July 19, 2013Doug Hadden
Doug Hadden, VP Products
Press releases from large Enterprise Resource Planning (ERP) companies need to be taken with some skepticism. As the market for these legacy systems has slowed, company executives have searched to pin the blame on some external factor. It reminds me of the famous “prepare three envelopes joke.”
The two largest and “tier 1” ERP companies have reported some disappointing financial results recently. A quarter does not a trend make. But, when both firms blame the same external factor, we have to wonder whether these weak signals mean something more profound.
Don’t get me wrong – I’m relieved that they are blaming Asia rather than Canada 😉
One of the firms blamed “Asia weakness”, as if the largest Continent on earth had become fatigued because of the Himalayas. Latin America was also blamed with Asia by the other tier 1 giant. Why can’t Asia get with the program?
I don’t think that this is a blip. I think that Asia is the “canary in the coal mine” that shows the weakness in the ERP market. Despite what the Financial Times thinks, it’s time to jump to some conclusions about the mature elements of the technology market.
Yes, it’s legacy technology sold in the old way of monetizing through the old supply chain. As Vinnie Michandani points out in reaction to a recent ERP vendor quarter when the vendor claims to have transitioned to a cloud company: 56% of revenue came from maintenance. “More than half of revenues from legacy is a pretty good definer of "traditional software company". And if you truly want that to shrivel and die, why do you keep trying to raise those rates?” And, the cloud revenues represented 6% of total despite $Bs in acquisitions of cloud vendors.
The emerging pattern is:
- Business model focused on maintenance revenue through vendor lock-in under question
- Over-reliance on “shelfware” deals at the end of fiscal quarters
- Increasing competitive threat of open source software, particularly for middleware
- Continuous acquisition of technology firms confuses the market
Economies of Scale have Shifted
Tier 1 ERP companies claim “economies of scale” when selling to potential customers. These companies are larger than Tier 2 companies or specialists like FreeBalance. The truth is that economies have shifted. There are diminishing returns and higher costs for companies to enter new markets, to become “vertically integrated” by supplying as much of the software stack as possible.
This “owning the stack” approach of application software, platforms, middleware and hardware challenges large firms to be the best at every layer. (I know, the technology analysts put them in the top right quadrant as ‘leaders’ in all the relevant categories – but is there a real disconnection between church and state here?)
FreeBalance has a strong commitment to emerging economies. And, we have a not insignificant success rate in Asia in government financials. (Against those tier 1 firms that theoretically have economies of scale.)
You can’t blame Asia for poor financial results because these economies are growing and there is an appreciation of how technology can spurn more growth. And, there is an appreciation for holistic solutions that solve real and deep problems. Many Asian organizations reference success in the West, so are predisposed to buying from successful vendors.
Asians have realized, in my opinion, the changing market dynamics:
- Power has shifted to customers and they’re not taking it anymore. Predatory pricing and extortive methods of “owning the customer” are not acceptable.
- Explosion of consumer technologies demonstrates that something intuitive to use is preferable to something with more “features”.
- Local providers (and some global providers) with contextual understanding of what is valued are growing while major ERP firms acquire companies in order to maintain any growth.
- Foreign solutions from the West operate based on a completely different cultural context of how organizations in Asia operate and grow.
Mergers and Acquisitions is no longer a Sustainable Model for ERP Firms
As the ERP Graveyard shows, the “ever-shrinking world of business software” demonstrates that large companies cannot succeed by acquiring more and more firms. This standard practice has reversed: it’s not possible to acquire enough companies to keep the status quo. And, the more companies acquired = the more difficult to integrate technology – and – corporate cultures.