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Vendor Viability (Size) vs. Customer Intimacy

Written By: Predrag Jakovljevic
Published On: November 7 2007

After almost a decade of following the enterprise applications market via insightful, sometimes exhaustive (and exhausting) free research articles (which will continue to go on in earnest and continue to be rated by our readers), the time has come for me to be in tune with the Web 2.0 and related social networking. In other words, the time has come for my blog at TEC, and the dilemma was then what to start with.

Well, given that facilitating impartial software selections has always been TEC's "raison d'etre", then the first topic should logically have something to do with that. To that end, as discussed in our now ancient article "Do You Know How to Evaluate Your Strategic Technology Provider?" , best practices drawn from TEC client organizations that have completed internal technology selections suggest that project teams should examine six key criteria groupings. The first three criteria sets should examine product specific capabilities, while the second three should investigate the software vendor's overall corporate capabilities.

One of the later three criteria is Vendors' Corporate Viability, defined in the above article as
a critical yet often overlooked category that should examine the financial and management strength of the vendor. Given the huge dollars spent upon and strategic importance applied to most major IT procurements, the financial stability of the vendor supplying the product cannot be overlooked. The vendor viability evaluation section should combine quantitative Wall Street ratio and metric analysis with qualitative management and corporate evaluations. Only by combining the two components can executives accurately assess the risk and benefit of corporate investment in a specific product and vendor. At a minimum, the corporate viability criterion should evaluate the overall financial viability of the vendor, its macro and micro market viability, its sales and marketing viability, its management viability, and its research and development viability. Relative to the other five evaluation criteria, best practice selections place approximately 20 percent of the overall selection importance on the corporate viability criterion.

In plain English, corporate viability would mean whether the particular vendor and product will be around for some time to come. Indeed, as well captured by the blog "ERP Graveyard", there has been a real carnage in the market for quite a while. Certainly, not every acquisition has necessarily meant a death of the acquired product (after all, good products with large install bases die hard), but has typically meant customers' anxiety, some changes in the product direction (i.e., usually increased service & support feels for fewer benefits), and so on. That is usually the case, while at the extremes, a few products have been "stabilized" (or "killed" if you will) on the one hand, while only a few lucky ones have even been reinvigorated by the new owner, on the other extreme.

In any case, as every change is painful, the ideal situation for the user enterprise would be to stick with the same owner (management) as long as possible. The common wisdom is then to go for a large, globally renowned provider, as such a company should remain independent much longer than the little ones. Right? Well, maybe (given that even $1 billion companies have lately been gobbled up), but also, should anything else enter the viability picture? Namely, what I am aiming at here is the customer intimacy -- how likely is that any user company amid a few dozen thousand of peers (as some consolidating vendors now brag about) will feel as special to the vendor?

This question popped in my head after attending (possibly reluctantly at first) a client summit event of a little and obscure vendor, Webcom Inc., a provider of on-demand/software as a service (SaaS) B2C (business-to-consumer) and B2B (business-to-business) e-commerce suite, with a strong product configurator, catalog, workflow and document management capabilities at its core. The two and a half day event in a single conference room of a Las Vegas hotel was miniscule compared to the like events of ERP giants with thousands of attendees. However, what has impressed me most at this event was to see the Webcom's founder and CEO, Aleks Ivanovic, stand up every day for a few hours and demonstrate to the users every new product feature as well as the 18 months product roadmap and the rationale why something (a customer or partner suggestion) was slated for now vs. pushed out for future developments.

Such hands on involvement of a CEO (also acknowledged by both users and other partners' staffers in our private conversations) is yet to be seen by any larger software vendor -- the best one can hope there would be access to a mid-level product manager, account manager, or so. Further, when not presenting, Aleks would be constantly checking his inbox for any message on a customers' suspected bug/problem or a request for some customized work as to improve their business (yes, I admit to my bad manners and looking over Aleks' shoulder, having been seated next to him). And no, Aleks doesn't strike me as a dictatorial control freak or a micro-manager, but rather as a workaholic and a dedicated young entrepreneur -- ironically, despite being a majority owner, Aleks admits being outvoted by other leaders at Webcom, in some instances, about some product or marketing decisions.

Aleks is proud of not having any venture capital (VC) investment (which he refuses to consider time and again) and having a full control of the company/product's destiny. And yet, the company keeps doubling in size every year (sure, it might be easy to double at such a size, currently with about 40 corporate customers and 40 employees) and remains profitable (whereby most of the profit goes back to the product development). Aleks believes that any vendor is most likely viable if it has the best product. Thus, Webcom offers a no-frills trial for believing that as soon as a prospect sees the product will not likely go for a competitor's. The strategy is to allow the folks to try it on, and while the "larger and more viable" competitors brag about their products, Webcom prefers that the customers come to their own conclusions.

Another example of a hands-on CEO would be Ned Lilly of xTuple (formerly OpenMFG) [evaluate or see a TEC report], an arguably open-source enterprise resource planning (ERP) vendor. Ned is quick to explain any minute product capability, rationale for having some capability or not, etc. Not to mention that the vendor is quite publicly open about its pricing and any other frequently asked questions (FAQ).

Given that Ned occasionally points out (if not crows over) poor viabilities of his competitor products at his abovementioned ERP Graveyard blog, I then recently challenged him to tell me how he then answers to some folks possibly questioning his company's viability. After all, xTuple is still a small start-up with about 70 customers (compared to e.g., the size of Microsoft Business Solutions [evaluate or see reports on some of its products] or Infor [evaluate or see some of its products]). While I was not sure about xTuple's VC investment arrangement, etc., the question is how prospective users can be sure of Ned's commitment and being around forever (after all everyone can be for sale, for a good price). Also, I saw some recent article talking about Ned's possible interest in more VC as for the company's international expansion, which can then dilute his control and decisions. In other words, what is your "defense" there Ned? :-)
"Well, first of all, I won't do a bad VC deal", Ned Said. "I don't have to :-) ... and having sat on the other side of that table as a corporate VC myself, I have some idea of what I'm looking at.

But to the larger question of viability, I think we have a pretty good one-two punch answer. First, we're closely held and profitable, and don't have to answer to the kind of often-punitive financial forces that can make other software companies behave badly. But even more significantly, I would say that the best hedge any company can have against the future of its ERP vendor is to have an open source strategy. If the commonwealth of Virginia fell into the Atlantic Ocean tomorrow, taking xTuple with it, our customers and partners would have a leg up on customers of other vendors in a similar situation - they would have the source code to their software, and they would be members of a larger community of users who are actively involved in the support, maintenance, and improvement of that software.

That's the best insurance policy against the ERP Graveyard. After all, how secure were JD Edwards customers - long operating history, $800MM in sales, strong balance sheet. Then they were bought and sold twice in a year. There is no security in working with a big vendor - and in fact, if the vendor's stock is actively traded, there's probably less so.

So back to us - in thinking about scaling up the business, we're only interested in working with investors that share our vision of the marketplace and the larger opportunity. In other words, investors who will give us operational running room, and also add significant value over and above the dollars. If we can attract people like that on good terms, great. If not, that's fine too - it's a big market, and we're pretty comfortable operating under the radar."

Thus, at the end of the day, a question for the readers, many which might be enterprise applications users, current or potential -- is the vendor's size and brand recognition what makes you most comfortable and sleeping better at night? Or, maybe some other, "softer" issues, like customer intimacy, source code availability, on-line try-it-on, etc. can enter the viability picture?
 
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