Earlier this fall, I helped IFS North America conduct a survey of executives and professionals of manufacturers with annual revenues in excess of $100 million. The purpose was to better understand the impact on customers when enterprise application solution providers are acquired. The ERP market in particular has been undergoing consolidation for years now. I remember back in the mid-1990’s Manufacturing Systems magazine used to publish a “top 50” ERP vendor list (solution providers were ranked by size). Soon that “top 50” list became a “top 100” list because there were so many ERP vendors. After more than a decade of consolidation, if that list existed today it would probably be a “top 20.”
As an interesting aside, the publishing industry underwent similar consolidation. Manufacturing Systems became Manufacturing Business Technology (MBT) magazine, owned by Reed Business Publications, who later sold it to Advantage Business Media. And in fact, Advantage Business Media was instrumental in collecting over 340 qualified responses to this survey.
Some of the areas we explored were:
- What percentage of companies is impacted by acquisitions of enterprise application solution providers?
- How are these acquisitions perceived?
- What actions are taken by customers post-acquisition?
- What concerns do customers have when the enterprise software they use is acquired?
Over half (54%) of the survey respondents have “experienced” one of these acquisitions. Acquisitions that result in broad portfolios of products are not necessarily viewed negatively but this will depend on the nature of the portfolio. Only 10% express no concerns whatsoever upon acquisition. Concerns primarily arise over the continued support and innovation of products that are acquired.
Most (86%) continue to run the acquired software post-acquisition- see the explanation for further information. The majority (68%) simply intend to continue to run the software, hence the need for that software to continue to evolve. But 18% are considering replacement and when they do, the incumbent vendor does not necessarily have the advantage. A search for replacement is more than 3 times as likely to be put out to bid. Fourteen percent (14%) plan to replace it through a competitive selection while only 4% plan to replace it with a product offered by the acquiring company. Of course even among the 14% the new company may be considered in the “competition” but aren’t necessarily any more likely to walk away with the deal. And in fact, where a replacement has already occurred, a new vendor was chosen 71% of the time, a new vendor is chosen. Only 4% replaced it with a product from the acquiring company while 10% replaced it with an offering from a different vendor.
This isn’t surprising because throughout the consolidation that has occurred, I find companies develop much more loyalty to a product than they necessarily do to the company that owns it, particularly when ownership changes multiple times. The vendors often gain much more from the acquisitions than the customers.
GOALS OF M&A
Vendors may have a variety of goals when they engage in acquisitions, and these goals often have nothing to do with better serving the customer. One goal is to grow market share. Growing a customer base through acquisition often creates a step function. Instead of selling one customer at a time (gradually), the installed base grows in large blocks of hundreds or even thousands at a time. Because so much of an enterprise application vendor’s revenue comes from recurring maintenance revenue, this can be an immediate and significant boost.
Acquisition can be a cheaper way of growing a customer base, but that assumes the acquiring company is good at it – good at integrating the new company, formulating product plans and executing that strategy. Some are better at it than others and some become good at it only after learning from mistakes of prior acquisitions. When you see ERP companies acquiring other ERP companies this is often the goal.
Yet another goal of acquisitions is to grow the share of the customers’ wallet. By acquiring complementary solutions that fill gaps in the product line, the acquirer creates more potential for cross sell and up sell opportunity. Now of course, this may not happen immediately. No acquisition comes with a magic wand that instantly integrates products, although in some instances, where the two vendors have previously partnered, the integration may already exist. But there is no guarantee that integration is seamless. For many acquiring companies though this fills product gaps faster than doing the pure development route. Although with the introduction of agile development methodologies the difference is not as dramatic as it once was. But it also can be a means of strengthening internal expertise immediately.
And the final reason for acquisition is to enter new markets. These may be new geographies, particularly in emerging markets. Or they may be new industries.
SO WHAT’S IN IT FOR THE CUSTOMER?
In some cases, acquisitions benefit the customer if they place an acquired vendor (or even the acquiring vendor) in a stronger financial position. M&A activity can “bail out” struggling companies, preserving legacy solutions and companies that may otherwise simply vanish. When vendors use M&A activity to grow their share of the customer wallet, customers may immediately benefit from having access to a broader solution from a single vendor. There may be synergies between merged companies/solutions and there could be an accelerated (or slowed) innovation processes’
When the goal is to enter new markets, there is little to no customer benefit unless the customer is in (or is entering) a market that is underserved by the original vendor. But that probably means the original selection of that product was questionable.
Given the fact that the vendors often have more to gain than the customers, it is not surprising to see concerns. These concerns can be summed up as follows:
- We could wind up running a collection of separate point solutions owned by the same vendor instead of a well-integrated ERP (58%)
- The product we use may not be well integrated with the rest of the product portfolio (55%)
- The owner of the product may not continue to invest in or evolve the product in the future (48%)
- The product may be discontinued, forcing us to move onto another product from the same vendor (33%)
- While customer acquisition goals are always important, don’t neglect customer retention
- Rounding out a solution portfolio is commendable, but don’t forget integration. If all you have done is reduce the number of vendors a customer deals with you are not really adding value in the eyes of the customer
SOME ADVICE TO ACQUIRING SOLUTION PROVIDERS:
ADVICE FOR USERS OF PRODUCTS THAT MIGHT BE ACQUIRED:
Get the facts. Hold your vendor’s feet to fire in terms of product road maps. But recognize that continued development of the product you are running might not be a good business decision for your new vendor. But it also may not be best for you, particularly in the case of a legacy ERP developed on older technology. ERP used to be viewed as brain surgery. Don’t do it unless the patient is dying. Today I would recommend viewing it like joint replacement (think knees and hips). Even if the joint is painful, you suffer along with it as long as it doesn’t severely handicap your ability to function. But when it becomes too painful, or too limiting, it is time to undergo the surgery. ERP replacement can be like surgery – it can disrupt your life. But if the quality of life post-surgery is vastly improved, it was worth the effort.
To see the actual results of the survey please click here.