• July 1, 2009
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

Matching Pie Slices to Plates

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For the rest of the July 2009 issue of CRM magazine, please click here.

Look around and you’ll notice a few things. One: The economy is still not so great. Two: Cloud computing is big, and there are an awful lot of software-as-a-service (SaaS) vendors in the CRM market. Three: That means more vendors are taking pieces of the pie. A corollary to all that? Some big companies might not be happy with the status quo.
Countering these factors is a growing buzz regarding industry consolidation. It’s not a new concept—Jeffrey Kaplan of ThinkStrategies blogged about it at the start of 2009 (http://sn.im/jk010109), as much to clarify as to break news—but it has gained added currency in the still-dismal economic climate. Selling out to a larger company may be a smaller vendor’s only hope, while the larger ones benefit by quickly gaining new technology.
New observations surfaced in a recent Forbes magazine article by tech entrepreneur and strategy consultant Sramana Mitra, who named three SaaS companies as likely targets of acquisition: Citrix Systems, NetSuite, and SuccessFactors. Mitra based her prediction on the strong first-quarter performances by NetSuite and SuccessFactors, and the possible vulnerability of Citrix Systems evidenced by its disappointing Q1 numbers. Her list of possible buyers? Basically the only companies with any money on hand: IBM, Hewlett-Packard, Microsoft, Oracle, and SAP.
Oracle, of course, already has an interest in NetSuite, where Oracle cofounder and chief executive officer Larry Ellison remains the majority shareholder. Oracle is also rumored to have tried unsuccessfully to acquire SuccessFactors earlier this year. On the other hand, Oracle is still in the midst of its multibillion-dollar acquisition of Sun Microsystems.
“Oracle is going to need some time to digest,” Mitra says, in a follow-up interview. “Sun will slow them down in terms of acquisitions for the next six to nine months.”
Even so, Mitra says, the time seems ripe for SaaS consolidation. “Most of these [acquirable] companies are venture-funded, and have had that money for several years,” she says. “The options are to keep funding them for several [more] years, or sell. Venture partners are looking for an exit.” At the same time, she notes, “larger companies have not been able to innovate as successfully.”
Mitra’s observations match well with Kaplan’s predictions from January: “The past year may have been the [peak] of the ‘cloud-rush’ that produced a proliferation of SaaS and cloud-computing players,” Kaplan wrote at the time, adding that 2009 “will see a shakeout of many of these players and consolidation of the market.”
As SaaS companies take a hit in valuation, the buying power of incumbents will rise. “Companies like Microsoft, Oracle, and SAP will acquire a series of SaaS/cloud-computing players to accelerate their migration to the on-demand services world,” Kaplan wrote. “Hardware vendors such as Dell, HP, and IBM, as well as offshore companies like Infosys, Tata, and Wipro, will also make acquisitions to enhance their systems and automate their services respectively. With traditional funding sources drying up, many SaaS/cloud-computing companies will seek corporate alliances.”
Ray Wang, a vice president with Forrester Research, agrees. “If someone wants to get into the market at this point, it makes sense to acquire or consolidate,” he says. “There appears to be some interest among technology companies looking to enter the enterprise software market and existing enterprise software vendors to make a play for some SaaS offerings.
“Companies buy into SaaS not only to bolster their own offerings,” Wang says. “It’s an offensive play as well. There’s a growing market for microvertical apps, and [for] building your own unique product.” He suggests four likely consolidation angles:
1. On-premises software companies may acquire niche capabilities to not only augment their offerings but poach competitors’ customers.
2. A systems integrator looking for a platform-as-a-service offering may acquire a SaaS vendor to extend its future capabilities and become less reliant on the quartet of vendors known as MISO (Microsoft, IBM, SAP, and Oracle).
3. Hardware vendors looking to enter the software market may use SaaS as the entry point and augment revenue streams with higher-margin consulting services.
4. Other SaaS vendors might try to create a suite by merging product lines.
With Oracle basking in the warm afterglow of Sun, other vendors have a window of opportunity—but one that might slam shut at any moment. “IBM and HP have to make a decision: Their acquisitions have been around infrastructure, not applications,” Mitra says, adding that one of the two will likely be a first mover in any new wave of acquisitions.
“We may be moving toward yet another ‘too big to fail’ industry structure,” Mitra wrote. “If HP, IBM, Cisco, Microsoft, and Oracle go around acquiring everybody and their mother, we’re in for stagnation in innovation, a precarious concentration of industry power and leverage at the very tip of the pyramid, and an overall undesirable structural evolution. SaaS is an opportunity for smaller companies to accumulate their own muscle, roll up their own smaller kingdoms, and create an alternative power structure. I would much rather see that happen than an accumulation of everything that matters into one of the five largest players.” —Marshall Lager

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