News

MDM, April 2005

When the editors of MDM asked me to share my perspective on the consolidation that has taken place recently among the 'distribution centric" technology providers, I warned them that my viewpoints might come as a bit of a surprise. In my opinion, this latest spate of acquisitions is not a result of a brilliant business plan or rocket scientist-level genius. I see this consolidation as more of an evolution than a revolution, a natural event in business. A platform company that is successful in facilitating consolidation just recognizes this event, and, like any quality business, takes advantage of the opportunity.

Evolution

Prior to the introduction of business software, distributors depended on manual processes, such as Cardex systems, bookkeeping machines, and green bar paper-based reporting, to run their business.

Then, 20 to 25 years ago, a number of talented individuals started technology companies that created the first generation of software offerings to distribution. These first-generation offerings were basic when compared to the functionality available today, but a huge improvement over the manual processes.

Many of these companies continued to invest time and money in further developing their original software offerings. While this worked well for several years and the products remained effective, any software solution has a limited shelf life as more advanced technologies are developed.

For technology providers to remain effective, they needed to build a next-generation offering from scratch, a capital intensive and high-risk step. Unfortunately, many of these companies lacked either the resources or vision to take that critical step.

These companies had reached a fork in the road.

The Road Not Taken

Creating a new software offering is the riskiest task a technology provider can undertake. It can easily kill a technology company. But not developing a new solution could also be fatal to a business, as eventually customers will migrate to newer technology.

Most of companies are not prepared to take on the financial burden of developing a new software offering and will avoid it for as long as possible. To avoid making this investment in new technology, these companies make cosmetic changes to their original product - so it looks like the latest technology, but lacks the functional benefits.

Prophet 21 chose the more challenging path and developed a new offering from the ground up. The company invested several years and more than $40 million in its latest offering before introducing it to distributors. This along with the company's investment in advanced support, educational tools, and consulting services, positioned Prophet 21 as a platform company for other quality technology providers to migrate to.

Models of Consolidation

As companies realized that they lacked the resources to develop new offerings, they began to look for an exit strategy that would protect their customers. This became the basis for consolidation among technology providers for distributors, which I expect will continue for the next two to five years with three dominant models:

• Financial: A large company acquires several smaller companies for the sake of creating a larger, more profitable entity. While this model makes financial sense for the technology providers, it delivers little value to customers. A lack of synergies among the acquired companies and the failure to develop a next generation software offering make this only a temporary solution in the marketplace.
• Buy-in: Technology providers inexperienced in the world of distribution may attempt to buy their way into the marketplace through acquisition. Unfortunately, many of these providers enter the marketplace without an understanding of the complex world of distribution or even a clear vision of what distribution is. Distributors suffer from trying to fit their unique business needs into a general-purpose solution.
• Growth: Distributors benefit most when one distribution-focused technology provider acquires a high quality, distribution-focused company with a similar culture. The combined domain expertise of the companies and the strength of the parent company enable the continued development and support of all existing offerings, plus provide an open path to the next-generation distribution-focused offering.

Prophet 21 has used this last model in making several acquisitions with much success for customers. As other technology providers look for ways to best serve their customers' growing needs, Prophet 21's size, customer-base, financial strength, and innovative culture make us an attractive partner. Acquiring like companies enables us to combine their tremendous talent and deep domain expertise with our own to deliver more value to customers than any of these companies could provide individually. Because Prophet 21 does not retire the software offerings of acquired technology providers, this extends the life of existing software offerings. For those customers who see more value in using a more advanced technology solution, we provide a parallel migration path.

If done properly, consolidation among technology providers for distributors shouldn't be feared. It can even provide great value to distributors who will benefit from increased access to advanced technology and stronger support. There will always be competition and an opportunity of choice. The market keeps all of us on our toes, as it should.

About Activant / Legal & Trademark Information

###

---

Prospective customers are encouraged to fill out and submit the convenient Activant Web Contact Form.

Back to Top