Nowhere to hide

A Computerworld article highlights the risks that enterprise buyers run in an age of vendor consolidation. In this case the article talks about Peoplesoft and Oracle, but the point is a general one. Just how anxious should software buyers be about their vendor being acquired?

I would argue that the vendor risk issue is frequently overplayed. You may “never get fired by buying IBM” but I recall when IBM dropped its “strategic” 4GL ADF for CSP in the late 1980s, leaving plenty of seriously large customers in the lurch (I worked for Exxon at the time, which had standardised on ADF). There is a risk in any software purchase, not only about whether the vendor will go bust at some point, but as to whether the vendor will continue to maintain and enhance the particular product you are buying. People often agonise about buying software from small vendors, but in the case of a company with one product in their portfolio, you can at least be sure that they will care a lot about that product. An industry giant may have ultra-solid finances, but can decide to drop a product line if it does not do well commercially, or for other internal reasons, as in the IBM example I mentioned. There are numerous other cases e.g. SAP MDM was dumped in favour of a new product based on acquired technology from A2i just a couple of years ago, while Oracle has plenty of “prior” in abandoning acquired product lines that did not meet its view of the world.

I believe that buyers should look at a few things in terms of risk. Look beyond the finances of the vendor to the installed base of the particular product they are buying. A product with hundreds or thousands of enterprise customers is likely to live a lot longer than one with a few. Moreover what is the growth trajectory of the customer base? A fast growing customer base will very likely receive continued investment, either internally in the case of an industry behemoth, or externally from venture capital firms in the case of smaller companies. The situation to be wary of, whatever the vendor size, is where there is a small customer base that is not growing. This situation should send warning bells off, whatever the vendor size. Of course vendors may be very coy about revealing figures, but you can for example try and talk to the chairman of a product user group to get a sense of how well the customer base is growing; a user group with shrinking numbers of attendees would be a worrying sign.

Above all, customers need to ensure that their investment has a clear and rapid payback. If you spend a million dollars in licences, with 20% annual support and 4 million in services putting it in, you should be able to stack up on the other side of the balance sheet the benefits that you are expecting to see. If the benefit case has a payback period of (say) a year, then it is less of an issue to worry about the vendor will be around in ten years time. If you have a choice between a mediocre product from a “safe” vendor and a much more productive product from a smaller riskier, vendor, then you should be able to quantify what the difference in productivity is worth to you. If the better, riskier, technology saves you millions of dollars a year and pays back in eight months v the alternative, then what sense does it make to accept an inferior technology that will actually cost you many millions in poor productivity, however “safe” it may be.

As discussed earlier, very few product lines are completely safe anyway, given the tendency of vendors to cull non-performing product lines and encourage “migration” to newer (read “profitable”) newer products. If you have a fast enough payback then you can be philosophical about a migration a few years down the road. It all comes down to rigorous cost benefit analysis of the software life-cycle, sadly something all too few customers pay proper attention to.