This is the second installment in our series on software mega-vendor business practices and the potential implications to the user community. In our first post, we touched upon commercial pricing practices of the mega-vendor and how this can lead to vendor lock-in, lack of viable alternatives, and increased pricing for customers. In this article, we will continue to discuss other ways the mega-vendor looks to capitalize on its dominant position.
Have you ever taken a look at the success of Walmart? Not to go too deep into their story, but the larger their market share grew, the more consumer product suppliers coveted selling their merchandise in Walmart stores, allowing Walmart to play a larger part in the success and failure of these supplier relationships. Walmart now enjoyed greater leverage in negotiating with suppliers because they could literally take any product and turn it into a market competitor practically overnight as a result of the brand loyalty, market reach, and distribution network Walmart had created. Their supply chain and consumer reach is invaluable and one of the biggest assets Walmart possesses.
Likewise, as the mega-vendor continues to capture more market share and establish lock-in within their installed base, they are developing Walmart-esque assets. This will provide mega-vendors with some unique opportunities. First, mega-vendors may choose to reduce research and development costs and focus on acquisitions. Why bother taking risks to develop the next big thing when there are so many start-ups out there that can do this faster. Let the start-ups take all the risk while the mega-vendor develops a core competency of tracking disruptive technologies, evaluating trends and market traction, and determining which vendors will emerge as leaders. The success of these start-ups in essence builds the business case for their acquisition. Even though the cost to acquire will be higher as these start-ups demonstrate market adoption, the sheer market reach and sales and distribution network of the mega-vendor can increase the scalability overnight, resulting in a huge return on investment. Plus, the mega-vendor will enjoy substantial risk reduction by being able to cherry pick the market leaders in proven disruptive technologies. Even if a start-up application or technology company reaches $500M to $1B in revenue, the mega-vendor has the ability to grow that multiple times over in a relatively short period of time due to its market reach and sales and distribution network.
The mega-vendor will also be able to improve margins by eliminating the redundancy in G&A. For proof, look no further than Oracle over the past decade. I bet you can name at least a handful of acquisitions Oracle has made since 2002, yet I challenge you to name any real new innovative applications or technology Oracle has internally developed and brought to market in that time. The reason is that it’s safer and more profitable for mega-vendors to acquire the proven leaders than to make the heavy investments in innovation with the hopes of developing a winner.
Further, without having to invest so heavily in innovation and R&D capabilities, mega-vendors get to increase the profitability of their maintenance and support revenue stream and use those funds to bankroll their acquisitions. Just look at SAP’s somewhat recent acquisitions of SuccessFactors, Ariba, and Concur Technologies to expand into the cloud.
You’ll get no complaints from the start-up and venture capital communities as mega-vendors provide them with a clear exit strategy. They can focus on innovation and do so in a much leaner and focused environment, whereas innovation is much more difficult with large mega-vendors and all of the latent bureaucracy and pressures from Wall Street. Smaller organizations are simply more nimble, focused, and conducive to innovation; whereas mega-vendors tend to be overly protective and focused on their core and very slow and resistant to change. Hence, the marriage between start-ups/venture capitalists and the mega-vendor is a match made in heaven. And the more successful the start-up, the more they can competitively bid themselves to the mega-vendor community.
So, what does this mean for the user community and customers of mega-vendors? First, expect to have a relationship with almost all mega-vendors, because if you do not now there is a good chance they will acquire one or more smaller suppliers you use in the future. Again, we can look to Oracle as an example here. We have worked with many companies over the years that never had a relationship or contract with Oracle. Yet when they looked around their IT environment they found many applications that were acquired by Oracle and were therefore forced to have a relationship with Oracle. Acceptance of this highly likely scenario is the first step. The next step is to develop a strategy and approach for how best to enter into and continually develop a relationship with these mega-vendors. Remember that the mega-vendors will ultimately compete with each other, so having relationships with most or all of them will provide a competitive landscape and offer viable alternatives should a relationship sour during downstream negotiations. Your goal should be to establish, continually nurture, and expand your mega-vendor relationships, ensuring each mega-vendor has enough but not too much of your IT landscape. You want them to feel they have been rewarded with your business but that if they fail to continue to provide value and earn your business, then you have options to move that business to one of their mega-vendor competitors. This will preserve your leverage in negotiations to ensure your deals remain competitive.
Next, be sure not to go soft on negotiations with smaller vendors, especially those in disruptive technologies, who you feel could be a future mega-vendor acquisition target. The reason is that once a mega-vendor acquires a company, one of the first things they do is migrate their pricing, packaging, and commercial terms and policies to that of the mega-vendor. However, the mega-vendor has to adhere to any pre-existing agreements of the acquired entity and this can result in receiving far more competitive deals for the same technology your competitors will be purchasing through the mega-vendor. Additionally, the mega-vendor may value moving you to their new agreement and this may present leverage opportunities for highly competitive deals for products and services throughout the mega-vendor organization that go beyond the acquired entity. You may not choose to take this path, but the key to remember is you will have generated leverage and options. Think about the last time you had that with a mega-vendor.
If you would like to learn more about how UpperEdge has helped companies source, gain leverage, and negotiate highly competitive contracts with their critical suppliers, or if you have any questions or comments, please do not hesitate to contact us at 617-412-4335.