Evolution of Enterprise Software: From Accounting to Cloud Computing

1. Enterprise Software and Services Industry Overview • Enterprise software is generally defined as a collection of computer programs with business applications used by entities, such as corporations, nonprofits, and government agencies, to manage internal and external operations. The focus of enterprise software is to improve organizational productivity and efficiency by providing logic support functionality. Established in the 1970s, the enterprise software industry began with the introduction of desktop computing in offices worldwide. Originally, enterprise software was used for financial purposes, primarily for general ledger accounting. The industry expanded to the manufacturing market by introducing material resource planning (MRP) software, which aims to improve inventory and operations management. Following the success of both accounting and manufacturing software, enterprise resource planning (ERP) applications were introduced in order to centralize and streamline productivity for internal operations. Since then, companies have found the need to incorporate software solutions into other operations, giving rise to an array of enterprise software, such as customer relationship management (CRM) and e-commerce solutions. • Over the last few years, the market for enterprise software, services, and security has changed dramatically. Companies are increasingly turning to web-based and on-demand software solutions to reduce costs and increase efficiency related to acquiring, installing, and upgrading in-house software applications. The outlook for on-demand software in the coming years is strong. Furthermore, the shift towards web-based solutions has driven significant growth in the security market. As security customers require more sophisticated solutions to combat disruptive attacks, the security market has evolved in terms of effectiveness, manageability, technical features, and performance. • Software Delivery Models • Organizations acquire enterprise software through three main delivery models.  Each model has its own benefits and limitations regarding cost, performance, scalability, and robustness: • Internal development – enterprise software can be designed and implemented internally by the information technology (IT) department within an organization. • Software product vendors – software products may also be purchased or licensed from an independent enterprise software developer, which often installs and maintains the software for customers and their servers and desktop computers. Installation, customization, and maintenance can be outsourced to an IT consulting company. • On-demand software vendors – the on-demand model is based on two primary concepts: cloud computing and on-demand software. Cloud computing is a delivery model for IT applications and services based on the Internet protocol, typically involving dynamically scalable and often virtualized resources. On-demand software, such as platform as a service (PaaS) or software as a service (SaaS) applications, are applications delivered to clients through cloud computing. Cloud computing providers deliver applications via the Internet, while the business software and data are stored on servers at a remote location. Customers typically do not download and install applications on their own servers or desktop computers; all processing and storage is maintained on the cloud server. • Organizations continue to seek more cost-effective enterprise software solutions. According to Susquehanna Financial Group, customers will spend anywhere from 50% to 70% of their allocated budget just on maintaining existing infrastructure.  As a consequence, on-demand software has rapidly grown in popularity.  With the on-demand model, no client software is loaded onto the end-user's personal computer (PC), reducing the amount of costly storage and maintenance required. • Enterprise Software • The enterprise software industry is divided into two segments: enterprise application software and enterprise infrastructure software. Enterprise application software is generally used to automate business processes and to provide business intelligence. It addresses the needs of organizational processes and data flow, often in a large distributed environment. Enterprise infrastructure software is used for the secure storage, retrieval, and manipulation of software-based data, and for developing and deploying applications on the Internet and corporate intranets. Each segment is composed of several subsectors. 1

2. Enterprise Software and Services Industry Overview (continued) • Enterprise application software – enterprise applications enable efficient management of core business functions and include: • Enterprise Resource Planning (ERP); • Customer Relationship Management (CRM); • Supply Chain Management (SCM); • Enterprise Performance Management (EPM); • Web Commerce; and • Industry-Specific Applications (i.e. Finance/Accounting, Human Resources, etc.). • Enterprise infrastructure software – enterprise infrastructure software provides common capabilities needed to support enterprise software systems and includes: • Application Server and Application Grid; • Service-Oriented Architecture (SOA) and Business Process Management; • Business Intelligence (BI); • Data Integration; • Content Management; • Portals and User Interaction; and • Development Tools. SaaS Applications According to Global Industry Analysts (GIA), growth in the SaaS application market is primarily driven by the need for cost-effective software solutions, the proliferation of the Internet, the growth in demand for subscription-based contracts, and replacement needs for existing applications. IT departments across multiple industries are focusing their attention on IT cost savings in terms of capital and staffing, functionality additions at lower cost, and simplified upgrades. In response, many customers are migrating from the conventional practice of purchasing software licenses for enterprise application solutions to those that can be rented or hired through monthly subscription fees. The on-demand model is well positioned to offerthe solutions, which is why enterprise application software offered as SaaS is experiencing strong growth worldwide. According to Gartner, SaaS analytic applications provide prebuilt intellectual property that can help firms circumvent the training needed to construct their own analytic solutions. As a consequence, SaaS will tap into midmarket companies that have yet to invest in Business Intelligence (BI). While there is evidence that SaaS provides cheaper software solutions, Gartner warns that the monetary difference is overstated. According to Gartner, SaaS is cheaper for the first two years of use, but the five-year total cost of ownership would be lower if an on-premise model was utilized. Despite cost uncertainty, SaaS applications have evolved into highly configurable and dynamic platforms for complex software processes and will be important in the future of enterprise software.

3. Enterprise Software and Services Industry Overview (continued) • Market Size and Projected Growth • The enterprise software and services markets are subsets of the larger $3.6 trillion IT market. According to estimates from Gartner, the enterprise software segment is expected to increase as a percentage of the total IT market, while the IT services segment is expected to decrease as a percentage of the total IT market. According to Gartner’s 2012 to 2017 projections, because of the convergence of social, mobile, cloud, and information initiatives, information technology will make up more than 26% of total enterprise software market revenue, up from 12% in 2012. This represents more than $104 billion in new worldwide enterprise software revenue from cloud, information, mobile, and social initiatives in 2017. • Enterprise software market – Gartner estimates that worldwide enterprise software revenue will reach $320 billion in 2014 and grow to $361 billion in 2015. • SaaS market – worldwide SaaS site search revenue, largely because of continued growth in the ecommerce market, is predicted to grow 19.3% from 2013 to 2018. The International Data Corporation (IDC) predicts spending will grow 5% year over year. This growth is projected to continue through 2018. • Security software market – worldwide security software revenue totaled $19 billion in 2012, according to Gartner. Strong gains in 2012 can be directly correlated to the growth of the SaaS market and virtualization options. The global cloud security software market is expected to improve its growth rate from just over 25% to just over 50% by the end of 2014. • IT services market – Global IT services market is predicted to reach an estimated $1,147 billion with a compound annual growth rate of 5% during 2012 to 2017, according to Research and Markets. Government-backed reforms are expected to contribute to an increase in IT investments. Cloud computing, with its ability to generate new opportunities for IT vendors globally, is projected to reshape the industry. 3

4. Enterprise Software and Services Industry Overview (continued) • Security • As organizations create collaborative networks with their customers, suppliers, technology partners, and other stakeholders, they increase the amount and value of confidential and sensitive data that travels across networks. The growing adoption of cloud-based applications and SaaS offerings further blurs the boundaries of organizations’ networks and has increased the amount of data leaving an organization. Securing this sensitive data from loss has become a priority for IT executives. • IT infrastructures and corporate data have become more vulnerable to external threats such as spyware, viruses, Trojan horses, and phishing and pharming exploits. Additionally, the rise of constantly updated user-generated content on the modern Web renders conventional security measures against these threats inadequate. To provide effective IT security in this environment, organizations are increasingly screening the information users access, as well as where and how the information can be sent or shared. According to Gartner, security buyers small to medium-sized businesses (SMB) increasingly consider SaaS to be as an alternative to deploying their own security technologies. With the increasing mobility and virtualization of the workforce coupled with more dynamic and difficult to detect threats, there has been exponential growth in software security companies, which has lead to significant market consolidation and more competitive pricing in security as a service. • Demand for security solutions is expected to continue to rise as organizations seek to address various security challenges in a growing and evolving enterprise software market. Below are a few major challenges for IT departments.  • Greater sophistication, severity, and frequency of attacks – the nature of computing is changing and so are the attack vectors used to compromise systems and networks. In contrast to the hobbyist hackers of the past, modern attackers often are motivated by financial gain. These motivated attackers are employing much more sophisticated tools and techniques to generate profits, such as anti-forensics and modularity. Their attacks are increasingly difficult to detect and their tools often establish footholds on compromised network assets with little or no discernible effect, facilitating future access to the assets, the data, and the networks on which they reside. • Diverse demands on security administrators – the proliferation of targeted security solutions creates a substantial burden for personnel who must manage numerous disparate technologies that are seldom integrated and often difficult to use. Most security products require manual, labor-intensive incident response and investigation by security administrators. Compounding these resource constraint issues, many organizations are increasingly challenged by a shortage of key personnel because the demand for security experts has increased dramatically in traditional corporate settings, government agencies, and a growing number of start-up security companies. • Heightened government and industry regulation – rapidly growing government regulation mandates compliance with increased security requirements, escalating demand for solutions that both meet compliance requirements and reduce the burden of compliance reporting and enforcement. • The main competitive factors affecting the market include security effectiveness, manageability, technical features, performance, ease of use, price, scope of product offerings, professional services capabilities, distribution relationships, and customer service and support. Competitors generally fall within the following categories: • Large companies such as Cisco Systems, IBM, HP, Check Point Software, and Intel/McAfee; • Software or hardware network infrastructure companies that may integrate security features into their products; • Smaller software companies offering applications for network and Internet security monitoring, detection, prevention, or response; and • Small and large companies offering point solutions. 4

5. Enterprise Software and Services Industry Overview (continued) • Outlook • Competitors in the enterprise software and services industry license application and infrastructure software to businesses, government agencies, educational institutions, and resellers. The overall growth of this market is affected by the general economic climate, business conditions, and governmental budgetary constraints, among several other factors. According to research conducted by Gartner, a high correlation exists between domestic gross domestic product (GDP) growth and enterprise software and services revenue growth. Historically, software tends to grow 4% to 6% faster than GDP. But other dynamic and uncertain factors, such as the price of commodities, may impact the future growth experienced by the enterprise software industry. The continued growth in the Enterprise Software industry has been credited for sustaining the economic rebound on a global scale. According to the IDC, software to manage, access, and share information continues to be a top priority for competition in today’s economy. • The enterprise software marketplace continually undergoes technology and business model transitions that affect how buyers procure software, implement technology, and conduct operations. According to Gartner, the five long-term trends affecting the enterprise software markets are globalization, implementation, modernization, socialization, and verticalization. • Globalization – this encompasses market consolidation and technology convergence trends, as well as the connected society, vendor mergers, and acquisitions. Gartner predicts significant technology and vendor consolidation during the next several years will reshape the current landscape. During this period of market disruption, highly fragmented software markets will become more structured and marked by an extensive reduction in the number of vendors. • Implementation – how organizations procure and deliver software is transforming with cloud-computing (on-demand models) and mobile access. The demand for cloud-based solutions will continue to grow through the next several years. In addition, mobile solutions have opened many new market opportunities, such as mobile banking and remote healthcare diagnostics. • Modernization – enterprises continue to migrate to open-source software (OSS) and service-oriented architecture (SOA) as older applications and systems become more costly to upgrade and maintain. Aligned with the modernization trend, automating business processes and streamlining workflows continue to gain traction. Enterprises are expected to provide significant resources in 2014 to upgrade all types of systems and software, ranging from more protective security functions and personal productivity tools to user-driven applications. • Socialization – use of social media and networking continues to gain traction. In the trend of socialization, which includes personalization, collaboration, and content in the context of user-defined activities, Gartner predicts that unified communications and collaboration will see increased adoption as enterprises seek to strengthen their collective intelligence. While social media is invaluable to the growth of software enterprises, there is some concern about social media’s future and utilization. Gartner argues that through 2015, 80% of social business efforts will not achieve the intended benefits because of inadequate leadership and an overemphasis on technology. Despite this prediction, enterprises still are working to increase their social analytics, social platform selection, and digital content management. • Verticalization – this trend involves software applications becoming more customized and catering to more specified industries. In deploying new software, it is common for vendors initially to provide generalized technology that can open the way for more industry-specific and line-of-business features. Examples are communications-enabled business processes and content applications. 5