Should ERP vendors enter adjacencies?

strategyThere is a tendency these days to advise that people and companies ‘focus’, and not try to do too much. Should companies stay with one set of products, or broaden out into other related areas or ‘adjacencies’?

Recently an analyst I follow on Twitter commented that SAP has spend $50billion over the years to acquire innovative products the company could not build. I can’t remember whether it was Vinnie Mirchandani or Ray Wang, but there is a Wikipedia link that shows the SAP acquisition list. The money for those acquisitions came from the annual license fees that SAP customers pay, an issue that Vinnie has said before is a concern to customers, for example here.

SAP is not alone, Oracle has also spent billions on acquisitions over the last 10 years to broaden its footprint from a database and finance applications player, to one that has its own complete technology stack.

In an era when ‘focus’ is often evoked, the question is how do executives of a company identify opportunities and prioritise goals when they move from specialising in one area of technology to a huge range of technology products? An article in 2014 raised the issue of the dangers of adjacencies. When growth begins to decline, the reaction is for companies to enter other related areas of business, and this seems to have become almost an addiction. When it comes to SAP and Oracle, their acquisitions appear to be driven by a need to continue an aggressive growth strategy.

The basis of the article is that adjacency moves distract the company leaders from finding new ways to grow the business they are already in, and so the core business grows slower. This reduces the focus on the core area, what makes this area unique and valuable, and the business loses the advantages it used to have. Again, SAP’s core ERP area has not recorded strong growth in recent years.

Interestingly, the writer of the 2014 article published another one in 2015 that discussed how diversification into adjacencies could work. What needs to be done to succeed is to:

think about focus in terms of how much your businesses materially benefit from the distinctive capabilities that make your company better than any other at its way of creating value.

According to the new hypothesis, you don’t diversify just to enter more attractive growth markets, you do it for these two reasons.

To use your company’s way of creating value and its distinctive capabilities to generate new avenues for profitable growth.

To strengthen your company’s current business, by enhancing either its capabilities or its value proposition.

The adjacency strategy for a business therefore is not to diversify away from your base, but to diversify for your base.

Looking at SAP, Oracle, and also IBM, the question seems to be, what did they diversify for?

The response to SAP’s Business ByDesign decision

softwareThe recent report that SAP was cutting back on development of Business By Design was widely reported. Here are some comments about it.

ZDNet

ByDesign is intended to serve “mid-market” companies …At launch, executives projected that the $4 billion software suite would generate $1 billion in annual revenue. Yet it is expected to generate no more than $35 million this year… Only a small team in India will take care of the maintenance of the software 

Forbes

SAP has been guilty of trying to own the entire ERP market by itself, rather than building a broad ecosystem which they are a part of – mid sized customers weren’t keen to be customers of SAP and by failing to embrace a more vibrant industry where small organizations could use third party products but would have a logical migration path as they grew or were acquired, SAP has done both its own business, and the market as a whole, a disservice.

PCWorld

Developed at reportedly great expense, the product was initially expected to have 10,000 customers by 2010 and be generating €1 billion (US$1.4 billion) in revenue for SAP. Instead, ByDesign has about 1,100 customers today

And from a SAP partner trying to do some repair work

SAP Business ByDesign, and its users, will in fact benefit from this leading technology [SAP HANA]… especially as SAP refactors parts of the SAP Business ByDesign platorm, so to take maximum advantage of SAP’s HANA breakthrough capabilities as well as dramatically improve speed and usability. As part of this, all of the know-how of SAP Business ByDesign is being preserved, and likewise is brought forward to benefit your business.

Of course, a cloud ERP vendor had to put the knife in. 

There was a major brouhaha when word leaked out that SAP was finally burying its ill-fated cloud-based ERP system, Business ByDesign. I assume it must have been a slow news week because no one could really have been surprised.

In my opinion, it is a sign of something happening in the cloud ERP space – maybe that the demand isn’t as great as the big vendors originally anticipated. Or it’s another failed attempt by SAP to penetrate the mid-market. What’s your view?

What journalists don’t understand about M&A in tech

There is an article in BusinessWeek about SAP acquiring software companies.  As it’s a story on a business-oriented site, the emphasis on matters financial is accepted. However it did make me question whether (some) journalists understand the impact of M&A in software companies.

The article mentions firstly that SAP has struggled to catch up with Oracle and Salesforce.com, but considering Larry Ellison discounted the cloud until fairly recently, and SAP is still the largest enterprise software vendor, I wonder what ‘catching up’ the writers are thinking about. From the way they write, it appears the writers think that the only real software business must be cloud based.

The emphasis of the article though is on the acquisitions SAP has been making. It find it interesting that, again, the writers compare SAP against Oracle, calling Oracle ‘a deal-making machine’; as though deal-making should be a major focus of a software company.

What I see in the article is an appreciation of M&A for investors; I don’t see an appreciation for what it means to customers, and the work that must be done internally by developers to meld the software together. Vinnie Mirchandani has made the point that:

… most CIOs are still ambivalent about technology M&A. As most will honestly say, we gave Oracle (or IBM or whoever) a chance to competitively win our business a few years ago and they did not. They are backing into our business with acquisitions.

Tom Peters has been vociferous about it:

 why do these ego-maniac CEOs keep merging…? Why do their boards sign off? Why does Wall Street go along?

I worked at a US software company some years ago that did a few acquisitions, and saw the problems that it creates.

Software from two different companies rarely has the same user interface and user experience, and the integration of the two systems is often complex. Despite the best efforts of developers to sort out the technical challenges, customers have to bear the brunt (ie, cost and trouble) of the early integration implementations.

So instead of focusing so much on the money side, why don’t journalists explore what the impact will be for existing customers – whose payment of annual maintenance revenues funds  the M&A activities.