Challenges
On
December 8, Pivotal Corporation (NASDAQ: PVTL; TSX: PVT), a
Vancouver, British Columbia, Canada-based mid-market CRM provider, announced
that it proposed a strategic combination with CDC Software. CDC Software
is a wholly owned subsidiary of chinadotcom (NASDAQ: CHINA),
a global enterprise software and mobile applications provider. This will position
Pivotal to re-establish a more esteemed position in the mid-enterprise CRM market.
Subject to the approval of Pivotal's shareholders, the Supreme Court of British
Columbia, and customary closing conditions, this transaction is expected to
close before the end of February 2004. Following the closing of the transaction,
Pivotal also announced that it expects to accelerate investments in its growth
including increasing technical support its research and development headcount
by up to 40 percent, resuming the expansion of its research and development
headcount, resuming its acquisition program, expanding distribution capabilities
in Asia through CDC Software, and increasing marketing spending by up to 200
percent.
Pivotal will operate as a distinct business unit within CDC Software. The Pivotal strategy, brand, product architecture, cross industry applications, vertical applications, partners, people, and management team will reportedly form the foundation of this business unit. Pivotal will reportedly be the cornerstone of CDC Software's CRM strategy, and CDC anticipates that the acquisition will prove accretive for the combined entity. As Pivotal has done in the past, from now on, CDC will focus on mid-sized enterprises around the world across multiple industries.
In
a nutshell, Pivotal's management deserves kudos for a textbook example of conducting
due diligence (if not reprimands for leading the company to its current difficult
state of affairs), and for seemingly opting for the lesser of three evils. Thus,
it could be particularly educating to examine the current state of the CRM mid-market
through the rivalry between Onyx and Pivotal ever since their inceptions in
1995 and 1994 respectively (See Onyx/Pivotal
Rivalry Through Thin Rather Than Thick).
However,
chinadotcom and CDC Software will have to be careful not to lose the deep domain
knowledge present in some of its recent purchases like Ross Systems.
Vertical industry depth and expertise is critical to ongoing success, and should
be encouraged and nurtured. However, this maybe easily neglected with a slew
of recent complementary acquisitions and subsequent attempts to intertwine.
While the product overlap is small, there is still the challenge of integrating
the companies. Company cultures and work styles may come into play, although
the successful albeit still short past partnership between chinadotcom and Ross
Systems is encouraging. Still, experience teaches us that often following a
seemingly promising acquisition, a major difference in philosophy might emerge
between the former and acquiring management teams on how to execute strategies
for growing the company while "increasing operational efficiency", inevitably
results in an exodus of the first group.
Although CDC has a presence in China as a reseller and service company, it is not an experienced enterprise software developer and vendor. It will now have to manage many still autonomous and possibly vain companies that will have hardly ever met in the past. Hence, at this stage, CDC has not yet espoused an integration plan required to provide midsize enterprises with a single platform and broad application suite to compete against the many vendors that have broader functional footprints and great multinational capabilities. Successful acquisitions nowadays require much more than a bolstered balance sheet and a number of expanded product features and functionalities; the ultimate goal should be the creation of an integrated platform that features inter-enterprise business processes performed via a number of loosely coupled web services.
Thus, while running these acquired vendors autonomously will be beneficial to both CDC and the users in the short term, some synergy will be required in the long run. That brings us to a number of dichotomies or disconnects. The first one concerns the geographical coverage, given the vendors acquired recently by CDC have a very small presence in the Asia and Pacific region and no particular experience in China. Their respective sales forces, offices, research and development facilities, and partners, and particularly revenue streams are concentrated either in North America or Europe, which also makes CDC's revenue increasingly dependent on the western markets. On the other hand, given its origins and available resources, it is logical to expect chinadotcom to focus on China. Also, given CDC's limited experience with CRM and lack of previous partnerships with Pivotal, Pivotal's revenue boost from Asia will be dubious in the near future. Time will tell how CDC's focus on manufacturers will play with its intentions to entice manufacturers to Pivotal. Namely, neither Pivotal has traditionally focused on manufacturing nor have manufacturers been avid adopters of true CRM products.
Given the market opportunity for all types of manufacturing in China, chinadotcom will have to resist the temptation to expand a highly focused Ross' software product to new, unsupported verticals. Ross Systems will need to leverage its past successes and deep domain expertise in the process industries in order to remain competitive against larger, less focused software vendors. On the other hand, the Ross' flagship iRenaissance suite of products lacks a comprehensive, integrated product footprint that includes native SCM and CRM applications. Mid-market companies prefer pre-integrated solutions, so the development of strong offerings in these areas will be critical to future growth in existing geographies.
While
the IMI and Pivotal acquisitions promise some cross-selling opportunities, time
only will tell how effective these integrations will be. For example, Pivotal's
sweet spot has been insurance; financial services; real estate and construction;
and the life-science sectors; however only the last one could have some touching
points with Ross. Still, current, successful partnerships with Prescient
and Selligent will likely be re-evaluated to align with Ross
and CDC product development and acquisition strategies.
This
is Part Three of a three-part note.
Part
One detailed the events.
Part
Two discussed the market impact.
User Recommendations
Existing Pivotal customers should feel a deep sigh of relief from this event. If anything, they should be comforted by the backing of a financially stable and cash flow-positive parent company that has money to invest. Pivotal at least seems content because it was not acquired by a direct CRM competitor with sinister intentions, such as milking Pivotal's customer base without putting much effort into keeping up the application or developing a next generation product. With the exception of any unforeseen shift from Pivotal's traditional markets or drastic cost cutting, this looks like the kind of acquisition that we would like to see more of in the industry. Thus, existing and prospective customers should, from now on, be less concerned about Pivotal's financial viability and pay more attention to potential improvements in Pivotal services and support, and product development direction.
Although this acquisition sounds like a very positive event, and CDC appears to have strategic growth intentions, look for future proof in the actions that these vendors, now under the same roof, take in the coming months. Additional acquisitions that provide strategic value and synergy with already acquired products should be welcomed, while significant cost-cutting and management turnover should be looked at cautiously. Typically successful software acquisitions have been those where the acquirer valued the acquisition of "brains" rather than just a code base.
Watch for continued or expanded vertical market focus, particularly for meeting the likely differing regulatory requirements of diverse geographic regions. Pay close attention to how CDC will juggle its development resources and focus on the domestic Chinese market with its acquired vendors' breadwinning western cultures and markets. Global enterprises with plants in Asia should give chinadotcom and its acquired process ERP, SCM and CRM products special consideration, even if they have larger ERP products running corporate administrative applications on a global basis.
Pivotal customers and prospects should review contracts that include product enhancements and negotiate specific delivery dates for new versions. For the time being, staying put and assessing how Pivotal and CDC will deliver on their ebullient promises at the time of the merger announcement (such as focusing on the needs of mid-sized enterprises; financial stability; a broad application suite; a web-based architecture; low-cost professional services; flexible pricing, and deployment options, etc.) seems as the best option for most current Pivotal users.
However, in case CDC wants to merge the multiple code bases in order to deliver a superior product, current users may want to look out for disruptions, such as the delays of enhancements for certain secondary-priority industries, or, at a minimum, increased maintenance fees. Current Pivotal users in life sciences, food and beverage, and other process manufacturing sectors that Ross covers might benefit the most from this acquisition. On the other hand, enterprises that have been less than happy with Pivotal's service and support in the past, especially those that are still on older product releases and are within the industries where Pivotal's competitors have excelled, might want to check other value propositions too. Such would be the case with the Onyx's above-mentioned wooing proposition for customers within its vertical sweet spots -- financial services (primarily retail banking), government, high-tech, and healthcare.
On a general note, prospective CRM customers should comparison shop to ascertain all the options presented by the competition. While the partnership with established and stable vendors is more logical, checking out innovative value propositions from relative newcomers can come in handy in order to gain the upper hand and leverage in ensuing negotiations with all the parties.