Market Impact
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 in the past, CDC will from now on 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 the current difficult
state of affairs), and for seemingly opting for the lesser of three evils. Thus,
it can 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
the 1995 and 1994 respectively (See Onyx/Pivotal
Rivalry Through Thin Rather Than Thick).
The
overall CRM market remains the land of opportunity but one with many treacherous
quicksand patches for those uncertain about the breadth of their footprints
in the field of either install base or product scope. It is a no-brainer that
the 2000s have been adverse years in the entire enterprise applications market.
Following the whopping growth rates of the late 1990s, and the spending surge
on sexy e-business-related technology in 2000, hard times worldwide in almost
all sectors have subsequently morphed into harrowing times for all enterprise
systems providers. While the biggest or the richest vendors have been able to
hang onto flat new sales, modest declines, or in some cases, modest growth,
only a lucky and the most apt few with true differentiation in a selected number
of markets (such as warehouse management and supply chain execution [SCE] or
supplier relationship management [SRM]) have bucked the trend and shown some
enviable growth of late (see The
Hidden Gems of the Enterprise Application Space).
It
might be of further interest to analyze the recent years of the ERP and CRM
markets to discern how fortunes may often fluctuate and go in different directions
at certain phases of their life cycles. The term ERP, if not necessarily coming
back into fashion, certainly is no longer the bad, pass term of a few years
ago, when almost all vendors were distancing themselves from the association
like it was a plague because ERP was perceived as off-putting (i.e., intra-enterprise
versus entire external supply chain and collaboration focus). At the same time,
anything associated with customer or front-office interaction was all the rage,
attracting both venture capitalists who poured their capital into new startup
companies with brave ideas, while the customers were (over)buying these applications
owing to then buoyant economy and the apparent need to better manage seemingly
mushrooming customer bases. (For additional information, see Comparison
of ERP and CRM Markets' Lifecycle Snapshots).
Over
the last few years, all significant enterprise applications players have been
actively partnering or finding other ways to provide solutions that allow businesses
to collaborate more effectively. Consequently, the boundaries between ERP, CRM,
e-commerce, and SCM have meanwhile blurred so much that any attempt to functionally
separate them becomes ever more pointless (see SCP
and SCE Need to Collaborate for Better Fulfillment). If the ultimate objective
is to win and retain customers, one must consider the entire chain, which includes
traditional ERP and SCM functions as well as the once considered more remarkable
and supposedly more relevant CRM and e-commerce activity.
This
is Part Two of a three-part note.
Part
One detailed the events.
Part
Three will discuss challenges and make user recommendations.
Competitive Pressures
Thus,
Pivotal, had been feeling competitive pressures coming from many directions.
Despite many mid-market and niche CRM vendors' attempts to overcome these challenges,
many will continue to struggle to avoid insolvency, while the luckier ones with
attractive point solutions (such as partner relationship management [PRM] or
portal solutions) will become the acquisition targets of large enterprise vendors
gladly seeking to incorporate them. As an example, marketing automation and
PRM point solution providers have particularly fallen prey to pessimistic investors
and diminishing global corporations' appetites for technology (Who
Alleges The PRM Market Consolidation?). Thus, the need for providing a full,
comprehensive CRM suite rather than an individual solution or a bundle of point
solutions for each distinct CRM area remains firm, and will urge further CRM
(and overall enterprise applications for that matter) market consolidation.
The recent merger of the PRM vendor ChannelWave with the e-commerce
service provider Aqueduct confirms the need for a broader functional
footprint as a way of extending the vendors' life expectancy.
Both
a large customer base (i.e., recurring revenue) and incremental product enhancements
have favored ERP vendors' longevity in the market. On the other hand, many CRM
weaklings have not gathered a large enough client base to find an interested
suitor that could help them recuperate the immense investment involved in using
cutting-edge technologies to develop these products from scratch using cutting-edge,
as seen in Xchange's case (see Xchange
Adds To The List Of CRM Point Solutions' Casualties). With that in mind,
Pivotal should be flattered by the attention it has managed to gather from three
prospective buyers, while Talisma and Onyx,
having failed in their merger bids, will have to rethink their survival alternatives,.
Like its market automation counterparts, Talisma will struggle to remain competitive within the highly isolated market, even as its narrow niche is further taken over by full-fledged and all-round CRM providers. The merger with Pivotal would have been more beneficial for Talisma's customers, but Pivotal's customer base would likely have not seen major functional improvements since they already have had e-mail management and Internet self-service capabilities.
In
2002, Pivotal acquired the struggling market automation vendor MarketFirst,
which has hardly improved Pivotal's viability and the market reach, if it had
not even sped up Pivotal's hardships. Our belief is that the Talisma deal would
not have been much more different, although one should never overlook the potential
benefit of going private via a strong financial backer, thus allowing focus
on product strategy without the prying eyes of the public investors, which Pivotal
would have had with Oak Partners. On the other hand, Onyx has likely had an
ulterior motive given its view of Pivotal's customers as the biggest asset,
and given it promised to support only Pivotal customers' current implementations.
It was more than apparent that many Pivotal's customers could have then expected
a forced migration to Onyx from Pivotal's platform, while nobody could know
for how long that combined entity would have lasted as an independent entity.
Namely, Onyx remains a potential takeover target itself as its cash position
has fallen to a risky low $11.8 million and its stock has plummeted over 20
percent in the past year. The company pre-announced disappointing quarterly
results on January 12, and CEO and co-founder Brent Frei said he would step
aside when a successor is found.
Now What?
Consequently, the deal with CDC is seemingly the best choice for lifting Pivotal's confidence levels in the market, which should in turn result in operational improvements and expanded market presence. The acquisition also comes at a time when many companies are purchasing distressed software vendors in order to acquire their customer base. These so-called "roll-up" acquisitions are typically characterized by subsequent large cuts in product investment in order to rapidly increase profitability. CDC Software claims the exact opposite intention in Pivotal's case. Instead of reducing the investment in Pivotal products, CDC has committed to increasing Pivotal's marketing budget by 200 percent and increasing its technical support staff by 40 percent--areas that Pivotal would have had to painfully reduce, indicating just how dire its situation was prior to the acquisition. CDC also intends to increase the level of investment through complementary acquisitions and access to Chinese systems development resources at lower, offshore rates.
Furthermore,
the company of late has been busy making several acquisitions, possibly reaching
the prodigal levels of expansion. In addition to the process ERP vendor Ross
Systems, it has acquired the SCM vendor IMI, a business
information and financial performance software developer CIP-Global
ApS. Clearly, CDC has been rounding out its portfolio of business applications
into a full suite through a series of acquisitions, with an idea of moving from
a services-based company to a product-based company.
CDC
Software integrates a series of chinadotcom's self-developed products engineered
in two software development centers in China, which include PowerBooks,
PowerHRP (human resources and payroll), PowerATS
(attendance tracking system), Power-eHR, PowerPay+,
PowerCRM, and Power eDM (a double-byte e-mail
marketing technology). In addition, the company also broadened its offerings
in software arenas by establishing strategic partnerships with leading international
software vendors to localize and resell their software products throughout the
Asia Pacific region. As a result of acquiring chinadotcom's software arm, CDC
Software currently has over 1,000 customer site installations and 600 enterprise
customers located throughout the Asia Pacific region.
chinadotcom
also established CDC Outsourcing, which allows for elements
of workflow such as client and project management to be provided in the contracted
country (i.e. UK, US or Australia), with technology and applications sourced
from either of the company's low-cost, CMM-certified (capability maturity model)
outsourcing centers in China or India. In its mobile and portals unit, the company
operates popular news, email, and consumer service portal web sites in China,
Hong Kong, and Taiwan. Through the recent acquisition of Newpalm
(China) Information Technology Co., Ltd. (Newpalm),
the company now offers consumer-based and enterprise-based SMS (short message
service) and mobile application software development services.
Hence, the low product overlap, along with complementary geographical focus, should result in a low level of disruption to current operations of these recently acquired vendors. The company reports to have no plans for changes in their management teams, which also points to a "business-as-usual-and-even-more-of-it" approach from a daily operations viewpoint. The acquisition will also enable Pivotal to more aggressively pursue the Asia market, cross-sell its product to Ross, IMI and CIP users, and exploit CDC's outsourcing operations, all in tune with the above on-demand discussion.
This
concludes Part Two of a three-part note.
Part
One detailed the events.
Part
Three will discuss challenges and make user recommendations.