What Does Vendor Consolidation Mean To The End User?




Observation

We continue to see evidence that the business application software space is consolidating, a process which has long started in the mid-market space (see The Mid-Market Is Consolidating, Lo And Behold). Very recently, Invensys has put Baan up for sale. SSA GT also recently purchased interBiz and Infinium (see CA Unloads interBiz Collection Into SSA GT's Sanctuary and Is SSA GT Betting Infini(um)tely On Acquisitions?, and Is SSA GT Betting Infini(um)tely On Acquisitions?), while MAPICS acquired Frontstep (see MAPICS To Leap Forward In A Frontstep Way). In a spate of recent acquisitions, one should not forget Microsoft buying Great Plains and Navision (see Microsoft 'The Great' Poised To Conquer Mid-Market, Once and Again). What is the current and future impact of these on the end-user enterprise?

Why Consolidation? For years, application vendors have fueled their economic success through new accounts but things have changed. Most application software markets are mature. Most markets show high penetration. Few new accounts are available. To continue to be healthy, a software company either needs a defendable niche or a large market share. For the latter, acquisitions are often required to grow and prosper. With revenue streams shifting from new accounts to sales to existing customers, software support and services, a large customer base is the key to continued health. Alternatively, vendors are developing defendable niches where the bigger vendors cannot afford to have a solution. By definition, these vendors are serving smaller, specialized markets and therefore will not grow into a larger company but will remain smaller but highly profitable.

The Enterprise Applications Market Of The Future

We expect the market for application software to break into two tiers. The first group will be a limited number of very large vendors. The second group will be a large number of small, highly focused vendors. This migration has started and will continue. The Big Five Daniel, keep on same page with preceding topic

The Big Five

The Big Five (or maybe it will be Six or Seven) will have a business model that focuses on the customer base. They will depend upon support revenues as a primary stream. They will also try to sell additional software and services to the base. A large customer base also gives the surviving vendors economy of scale for support, services, and technology investments. How large of a customer base will prove large enough? SAP now claims nearly 20,000 customers, many of which are large and mid-size global enterprises. SSA GT currently claims 10,000 primarily mid-size global customers, which number is likely to grow via future acquisitions. To be a Big Five player, vendors need to get into this range or larger.

In the past, some vendors have justified acquisitions with a plan to replace the new customer's software products with the vendor's existing products. We talked with Cory A. Eaves, Vice President of Solutions Management at SSA Global Technologies, and he says SSA GT disagrees with this approach. Cory pointed out, "It is very expensive, in terms of both money and disruption, for a customer to change application software. Therefore, we see that most customers want to keep the software they have, increase the value received and grow with it. Meanwhile, SSA GT, like every other similar vendor, must continually simplify its development and support businesses to be profitable, allowing them to invest and grow. Successful companies will be able to meet both goals simultaneously; doing what is right for the customer and while doing what is right for our business." We nonetheless see the need for the companies who acquire their way into the Big Five being challenged to manage the many different products they have acquired to reach these two objectives.

Of course the Big Five will continue to sell new accounts, particularly in still non-penetrated and/or emerging markets. In Asia, East and Central Europe and South America, new accounts will represent significant license growth. This is important for the future health of these companies, driving them to innovate and replacing natural installed-base attrition.

Who will make it into the Big Five? We see the Big Five coming from several sources. We have to say that SAP is already and will remain there, as it has the base and momentum already. Of the other large vendors (i.e., J.D. Edwards, Oracle, and PeopleSoft) we see one or two making it into the Big Five but which one(s)? We expect Microsoft Business Solutions and Sage/Best Software, now with several hundred thousand customers (albeit most of them being small businesses, and not including small offices/home offices (SOHOs)) to be one of the Big Five.

We also expect there is room for a company to acquire its way into the Big Five. This seems to be SSA GT's strategy, which looks to be well on its way. It recently raised $75 million from General Atlantic Partners earmarked for acquisitions and the company has been very profitable in these difficult times. SSA is often mentioned as the logical buyer for Baan. We also see the possibility of a wild card or two. What if IBM wants to join the Big Five? IBM has the money, but does it have the desire?

Boutique Vendors

We also see a second tier of many small, highly focused businesses. Their business model will be focusing on a relatively small, tightly defined market with specific requirements that cannot be met with more generic products. Usually, these markets will be too small for the Big Five to want to compete.

These markets will also have unique requirements which cannot easily be built into the more generic products offered by the Big Five. These boutique vendors will compete by having in-depth product functions and intimate knowledge of their market place or by offering services (content or location) not available from the Big Five or independent service providers. Example of these markets can be industrial (e.g., fresh meats, dentist offices, etc.) or regional (e.g., Chicago, New Orleans, etc.) focus.

Some of the Boutique Vendors will actually be conglomerates of smaller divisions or vendors with a common owner. These might be a current mid-range vendor who specializes in a series of smaller markets or even a sub-segment of a Big Five vendor.

Recommendations

Vendors - Vendors need to make a strategic decision, pick where they want to be and execute. To be part of the big five, they must either grow their base at rate faster than the market and their competitors, or find the capital, in these difficult economic times, to grow through acquisition. To be a boutique vendor, focus on one or a limited number of verticals and become very good at serving those customers. If a vendor does not pick between these two strategies, the vendor will end up as a collected company, owned by one of the big five.

End-Users - We suspect that most end-users organizations will weather this storm. The larger the install base for the products they are using, the safer they are. End-user companies should track the financial health of their vendors to see if the vendor will be a collector or one of the collected. If the end-user company has a focused vendor, think of that vendor's health and help them become even better in your type of business.

If your vendor is acquired, meet the new owners. Talk with management and make certain they know your expectations and plans. Understand their product strategy and look for opportunities in their product portfolio. The new owners motivation in buying your product and vendor was the install base and that's you. Showing interest is your part in keeping the relationship the way you want it.


About the Authors

Olin Thompson is a principal of Process ERP Partners. He has over 25 years experience as an executive in the software industry. Olin has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce and the impact of technology on industry. He can be reached at Olin@ProcessERP.com

Predrag Jakovljevic is a research director with TechnologyEvaluation.com (TEC), with a focus on the enterprise applications market. He has over 15 years of manufacturing industry experience, including several years as a power user of IT/ERP, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.

 
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