Prepare for the shakeout in the enterprise energy management market

Green regulatory issues have brought the enterprise energy management solutions market to the forefront. But the market is facing a shakeout, and buyers need to plan accordingly.

Most firms today are concerned with rising energy costs and potential threats to service caused by aging infrastructure and natural disasters. Enterprise energy management software solutions that help manage cost and risk should be on the radar for general management everywhere. Recent activity makes it clear that in the next few years, enterprise energy management will be a strong market.

There has also been increased concern over carbon production due to regulatory issues, public perceptions and opportunities to capitalize on carbon credits. This assures a strong short-term market for carbon management software solutions. As products in these markets converge, we see a place for integrated software solutions in the enterprise energy and carbon management space. It’s a fast-growing market, but it won’t last forever.

The market for energy and carbon management solutions is in its infancy, but the coming shakeout is inevitable. Prices are already under pressure, and vendors speaking candidly will confess that sale cycles are lengthening. Buyers must prepare for this shakeout, and plan accordingly.

Fred Brooks, legendary project manager for OS/360 and author of The Mythical Man-Month, observed that a program that costs $X to build will cost approximately $3X to turn into a product (something of use to a population beyond the developers themselves). The projection jumps to close to $9X to turn into a systems product (a product that must integrate with others in the environment). The multipliers may have changed a bit -- it's easier to get the first one out due to better tools, but it’s more expensive to conquer a market due to higher integration and sales costs -- but the idea is still valid.

Today, a startup can deliver an enterprise energy management program to an individual client for perhaps $1-3 million. Leveraging-third party compliance data, a midsized enterprise could have such a solution up and running with incremental deliveries over the course of a year.

However, to bring a product to market in the same space requires more effort, and probably about $5-10 million. Building on Brook’s model, I would submit that the cost today to create an energy and carbon management solution that is fully functional and integrated as part of the enterprise software ecosystem will ultimately balloon to approximately $50 million. In addition, there should be another $50 million in reserve for services, sales and marketing for the enterprise energy management solution.

Of the roughly 60 firms in the market today, only SAP AG, CA Inc., SAS Institute Inc. and Cisco Systems Inc. have such resources available from operations. In addition, only Hara and C3 have demonstrated sufficient mastery of the private equity markets to give confidence that they, too, could access the capital to compete at the highest level.

A likely scenario is that within 24-48 months, three to five vendors will have sufficient market penetration and capitalization to dominate the enterprise energy management market for the next decade.  Most of the others, regardless of the quality of their offerings, will likely be acquired, relegated to engagement-aid status for consulting firms, or limp on with their core clients until abandoned for one of the big players. A few may continue on for an indeterminate time with limited resources available for product enhancement, before facing one of the aforementioned fates.

With that in mind, the obvious recommendation might be to try to pick the winners now, and buy from that short list. In this case, the obvious is not the best, because:

A likely scenario is that within 24-48 months, three to five vendors will have sufficient market penetration and capitalization to dominate the enterprise energy management market for the next decade.

a. There is value to be had from the specialists of today;

b. SaaS delivery models offer compelling economics that buyers can leverage; and

c. Switching costs are unlikely to increase as data formats and reporting standards promote transparency and interoperability.

That brings us to four recommendations for enterprise energy and carbon management strategies to improve payback while mitigating the risks associated with the coming shakeout:

Get started. Don’t wait until you can do it all to do anything at all.  The energy cost-reduction benefits of going with almost any energy management solution will be realized before the market shrinks, and preparing for carbon management without regulatory threat will offer new opportunities that can be realized before or after the shakeout.

Buy off the shelf. Don’t build it yourself, and don’t become a development partner for a boutique unless your enterprise has unique needs that can be accommodated.

Make no investment that will be difficult to modify when market conditions change. Insist on a Software as a Service delivery model to control costs, with clear escrow plans for your data.

Leverage relationships with your existing preferred software and services vendors when possible to have them act as your general contractors. For smaller enterprises, a better case may be made for dealing directly with the boutiques to get personalized service. Large enterprises would be well served to work with their usual providers to bring in this expertise.

Adrian Bowles has more than 25 years of experience as an analyst, practitioner and academic in IT, with a focus on IT strategy and management. He is the founder of SIG411 LLC, an advisory services firm in Westport, Conn., and director of the Sustainability Leadership Council.

This was first published in April 2011

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