Far too many small and midsize enterprise software companies spend too much on sales and on research and development to survive the coming shakeout. Many rely on cash reserves, while others milk maintenance contracts and upgrades on software they have already sold.

These smaller vendors might have reached their sell-by date, for the enterprise software industry will consolidate as customers buy products from fewer vendors. One company we know recently raised its preferred supplier’s share of its software budget to 70 percent, from 10. This sort of decision—by no means unusual among software customers these days—is good news for larger vendors, which find synergies in selling bundled applications, such as enterprise-resource-planning or supply-chain-management software. But it is bad news for small companies.

The big will get bigger in enterprise software, though not primarily through acquisitions, because the difficulty of integrating the products of two merging companies can make the price too high. Such companies can’t simply paste a new brand name on an acquired line and expect it to work seamlessly with their existing products. Software must generally be rewritten, often extensively, to work with a buyer’s platform—a requirement that replicates much of the acquired product’s R&D cost. Companies...