Some shifts are tsunamis. IBM buys Red Hat. Oracle buys Sun. Broadcom buys CA, a company famous on its own for acquisitions.
Dell (sort of) buys VMware, making an investment they may someday spin off to allow both companies to get back to their core strengths.
Another day, another acquisition.
And more waves. The aforementioned VMware buys Pivotal (Cloud management) and Carbon Black (Security) among others. Salesforce buys MuleSoft and gets its own API integration solution. A resurgent NVIDIA buys Arm, creating a potential semiconductor monster of the future. Progress buys Chef, to tie one of the original app dev platforms to the original IaC vendor.
The shakeups never seem to slow down, even in a seemingly slower economy.
Are acquisitions good for the enterprises they serve?
If you ask the vendors involved you will always hear the same diplomatic response — “this merger will give us more resources and reach, breadth and depth, to further innovate and deliver services at greater scale for customers.”
But we’re not here to talk about whether or not a merger or buyout is good for the vendor.
When you ask the end customers’ CIO or digital executive, their read is always ‘it depends.’
The less vendors, the better, more or less…
Smaller companies with few IT resources want to standardize on a single specialized platform often with vertical industry orientation, and stick with them.
Take for instance an auto dealership group that would grab much of its inventory, sales and accounting software from one specialized supplier that wouldn’t be worth usurping — because it likely already acquired or defeated other niche vendors in its industry.
That’s an outlier for enterprises though. A recent survey from Tech Pro Research showed that more than 47% of all respondents said their company managed more than 10 IT vendors… and that trend is only accelerating with the adoption of cloud-based services. The average CISO now has at least 27 security vendors in their portfolio, and likely many more than that.
For the broader market, smaller companies with stronger growth expectations can take an ad-hoc view to IT vendor selection, appreciating the ability of innovative teams to self-purchase cloud infrastructure and SaaS services with the swipe of a credit card.
These customers still appreciate market aggregation — for instance an Atlassian customer using Jira likes getting related tools off their marketplace (some of which are acquired by the host company, some of which are ecosystem partners). Marketplaces offer a single contract interface that feels more manageable than dozens of little contracts with separate vendors.
Once past the pure growth phase, IT customers in medium-to-large sized enterprises start putting initiatives in place to reduce the number of technology vendors they are using, to limit operational cost and the risk of integration failures.
One simple way to limit that exposure is to put much of that variety and complexity under the control of a managed services provider (MSP) who might either bundle own technology stack, or leverage another service provider (for instance, a CSP like Rackspace who bought CloudKick, et. al.) to take some of that integration complexity off their own hands.
In any case, we can safely say that most IT customers would generally prefer to deal with fewer vendors, except…
What if innovation suffers?
“Consolidation is a natural evolution as industries and markets mature and the big vendors of enterprise technology will always argue that their power and reach prove to be an asset for customers, boosting the quality of product and innovation they can deliver through their massive economies of scale,” writes Pat Marlew in IDG Connect. “However, this sentiment may be an overreach, as there are many ways that the concentration of the market could be stifling innovation.”
Delivering better, faster, cheaper… the only draw more powerful than that of avoiding multi-vendor complexity and cost is the constant pull for innovative new functionality to meet customer demand. After all, digital transformation is driven by customer choices, not the wants of the organization.
B2B software markets are in a constant progression toward consolidation, with a few players (IBM, Microsoft, AWS, Google, Oracle) constantly acquiring or crushing adjacent competitors. While inventions still happen in big vendors, the tradeoff for vast scope is agility. Larger vendors have a harder time turning their giant vessels to deliver new innovation to market.
This drives enterprise customers to seek out new disruptive startups, and choose specialized, best-of-breed vendors that can give them a leg up on their own competition. Even if the small, innovative vendor is eventually acquired, three or more good years of relative performance gains can make all the difference in the enterprise IT buyers’ trajectory.
It’s not like all that innovation disappears either. The acquisitiveness of the 800-pound gorilla will hopefully deliver some of that startup genius and agility into the DNA of the larger vendor, along with the advanced technology itself.
What’s important here for customers is to gauge the level of support the larger vendor is offering its newly acquired customers. Is there a real vision expressed by both parties? Are they proactively reaching out to explain where the new product fits into their vision? Are leaders from the acquired vendor joining the new host in strategic roles (whether or not that is a good thing)?
There’s no pat answer to how innovation should be absorbed every time.
The acquired vendor could retain 99% of its brand, people and technology stack — and still operate like an independent entity under a larger corporate umbrella. Or in the other extreme, a tighter integration of the new tool with a larger, more complete portfolio and global support offers a lot better value for enterprise customers, and there might be no need for the original people to stick around.
On the innovation front, I would say acquisitions generally benefit customers of the acquirer, if they make sense. They generally add innovative functionality choices at a lower price than if the large vendor tried to design their own similar tool.
Customers of the acquired company should carefully evaluate how their strategic supplier relationships (including contracts, support and pricing) will evolve.
Chilling effects versus reinvestments
It’s easy to get discouraged by the news that the success rate of new enterprise software startups is down, and with it, the rate of VC investment in early stage companies that can easily find themselves in the ‘kill zone’ of stronger competitors that can undercut costs or overdeliver on the niche they are trying to fill.
But there’s hope.
Take cybersecurity, where the average CISO is bombarded on all sides by seemingly essential vendor claims of risk avoidance and data protection. The continuous expansion of a distributed cloud threat surface, coupled with innovation on the part of motivated attackers, ensures we will continue to see new research and resulting startups to fill ATT&CK vulnerabilities.
Behind the scenes, there’s an open source network of the best minds across cybersecurity firms, constantly contributing to an industry wide body of threat research. Customers of any participating vendors stand to benefit, no matter what the corporate structure.
Private equity (PE) also has a role to play here. In many industries, we might consider their consolidation of retail businesses and manufacturers as opportunistic at best. But in the software arena, firms like Thoma Bravo and Vista Capital can actually create new kinds of IT portfolios that can work together, and spin off new vendors in ways that wouldn’t have existed if they were simply driven out of a dominant software vendor’s ambitions.
Even the good old IPO is coming back now as an alternate sort of acquisition — letting publicly traded shareholder value flush the vendor with cash for future acquisitions. The market has responded very positively to recent big IPOs from cloud vendors like Snowflake and JFrog, who will certainly not sit still.
If you are a customer of such a unicorn, you benefit from the new innovations that will join your selected vendor for the ride.
The Intellyx Take
Vendor consolidation will continue unabated. Whether it is a good thing for you as a customer depends on the strategic value of your relationships with the vendors involved.
Obviously, many business IT purchases are purely transactional marketshare grabs for customers. If cost and capability metrics align, the customers can make vendor relationship decisions with dispassionate objectivity as vendors change form.
But if the vendor is strategic to the way you intend to meet customer demand, you are also investing in their leadership, the delivery capabilities of their people, and their vision for the future state you have targeted.
At such times, tune your depth perception carefully.
© 2020 Intellyx LLC. Intellyx publishes the Cloud-Native Computing Poster, the weekly Cortex and Brain Candy newsletters, and advises business leaders and technology vendors on their digital transformation strategies. Intellyx retains editorial control over the content of this document. At the time of writing, IBM is a current Intellyx customer, and Broadcom, CA, Microsoft, MuleSoft, VMware, Chef, Red Hat and Progress are former customers. No other parties mentioned in this story are Intellyx customers. Image sources: Donnie Nunley, and Pan.li75, flickr (CC 2.0 license)
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