Software Industry M&As are Doing Your Vendor Rationalization Work for You
The software industry consolidation mania in late 2007 and early 2008 is starting to look like 2004, when there was a spate of M&As such as Oracle-->PeopleSoft and Symantec-->Veritas.
Traditionally, M&As in the software industry were based on one company trying to fill an offering gap by buying a niche company. These days, consolidation is following a more traditional M&A recipe: growth through acquisition. With the markets becoming saturated and vendors running out of market space (think SAP's small business offerings--I never thought I'd see the day), growing organically is a difficult row to hoe these days.
Software companies that have less resources and reserves to ride out the bad times--and that can't seem to produce anything else truly revolutionary--are showing signs of desperation. A perfect example was Hyperion when they came out with their very unpopular "enablement fee." That's where existing customers who had dutifully paid their maintenance fees over the years were faced with paying a large ransom to get the next release. Instead of giving the company a revenue boost, the company ostracized its customers and hastened its demise. Oracle then swooped in and acquired Hyperion before they went too much further down the tubes. I personally think that, had Oracle waited, they could have gotten Hyperion for a lot less.
In late 2007, some large acquisitions were announced:
Oracle-->BEA Systems
SAP-->Business Objects
IBM-->Cognos
Other companies--even though they publicly deny it--are positioning themselves for takeovers because they know they can't survive over the long-term. Open Text is a good example of a company that's ripe for acquisition and that has a limited future if they don't get themselves bought.
Customers benefit because they're battle-weary from buying piece parts and then having to hire over-paid consultants for integration. I don't want to go to one car dealership for tires, another one for the interior, and another one for the engine--and then have to pay a fleet of consultants a ton of money to put together something that may not work. I'd rather buy a car from one dealership, pick some options, and customize it more if I need to or want to.
Vendor rationalization is Purchasing 101, where you reduce your vendor base to maximize volume spend and increase your leverage. Other benefits include less relationships to manage. With software industry M&As, the companies are doing the vendor rationalization work for you.
Some buyers have a fear-factor over software consolidations because they're worried they'll lose leverage. There'll always be competitors... And just look at the Oracle-->Hyperion acquisition as an example of how M&As can benefit buyers--the enablement fee / ransom demand has pretty much disappeared.
Traditionally, M&As in the software industry were based on one company trying to fill an offering gap by buying a niche company. These days, consolidation is following a more traditional M&A recipe: growth through acquisition. With the markets becoming saturated and vendors running out of market space (think SAP's small business offerings--I never thought I'd see the day), growing organically is a difficult row to hoe these days.
Software companies that have less resources and reserves to ride out the bad times--and that can't seem to produce anything else truly revolutionary--are showing signs of desperation. A perfect example was Hyperion when they came out with their very unpopular "enablement fee." That's where existing customers who had dutifully paid their maintenance fees over the years were faced with paying a large ransom to get the next release. Instead of giving the company a revenue boost, the company ostracized its customers and hastened its demise. Oracle then swooped in and acquired Hyperion before they went too much further down the tubes. I personally think that, had Oracle waited, they could have gotten Hyperion for a lot less.
In late 2007, some large acquisitions were announced:
Oracle-->BEA Systems
SAP-->Business Objects
IBM-->Cognos
Other companies--even though they publicly deny it--are positioning themselves for takeovers because they know they can't survive over the long-term. Open Text is a good example of a company that's ripe for acquisition and that has a limited future if they don't get themselves bought.
Customers benefit because they're battle-weary from buying piece parts and then having to hire over-paid consultants for integration. I don't want to go to one car dealership for tires, another one for the interior, and another one for the engine--and then have to pay a fleet of consultants a ton of money to put together something that may not work. I'd rather buy a car from one dealership, pick some options, and customize it more if I need to or want to.
Vendor rationalization is Purchasing 101, where you reduce your vendor base to maximize volume spend and increase your leverage. Other benefits include less relationships to manage. With software industry M&As, the companies are doing the vendor rationalization work for you.
Some buyers have a fear-factor over software consolidations because they're worried they'll lose leverage. There'll always be competitors... And just look at the Oracle-->Hyperion acquisition as an example of how M&As can benefit buyers--the enablement fee / ransom demand has pretty much disappeared.
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Hi Stephen,
I have spend the past 12 months getting my arms around the software spend of our organization. It was the largest area of spend with IT – 17% of our “controllable” spend (excluding salaries, lease, etc.). We found so much low hanging fruit by simply analyzing the usage versus maintenance spend. I would encourage any procurement or vendor management offices to look closely into their overall software spend data. I could go on and on regarding all the sales traps, bundled services, “free” software – but utilization review will return a significant amount of savings very quickly.
I would love the idea of rationalizing our vendors in the software arena. I am exploring the options now - but it is proving difficult. Some of our legacy applications are so embedded proving even the notion MORE difficult. The complexity for our support staff moving to a whole solution is met with a ton of resistance. I wonder if your other members are running into the same hurdles?
We recently started to mature our architecture group. It was previously made easy for an associate to spend $100k on a new solution – when IT already had made an investment in another solution. We are moving toward a solution based model within IT. Our business units come to our relationship managers and architecture with a need – IT fills the need with our existing architecture solutions.
Although this will take time – it is already improving efficiencies. Our architecture lead has an analogy of a car manufacturing line. Right now our business units are picking out different engines, body styles and sizes of their car – all while having input the whole way down the manufacturing line making more requested changes. Now they can pick out the color and we can help tweak some options the company car. But we are not willing to allow for custom builds on an already great car – it is far too costly and takes too much time.
I would love to cut us down to a small handful of Strategic vendors. My comments are only around my organizations agility.
Michelle
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