Trends and challenges in the EMEA software market

Over the past couple of years, the macro environment has changed considerably. Investors are exercising more caution, forcing software executives to rethink their strategies as they seek to drive more productivity from their operations. This has presented a new set of challenges. However, “the good news” Di Mattia reassured me, is that “compared with other sectors, software remains a very healthy, long term, and attractive investment opportunity despite the weaker macro environment.”

It won’t come as a surprise that generative AI was a hot topic in our conversation. Everyone’s talking about the technology—both within and outside of the software sector—with hype and conversation getting a boost from the uptake of generative AI chatbots in the consumer space.

Executives know generative AI will drive productivity and profits, but by how much? Di Mattia likened this to one of the most-asked questions before the dawn of generative AI: “What's the impact of Software as a Service (SaaS) on the software industry?” We know that SaaS revolutionized the market, and generative AI is set to do the same.

Di Mattia answered my original question with data: “There's US$3.5 trillion in potential productivity on the line,” he said. “Right now, 60 percent of work tasks could be automated, and nearly half of that can be done using natural language understanding.”

Generative AI is also predicted to level the playing field. A new innovation coming to market can fundamentally change the way enterprises use technology as part of their operations. Provided they invest in smart solutions and have a clear strategy, this gives established companies an opportunity to re-affirm their leadership in a certain segment, while for new entrants, it’s a chance to make their mark and gain a strong foothold in the market.

It will take US$1 trillion to unlock the full potential of generative AI, Di Mattia reported, “which could add US$200-250 billion to the total addressable market (TAM) for software. This represents a major boost for software companies, expanding the enterprise software market—which is currently valued at US$700-800 billion – by about a third.”

Over the past 18 months, however, we’ve observed a focus on cost rather than growth. To unlock the potential of the technology, executives must make difficult decisions around their business operations and economics. This includes adopting a clear, data-driven strategy for the adoption and deployment of generative AI.

This will involve a shift from the current zeitgeist, summarized by Di Mattia in some pertinent stats: 90 percent of today’s data has been created in the last two years according to Science Daily, yet 68 percent of companies say they are still unable to realize value from data.

This strategy must be centered on value creation and the prioritization of use cases that will have the strongest impact on business. The generative AI trend is about technology, but first and foremost it’s about finding solutions to needs and challenges. Deployments must be incremental, and their impacts measured by accumulating and taking action on data.

To enact a generative AI strategy, many organizations will require expert consultation and strong partnerships. Di Mattia advised forming such partnerships with complementary solutions and system integrators (SIs). “Go beyond product integrations—start targeting key accounts together and create joint thought leadership initiatives,” he said. Alongside this, he stressed the need for a shift in focus, with software companies turning their attention toward what he termed “market-making.” Di Mattia suggested, “investing more in activities like hiring industry advisors, field CTOs, and funding professional services and post-sales technical support.”

Finally, none of this is possible without that third magic ingredient: investment. Looking back 15 years, Di Mattia explained, the size of the US economy and that of the European Union, including the UK, were roughly the same. Fast forward to the present day and there’s a significant difference. Investment in technology has been a fundamental driver of that difference, and it’s clear that EMEA has not invested enough in technology.

Those companies that have invested, however, have assumed competitive positioning as a result, as Di Mattia explained, “Top-tier companies invest 1.7x more in R&D than the median, and that’s key to leading the market.”

We’re at an inflection point with generative AI, Di Mattia said, which, when coupled with the cautious macro environment, does create uncertainty. Yet this is also a tremendous opportunity for software companies to leapfrog the competition, to be bold and courageous, and to become leaders in their respective market segments.

This is the perfect storm, illustrated by a quote that Di Mattia shared from Formula One driver Ayrton Senna—often relayed by McKinsey’s CEO—“You can't overtake 15 cars in sunny weather, but you can in rainy weather.” This is a moment to invest, to be bold, and to be ambitious. It’s a great conclusive message for the entire software world.