Consolidation

I'm crossposting on Sandhill.com from time to time, this was my first post over there.

Obviously there has been a trend at consolidation in the enterprise software industry, I'm not sure if it began with Oracle declaring it would happen or Oracle initiating their takeover of PSFT and everyone realizing that it was happening. My gut tells me that it began earlier with the consolidation of a wide range of startups into more moderately sized companies. At any rate, it is happening and it's probably, on balance, a good thing to clear the decks.

The enterprise software industry goes through periods of expansion followed by periods of digestion. The expansion stage last 5-6 years and is marked by significant market growth and dramatic technology transformations that create new leaders. The digestion period last 5-7 years and is marked by low overall market growth, a couple of points above GDP, and declining prices. In this environment, which the industry has been in for almost 4 full years, the scenario is ripe for vendor consolidation... declining prices in a low growth market are not exactly exciting conditions for new entrants or weak players. So in effect, this period of consolidation was very predictable, and indeed desireable.

 

The second aspect of this period of consolidation that is interesting is the notion that so many vendors want to claim the "platform vendor" title, and with it the underlying assumption that in order to be a platform player you need to have account control. I think this is a false assumption, witness Intel's use of partnerships to gain channel mastery without having absolute account control. Nonetheless, many enterprise software vendors believe that they have to own an account in order to reap future rewards from it, so consolidation is a natural strategy to employ in order to accomplish this goal.

The best acquirers of companies are the ones that know what to do with the asset after they own it. Integrating an acquired company's assets and more importantly, leveraging your own field assets and products to offer your prospects and customers something more than what they would get with a standalone app is critical. This is where most acquisitions fail, and where most future acquisitions will fail. It's about here that people start talking about corporate cultures and such, and while they are no doubt important factors to consider, I think in the end they have little to do with actually making an acquisition successful. Probably the single biggest thing you can do with an acquired company is know what members of the management team and rank-and-file that will be leaving the combined companies no later than 12 months after the acquisition. The fact is that when you have large companies buying small companies most of the people won't mesh together for the simple fact that entrepreneurs and people attracted to startups don't like big companies. So knowledge transfer and integration becomes a critical success factor.

With big companies merging or acquiring other big companies, it is essential have a detailed plan for integrating the field assets and management because at the end of the day the most valuable asset you are acquiring is the maintenance base. In order to keep your newly acquired customers paying their maintenance, you have to have a seamless account strategy that serves their needs well... you don't own customers, you serve them. In enterprise software this is becoming a meaningful issue to attend to as third parties have started to attack the maintenance revenue streams of OEM vendors. In other words, customers aren't paying maintenance out of habit anymore, they actually expect you to deliver a value add service to deserve it... and product upgrades alone don't cut it anymore.

 

For the most part, the consolidation that we have seen recently will continue. There are simply fewer enterprise software segments that are hitting good growth numbers, and even fewer that you can call 'whitespace' and grow into. Pick a vertical or a platform stack layer and there will be at least 1-2 dominant vendors and a handful of hanger ons, and even the largest vendors in the space have a hard time displacing a vertical leader. The investment required to build a vertical from the ground up is too great, it's much more cost effective to acquire a dominant vendor and use the maintenance base to pay off the acquisition