Challenges
On
January 15, Global eXchange Services, Inc.
(GXS, www.gxs.com), the large,
privately-held business to business (B2B) e-commerce software, services,
and solutions pioneer, which operates one of the largest B2B e-commerce networks
in the world and manages one billion annual transactions for more than 100,000
trading partners, announced that it has signed a definitive agreement to acquire
HAHT Commerce (www.haht.com).
HAHT Commerce is based in Raleigh, North Carolina and is a privately-held provider
of demand chain management applications (DCM) that strategically automate,
integrate, and optimize order management, product information management
(PIM), channel management, business intelligence (BI), and customer
services functions between manufacturers, their channel partners and end customers.
Under
terms of the agreement, GXS would acquire all the capital stock of HAHT Commerce
through a merger for approximately $30 million (USD) in a combination of cash
and shares of GXS Holdings, which is the parent company of
GXS, headquartered in Gaithersburg, Maryland (US). The transaction was subject
to the approval of HAHT Commerce's shareholders and other customary conditions,
and the acquisition was completed in February. CIBC World Markets Corporation
acted as exclusive financial advisor to HAHT Commerce with respect to the transaction.
However,
despite its data exchange savvy (see Part Three
of this note), lately GXS has had its share of difficulties. Immediately before
the HAHT acquisition, the business to business (B2B) connectivity and
service provider has announced its plans to restructure and streamline its operations,
which involved cutting about 5 percent of staff and reducing office space by
30 percent at its headquarters. In 2002, GXS had total revenue of slightly over
$400 million (USD), which was significantly lower than over $600 million (USD)
during the GE era, but nonetheless, was somehow in tune with the current economic
trends. Overall, GXS's core business has remained fairly steady over recent
years compared to many other B2B services that rose and fell quickly.
While
EDI value added network (VAN) service prices might have fallen to competition,
transaction volume has also fluctuated back and forth whereby revenues are the
same or slightly declining across the industry. Still, the use of virtual
private networks (VPN), which provide secure connections over the Internet,
and extensible markup language (XML), which makes data exchange more
flexible as discussed earlier, allows for similar services that are growing
in popularity, while the more recent emergence of web services technology for
exchanging data could further change the electronic data interchange
(EDI) landscape and drive down costs for subscribers. Also, the former VANs
are taking advantage of emerging standards like AS2, RosettaNet, and UCCnet,
while the emphasis has been moving from mere connectivity to becoming more flexible
and better-rounded service providers.
Although
GXS's above capabilities have put pressure on such specialists in EDI-XML translation
including Inovis (after acquiring IPNet),
Sterling Commerce, Internet Commerce Corporation (ICC),
webMethods, Vitria, or Cyclone Commerce,
these have been swift to recognize early on the need for such translation services,
and have been able to enhance their services with useful ancillaries such as
support for collaboration (see Secure
Transport of EDI and XML for Trading Exchanges). While we still find it
hard to see how they make it on their own in the face of competitors like GXS
and IBM, each of which should be easily capable of commoditizing its infrastructure
work to serve smaller and midsize companies and which can certainly attract
the large enterprises as customers, these smaller players deserve commendation
for raising the bar within the B2B e-commerce arena. Although connectivity remains
important, the value proposition of collaboration and improved planning drives
efficiencies and improvements on both sides of the relationship. Those complex
relationships require a great deal of face-to-face discussion and this, rather
than the actual transaction, is the real expense in B2B trading. This is why
technologies that enable collaboration and interaction are often more critical
in B2B e-commerce situations than simply technologies that enable basic transactions.
Thus,
over the last few years GXS has been diversifying its network service offerings
as demand for EDI activity has shifted away from proprietary VANs onto the Internet.
That migration is fueled in part by the earlier mentioned pressure from retailers
like Wal-Mart, which is requiring that its suppliers be able
to send and receive EDI data over the Internet using the AS2 standard. Although
the global network infrastructure still plays a large part of GXS's business,
its future focus will involve growing value added services like data synchronization
and the AS2 outsourcing.
This
is Part Four of a four-part note.
Parts
One and Two detailed the event summary.
Part
Three discussed the market impact.
Impact of HAHT Acquisition
Now, with HAHT's acquisition, GXS is making a play to build out its complementary software offerings—in particular, its product information management (PIM) and data synchronization tools. Going hand-in-hand with the trend to conduct business transactions electronically via the Internet is an effort to clean up those transactions and reduce the occurrence of errors. Often enough, the trouble with product attributes is that they do not match from one database to the next in the value chain. For every product under its brand umbrella, there are several product attributes, including definitions, specifications, images, marketing messages, and prices. As a result, something as bland as a can of food comes with arrays of data relating to pricing, description, promotion, and so on.
To make things worse, companies may have hundreds or thousands of products and multiple individuals may maintain each bit of product information. The task of organizing and maintaining all this information is critical to companies, since bad data costs companies billions of dollars in incorrect purchase orders, subsequent returns, and the manual effort required to fix these problems. To that end, data synchronization applications automate the process by which suppliers, manufacturers, and retailers share information relevant to issues like inventory status and product specifications. This technology might also be an important underpinning for emerging plans around radio frequency identification (RFID) technology, which is high on the agendas of retailer giants.
The HAHT acquisition seems to bring together two providers of complementary e-commerce products that help retailers, manufacturers, and suppliers manage and sell products to other companies and customers on-line. GXS has the technology that allows the businesses to communicate with each other, while HAHT provides software that helps companies record the correct product data and push it throughout the channel in order to avoid such things as the overstocking or under-stocking of often incorrect items. Additionally, HAHT has been specializing in demand chain management (DCM), with a software portfolio aimed at helping manufacturers and their business partners manage orders, product information, and channel activity. In other words, GXS gains PIM software, which aggregates and organizes item-related data from multiple application sources; and data synchronization/syndication tools, which let manufacturers and suppliers synchronize items with retail partners through the UCCnet foundation service. Given Wal-Mart's requirements for its suppliers to meet data sharing regulations passed by UCCNet and given both GXS's and HAHT Commerce's endeavors in addressing UCCNet's compliance, one can discern the major rationale behind the acquisition.
On
a more general note, it is only logical that EDI VANs and other providers of
integration as a service would seek to reinvigorate their business value proposition
by adding applications to their "plumbing" portfolios, which offer more of an
application-like, vertical solutions-oriented approach to trading community
integration requirements. Examples of other vendors that have also eyed delivering
packaged data synchronization software and transaction delivery services would
be e-commerce network services vendor Transora and product
information management software maker Trigo Technologies, which
recently announced plans to work together on a joint offering that combines
the two companies' products.
Contrary
to the above competitors as well as to Inovis and Sterling
Commerce, which partnered to fill in key functional gaps in PIM and
data synchronization areas, GXS's direct acquisition of HAHT shows its commitment
to the retail sector. Sterling still has a significant partnership with HAHT
Commerce, and its sales force has provided many of HAHT's opportunities in the
past. Therefore, this acquisition will likely cause Sterling to seek another
behind-the-firewall data repository partner and GXS-HAHT competitor, such as
Trigo, Velosel, or FullTilt.
HAHT's
data-synchronization and PIM capabilities will allow GXS a chance to attract
smaller suppliers and retailers that sell goods to the larger ones such as Nordstrom
and Hecht's. While the HAHT product will require minor enhancements
to be suitable for retailers, it should not be a major undertaking given HAHT's
focus on the consumer products segment. The acquisition should provide GXS with
a strong behind-the-firewall data repository proven with many consumer product
manufacturers (for example, Pfizer Consumer, Clarins
or Kraft). GXS's own data product has been amenable to just
the hosted mode, which prevented it from winning deals in more complex global
corporation situations where traditional on-site behind-the-firewall data management
was required. The future GXS offering should appeal to retailers, as it can
now not only provide retailer systems, but also a huge committed trading partner
community. This will be dependent on swiftly delivering interoperability plans
to ensure retailers can synchronize with all suppliers regardless of the supplier's
own system. Thus, interoperability between GXS and other data pools and exchanges,
including Transora, will have to be proven as a matter of urgency.
HAHT History
The
acquisition signals another chapter for HAHT (standing for its founders' initials),
which has had many ups and downs and shifts in its direction throughout most
of its history. After it was founded in 1995 by former Q+E Software
executives (after Q+E was bought by Intersolv), Thomas, Archer,
Holcomb (who stepped down as chairman in 2001), and Hebert (who left in 1997),
HAHT Software spent the first few years selling software tools
that have helped customers develop their own interactive Web site applications.
During that time, it raised about $47.5 million (USD) in venture capital.
When
that business model failed to generate strong profit, the company underwent
a facelift and changed its name to HAHT Commerce. It also shifted its focus
to B2B sell-side e-commerce applications announcing alliances with Ariba
and Commerce One. These alliances came in addition to the earlier
partnerships with SAP America and Computer Associates,
during the mid 1990s, when these vendors needed help with e-commerce enablement.
In November 2000, HAHT filed to raise $75 million (USD) in an initial public
offering (IPO) of stock, but canceled those plans two months later, citing the
decline in technology stocks. It instead went on to raise an additional $37
million (USD) in venture funding, but slow sales forced it to make several rounds
of layoffs. In the past year however, HAHT has had a turnaround, and it now
has about 110 customers, including Pfizer, Phillips Electronics, OxyChem,
and Dow Corning, which bundled with the recent profitability
has made it attractive prey for GXS. As mentioned earlier, in 2002 HAHT acquired
two small software companies, Paris-based iMediation and San Francisco-based
ArcadiaOne, which allowed it to release new software (in 2003) aimed at helping
companies organize data (i.e., catalog, translate, and synchronize) about their
products.
This
brings us to the question about the advantages and sustainability of partner
relationship management (PRM) applications. Designed to help manufacturers reach
end users served by an intermediary, PRM software lets OEMs grasp feedback from
end customers, while also supporting commerce and interactions with distributors.
The natural question then is why only a few software vendors specializing in
PRM, which is also known as channel management, demand chain management (DCM),
or channel relationship management (ChRM), have thrived? For a detailed discussion
of the future of PRM. See "What
Does the Future Hold for PRM?"
The
relatively recent demise of PartnerWare, a PRM pioneer, whose
TCX Insight product included components for channel marketing,
closed-loop lead management, and extended team selling, as well as a number
of recent mergers and acquisitions like Click Commerce and
Allegis (see Click
Commerce Acquires Allegis), ChannelWave and Aqueduct,
or Comergent and Profile Systems, indicates
the rapidly more difficult competitive position of pure PRM players. That is,
their insufficient client base traction and recurring revenue, narrow functional
footprint (e.g., without order management functionality) and it is almost impossible
to find new investment funds infusions. For more discussion on what constitutes
PRM/DCM functionality, its importance, and its stand-alone sustainability, see
Who
Alleges the PRM Market Consolidation?
HAHT must have breathed a sigh of relief for finding its white knight in GXS. However, given the company's traditional focus on order management aspects including catalogues, configuration, order capture, order tracking, returns management, etc., one should watch GXS's commitment to maintain continuity with HAHT's order management products. GXS will likely focus on data synchronization and PIM in the immediate future. HAHT has a substantial customer base with these legacy products, which might be neglected or even divested, causing these customers to be concerned and even possibly consider alternatives.
Further, PRM is still a moving target in part because different industries have very different needs in their PRM solution. A chemicals company for instance, will start with order management, while a more consumer-focused company will be more interested in looking at brand management. Telecommunications companies will pay attention to order management and commissioning (a complex process based on partner agreements and rate structures) and will be interested in giving their agents a single interface to many back-office systems, such as billing, order management and pricing, which would require a flexible integration framework. In the energy sector, the emphasis will be on the service side.
Thus, GXS has to clearly articulate an overall strategy for blending the two companies' software into a single package that provides architecture for processing and sharing data from the time it is first captured into the system till it is archived. At this stage, the company is unable to detail much beyond its indication that it will support all of HAHT's stand-alone applications, for the time being. While GXS might be tempted to tackle the role of inter-enterprise translator between disparate industries, that is an immensely overwhelming task requiring savvy in every industry and how best to integrate enterprises coming from these unrelated industries.
Despite a good fit at first glance (the enlarged install base and improved cross-selling opportunity) there are more challenges to overcome. One is to possibly conduct a product rationalization and integration (although integration should be moderately straightforward with XML, given that both products are Java-based, time will be of the essence) to orchestrate sales forces, and organize service strategies, given the constituents' different expertise and culture in the past. In addition to the above-mentioned direct and indirect competitors in data synchronization, retail distribution, and PRM spaces the combined company's possibly biggest challenge remains a lack of awareness of the need for these applications. While many people have realized the power of e-commerce on the consumer side, there is still plenty of education to be conducted by all the B2B e-commerce vendors to prove how much leverage their applications can bring to corporations.
In any case, the GXS acquisition will cause commotion amid the competition, which will have to rethink their strategic moves and partnerships in the future, but the speed of executing the acquisition will make the major difference between GXS's ultimate domination in the market or not.
User Recommendations
The combined respective GXS and HAHT Commerce customers should consider this event as a move toward a more viable position for their IT investment. The combined company stands a better chance to provide more elements of B2B e-commerce, particularly in the realm of data synchronization and PIM. Prospective and current customers from the retail and consumer product segments, of all sizes, and that need data synchronization should evaluate the GXS-HAHT combination.
Users should not expect a unified suite of applications to be available before some time in 2005, and should challenge the company to commit to a more certain product development and migration strategy roadmap. Consequently, until the merger is consummated, users evaluating the above individual products should keep themselves informed, and consider generally available (GA) functionality only. Non-retail customers (for example automotive, chemicals, electronics, etc.) should inquire about similar commitments by GXS to their industry, and they should demand GXS articulate its overall strategy regarding industry-specific solutions. Current Sterling customers that have already selected HAHT Commerce should not necessarily abandon the project, while the prospects might want to look elsewhere, given the likelihood of the partnership dissolving soon.
Users
should ask the following questions when evaluating the GXS-HAHT Commerce combined
offering:
- Are
there any price advantages offered to existing clients who elect to purchase/migrate
to the future integrated products?
- Will
(and when) the applications share a common server platform and user interface?
On a more general note, a company that is dependent on EDI for transaction routing should look hard at GXS as its pathway into the XML century. What is most important to them should be how smoothly the translation service can be implemented in terms of integration with their other systems. Therefore, GXS' size and technical strength are not as important as its experience with the same systems users might have; another vendor, including one of the specialists in EDI-XML translation, might be a better match if it has experience with the same systems that users have or has worked with users' major trading partners. In time, GXS will have experience with almost every relevant back-end and front-office system. But even if a company has the specific experience users need, it does not necessarily follow that they will benefit from it. Therefore, when negotiating terms potential users should make sure they have guaranteed access to the individuals who have worked on users; own types of systems. Given that XML and EDI will be used concurrently for some time in the future, the companies should think carefully about how to leverage this mix as to minimize the risk of duplicating efforts (i.e., of both systems doing virtually the same work).