Size may matter more than Functionality!

Software Gorillas will grow bigger!

o Over the last decade we've seen a slew of tiny companies releasing products for optimizing different fragments of the extended supply chain. However, shrinking product life-cycles, growing compliance-related complexities due to the expanding global footprint, recent advances in mass-customization technologies and wider acceptance of highly collaborative demand driven supply networks are going to raise the level of complexity of doing business far beyond what can be handled by standard SCM and CRM solutions offered by the small vendors, and customers will begin to turn back towards the software giants.

o In the meantime, the relentless acquisition spree of the software gorillas such as Oracle continues unabated. With the announcement of Oracle's decision to buy Hyperion for US $3.3 billion, the war to grab territory will hot up between Oracle and SAP! While Oracle's strategy has been to buy market leaders for their customer base and technology (25+ acquisitions in 3 years!), and then to cobble these together into a wide application suite, SAP continues to believe in building its own applications.

o Oracle hopes that the acquisition of this Business Intelligence (BI) tools vendor will increase Oracle's offerings to SAP customers. However, though Oracle has announced that it will continue to support non-Oracle databases and applications for Hyperion customers, the sudden uncertainty over the road-map for the integration of Oracle and Hyperion BI tools might cause customer defection to competitors such as Business Objects!

Small SCM vendors will face stiff competition

o Simultaneously, the existing giants in the SCM solution space, SAP and Oracle are aggressively setting their sights at the bottom of the pyramid (BOP) and are seeking to expand their market share beyond the large enterprises to small and medium businesses (SMB's), with offerings such as Business One from SAP, as well as Accelerate from Oracle.

o Customer preferences - in the SMB segment - indicate gravitation either towards the customizable application suites from solution providers, or towards the system integrators who have deep knowledge of specific industry verticals. Customers today expect their vendors to have intimate familiarity with their business, even before they walk into their door! In other words, the small SCM vendors should not only move towards greater vertical-specific solutions to remain competitive, but should also redesign their sales strategy into a building block process to accommodate customers who demand sliced-and-diced solutions as well as a pay-per-use model.

o The writing on the wall, then, seems to be that no matter which way the small players move, they are bound to face financial uncertainty in the near future. Sales cycles will grow shorter increasing the number of deals; however any gains will be offset by the substantially smaller size of each deal as customers demand smaller and lower cost implementations, pay-per-use models, and sub-12 month paybacks!

Small vendors: Increased vulnerability to low-cost acquisition moves

o The small Software-as-a-Service (SaaS) SCM vendors may find the market turning skeptical of this model once customers realize that they're paying a higher cost over time, and at the same time facing major exposure to business continuity risks due to outages, unpredictable performance, loss of control over business data, as well as an unhealthy dependence for security on the vendor. Saas customers will increasingly seek source code escrow as insurance. SaaS vendors have to solve these customer concerns quickly, else the new trends towards 'appliance based software delivery' may completely supercede SaaS, just as SaaS once superseded the traditional software delivery models!

o Customers are also looking more closely at spend-analysis, and are steadily decreasing the number of vendors they deal with, so organic growth does not look like a very feasible option anymore for the smaller SCM vendors. To combat this, the smarter small players will look at getting private equity funding to acquire several complementary players in one specialized niche, integrate them into into a broad suite of applications, cut costs by replacing experience with youth, and then resell this package to a larger player for very handsome returns!!

o Sounds like an excellent plan except for the following trends that threaten to throw the proverbial spanner in the works:
(a) the age of suite-based solutions looks like ending very soon
(b) the low rate of successful acquisitions across the globe is increasing market skepticism about companies that have not grown organically, and,
(c) the tough competition from the software giants, as well as from the small system integrators will act as a double whammy, as the very same customers who will willingly buy a suite from a software gorilla, will demand slicing and dicing from the smaller players.
These trends will lower market valuations, and leave the small players vulnerable to low-value acquisition moves.

However there is a silver lining ...

o This, then, is not the easiest of times to be a small player in this space, and the small players need to do some hard soul-searching and take decisive strategic decisions if they want to survive the next two years.

o This could be through downsizing, organizational restructuring or cutting on development costs to allow them to retain temporary financial stability, even knowing fully well that such decisions will not contribute to the growth of a healthy or stable company, which in turn will make their exit options that much more difficult to achieve! Unfortunately, if being a small player looks difficult, the consolidation route does not look like a sure alternate any more either.

o There is a bright lining however: the small players who are smart enough to align their services to specific industry verticals, or in highly specialized niches will thrive and do well - provided they take care to remain complementary to the offerings of the big software gorillas!

Sounds unfair, but then these uncertainties and constraints are the hallmark of the new economy, and this new economy is here to stay!!

The next post will be up on March 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com