It seems like every other day, announcements file in from the US and around the world about software companies, in different markets, merging, acquiring and divesting in each other. With so many solutions on offer, and so many players vying for market share, the catch cry of 2000-2001 appears to be "consolidation".
Furthermore, an economic downturn coupled with the bursting of the hype-bubble for enterprise resource planning (ERP) solutions has plagued the large-scale deployment of enterprise software. Such a climate magnifies pressure on vendors to adapt and seek out the best way to survive, such as being picked up by a wealthy benefactor or joining forces with an erstwhile foe.
Gartner Asia Pacific research director Kristian Steenstrup recognises this tendency, and claims the level of consolidation in the market is largely due to a tough year in 2000 for business and ERP. During a downturn, there is strength in consolidation, argues Steenstrup, not to mention reduced overheads by streamlining administration, distribution and other business processes while theoretically maintaining and growing a company's customer base.
Gartner has kept a close eye on the consolidating software vendor space and warns the most dangerous scenario for customers and the channel, due to its somewhat unpredictable nature, is when two direct competitors merge.
"As is the case with tier-one suppliers, traditional tier-two and tier-three ERP vendors are currently facing the need to juggle large investments in e-business, technology, architecture, globalisation and verticalisation, at the same time as they are being pushed to scale up sales and marketing," a recently published Gartner report states. "These over-stretched vendors feel tremendous pressure to search out, acquire or merge with compatible enterprises, as well as divest themselves of underachieving assets to gain needed economies and move ahead faster with their plans."
When companies merge, Gartner suggests there are a number of factors at play that the channel must keep abreast of. These include whether certain product lines will be discontinued or left unsupported, the motivations behind the merger, the vendor's go-to-market strategy and any contracts in place prior to the announcement.
"One thing is certain, no product strategy is sacred when vendors merge," warns Steenstrup.
While Steenstrup says technology or customer-base acquisitions are one thing, acquiring a company for its channel is another. He believes that even though purchasing a company for its channel gives the acquirer instant street credibility, it can lead to significant overlaps in channel sales and marketing, thus resulting in channel conflict.
ERP vs ERP2
Early indications are that the ERP market is showing double-digit growth again after a slowdown in the late 90s. Worldwide licence and maintenance revenue for ERP systems was worth $US21.5 billion in 2000, according to preliminary figures compiled by Andrew Golloboy, ERP research manager at market research company IDC.
This represents revenue growth of 13.1 per cent from 1999, when the worldwide market was worth $19 billion. In comparison, IDC's preliminary figures show a growth of 8.1 per cent between 1998 and 1999, when the worldwide market for sold licences and maintenance was $17.6 billion.
The surge in sales is ascribed by industry insiders to vendor efforts to link traditional ERP systems with CRM (customer relationship management) and SCM (supply chain management) software, and allows users to access the resulting integrated information over the Internet.
In the past, ERP systems were designed to integrate various departments within the enterprise - typically manufacturing businesses - by offering different components. These components, such as distribution, accounting, human resources and factory floor automation modules, could all be linked in a configuration customised to individual companies, with data flowing among the various modules. But the integration remained within the four walls of the enterprise.
These days, an end user wants to go straight into a distributor's system over the Internet and see whether a product is in stock before he/she orders it. A distributor wants to see where in the manufacturing chain a product is at each precise moment.
For all of this to work over the Internet, the software vendors must first integrate their systems offline, so users tapping in to the systems from the Web can get an integrated view of data.
"In the last 18 months new systems have been coming to the fore," acknowledges Gartner's Steenstrup. "And unlike in most cases where customers are demanding something, the vendors are driving it."
The resulting next phase for ERP is what Gartner and others are imaginatively calling ERP2.
ERP2 is externally focused and open in its processes and its integration with other systems. This differs from the fortress-style ERP of old, where the ultimate goal was that the users themselves wouldn't even know they were using it.
While some vendor's early forays into making ERP "Web aware" had a heavy focus on Web interfaces, Steenstrup eloquently equates this to "putting lipstick on a pig", as the problems of a silo approach to individual businesses prevented any real core-to-core system collaboration from taking place.
Case study: Navision, six months on
An interesting case in point is the merger of long-time Denmark-based ERP rivals Navision Software and Damgaard in November 2000. Both companies shared similar product offerings and corporate cultures. They attacked similar markets and exhibited a close channel-focused, go-to-market strategy.
In theory it was a perfect match, as the similarities far outweighed the differences. The unanswered question, however, was how the new company's combined channel would react.
Navision Software was the dominant player in the merger, around two-thirds bigger (revenue-wise) than Damgaard. This was reflected in Navision Software taking a 72 per cent stake in Damgaard. It also had greater international penetration. But its Navision Financials ERP suite was considered by all and sundry as a lower tiered solution than Damgaard's Axapter range. Damgaard's technology on the other hand was considered a later technology, more readily scalable and more in line with where ERP is heading in terms of open systems.
Initially the merger was greeted with a few raised eyebrows, as analysts and channel partners (largely on the Damgaard side) wondered whether the larger Navision channel would adopt Axapter and effectively close ranks around the better technology. But six months on this fear appears to have been quelled, thanks to some deft merger handling, steered largely by the company's joint CEOs Preben Damgaard and Jesper Balser.
Preben Damgaard claims there were five key factors in transforming the companies into a new entity, starting with "leaving our egos at the door". Damgaard went so far as to drop his family name from the new company as a mark of commitment to the new venture.
Damgaard also says the company committed to a new brand, vision, value and promise to its customer and reseller channel. "Company loyalties have to be with the new company, regardless of how liked the old companies were," Damgaard said, addressing Navision's first joint international partner conference in Copenhagen.
It also put in place strong channel certification requirements for the alternative product offerings and guided resellers into vertical market specialisations.
"From a cost synergy perspective it was so obvious [to merge]," says joint CEO Balser. "We were headquartered five miles apart, organised the same way, had offices in almost all countries and in many situations, the same cities - so it just made a lot of sense."
As a result of the merger Navision has committed to the Copenhagen stock exchange cost synergies to the value of DKK 140 million (A$31.8 million) for this calendar year. This equates to around 10 per cent of the company's forecast revenues, a large chunk of which is going to be reinvested into a global branding and marketing campaign to leverage Navision's perceived position as the largest tier two ERP vendor in license sales in the world.
But not everyone is convinced. Gartner's Steenstrup claims the Navision Software/Damgaard merger was more a marriage of convenience rather than an aggressive strategy. "Navision and Damgaard [combined] is not more than a sum of its parts, which is what a merger is ideally going for. Perhaps a stretch could have given them something they didn't already have."
However, both Damgaard and Balser argue that the similarities have been the biggest factor in easing the transition.
"The biggest difference was, and forget about size and profitability and so forth, that Damgaard was more centralised than Navision [Software]. Navision's country offices were more independent of their headquarters. But that wasn't even an issue," says Balser.
"If we acquired a US company in the mid-West, and we had to travel far to get there and contend with a completely different background, it would have been much more difficult. In this situation, within two months the headquarters were joined, as were all the country offices. Within a week Preben and I had offices next to each other," he adds.
One of the key objectives coming out of the new Navision is a desire to better brand and market the company. So much so that Damgaard says it is to become a "core competency" for the company in the next few years. This goes against the general trend during tougher economic times, in which the hard-to-quantify benefits of marketing are often overly reeled in to benefit the bottom line.
Steenstrup says that from a channel's perspective, cutting back on marketing is the wrong way to go.
"Australian, and particularly European, vendors have failed to realise the importance of the North American marketing mind-set. [European vendors] tend to be of the if you build it they will come' mentality, which in a tough climate isn't going to happen," Steenstrup says.
"If you're a reseller you want to be a reseller of a household name," he adds.
Being one of the first Damgaard (Axapter) resellers in Australia, Roger Gibson, general manager of Gibson and Beebe, kept a close eye on Navision when the two vendors competed. But when the merger was announced, he was optimistic about the potential of the combined entity.
"I thought it was a good thing, because what I saw (and still see) in Australia is this hammer-and-tong competition. If I'm going to build a business around a product, and effectively that's what you have to do at this level, then I want a [vendor] with a strong channel strategy, and that's what Navision has," says Gibson. "You want someone who's not going to leave you hanging with a direct and in-direct model."
Gibson believes Navision maintains a healthy level of contact with, and management of, its solution centres without becoming too autocratic. This effectively leaves resellers with enough freedom to attack markets they think they are best suited to.
Ross Powis, director of Xapt International, another former Damgaard (Axapter) reseller, claims he was not surprised by the merger because of how volatile the market has been over the past few years.
Xapt International is a conglomerate of Axapter resellers founded just over 12 months ago. Currently in 12 countries, the group has begun to realise its potential with international customers.
According to Powis, the world alliance of Xapt resellers means the group can leverage global customers, command a bigger presence in deal negotiations and leverage joint marketing and advertising campaigns. This leverage becomes increasingly important in an era of consolidation.
IDG journalist Pia Landergren contributed to this article.How it happened1983 - Damgaard is founded by brothers Preben and Eric Damgaard.
1984 - Navision Software is founded.
1988 - IBM is a part owner of Damgaard. Both Navision Software and Damgaard remain private companies and informal meetings between respective chairmen prove fruitless.
1999 - The Internet starts driving the need for more open ERP systems.
1999 - Navision Software lists on the Copenhagen Stock Exchange, followed six months later by Damgaard.
2000 - February, Navision Software's share price peaks at over DKK900 (A$225) per share.
2000 - In the second half of the year, both companies come under increasing market pressure as the gloss fades from ERP and it slides down the hype curve. Navision Software shares crash to under DKK100 (A$25).
2000 - October, Preben Damgaard and Navision Software chairman Jesper Balser meet and put "deal breakers" on the table.
2000 - November 4, a shared vision is established.
2000 - November 20, an announcement is made to the Copenhagen Stock Exchange stating the two companies are merging.
2001 - February, companies have amalgamated headquarters and regional offices.
2001 - March, NavisionDamgaard announces it will change its name to Navision.