In The Fast (Growth) LaneIn The Fast (Growth) Lane

Software vendors number among the fastest-growing tech companies. Mark A. Evans, managing partner of the Technology, Media & Telecommunications Group at Deloitte & Touche LLP, looks at whether they'll stay there.

In recent years, software companies have dominated Deloitte & Touche's Technology Fast 500 list of the fastest-growing tech companies by revenue. This year's list is no different, but the numbers have trended downward. In 2002, the total number of software companies peaked at 48%, with two among the top 10. This year, software companies still lead all other categories but by a smaller percentage, accounting for 38%, with only one company in the top 10.

This movement is consistent with what we've seen in the software category as a whole. There's a lot of activity going on, but a confluence of events and the technology sector's maturation in general is resulting in fewer independent software companies.

Let's address the obvious first. If you were to look forward from 10 years ago when we began the Fast 500 program, you'd see a steady growth in the number of software companies making our list, hitting a zenith in 2002 as a consequence of the robust growth of the technology sector and the Y2K effect. For two to three years leading up to 2000, massive enterprise-resource-planning implementations were common. Some global Fortune 500 companies spent as much as $100 million on large ERP systems. Companies' modest software-application investments since then have largely been to extract more value from that original IT investment to gain greater efficiency and profitability. Tied to that, of course, was the recession that followed in 2001.

So why are there fewer software companies? Competition resulting in consolidation is one reason. Early-stage venture-capital funding moving toward other sectors such as life sciences is another. We're in an age of product-focused service- and solutions-based businesses. The lines that separate our sectors are blurring, and categories are morphing. That means that new independent software companies are more likely to be folded into larger businesses that develop solutions, networks, or other products. Or these companies may be labeled differently than in the past. Is Google Inc., our No. 1 company this year, an Internet company, a software company, or both?

All this points to an industry that's evolving and maturing. This doesn't spell the death of the industry. It's more like the dawn of a new day.

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Illustration by Brian Stauffer