Software market consolidation is customers' gain

Companies have fewer vendor choice and less bargaining power with industry consolidation, but could stand to gain in terms of faster product innovations and lower costs, analysts say.

Consolidation in the enterprise software space is not entirely bad news for customers, analysts say. Despite drawbacks such as limited product options and fee negotiation, consolidation could also spur innovation, faster time-to-market, and facilitate integration among rival software offerings--all of which benefit customers.

According to Brenon Daly, mergers and acquisitions (M&A) research director at 451 Research, the main downside to customers from the current wave of acquisitions in the software market is that customers have "fewer suppliers to play off one another to secure favorable pricing".

This impact is somewhat muted though, because most IT departments would have their budgets frozen or shrunk due to current economic uncertainties, and so suppliers are still governed by their customers' tightened wallets and cannot raise prices indiscriminately, he qualified.

Maxine Holt, software manager and enterprise solutions practice leader at Ovum, added that midsize companies are the hardest hit from the reduced vendor choice. Elaborating, she said small companies will always have smaller vendors to work with, while large enterprises will typically rely on big IT vendors, which are the ones acquiring other vendors. As such, the squeeze will be felt by those in the middle.

She also noted that customers will not have as much freedom to go for "best of breed" as the market consolidates. The large vendors will dangle plenty of financial incentives to customers to procure all enterprise software from one company, and this is something smaller vendors cannot compete with, she explained.

"Best of breed might well be good in theory, but [in reality], the practicalities of integration, licensing and contract management, are not so easy to deal with," the Ovum analyst surmised.

The analysts' comments come amid the recent slew of acquisitions made by IT giants such as SAP, IBM, and Oracle.

Benefits to be gained
However, while the ongoing industry consolidation can be problematic for customers, there are also positives to be gotten, analysts argued.

Carter Lusher, chief IT analyst at Ovum, disagreed that when the market is increasingly occupied by fewer but bigger software companies, it puts pressure on customers to purchase more from the same vendor. While a vendor can offer financial incentives, or develop useful or compelling integration between their products to entice customers, it cannot force organizations to buy a bundle of products, he stated.

"In fact, vendors rely on standalone sales of their products and the ability to integrate [their products] with other vendors' products in order to be successful," he stated.

According to Lusher, customers' lesser choices and reduced bargaining power are only short-term negative repercussions of consolidation.

The "bright spot" in the longer run comes as the bigger IT vendor may "lose some of the smartest, most ambitions, and well-connected staff" from the acquired company, he noted. These people would then launch a new company using the latest technology, which in a few years could become a formidable force in the marketplace, he said.

One example of this was Workday, Lusher pointed out. The company was started by the founders of PeopleSoft--the company which went through an "ugly acquisition" process with Oracle in 2004--and is now on track to earning US$300 million in revenue this year, he noted.

Daly concurred, saying that to wean off depending on the same few suppliers, IT buyers today are more open to pitches from a "new breed of companies and small vendors with truly disruptive approaches to technology" than they have been in the past.

Elizabeth Henlin, enterprise software analyst at Technology Business Research (TBR), also dismissed the "idea that the current consolidation wave is in any way bad for customers". With the acquisitions, large IT vendors are able to deliver innovation and high-value features to customers on a global scale, she said.

The onset of cloud delivery means smaller software vendors can move their innovations to market faster and at lower costs for customers as well, she added.

Therefore, whether customers decide to continue with their existing vendors or migrate to new ones, regardless of whether these are established vendors or software startups, they retain "complete control and choice" of opportunities presently and over the longer term, Henlin stated.

Daly stated that with the market consolidation, the onus is definitely on the IT department to explore all technology options, rather than "just passively listening to the pitches made by big vendors and then writing checks" and handing it over to them.

Martin Schneider, research manager at 451 Research, added that companies must perform due diligence to ensure that their software projects and lifecycle is as seamless as possible. For instance, with smaller vendors, companies should ask the "right questions" such as what their growth plans and roadmaps are to see if they are potential acquisition targets.

Lusher said organizations have to become more sophisticated in contract negotiations in order to insert clauses that protect them from changes in vendor ownership, too.

Ultimately, given the increasingly volatile software marketplace, companies need to develop an approach that would "future-proof" their IT strategy and procurement tactics, he said.


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