § The average proportion of investments being handled in a Mode 2 manner is 25% § SMB companies reported that on average 28% of their revenue comes from digital sales, expected to increase above 40% next five years** § 95% of global businesses are, in fact, SMBs Digital Transformation Initiatives will generate new revenue streams in the next two years and beyond Follow the Money! * = Digital Business Survey (number of respondents = 304); ** = Gartner 2014 CEO survey (number of respondents = 64) Sources: IT Key Metrics; Gartner elaboration of shadow IT spending 2015 (based on forecasting data); 2016 Gartner CIO Survey (2, 944 CIO respondents) 5 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Recommendations by Market Segment § Global Application Software Providers 6 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. § SMB Application Software Providers Sunset Old Offerings Pursue Digital Opportunities Diversify Plan Realistically Embed Analytics Specialize and Simplify

Recommendations by Deployment Model § Cloud-Native Application Software Providers 7 § On-Premises Application Software Providers Bundling for Essentials Offer Subscription Focus on Customer Service Agile Development Comparative and Competitive Entrants Have a Roadmap to Transition Customers to Saa. S © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

How Can the Application Software Providers Seize That Growth? How will the buyers behave?

Buying Behavior: Digital Gets Strategic Attention and Sense of Urgency Compete Globally A source of competitive differentiation and advantage Attain Operational Excellence Improve the efficiency and effectiveness of business operations Implement Business Diversification Allows embracing new business opportunities, reaching new targets Top Five Highly Relevant Factors to Organizations Definition and Execution of Digital Business 1. Creation of client value and new revenue streams (66%) 2. Focus on new front-office strategies to reach the customer or change the customer experience (this includes improving the end-to-end product visibility) (61%) 3. Creation and introduction of new business strategy/models (56%) 4. Clearer understanding of clients' requirements to launch new products or services (55%) 5. Focus on new back-office strategies to change and enhance or modernize business processes (47%) Source: Gartner Digital Business Document Collections; Digital Business Survey 2015 (total number of respondents = 210) 9 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. GROWTH

Buying Behavior: Bimodal IT Practice for IT Delivery Will Extend and Change the Decision-Making Structures § Bimodal IT is the practice of managing two separate, coherent modes of IT delivery within the same enterprise, with one mode focused on stability and the other focused on agility, predictability and experimentation or uncertainty. § Mode 1 is sequential, emphasizing predictability and accuracy; Mode 2 is exploratory and nonlinear, emphasizing agility and managing uncertainty. § Each mode has specific requirements for people, resources, partners, structure, culture, methodologies, governance and metrics, as well as different attitudes toward value and risk. § New investments are deployed through one of the two modes, depending on the balance of business priorities. When the balance changes, investments and operations move seamlessly between modes as the situation dictates (see "Kick-Start Bimodal IT by Launching Mode 2" [G 00273955]). 10 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. Unsure 23% Have no bimodal plans 14% Will have bimodal IT in 26% next three years Have bimodal IT, not 64% 23% business Have bimodal business 15% and IT 0% 10% 20% 30% Source: 2016 Gartner CIO Survey (948 CIO respondents represent 32%)

Buying Behavior: Many More and New Decision Makers to Align Digital Business Decision Makers Versus Application Ones § The CIO is still in the lead of most digital business efforts. § The fastest-risingle job title in digital business leadership is the VP of digital business. § The chief digital/innovation officer has slowed down in comparison — growing but not as much as the other titles. 33% CIO and IT Other Executive Suite (CEO, COO, CFO) CMO 5% 5% Innovation Committee 6% § Powerful stakeholders: CEO and CFO. Other § Many others are involved: COO, Cx. Os. Don't Know 14% 11% 9% 8% CDO or CTO Innovation Officer 14% 11% 8% Individual Business Units Office of the Chief 59% 5% 6% 3% 2% 1% Driving digital business initiatives Application selection, procurement and implementation Sources: Digital Business Survey (number of respondents = 304; Digital Business Application Fulfillment Survey, October 2015 (number of respondents = 167 IT and business leaders). 11 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Buying Behavior: Top Five Applications Priorities in 2016 Business applications fulfilling digital business initiatives: 1. Mobile applications 2. Enterprise software applications 3. Business analytics applications 4. Saa. S applications 5. Digital marketing applications Most influential in evaluation and selection of application provider: 1. Has a demonstrated understanding of the business/industry/business process 2. Has openness, integration and interoperability standards 3. Is a trusted brand with credibility in my organization 4. Offers a choice in delivery, pricing and licensing options 5. Has a center of excellence and/or innovation center Source: Digital Business Application Fulfillment Survey, October 2015 (number of respondents = 167 IT and Business leaders) 12 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Buying Behavior: Looking for New Sources of Help From an application perspective, which of the following have you been using in order to fulfill your digital business initiatives and which ones will you add in order to support your digital business initiatives for end of 2015/early 2016? Internal development team 85% Long-standing global provider 67% Local application provider/software house 43% Cloud native provider 42% Long-standing global service providers 40% 33% Open-source software provider/community project 31% Web agency 13 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. 20% 45% Communications service provider Source: Digital Business Application Fulfillment Survey, October 2015 (number of respondents = 167 IT and business leaders, excludes don't knows) 18% 48% Local service provider Other 17% 51% Vertical-/industry-specific provider Startup 12% 14% 2% 3% 26% 18% 11% 30% 21% 20% Currently using (n = 166) Will add (n = 116)

Recommendations by Market Segment § Global Application Software Providers 14 § SMB Application Software Providers Accelerate Modernization Value Prop: Cx. O, CIO, CFO Unique Advanced Analytics Realistic and Impactful ROI Value Creation Co-create © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Recommendations by Deployment Model § Cloud-Native Application Providers 15 § On-Premises Application Providers Customer Satisfaction Easy Adoption for Mode 2 Integration in Mode 2 POCs, Pilots Hybrid How Cloud Changed the Business Enter Near Markets © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

How Can the Application Software Providers Seize That Growth? What do successful competitive and

Application Software Providers Also Must Develop a Bimodal Strategy and Bridge the Gap Between the Two Modes Shaping the Future Industrialization Replacements Rapid Modernization Legacy Transition Saa. S Enabling Platforms Mode 1 Mode 2 Digitization Commercial Reinvention — Bundling Saa. S Transition Services Enabling Components Digitalization Business Co-creation — Shared Risk Models Bring Insight, Vision, Clarity, Rigor Transforming Offer the right bimodal mix 17 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. New Designs New Skills New Approach Digital Ecosystems Digital Platforms

Case Study Snapshot: Telecom Italia Digital Solutions — Exemplifies Mode 2 Strategy § Legal entity created in June 2013, with goal to play a leading role in digital transformation initiatives of its customers (B 2 B), their industries and their customers (B 2 B 2 C) § Platform-based E 2 E solution provider § Commercial operations expanding to selected countries by opportunity (South America, EMEA …) § CAGR +75% by LOBs; profitability target CAGR +23%; partner business development: CAGR +13% 18 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. Accountability: Dedicated and accountable LOB/company for each digital offering: cloud; Io. T; analytics; security and identity; customer data monetization; and verticals Decisional and executional autonomy: Each LOB runs its operations autonomously including platforms, sales and marketing Multifaceted partner ecosystem: Developed partnerships and reseller agreements with traditional IT value networks, global-scale cloud providers, developers and governmental agencies (provisioning to citizens of digital identities)

GE's Digital Reinvention "On our current trajectory, GE is on track to be a

How Can the Application Software Providers Seize That Growth? How can providers differentiate? Unique

In the Digital Realm, Ecosystems Are Foundational, Not Optional External "Digital" Domain Enterprise Internal Domain Partner Government Agency Headquarters Affiliate Business Applications BI ERP CRM SCP ECM Office What to What? What to Whom? By Whom? With Whom? New Value Networks, Opportunities, Competition 21 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. . com

Digital Supplier Value Network: Buyers Get More Choice! Add to Your Unique Selling Points Cloud Providers New Paradigm New Market Iaa. S/Paa. S Provider Entrants/Creators Cloud-Based Saa. S Provider Web Digital Platforms Service Providers Digital Solutions CSPs Digital Transformation Initiatives Mobile Things Provider Developer Mobile Device Provider Start Up ISV OSS 22 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. Digital Builders' Most Valuable Contributors The Essentials to Connect and Work Cloud Provider: Contender/Partner

Recommendations by Market Segment: Unique Selling Points § Global Application Software Providers – Don't lock in your customer; instead, position to create business value through your offerings and those of your ecosystem – Seek and align to consulting and system integration partners who are able to deliver the vision you are creating (these may not be same partners that you have today) – Even your customers may transform into digital suppliers and be part of a wider and differentiated value network – Consider acquiring, merging, and/or partnering with communications service providers and native dot-com businesses 23 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. § SMB Application Software Providers – Show you can be more focused and deliver more appropriate solutions to a smaller customer than global application competitors – Establish a presence in the most influential apps stores for SMBs – Expand your mobile development and UX design skills – Partner/develop with a traditional business services company looking to digitalize its services

Recommendations by Deployment Model: Unique Selling Points § Cloud-Native Application Software Providers – Offer a holistic experience versus a fragmented one – Show openness and choice when it comes to integration strategies – Develop and allow for extensive configuration so end customers do not feel it is your way or not at all 24 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. § On-Premises Application Software Providers – Offer a hybrid deployment opportunity; show adopting a hybrid solution from a single vendor benefits the user in terms of process and data integrity – Ensure and demonstrate how your application stack can be functionally modified without sacrificing on upgradability by protecting the core yet allowing for custom processes and features that do not interfere with the core application

Action Plan for Next Six Months Develop a bimodal strategy to leverage the dynamics

Three Steps to Start Off Your Bimodal Strategy: Use It as an Organizing Principle 1. Launch Mode 2 Structure to respond to any size digital business innovation initiatives Identify where you can create value, where there is the greatest cultural fit and profit potential Identify where you have gaps: talent, knowledge and skills 26 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved. 2. Transform Mode 1 Propel your marketing, sales and channel efforts to create a sense of urgency and convenience to accelerate legacy modernization Be aggressive; aim at displacing the competition 3. Bimodal in Action Let Mode 2 drive and transform Mode 1, and let Mode 1 industrialize rapid innovation Systematize the emerging bimodal Develop talent and foster continuous practices to establish a new order of things (business model) learning culture Focus on differentiation and competitive advantage

Work Through This Organizational Framework to Start Your Bimodal Strategy Roadmap Mode 1 Mode 2 Step 1 Market Share — Market Entry Replacement Markets Leadership Commit to a Business Model Innovation Train and Coach; Rotate Jobs — Interdisciplinary Teams Operations Build the Team and Provide Funding Focus on Market Share and Increasing Brand Recall Value Marketing Brand Building/Understanding the New Competitors Sales/Channel Insight/Consultative Selling/Performance. Based Contracting Services Delivery Build New Service Model Product Development Create a Co-creation Lab; Iterative Process; Development and Design Skills Step 3 Commercial Reinvention — Shift to Subscription Innovative Contracting Develop Services for Transition Strategies Away From Legacy — Develop Holistic Approach Step 2 Out With the Old and in With the New! 27 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Complementary and Recommended Research 28 © 2015 Gartner, Inc. and/or its affiliates. All rights

Gartner Research Addresses Specific Roles Examples of Recently Published 2015 Research Roles We Address Upcoming Research 2016 Enterprise Applications Software — Cloud-Based Saa. S • Business Unit Leaders • Strategic Planners • Product Leaders • Marketing Leaders • Sales Enablement 29 • "Forecast Analysis: Enterprise Application Software, Worldwide, 2 Q 15 Update" (G 00279474) • "Competitive Landscape: Public Cloud Business Application Marketplaces, 2015" (G 00262514) • "Market Trends: Prepare Now to Smooth the Inevitable Transition to a Subscription-Based Business Model" (G 00290238) • "Market Trends: Move Beyond Homegrown Licensing and Entitlement as the Io. T Creates New Revenue for Software" (G 00277387) Market Segments: BI and Analytics, CRM, ERP, SCM, Office, ECM • "Market Trends: Business Intelligence Tipping Points Herald a New Era of Analytics" (G 00264016) • "Ten Reasons to Reach Beyond Basic Business Intelligence" (G 00227064) • "Emerging Provider Executive Insights: Move Now to Seize the Opportunity in the Personal and Ecosystem Eras of Analytics" (G 00278429) • "Strengthen Your Sales Analytics Initiative With These Six Best Practices" (G 00274949) • "Using Mobile Geoconquesting to Steal Customers From Competitors" (G 00278576) • "Forecast Overview: CRM Software, Worldwide, 2015" (G 00275913) • "Market Trends: Digital Commerce Platform Software Opportunities in Southeast Asia" (G 00274134) • "Market Snapshot: Customer Relationship Management, Worldwide, 2014" (G 00275912) • "Technology Overview for Travel Expense Management Applications" (G 00272872) • "Technology Overview for Employee Recognition and Rewards Software" (G 00275498) • "Market Trends: SAP Service Provider Opportunities in a Postmodern ERP World" (G 00270342) • "Market Guide for Contract Life Cycle Management" (G 00276707) • "Survey Analysis: Saa. S Trends Providing Opportunity in the Supply Chain Market" (G 00275970) • "Market Snapshot: Supply Chain Management Software, Worldwide, 2014" (G 00275972) • "SWOT: Google Apps for Work, Worldwide" (G 00270208) • "Competitive Landscape: Cloud-Based Office Productivity Tools, Worldwide, 2015" (G 00271898) • reserved. "Market © 2015 Gartner, Inc. and/or its affiliates. All rights Trends: New Mandates and Market Structures for Content Management Drive Growth in 2015 and 2016" (G 00277482) • Key Initiative Primer: Build and Market Digital Application Offerings Primer for 2016 • Key Initiative Primer: Exploit Application Software Dynamics • Key Initiative Primer: Shift On. Premises Offerings to Cloud-Based Saa. S • Software Adoption Predicts

Appendix: Gartner Definitions 30 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.

Gartner Definitions § Digital Business: The creation of new business designs by blurring the digital and the physical worlds. § Digital Transformation: The execution of a digital business strategy. § Digitalization: The use of digital technologies to change a business model and provide new revenue and value producing opportunities. (It is the process of moving to a digital business. ) § Digitalize: To move a business or process toward digitalization. § Digitization: The process of changing from analog to digital form. § Digitize: To change from analog into digital form. 31 © 2015 Gartner, Inc. and/or its affiliates. All rights reserved.