Software Growth - Complete the Transaction! Part One

Software Growth— Complete the Transaction!

In our last article about growth we discussed why software companies don't grow. Supply Chain software growth strategies were discussed then in an overview format^[1]. We got many letters for more ideas and details, so we are doing a more in-depth series for supply chain software leaders. In this article we will discuss the issue of completing the whole transaction—the complete solution—which is key to continued revenue growth. And this can be looked at from two vantage points—service providers moving from physical services management to include IT services, or software firms expanding their offering to complete the end-to-end capabilities.

There have been some recent acquisitions—and there will be more soon—that seek to leverage these approaches. But before we get into specific news flashes, we really want to provide some guidance and thinking about how to drive your firm's strategy forward. This will be a bit of a stream of consciousness, but bear with me as I walk through some concepts and different approaches today.

[1] Refer to Parallax View article (Sept-03) Why Software Companies Don't Grow.

Thinking About a Growth Strategy

Many firms are thinking about adjacency expansion as a key strategy. Expansion into the market or functionality next door—or acquisition or building functionality into adjacent markets. The assumption is that it is familiar territory, the same customer with a new product, or a new twist on our product in a new department or vertical.

We see adjacency strategies all the time. They are perceived with mixed emotions. PeopleSoft board continues to spurn Oracle's offers—a good thing for JDE and PeopleSoft customers, since the name of the game in ERP is about lifetime support. Or the negativity between AOL and Time Warner employers—bad for customers. I guess the Time and Warner Brothers old timers have not noticed how much news, games, and entertainment people reach out for over the net! The big news this month is Comcast's offer for Disney. It's easy to understand Comcast's desire, but this really expands the boundaries of adjacency from media and digital services to hotels and play lands! That might more honestly be called Comcast's move to conglomerate. And here you do have to question the expertise in managing such a business.

Dell, on the other hand, leveraging their customer connectivity and expertise in tech and supply chain management, has adjacency pilots, moving up the category position to look more like an HP or IBM—a full data center or office full of products company. The good news for Dell is that they invest with other people's money. Their R&D, inventory, etc., comes from leveraging their partners—unlike some others in the field who rely on their own internal investments, so they can experiment, and move on with little impact to the bottom line!

In addition, many adjacent opportunities and funding mechanism can come from joint collaboration from technology companies, though these relationships rarely deliver the whole value people envisioned at the outset of these relationships.

The reality is that there is pent up investment money, as well as bargain companies yet to be acquired. And strong management teams hankering, and expected to create a financial legacy and shareholder returns. Yet the challenge and the issue are to understand the opportunity and stay focused—since there are many opportunities and many markets yet to address. The other issue, your position is in decline and you need a new space, product and message. Supply chain spending has significantly transformed, so you need to understand where to go, to perk up the corporate profile, not just make deals in the cigar bar that don't have good market data to support them (see table below).

Success in Adjacency

Jonathan Byrnes, of Harvard Business School's HBS Working Knowledge, says: "Paradoxically, leadership businesses have the most to lose in adjacency expansions. Their valuable core franchises would be put at risk by major forays into the wrong adjacency or by premature abandonment of the core as an investment vehicle. And this risk is compounded by the abundance of temptation: The strongest businesses with cash to invest have opportunities brought to them every day by a long line of investment banks and deal makers. During discussions of adjacency expansion, Sir Christopher Gent, CEO of Vodafone, remarked that CEOs should be judged by the opportunities that they decline, as well as those they accept. Adjacency expansion for a strong leader is reminiscent of Napoleon's famous statement "The most dangerous moment comes with victory."

Or General Dorio (VC investor for Digital Equipment Corp) said: "That is the problem with success. It breeds complacency."

Having said that, there are many companies in the SCM market who have done well by expanding the definition of their product, say from APS to SCM, to include many new products, or e-procurement to sourcing, or interesting combos, like adding strategic source to transportation, to create Global Trade Management.

Supply Chain Vendor Strategies

A big issue is that though there are many opportunities in supply chain categories, each may not represent a significantly large enough opportunity. One client we worked with only would contemplate market opportunities of $500M and up. But for most software firms, you are looking for slightly more humble results. Yet the fact is that many of these niches collectively may represent only $50-$100M. So, unless one attempts to buy-out the whole market—totally unlikely—a raw acquisition may only gain them a few million—as is. You must contemplate what the additive value of the acquisition will make—how will it help you capture more market share, gain a substantial leadership position through some smart thinking.

Think about global forces in supply chain—how can you best serve that. Think about the transactions—where are they going?

Your product footprint, then, should be about where all the activity is and will be, and address the emerging market. You get to charge a premium price as you have some future returns to contemplate, rather than a respirator on past glories.

The Challenges in Acquisition for Software Firms

Challenges come from several areas like, of course, making the smart move, absorbing the culture, technology and sales approaches.

If you look at the merger of giants, you are dealing with customer pliability and cultural adjustments, usually not a company breaking (or making) strategy.

Mergers of market followers or weak players looking for a life vest are not that successful. Strong players given realistic expectation of the difficulties involved can work. This, for example, would represent the merger of Tillion, Synquest and Viewlocity vs. a Think and i2, or even a Promira and Manugistics. After all, it is not about getting to Baghdad, it's about successfully managing once you get there—In other words, buying a company is the fun part, now you have to make it work. Companies focus on the details of the acquisition, not the successful ascendancy of the new company.

So far, there is only one CA, but it will be interesting to see how SSA moves forward with mature and slightly worn companies.

Other challenges in creating success acquisitions come from absorbing different architectures—planning and execution, or disk centric data base (ERP) and APS memory resident or web centric approaches. Software companies tend to be an either/or architecture, which is not the way businesses are living today. Businesses are heterogeneous, dealing with external trading networks as well as fixed fiduciary environments.

In addition, there are different buyers in the enterprise, so you have issues in creating a cohesive sales team, marketing messages etc., to address your expanded footprints.

Conclusions— What's Being Done Now?

Winner—even very small winner—plus winner, tends to be the play. 3M and High Jump or Red Prairie and LIS—which are very different strategies, are interesting to note. 3M continues to grow their service packaging for logistics business. High Jump allows a neat integration of packaging labeling and tracking through the logistics chain. LIS gets Red Prairie into a strong global position and some new verticals.

A good strategy follows the transaction play, like the GT-Nexus and Open Harbor partnership, since it addresses the real transaction focus—the shipment—not just the TMS play, but also the compliance issues associated with the shipment. Accenture is building such a system for the US government, integrating Yantra, GT-Nexus and Manugistics to create a huge real-time ocean/land transportation system. Good project for Accenture, but you have to wonder why the software players did not have a working solution like that, so obviously of value to so many large enterprises.

Timing matters, I guess, since we now see a very strong play from G-log, who is building their way through the footprint as they win very large customer opportunities and fulfill the customer specs.

Expansion is a must—we see several strategies that are working—from code your way through, to acquire your way through. But the bottom line is, not to fiddle. These opportunities will not be here soon. Market share once taken is lost forever!

About the Author

For more than two decades, Ann Grackin, Chief Executive Officer, has been on the frontlines of the Supply Chain Management technology and eCommerce frontier, leading global strategy and technology implementations in the high technology, semiconductor, automotive, textile, and apparel industries.

ChainLink Research is a bold new supply chain research organization dedicated to helping executives improve business performance and competitiveness.