The 2015 edition of the Gartner Magic Quadrant for APM published this week. There were several interesting changes, the first being that the name of the research has been changed. The research is now titled “APM Suites” versus simply APM. The second big change is the lead author; the research is now being led by Cameron Haight, a 15-year veteran at Gartner. Having worked with Cameron for many years, I was glad when he took over to lead the APM research. He’s a progressive thinker at Gartner, having pioneered the DevOps research in 2010, and then going on to kick off Gartner’s Web-Scale research in 2012. Most of what he was writing about and taking client calls on were very progressive topics that were on the cusp of normality. DevOps has reached normality, and hence is positioned on the peak of expectations in the Gartner Hype Cycle. With all of Cameron’s progressive thinking, I was quite surprised to see the APM research have such weightings applied to legacy technologies and business models.
Most APM Tools Are Poorly Integrated “Suites”
Gartner identifies that most of the vendors, especially the legacy vendors, have broad suites of tools, which are poorly integrated. Gartner pointed out in the survey results earlier this year that APM tools are not as widely adopted due to lack of integration, which is the second most cited barrier after price. The fact that Gartner has adjusted the name of the research explains some of the changes in the model that affect relative positioning of legacy vendors. Gartner is saying that suites are okay here, even though they present a major barrier to those implementing and managing these tools.
The Legacy Lives On
While legacy software vendors exist within IT operations management, there is clearly momentum towards newer technology providers. Why is this shift occurring? Digital transformation is not an option. It’s a requirement to remain in business. In order for these companies to transform, Gartner recommends implementing a bimodal strategy; the net result is that model 1 manages legacy systems, while model 2 is the fast-moving group. Becoming innovative is not an option, Gartner states in “How to Achieve Enterprise Agility With a Bimodal Capability”: “At the heart of the digital transformation and bimodal is the need for enterprises to become more creative, to break out of the business as usual and, in particular, to establish a stronger capability in technology-led business innovation.” The result of this is that legacy ITOM vendors existing in mode 1 teams will collect maintenance revenue, but fail to grow, while mode 2 is where growth and innovation is occurring.
Favoring Legacy Software Revenue Models
Once again, in Gartner’s own words, software is transitioning to new consumption models. “As subscription-based alternatives and particularly software as a service (SaaS) are being adopted by organizations, a more predictable revenue pattern will emerge”. Modern software companies have shifted to subscription-based revenue models. What this means is that for subscription businesses, revenue comes during the lifetime of the customer, versus being paid up front as it is for perpetual businesses. Revenue is a lagging indicator for SaaS businesses, whereas bookings is an accurate measure. Gartner is using 2014 calendar-year revenues, which favors these perpetual businesses. The reason why Gartner is using this data is because revenue is reported by every public company; hence it’s easier to obtain for many vendors, but it also favors these legacy models. Every business is slowly transitioning to subscriptions, but many legacy providers cannot make this jump. For example, based on IDC data for systems management vendors, Dynatrace’s SaaS revenue declined 3.3 percent in 2014, as they continue to sell primarily perpetual software along with the other legacy vendors.
When analyzing the IT Operations Management market, the fastest growing companies in the space, and the most relevant to their respective markets, include AppDynamics, New Relic, Splunk, and ServiceNow. These businesses are almost entirely subscription revenue model, while the legacy vendors are primarily perpetual software models. This shows that ITOM has a massive legacy of companies that cannot transform and have failed to transition.
Private equity has been extremely active in the ITOM space, especially in monitoring. Thoma Bravo now has acquired seven public companies in this space. I was fortunate enough to sit in on Gary Spivak’s financial sessions at the Gartner Data Center, Infrastructure & Operations Management Conference in December 2015. In Gary’s session and research note titled, “How to Re-evaluate Strategic Vendors Acquired by Private Equity,” he mentions the reason PE firms acquire these companies. “The company has a lack of revenue growth, accompanied by strong cash generation.” Clearly, these companies have large installed bases generating maintenance revenue. Additionally these leveraged buyouts require a large portion of financing or debt to execute, and with today’s low interest rates they can pay off the debt they accrue. As Gary states, “The company’s cash flows are sufficient to make interest payments on existing and new additional debt (commonly referred to as a debt burden), and still sustain business operations (to an extent).” With each of these acquisitions there have been immediate layoffs, reductions in sales forces, and typically a reduction in R&D. This translates to profits for the private equity firms, but these goals do not align with what end users expect. In this same research, Gary indicates that privatization of companies like BMC amassed a large amount of debt owed by the company; BMC moved from $1.8b to $6b in debt. When Dell went private, the debt swelled from $9b to $18b in order to fund the transaction. During privatization, Compuware raised an additional $2b of debt to fund the transaction. This debt or obligation is the responsibility of the company, not the private equity firm.
When analyzing the growth of these vendors, the picture for many is quite bleak. In a previous blog post I analyzed Gartner’s own market data numbers, and many companies included in this research who were scored with high marks in execution are failing to grow at the rate of the market expansion. This means that new business is not going to legacy players, it’s going to the new breed of company solving today’s new problems. The health of these businesses are in question, yet they are being rated as viable, well-executing companies.
I was quite surprised that no vendors fell in the visionary quadrant. There are two ways to describe this:
- It’s very hard to build a fully capable APM tool, so most vendors do not want to compete with market leaders in this space.
- The market is mature, meaning there are fewer scrappy startups as there once were just a few short years ago.
Clearly the problem has not been solved. By most expert estimates, fewer than 10 percent of enterprise applications have APM tools in place, meaning there is a lot of work to be done to solve application problems. None of the challengers can build a compelling vision for how to solve these issues in a unique way?
One can hope this model evolves with progressive thinking to meet the demands of today’s digital businesses as they try to remain relevant in a time of disruption. In Gartner’s own words, “CEOs should assume that business model change will be forced by new digital entrants or an adjacent competitor within the next two years.”
(2015 CEO Survey: Committing to Digital, Mark Raskino ) digital transformation is not an option but an imperative for CEOs today, and this imperative is only addressed by innovative companies.