Less Is More In SoftwareLess Is More In Software

Consolidation in the software industry cleaned up many struggling and marginal companies last year. And while lows in any industry have always been bargain-shopping time, this consolidation actually is being fueled in part by customer demand, IT execs and analysts say.

The year closed with two newsworthy buyouts: IBM said it would buy toolmaker Rational Software Corp. for $2.1 billion, and business-intelligence apps vendor Cognos Inc. bought Adaytum Inc., a privately held developer of financial-planning and performance-management software, for $160 million. According to a report by Goldman Sachs, 13 software vendors have revealed buyout plans since August alone, and the buying spree is nowhere near finished.

Much of the spree has been prompted by stable vendors looking to hold their ground against ever-diversifying and growing mainstays such as IBM and Microsoft, which are sticking their fingers into all kinds of pies.

This is a widespread phenomenon, says Craig Conway, CEO of ERP powerhouse PeopleSoft Inc., which bought four companies in the last 12 months. The new year will see continued software consolidation "as customers favor financially secure, well-managed, large, global providers," Conway says.

The migration toward real-time business is pushing IT shops to eliminate any need for software or middleware integration. That means that smaller outfits, no matter how innovative their products, could face extinction.

"There are some excellent technology companies not strong enough to survive on their own which have innovative capability that could be attractive to us," Conway says. "We'll probably continue to be a careful but determined shopper."

In business intelligence, analysts say strong companies--Cognos, Hyperion Solutions, and Business Objects--most likely will pick up competitors and expand their product lines until financial-planning features are standard within business-intelligence suites. The Cognos-Adaytum deal is one example. Moves like that one might defend against market incursions by increasingly omnipresent competitors, says David Folger, Meta Group's VP of Web and collaboration strategies.

"Microsoft is getting more serious" about business intelligence, Folger says. "We could expect more announcements from them in February, so they may be one of the full-suite suppliers," he says. That puts extreme pressure on the less financially secure business-intelligence vendors, such as Brio Technology Inc., making them buyout targets.

Then, perhaps counterintuitively, there's customer interest in consolidation. Many buyers are weary from budget and integration battles. Trimming the number of software vendors they deal with could aid both efforts, some think. Integration often is seen as little more than a relentless drain on resources that doesn't even result in a more-competitive company.

Cognos says its Adaytum acquisition was a response to customer demand for a single vendor for business-planning, decision-making, and monitoring features. "We're not the only ones seeing that need," says Mychelle Mollot, VP of analyst relations at Cognos, who says she expects to see similar acquisitions in the near future. "What's driving the consolidation is that customers want one vendor to provide all those services."

Things are changing in security, too. Symantec Corp., known mostly for its antivirus tools, acquired three small, private vendors in the second half of last year, each of which helps either fill gaps in or improve the quality of security services that Symantec sells. Meanwhile, both Trend Micro Inc. and Network Associates Inc. have gobbled up anti-spamming software makers in a move designed to help the companies sell a much-demanded combination of antivirus and anti-spam desktop apps from a single vendor.

Some cagey vendors are trying to win an advantage in this environment without necessarily buying anyone. They are playing on fears, warning customers against new and niche players who, buyers are told, might not have the wherewithal to last.

"A new breed of delightful and smaller vendors are trying to attack piecemeal problems [such as] managing supply-chain visibility using Web services," says Narry Singh, senior VP of worldwide marketing at Commerce One Inc. "Our only advice for our customers," Singh says, is that "it's not so much about technology but the experience vendors bring and how much cash they have in the bank."

Jack Corrie, CIO of Calpers, the California Public Employees' Retirement System, was so frustrated with the costs and headaches involved with merging best-of-breed apps that he launched a two-year effort to move his organization to nearly 100% Oracle products. He even ripped out applications from other vendors. Corrie says Oracle is so diversified that he almost doesn't need any other suppliers.

"The maintenance and support costs for the software products we loaded into this hybrid environment became unbearable and kept me up at night," he says. Major vendors are moving to stacks of apps and suites of technology. "We don't want to be the integrator and now we don't have to be." Already, Corrie says, he's saved millions by simplifying his operations.

W.W. Grainger Inc. chose SAP as its primary vendor and hasn't entertained discussions with any other vendors in more than a year, says Jarnail Lail, VP of business systems. During the Internet boom, the company had attached numerous non-SAP niche apps to its ERP system. Now, those add-ons are being phased out slowly in favor of similar SAP pieces.

"The apps vendors are much more mature now in markets that they weren't paying attention to at the time, like CRM or Internet applications," Lail says. Moving to the one vendor, he says, has allowed him to cut from more than 100 to 10 the number of consulting firms helping with integration and installation.

Consolidating vendors also helps when running a high-transaction business that guarantees its customers always-on service, Lail says. "We conduct so many transactions, and it's critical that our system stays up and there's no breakage," he says. "A lot of breakage happens when you have different applications talking to each other. Going with one vendor, even if it only comes close to providing all the capabilities of multiple software makers, is a better choice.

"You have to leverage the technology that goes to the bottom line to save the company money while delivering services," Calpers' Corrie says.

Or, as AMR Research senior analyst Bob Parker says, "The cheapest form of integration is elimination."