When Graham Stubbins, principal accountant at Aberdeen City Council, heard that two more software suites – QSP and Walker – were being acquired to operate alongside the Cedar package which ran the council’s accounts, he was naturally concerned. After all, it’s not unknown for takeovers or mergers to result in a change of direction in software roadmaps.
Stubbins needn’t have worried. Redac, the holding company set up to merge the former businesses of Cedar Software and Arelon, made it clear that all three would run as a family. Moreover, users were kept informed of what was happening as the merger took place. And the vendors also accentuated the positive, by explaining how the larger organisation would have more funds for product development.
One year on, Stubbins – who is chairman of Cedar’s local authority special interest group – doesn’t detect any signs of disquiet among the 40 or so councils that use the product. But software takeovers don’t always happen so smoothly, and finance directors are right to be nervous when they hear about a key supplier becoming another acquisition victim.
The past few years have seen a wave of software industry takeovers, with analysts predicting more to come. The industry is still holding its breath about whether Oracle’s hostile bid for PeopleSoft will succeed.
But while some of the past acquisitions have resulted in benefits for users, that is not universally the case. Even where there are benefits in the long run, short-term worries may cloud the immediate future. And, sometimes, the takeover simply doesn’t work out as users and vendors had hoped.
Analyst Nigel Pendse has been observing the software industry for more than a decade. He has seen high hopes dashed too often as ambitious vendors build their product portfolio but lose sight of customer needs. Sometimes it takes years for the full scale of the tragedy to emerge.
Take the case of Seagate Technologies’ takeover of Holos in 1996. Holos had a midrange business intelligence product and the company, says Pendse, was “profitable, conservatively run and really looked after its customers”.
For a few years, it looked as though Seagate was committed to developing the product with new versions, but sales dropped off after 2000 and Seagate announced last year that it was abandoning sales and withdrawing support next year. “Some companies have built important systems on Holos and ended up with a product whose key developers have left,” says Pendse.
Then there’s the sad tale of Informix’s takeover of Stanford Technology, which had developed Metacube, an innovative business intelligence product.
Because the Stanford guys were mostly ex-Oracle, they had naturally developed their product to run on top of an Oracle database.
But that didn’t suit rival database vendor Informix. Within nine months, recalls Pendse, Informix had withdrawn support for the Oracle version, even though that’s what most customers wanted. Most of the customers abandoned Metacube and Informix lost vital reference sites. Soon the product faded away.
But it doesn’t have to be like that. When Geac took over Comshare last year, one of its first actions was to announce that it would junk the budgeting and consolidation software it was using in its own finance department in favour of Comshare’s superior MPC product. The move sent a positive signal to Comshare’s 500 users that MPC had a long-term future.
But whether the outcome is positive or not, it’s clear that software takeovers have implications which FDs need to consider, especially when the takeover involves products that are used in the finance function, as many are. Even where the software is still supported and continues to run as before, the transition from one vendor to another can be unsettling.
A bitter dispute flared up in the US earlier this year between the user group of manufacturing software supplier JD Edwards and PeopleSoft, which had acquired the company the previous year. Quest, the independent JD Edwards’ user group, complained that PeopleSoft had pulled out of a key regional conference being attended by 600 users.
The row revealed how differences in culture can cause tensions among users. JD Edwards had largely handed over control of user conference programmes to Quest. But product marketing plays a larger role in PeopleSoft conferences, Quest complained. PeopleSoft wanted to represent all its customers, not just those who were Quest members.
But in the UK, a JD Edwards’ user group member who didn’t want to be named has noted similar tensions. “There are two different cultures. Edwards was hands-off, interested in what the user group had to say, but let it run its own events. PeopleSoft wanted their own representatives and wanted to set the agenda. They were much more hands-on and set out items for discussion at the conference. That created a bit of tension,” the member said.
Perhaps the answer is for FDs and other users to be more assertive when they encounter a powerful new vendor that wants to change the way they work. “We feel that user power is growing,” says John Holden, a research analyst at the Butler Group. “This is because of the way in which there’s a tighter squeeze on user budgets and a drive to get more from less. Software vendors are having to become more flexible.”
He points out that even Microsoft is negotiating with the National Health Service about bespoke add-ons for Windows and Office. “When a company like Microsoft bends over backwards, it shows there’s a change of heart.” But it’s also worth pointing out that Microsoft is bending over backwards for the largest single employer in Europe and that smaller companies could struggle to force the software giant into even the tiniest genuflection.
Even so, FDs of smaller outfits might have more leverage than they realise, says Peter Lumley, a partner at PA Consulting Group and head of the enterprise-wide solutions practice in the UK. He believes FDs should look separately at the short-, medium- and long-term scenarios if they find a favoured software supplier has been taken over. “In the short term, I’m convinced there’s opportunity for the user to make real commercial gains,” Lumley says. “When these mergers take place, stock markets show a close interest in the outcome. Analysts are interested in whether the vendor’s takeover target is selling as many licences under its new ownership. There are some incredibly good deals to be had in the transition period.”
But it doesn’t stop at licence fees. “I was also surprised that it’s possible to strike really attractive deals for maintenance during the transition period immediately after a takeover. The reason is the newco really needs to show the markets it can build volume,” Lumley says.
So the message in the transitional months following a takeover seems to be: look for the main chance. But the issues become more subtle in what Lumley calls the medium term. “The question that really emerges in this phase is about access to expertise,” says Lumley. For example, senior management and consultants – the people who provide the high-level expertise which adds value to the basic software products – might choose to move on from the company that has been taken over if they feel the acquisition isn’t working out. If that happens, the ways in which the vendor can add value to its customers’ business beyond the core product may diminish – and even the core product’s development may start to atrophy.
“So in the medium term, you need to think about your sourcing strategy,” Lumley says. “Where you may have been going to the software supplier for expertise, now is to the time to go to the market and analyse what alternative sources there might be.” There are plenty of third-party suppliers of expertise for most of the major software suppliers, says Lumley.
Which leads on to the long-term. And in this period, FDs tend to worry about whether a takeover will ‘contaminate’ the software roadmap they believe their product will follow. “I think you can get much too hung up on this,” says Lumley. “I believe the crucial task in this kind of situation is to challenge your own information systems strategy. You need to ask which elements are absolutely essential for the future? What must we deliver to the business? When you’ve answered those questions, you’re in a better position to decide whether you’re still with an appropriate supplier for the long term.”
The key to dodging the fall-out of doubtful IT industry mergers, Lumley argues, is to decouple the systems strategy from the software. Pendse makes a similar point. He believes the day of ‘strategic’ decisions about a software supplier should be passing. “I think most of the strategic decisions people make come back to bite them. You should try to have as much of your software in the tactical category as possible, and as little in the strategic category.”
He also believes that “long-term commitment is crazy. It means you invest a lot in it, but sooner or later your strategy and that of the software will diverge. You don’t want to switch suppliers gratuitously, but just don’t assume any particular supplier is right for the long term.”
Meanwhile, Stubbins is confident the software roadmap he signed up to is on track into the future. “Cedar released a new version of its e-financials software at the end of last year and their roadmap shows they will release another version in a years’ time,” he says.
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