When guiding our clients through the ERP selection process, we often hear executives say that they are concerned about the viability of their ERP vendors. Even after we’ve confirmed that a product is the best functional fit, made sure it meets the business requirements of the organization, and negotiated a great contract for our clients, the viability of ERP software vendors is often the last unresolved concern for client CFOs and CIOs. After all, it is the job of executives to mitigate risk and ensure the long-term success of their organizations, so it only makes sense that the last thing they would want is a recently purchased ERP system to be discontinued or not supported as a result of an acquisition.
ERP software vendor viability has become even more relevant with the recent merger and acquisition activity in the enterprise software market. For example, Infor recently acquired Lawson, Epicor and Activant were acquired as part of a private equity buyout, and JD Edwards and PeopleSoft were both acquired by Oracle several years ago. Some of the leading ERP vendors, including Oracle, Infor, and SAP, have been extremely aggressive in acquiring other ERP software solutions, as well as best of breed points solutions, to augment their core solution offerings. With each of these acquisitions comes uncertainty – will the new parent company continue providing maintenance and support? Will it invest in future enhancements? Or will it force a costly and risky migration to another product?
These are all valid questions and concerns. And although it is impossible to predict the future, there are common signs that could give some insight into whether or not a company is on the chopping block. Here are three things to look for when determining whether or not an ERP vendor is ripe for an acquisition:
Product roadmap. Companies typically stop investing R&D in their product if they are looking to sell in the near future. For example, we have been hearing from some of Oracle’s competitors for the last several years that the company was going to stop supporting JD Edwards as part of their acquisition of the product. However, this still has yet to happen. In fact, some of our team members just last week attended the JD Edwards Summit near Denver and learned about the company’s roadmap for the product through 2026. Companies with no clear roadmap are much more likely to be sold and/or discontinued as part of an acquisition than vendors like JD Edwards who have a clear vision for their future.
Current R&D investments in the product. Another telling sign is the current and recent investment in the ERP software in question. If the product has become stagnant and it becomes apparent that R&D spending is on the decline, this could mean that the product is on the chopping block. Again using JD Edwards as an example, the company recently launched a cutting-edge user interface and mobility solution as part of its core offering – hardly the sign of a product about to be discontinued, despite the fact that a larger company acquired the product. If, on the other hand, the software is still using dated technology, isn’t keeping up with the competition, or doesn’t have a decent size R&D budget, chances are more likely that it is (or will be) a target for another company.
Organizational viability and stability. A third sign to watch for is organizational stability and viability. In other words, does the company look and act like a company that is growing for the future, or one that is trying to maximize short-term results to get a higher valuation in a potential takeover? For example, we had a strong opinion nearly three years ago that Epicor was positioning itself for an acquisition, simply because of the way the company was acting. Although it had just replaced its flagship Vantage product with Epicor 9, it was aggressively cutting professional services staff, offshoring much of its development work to Mexico, and even making cuts within its sales organization. These are typically not indicators of a company that is looking to remain independent in the short-term, which eventually proved to be the case with Epicor.
While it is not always a bad thing for an ERP vendor to be acquired, it is important to understand and mitigate the risks associated with a takeover. An acquisition could mean more R&D muscle behind a product or additional technical strength, or it could result in discontinuation of the product and a forced migration to the parent company’s flagship product. In either case, it creates a level of uncertainty that makes most executives nervous. The associated risks can be managed by ensuring a solid contract with clear SLAs.