These are nervous, career-defining moments for enterprise resource planning (ERP) software buyers.
As the whole sector folds in on itself in a frenzy of mergers and acquisitions, it is not uncommon for senior IT management to find that the ERP package they ‘bet the business’ on not so long ago is being sold to a ‘consolidator’, sometimes for the second time.
And that leaves only two possible outcomes. Either they will face a series of tricky migrations to a new product line that will (if all goes well) sport all the key parts of the new owner’s collection of previously separate packages; or the ERP suite will be ‘functionally stabilised’, with users only able to count on support and basic updates.
The big buy-outs that started in the high-end ERP market in 2004, as PeopleSoft absorbed JD Edwards only to be acquired itself by Oracle, were just the overture.
The real consolidation drama is underway in the buoyant mid-market of ERP, where target customers might have revenues ranging from E100 million to E1 billion, or are the divisions or subsidiaries of the world’s largest multinationals. After two years of courtship (during which “everybody has been talking to everybody”, according to Michael Hallén, CEO of IFS, itself a reluctant participant in those dates) scores of vendors have been subsumed into much larger – though not always coherent – groupings.
Just witness the portfolio now under the control of consolidation vehicle Infor. Following its early-2005 acquisition spree, Infor is now the home of the Mapics line of manufacturing software (4,500 customers, from golf cart marker Club Car to Volvo Construction Equipment) as well as Mercia Software’s highly acclaimed MerciaLinc (demand planning software, whose bluechip user base ranges from General Motors and Coca-Cola to Unilever and the Body Shop). But Infor is also about to take stewardship of GEAC’s broad ERP software range (itself the result of several acquisitions, including JBA System21 and D&B Software’s Smartstream and E & M Series).
Infor is following a trail blazed by another mid-market veteran, SSA, which over a four year period has augmented its own ERP packages with the acquisitions of Interbiz, Baan, Marcam and (when the deal completes) Epiphany, the customer relationship management (CRM) software vendor.
But the third consolidator is the relatively unknown: CDC (formerly chinadotcom) is using the market value and cash established through its Chinese web portals to pull together an ERP portfolio from a starting point of Ross Systems, Pivotal and Industri-Matematik International. Its unsuccessful hostile bid for customer software vendor Onyx in recent months gives a flavour of just how unpredictable the future provenance of some software in this sector is likely to be.
Distinct from such consolidators, other M&A activity looks more like the merger of peers, often inspired by a mutual need to grow global reach and product breadth: for instance, Lawson Software of the US’s deal to buy Sweden’s Intentia or US-based Epicor’s buyout of Scala of Holland.
What is driving this frantic pace of M&A activity? Above all, a realisation that the ERP mid-market – which was a relatively stable environment for two decades – is in the midst of a metamorphosis that creates phases of upheaval for its customers.
The structure of the business applications mid-market to date has been based on suppliers’ ability to serve specific areas – geographical and industrial. Historically, customers have bought from regional suppliers (especially in Europe) with the belief that their software would be more attuned to local needs and better supported locally.
However, the globalisation of the supply chain of even the most modest of these customers (where they might design in Europe but manufacture in the Far East and distribute around the world) means that locally focused packages are no longer relevant.
Moreover, many of those suppliers have only provided a part of the solution – financials or manufacturing, supply chain and so on – adding integration headaches, cost and complexity. That has created a hunger in the mid-market for a new mould of business applications package.
And the result is that some of the biggest forces in the IT industry want to brand that ERP mid-market their own.
High-end ERP giants, SAP and Oracle, have been aggressively pushing down into the mid-market; Microsoft has been building a formidable launchpad for an all-out attack on ERP; and Sage has been making rapid inroads from its dominant position in small enterprise ERP.
Already the Microsoft Dynamics division – formerly Microsoft Business Solutions and forged over three years from its acquisitions of Great Plains, Solomon Software and Navision – is generating annual revenues of over $800 million and growing at over 20%. And that is even before it has finished its effort to build a converged code base (due 2008 and beyond) and achieved what chairman Doug Burgum calls ‘deep integration’ with other core Microsoft products, such as Office and SQL Server business intelligence.
"It is like water pounding against a rock, the economies of software scale are just going to keep pounding away."
Doug Burgum, Microsoft
These developments mean the writing is on the wall for many of today’s ERP vendors. “Some vendors might have defensible market positions today, simply as a result of customers’ deep reluctance to switch between products. [But] at some stage, the sheer scale and rate of R&D investment by the likes of Microsoft, Oracle and SAP, will eventually impact customers’ expectations to the point where it is too much of a business imperative,“ says Burgum.
“It is like water against a rock, the economies of software scale are just going to keep pounding away,” he says.
Investors certainly see opportunity in those ‘defensible positions’. SSA Global and Infor were both bankrolled by private equity investment companies, cognizant of the fact that the high ‘barrier to exit’ of almost any ERP customer means they are likely to continue to pay maintenance and support revenue for many years.
However, suggestions by some critics that SSA was setting itself up as the retirement home for veteran software now seem a little bit thin – a sentiment reinforced by its recent move to buy CRM company Epiphany.
According the Karen Richardson, formerly CEO of Epiphany and now head of SSA’s CRM unit, SSA has a track record of taking on struggling companies, solving their expense issues and rationalising their model – while at the same time (if possible), rationalising their technology footprint around a modern software platform – namely the Java enterprise standard, J2EE.
“The data on SSA shows new licence growth, the number of verticals expanding, the technology being rationalised around modern architectures. What it doesn't show is SSA is just trying to milk a maintenance stream,” says Richardson.
Nonetheless, having to divine the motivation of suppliers, just adds to the sense of uncertainty.
"If you don't have the vertical expertise you are out of the market."
Bertrand Sciard, Intentia
Dazed and confused
The upshot for customers is “huge confusion”, says Bertrand Sciard, CEO of Intentia and COO designate of ‘Lawson-Intentia’.
In many ways, the company he is about to join has the DNA of a species on its way out. Lawson has an ageing base of clients: only 20% of its revenues actually come from software licence sales – the remainder is derived from annual maintenance and support fees paid by the many thousands of clients it has built up over its 30 year history. It is geographically niche: Lawson’s business outside of the US is negligible (less than 6%), partially as a result of the markets it targets – healthcare, retail, banking, insurance, education and local governments. And its claims to be an ERP player are questionable – its financials and HR packages are highly rated, but they do not sit alongside any credible manufacturing or supply chain offerings.
Its acquisition of Sweden’s Intentia will not only provide Lawson with European revenue but will give it manufacturing and distribution modules to sell alongside its financials and HR – much more like the broad, integrated suite mid-market customers want, after having spent many years pulling together applications from multiple vendors.
However, one of the chief reasons clients went for a niche product in the first place has not gone away. While mid-market customers now want breadth, that should not be at the expense of depth.
What it boils down to is that “if you don’t have that expertise, be it fashion or fresh food [or another vertical], you are out of the market,“ says Sciard. That fact offers survival routes for existing players in the mid-market.
When he arrived at Intentia in June 2004, Sciard found a company targeting customers spread across dozens of verticals. He quickly cut that to five: apparel; food and beverage; wholesale distribution; manufacturing (automotive, furniture, paper and steel); and asset and maintenance-intensive industries.
“If you as a vendor are focused on 30 industries and only have 500 people in R&D, you should realise you can't serve the needs of all those specific industries,” says Sciard.
“In short, the vendors that are going to survive in the mid-market are going to be very verticalised on four or five verticals – maybe up to a maximum of 10, if they are very big.”
And this can get pretty specific. Many of those vendors list automotive companies among their clients, but that does not mean they target Volvo, BMW or Fiat. Rather, they are focused on tier 2 or 3 manufacturers – the companies that produce the parts or even the components for the parts that are used by the household name car makers.
Sweden’s IFS is a case in point. It targets seven industries (aerospace & defense, automotive, construction & facility management, high-tech, industrial manufacturing, process, and utilities & telecom industries). But often it is targeting deep within these sectors.
That kind of domain expertise is already a differentiator, but as it becomes more refined it will change the whole shape of mid-market ERP with applications that are today 80% horizontal and 20% vertical moving much more in the other direction. By the end of this decade companies like Lawson-Intentia may be most closely associated with ERP for healthcare or ERP for fashion; IFS may be the ERP leader in car part manufacturing; and Sage the owner of construction ERP.
The consequence for customers is that they need to take a cold, hard look at the target industries of their current and future suppliers and choose those that are going to serve their industry well.
"To be successful in this area, vendors need three things – to be global, to have great technology and to focus on specific industries."
Michael Hallén, IFS
Choose the wrong supplier and a customer will find themselves trying to fit a square peg into a round hole, with a healthcare supply company, for example, trying to align its business processes with a package designed for maritime agencies.
The Microsoft and SAP strategy is to leave that verticalisation to channel partners. “With the breadth and number of mid-market customers, times the number of geographies, times the number of niches, we won’t be able to deliver all that code,” says Microsoft’s Burgum. “We want to leave that [to ISVs and resellers], giving them the chance to create their own intellectual property, with us providing base capabilities for select industries.”
Others have their doubts about the role of resellers in mid-market ERP. “Resellers are not always strong, competent, impressive organisations. They [typically] haven’t got the depth and history of serious manufacturing implementations,” says Alastair Sorbie, CEO designate at IFS, “Plus there are lots of them, [all] competing.”
The approach at SAP sounds a little more hands on: a select number of channel partners will be invited to build industry-specific, vertical templates on top of the company’s mid-market offering, All-in-One.
The code base of that product may be the same as the high-end MySAP, but a version of All-in-One for the legal profession, say, may come in at around £250,000 to £300,000, not the £20 million a large company might expect to pay for an implementation of MySAP, says Ciaran Rafferty, director of SME applications at SAP UK.
That approach means SAP does not have limits on the number of verticals it targets. “If the markets are saying we should be in a vertical and it is big enough then we will focus on building it with a partner,” says Rafferty.
That kind of player is saying, “go with us, we’re stable. Otherwise you’ll end up in a consolidator’s portfolio,” says Sciard. The truth is the mid-market has always been about diversity, and the current upheaval is likely to lead to that diverse customer need being more closely met.
And there is a simple formula behind delivering on that. “To be successful in this area, vendors need three things,” says IFS’s Michael Hallén, “to be global, to have great technology and to focus on specific industries.”
Where’s everybody gone?
Mid-market ERP acquisition portfolios
CRS Retail Systems