Within two months we have seen just about every major enterprise software vendor in the ERP and Business Intelligence space involved in some form of merger or acquisition. And while most analysis of this dramatic trend has so far focused on how it affects customers, a better curious question is to ask how it affects the business partners of acquired vendors.
Vice-president for business applications at Gartner, Kristian Steenstrup, sees the consolidation among enterprise software vendors as the sign of a maturing market, where at least in terms of the technology, customers are bound to see the most benefit in the end.
“The consolidation in the marketplace is not surprising,” he said. “Initially, in any industry, there are lots of players finding niches, experimenting with the technology. The competitive advantage is shared among many companies — and this advantage shifts as each player comes out with a new idea. The advantage is usually only temporary until the other competitors catch up.”
“It is inevitable that eventually this process must create a best practice or a best in class product. There always has to be a best way of doing something. There is then less differentiation in the products, and customers will find that they are more or less the same. Once there is no differentiation, vendors are no longer able to charge a premium for their product and margins are eroded. Eventually there must therefore be fewer vendors in the market place providing those products.”
This does not mean that users were not well served, Steenstrup said. If anything the users benefit from a more mature and stable product at a better price.
Steenstrup said that much of the fear, uncertainty and doubt among customers of acquired vendors was somewhat unwarranted and he warned against the use of such emotive statements as “they are going to kill off the product”.
“It is more likely that [the acquirer] is going to discontinue the marketing and sale of that product when making new deals, not kill off the product in an instant,” he said. “In any case, the discontinuation of the sale of product is a reality, regardless of acquisition. Software vendors are notorious for forcing their customers to upgrade to newer versions. It is perfectly natural for example, that SAP would discontinue R/2 when it brought out R/3. As long as reasonable support is in place for existing versions, customers have little cause for alarm.”
Streenstrup said the real cause for alarm should be among channel partners — companies he described as the “hanger-on” businesses such as ISV partners and systems integrators that make a living selling additional products around a core technology.
Large vendors such as Microsoft, IBM, SAP and Oracle tended to maintain a technology “stack” — an ecosystem that starts at the operating system, through to the management system, the database, the middleware and the presentation layer, Streenstrup said. These were generally completed either from within the vendor or in combination with its closest business partners.
“Large software vendors like locking customers into their technology stack,” he said. “The consequence for the business partners of an acquired vendor is that their technology is similar to some part of that stack — so they often get shut out. Those rows and rows of stands at the vendor’s conference are companies that are likely to be supporting something that very soon, nobody will need.”
Steenstrup quoted one of his analyst colleagues as the two walked along the floors of a recent software vendor tradeshow. “I see dead people. They are dead and they don’t even know it yet.”
The mass consolidation the industry has seen in recent months was just the tip of the iceberg, Steenstrup said.
“I believe that there are more to go — and not just the high profile ones,” he said. “There are certainly more mid-tier ERP vendors out there than there needs to be. As the market consolidates further, a small vendor’s ability to win business becomes precarious as your competitors become multi-billion dollar companies. It’s a case of get big or get out.”
The survivors so far, he said, were unique either in the functionality of their products, in their entrenchment within a specific industry, or in their geographic specialisation.
Those with unique functionality would tend to find they were either acquired, or larger competitors would simply wait for demand for that functionality to rise to a point where they saw fit to launch a similar product (consider SAP, Microsoft, Oracle and PeopleSoft launching CRM products and almost putting Siebel and i2 out of business).
Steenstrup suggested those with a geographical niche had the best chance of surviving as a small software vendor. “You tend to find that local payroll and finance software vendors never get big but they never go out of business either,” he said.