The Challenges of the Lawson-Intentia Merger

Challenges

The new management team for the company resulting from the merger of Lawson Software, Inc. (NASDAQ: LWSN) with Intentia International AB (XSSE: INT B) will have its work cut out for it. Both companies serve different markets, which will hopefully extend, not cannibalize each other's client base, but combining two companies with financial and revenue growth issues is not exactly a recipe for success. Although recent quarters for both companies have shown license revenue increases and profitability, neither Lawson nor Intentia have been stellar in terms of their financial performance lately. Despite this recent increase, overall Lawson has been experiencing declining license revenue (down nearly 20 percent since 2002) and has been keeping some appearances of profits mainly by cutting costs. Now that revenues are increasing, this cost cutting and revenue management strategy may provide further opportunity. Intentia, on the other hand has been on a losing streak for years, with its last profitable full fiscal year was 1998. Intentia's financial situation has at least played in Lawson's favor to acquire Intentia's assets at a good price—about 1.2 times its revenue, and become somewhat a bigger partner in what has been touted as the "merger of equals". For details on the merger announcement, see "New" Lawson Software's Transatlantic Extended-ERP Intentions.

Part Four of the "New" Lawson Software's Transatlantic Extended-ERP Intentions series.

This merger is not a mere consolidation of a smaller and struggling vendor by a bigger and more viable one. The intention is to grow a company that remains profitable on both sides. But it is questionable whether the existing Intentia and Lawson sales and service organization can sell and support each other's products. While having little overlapping functionality in the product lines is favorable, the downside is that the products serve quite different industries and different geographical markets, meaning the "common denominator" of post-integration cost-cutting synergies and cross-selling opportunities is low. Cross-selling brings the challenge of preparing Lawson's North American channel to sell in unfamiliar manufacturing, maintenance, and distribution industries. Currently, there are only a few seasoned Intentia implementers in the region nowadays and, vice versa, in terms of Intentia's European and Asia-Pacific channel that has been selling to the service and non-manufacturing industries. One should also not neglect the possible brand confusion in many markets either. For example, the Lawson brand will hardly ever resonate with prospective users in many manufacturing segments, even in North America, let alone elsewhere.

Executives of both merging parties have pledged to participate equally in managing the new combined Lawson and are committed to developing and supporting both vendors' current products through 2010. However, although this should comfort existing customers that their investments are not endangered, it limits "new" Lawson's opportunity to achieve significant near-term cost savings through customarily more forceful rationalization to bolster its near-term financial health. Quite the contrary, this will require investments in both complementary product lines that will need to be evolved and supported in the short-to-mid term, in order to eventually take advantage of any up-sell or cross-sell opportunities until a more unified next-generation product can be delivered. At the same time, the new entity will have to carefully blend the differing corporate cultures of merging parties, both of which have traditionally been proud of their product, with resulting in a "not invented here" attitude.

Further, even at the technology front, where the two vendors have the most in common, they will still have to resolve separately launched initiatives to create a unified next-generation set of software oriented architecture-based products (SOA). For example, while Intentia has rewritten its product in Java, Lawson still has a proprietary fourth generation language (4GL) in the business logic layer of its three-tier architecture. This proprietary 4GL defines business logic with a computer aided software engineering (CASE) tool that generates a COBOL executable. Going forward, Lawson plans to use Java, or rather a highly intuitive 5GL named Lawson Pattern Language (LPL) that would generate Java code, rather than the 4GL, while the presentation layer already uses extensible markup language (XML). The recently unveiled Landmark project, however, has great potential, but is still unproven and needs to be rationalized with development efforts at Intentia. For more information of the "New" Lawson's technology blueprint, see A New Platform to Battle Software Bloat?.

One can point out the success of similar mergers between Epicor and Scala or SSA Global and Infinium, but the major difference is that these respective vendors had more in common. They had a greater critical mass for synergies than Lawson and Intentia, and moreover, the acquiring vendors, Epicor and SSA Global had already "turned the corner" financially before their mergers. Although some might argue that Lawson and Intentia have also had a turnaround, Lawson will be caught between "the hammer and anvil" in an environment where everyone is concerned with the financial health of the software vendors. They have had to continue their cost containment efforts while enhancing both current product lines, developing the next-generation ones, growing top-line revenue, and increasing brand recognition.

To that end, the new management team will need to score some early wins to demonstrate the synergy of the deal. The primary goal will be to quickly develop the necessary integration to push Lawson financial and human resources (HR) applications into Intentia's installed base and Intentia's manufacturing and maintenance modules into Lawson's.

The management teams at Lawson and Intentia certainly understand the efforts ahead, and they both have experience in dealing with revitalizing stalled software companies. Bertrand Sciard, the president and chief executive officer (CEO) of Intentia, who will become the chief operating officer (COO) of the new company, and Romesh Wadhwani, who will serve as one of the co-chairs, have seemingly paved the way for "new" Lawson if one is to judge their record at Intentia so far. They have reduced the number of targeted markets, reduced costs, and emphasized license revenue growth. Likewise, Harry Debes the former president and CEO of Lawson, and the new management team will first return to their core competencies, and allocate their resources to a few existing markets and products where Lawson has traditionally been strong. Once the acquisition is finalized, the vendor hopes to have organic growth in its traditional strongholds of health care, retail, government, and financial services, while gaining new traction in areas in which Intentia has been strong. Another part of the plan is to add a new sales force in 2006 to handle the renewed focus.

Like Infor, both Lawson and Intentia have adopted a strategy that is highly focused on specific industries, which is possibly the only way to compete these days against the "two-horse race" between SAP and Oracle, particularly in the top tier. If these notable challenges can be overcome, the new Lawson will have a chance to stake a leadership position in the upper mid-market, enterprise resource planning (ERP) segment, and give customers in those industries another viable choice. But to that end, it must crisply define its target markets, create more viable leads, provide its people with appropriate sales and product training, ensure that they are properly resourced to cover the territory and offer its clients a complete solution to their needs—a full vertical-specific software suite complemented by Lawson consulting services.

Lawson admits that its solutions are less vertical than they could be, particularly when compared to Intentia's. Namely, the number of customers in certain industries have been the result of circumstance rather than the vendor's deliberate and orchestrated effort to deliver a perfect-fit solution. The vendor offers primarily horizontal solutions (HR, financials, and procurement) with a few vertical-point solutions that extend its offerings. Lawson might have a more complete solution in the retail sector, but that is more an exception, not a general rule. Regardless, in each of its target verticals there is still a lot of opportunity that the vendor does not currently address. Yet, in order to be an effective vertical-solutions company, it must offer its clients the mission-critical, vertical-specific applications they need in addition to the back-office ERP solutions it provides today. Thus, there is both a challenge and an opportunity to fix this and thereby grow the footprint and revenue with each client.

This is Part Four of a four-part note. Part One detailed the merger. Part Two discussed Intentia. Part Three analyzed the market impact.

Strategic Alliances and Partnerships

This brings us to the opportunity for new Lawson to enter into more strategic alliances with systems integrators (SIS), consultants, and resellers to benefit from the partners' resources, expertise and customer base. Traditionally, both Lawson and Intentia have been remiss to cultivate strategic relationships with system integrators that have also demonstrated vertical expertise. Yet, the main cause of Intentia's protracted losses is that more than half of its revenue traditionally comes from professional services by Intentia's well remunerated (and perhaps spoiled, by US workplace standards) staffers. The gross margin on these services has been around 10 percent, which is way too low to sustain the cost of new product development.

Also, integrators need templates, specific expertise, and other intellectual property furnished by the vendor, otherwise they will end up over customizing the solution, which defies the purpose of an integrated approach in the first place. Intentia and Lawson have only recently made a point of concentrating their internal sales efforts on their traditional vertical markets and to rely on partners to address and develop particular industry needs, thereby expanding its functionality footprint.

Additionally, while Lawson and Intentia have long provided professional services to ensure high customer satisfaction ("to get one client at a time and keep it forever"), the relatively recent announcements of vertically focused system implementation partnerships, with, for example, CSC and Capgemini for the health care industry, and with Answerthink and Deloitte for the service automation sector, should bode well for the company's continued market success. These partnerships might be the sign that Lawson has begun to address its system integration partnerships as strategic rather than opportunistic. Also, partnerships with renowned middleware and enterprise application integration (EAI), infrastructure and applications management vendors including IBM, WebMethods, Sun, BEA Systems, will provide Lawson with toolkits that are readily available for making deeper functional adjustments and customizations. They will also allow for better scalability, security, and load balancing and overall, it will contribute to areas where the company has traditionally trailed the bigger competitors. Other strategic relationships should also allow Lawson to expand its product functionality through the offering of services that are not its core competency, such as BSI TaxFactory for state and local tax data.

The size and scale of future engagements could, on the other hand, be more attractive to the consulting and system integration (SI) giants to bring real value to Lawson. When integrators participated in the past, they all too often acted like "ambulance chasers", showing up at the last minute when a deal had already been decided, asking to be introduced to the account and often getting in the way of the Lawson' relationship with the customer. Only when a services partner is actively campaigning for Lawson to win the deal and is working with its services management team to share the work in an equitable manner, will it deliver value.

Lawson and Intentia will therefore have to put lots of thought and effort to select the most appropriate partnerships for each targeted vertical sector as to avoid internal competition; to further focus these partnership; and to reach the critical mass of trained professionals for the industry sector. When it comes to staff augmentation, the current 15 percent or less margins the two vendors have been getting from third-party service providers remains unacceptably low. For this kind of work, they will likely further explore offshore resources to get at a better price for the clients and a better margin for new Lawson. At present IBM and Symphony have offshore relationships with Intentia and Lawson has an offshore relationship with Xansa, and going forward they will explore both of these offerings as well as others, including having its own offshore operation.

Further, while "old" Lawson's deliberate decision not to offer a manufacturing product suite has been known, the company's CRM strategy has been less clear-cut. The vendor departed from its plans to develop CRM functionality in house in 2000, and partnered with Siebel instead (see Lawson Software's CRM and ASP Moves— Wise, Bold, Injudicious, Enforced, or Something Else?).

The partnership has, however, had only limited success in the financial institutions sector, and the reasons thereof would be too extensive system modifications and price tag to handle the needs of other verticals, which often do not require a product-oriented, customer relationship management (CRM) system per se either. Indeed, Lawson confirms to have ended its reseller agreement with Siebel because its customers, given the verticals they play in, were reportedly not demanding a CRM solution from Lawson.

An exception is professional services, where Lawson's Service Process Optimization (SPO) solution already offers strong native CRM functionality. Also, service automation is a vertical where opportunity management remains the main CRM need and where the alliance with Interface Software will play its role (see Interface Software Expands Its CRM Functionality).

Still, while there is also the truth in the claims that the ERP and the CRM decisions are often made separately, vendors like SAP, Oracle, or SSA Global will beg to differ. This may result in a number of lost opportunities in the future, since certain customers prefer more complete native solutions from a single vendor. Time will only tell whether Intentia's adequate CRM functionality for manufacturers will be enough of a jump start for Lawson's missing order entry and management capabilities for disparate industries. In any case, the CRM strategy remains muddled at this stage.

Increased momentum in top-line revenue and improved market perception and awareness are needed for Lawson to remain competitive in a rapidly consolidating market, since any instability and uncertainty during the impending integration process could lead to a further drop in new license sales (although license revenues are currently increasing) and vulnerability to many remaining predators in the market. Still, since both vendors' performances and global recognitions have been suboptimal lately (especially due to the uncertainty caused by constant acquisitions and mergers), they may not have much left to lose, and this merger is certainly worth a shot.

User Recommendations

For most customers, the merger should be a positive development, given that both vendors have recognized that maintaining their respective status quos would not have worked in the long run. Customers should hereby, and in the long run, gain applications that neither company could have developed on its own, and its increased size and Top 4 position means that any selection committee's questions about the company's long-term viability should be mitigated. In addition, there should still be a useful sharing of best practices in product development and services.

"New" Lawson's solutions should become more functional and scalable, and will continue to be enhanced. For the time being, current and prospective customers should evaluate current Lawson if they are a mid-market and low-end tier one company (up to $2 billion in revenue), are within the vendor's current service industries and geographies of focus, and are considering business applications (both Web-based and client/server network dependent). Conversely, Intentia's current functionality footprint, technological innovativeness and expertise, and sharp vertical focus should be attractive to similar mid-sized and large global enterprises within manufacturing, distribution and asset intensive industries.

Still, until the merger is fully consummated and the new service organization is established, all the industries listed above might benefit from evaluating these vendors subject to their geographic location, as the companies' industry focus and capabilities varies significantly in different geographic markets. Also, although Intentia and Lawson are generally competitive in speed of implementation, total cost of ownership (TCO), and intuitive user interface functionality (e.g., the Lawson's "Drill Around" tool for cross-applications data access, and its role-based "Self-Service Applications" on the Web), users should be aware that these are intricate products to implement which rely on key success factors that are applicable to all other major ERP products (and are often reliant on human nature). A robust, industry-focused product can help only so much without a genuine buy-in from users. Also, a well-executed vertical offer needs to show a combination of partnerships with other software vendors, system integrators/consultants, and with industry-specific templates that reflect a deep understanding of the particular industry's idiosyncrasies.

As seen earlier, Lawson's (and to a much lesser degree Intentia's) products are still built upon proprietary, as well as industry-standard components. Over time, as industry standards evolve, the vendor will be required to re-design products to incorporate new industry standards. Thus, users of its much older product versions should approach Lawson and inquire about some of its major enhancements since the late 1990s and of its forthcoming effort to upgrade to a product that is browser-based, provides connectivity to wireless devices, is a 100 percent Java-based, and has XML-enabled interfaces.

Existing users should consider their current enterprise applications investments to be out of harm's way through to 2010, except in some instances of products that are several generations' old with limited windows of continued support. In this case, negotiated upgrade deals are highly advised. Nonetheless, existing users of viable systems should continue to monitor and assess their vendors' financial health both before and after the transaction's close. Any protracted cost containments that do not have top-line growth will limit Lawson's ability to meet its ambitious long-term product strategy. In the case where there is no apparent improvement, or if there is financial erosions in a year or so, users will have to further limit new investments with the vendor. This may possibly lead to a spiraling and vicious downward circle. However, Lawson is profitable right now, revenues are growing again, and its cash position is strong, which might allow it to make additional investments needed for innovation and market opportunity.

Delivering depth in a few targeted verticals should help Lawson improve customer satisfaction, reduce any outstanding product quality and solution delivery issues, and remain competitive, but this narrower focus decision may leave some customers feeling neglected and left behind. Existing users should listen carefully to the vendor's future plans for current and future products, technology blueprint, services and partnerships, and try to influence these strategies by articulating their needs via customer advisory groups, special industry groups. If some customers feel that their vertical-specific needs will not be met, despite voicing their concerns with the vendor, they should logically limit their long-term investments and seek alternatives. For more of pertinent info, see How to Cope When Your Service Provider is Acquired.

Detailed information about current Intentia and Lawson Software's products is contained in the Technology Evaluation Centers at http://www.erpevaluation.com/, http://www.hrsoftwarecomparison.com/, http://www.scmevaluation.com/, and http://www.financialsoftwarecomparison.com/.