The Software Bazaar is boisterous again, and the merchants have a new cry. It's SOA (rhymes with Boa) or, in full, service-oriented architecture. Vendors promise flexible, friendly software, and business agility. Is it the new big thing? And what does it mean for customers, and investors in enterprise software and services?

SOA is an extension of the software as a service concept to the internal IT departments of companies. Both convert software from unfriendly, expensive lumps to easy-to-use services, available via a Web interface. Both are early stage technologies. A recent MIT study found only 6% of companies had reached a state of "business modularity"-- the ultimate benefit of SOA. SOA goes beyond SaaS, to offer business processes as services.

Investing without a portfolio
Imagine investing before portfolio management theory. Your broker recommends a sizzling small cap? Buy it. Feel a need for a stock with dividends? Buy some. Sense of adventure? Buy a junk bond. Before long, it's hard to work out what you own, let alone why. That's pretty much where the typical corporate IT portfolio is today. It's a mash of inconsistent processes, disparate applications, different data types, and multiple interfaces -- all evolved to support the needs (often whims) of individual business units. And the bigger the company, the bigger the challenge.

Don't sweat, SOA is here
As Chief Information Officers (CIOs) sweat over their IT assets to apply portfolio discipline, they dream of high-value IT investments and flexible business processes. This is the SOA promise -- and CIOs believe. Merrill Lynch surveyed CIOs and found 87% agreed SOA is the "next big thing" in enterprise software. So, what benefits are they buying?

  • Technology benefits: reuse of existing IT assets; quicker development of new software; simplified, integrated, and standardized IT portfolios; and leaner technology departments, organized around processes, not packages.
  • Business benefits: create more flexible businesses, supported by streamlined, automated business processes and software services.
  • Financial benefits: quicker responses to market changes boost revenue; reuse lowers maintenance and development costs; requires lower total capital invested in IT; and risks reduced by not building software from scratch.

Big pitch, many dollars
Away from the souks, the large enterprise software and IT services firms are backing their pitches with huge dollar (and euro) investments in SOA initiatives. Of the enterprise software companies, SAP (NYSE:SAP) is the leading investor. According to Raimo Lenschow, at Merrill Lynch, SAP has already invested $3.2 billion in its SOA platform, the Business Process Platform. Oracle (NASDAQ:ORCL) is developing a competing platform, called Fusion. For IT services, Accenture (NYSE:ACN) has announced a new $450 million research lab focused on developing SOA applications initially for health care and financial services. Bridging software and services is IBM (NYSE:IBM), who wants SOA to lift growth of its $16.8 billion software business from 4% to 6%. For services, IBM says it has done 1,800 assignments for 1,000 clients, and is training 90,000 consultants in SOA.

SOA growth to soar
Given IT often amounts to half of all new investment for large firms, SOA's promise of increased returns from IT investments creates a huge opportunity. Annual growth rates of 70% are forecast by industry researcher WinterGreen, with the U.S. SOA market soaring from $450 million in 2005 to $18.4 billion by 2012. SOA growth should benefit most of the business technology sector:

  • Enterprise software: Gartner expects that most of the growth in application software will be SOA-based by 2010.
  • IT services: As clients with problems are always good for business, IDC is projecting that by 2010, global SOA-based services spending will reach $33.8 billion.
  • Outsourcing: As SOA services can be sourced internally or externally, it removes another frictional barrier to outsourcing.

Practice ruined my pitch
In theory, the SOA pitch is perfect. For technology buyers, it will transform returns on the huge, legacy IT portfolios of companies, and make businesses more agile -- a word stiff from overuse in sales pitches. For investors, it's an early stage, multibillion dollar growth opportunity, which will drive the whole business technology sector.

In practice, there are whispers of disappointment from some of the bazaar's first customers. A survey from InformationWeek, released this month, found one out of four SOA projects disappoints. Bizarrely, 69% were undecided about the outcomes of their efforts.

The results are unsurprising. New software, or architectures, cannot banish old problems. Technology integration is getting easier, but it's still difficult. And consolidating application infrastructure is more complex and costly than consolidating servers, storage, or infrastructural software. Reuse is the chant of choice for SOA, but, so far, this seems to be mainly at the level of IT assets (saving money on software maintenance, for example), rather than the more valuable (and difficult) level of business processes.

SOA for the impatient and patient
SOA, like any good investment, has a sharp link between risk and return.

For the technology buyer, if you just buy a new SOA software tool, without reviewing the state of the IT portfolio, then implementation will be easy, but so are the returns. Use SOA to improve software development efficiency, and you'll get primarily IT benefits. If you want the business benefits, you need the patience to rework how you operate the business.

For the technology investor, there is an opportunity to invest early in a secular shift in software and IT services. The returns should be high, with moderate risk, for the big players like IBM, Accenture, Oracle and SAS. There are some small SOA specialists such as Progress Software (NASDAQ:PRGS), who offer the Sonic product suite. However, full-value SOA will take four to five years to implement, so, there is time for the patient investor.

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Fool contributor John Finneran is a consultant, investment analyst, and writer specializing in the financial value of technology. He does not own shares in any of the companies mentioned. The Fool has an ironclad disclosure policy.