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The Enterprise System Spectator

Wednesday, January 24, 2007

Unlocking value within legacy software vendors

With so much news about vendor consolidation, one might imagine that in a few years the entire market for enterprise software will be owned by SAP, Oracle, Microsoft, Infor, and a handful of other players.

But that won't be the case. The software market is far more fragmented than most people realize. There are thousands of vendors of business applications. Most are small and privately-held, and they are not household names. But they serve real needs, and millions of customers rely upon them.

If you were to plot all business software vendors individually in order of declining revenue, you would see a few tall bars representing the big vendors, such as SAP and Oracle, and then a long, long series of bars tailing off to the right, representing the thousands of software vendors that serve niche industries and business functions. For example, the Open Directory entry for agriculture and forestry software lists nearly 50 vendors, and the page for veterinary business software shows 20 vendors. And that only includes vendors that took the time to get listed.

Functionally adequate but technically dated
So, who are these developers? Some of them are new companies, using the latest software platforms to provide leading-edge applications or serving new markets. But many of them have been in business long enough to have fallen behind the technology curve. They still have customers, even satisfied customers--business users can be notorious for sticking with obsolete technology, such as client-server or even mainframe platforms, as long as it works. But the vendor's business may be stagnating, as new prospects are reluctant to go backwards in terms of technology.

I'd been thinking for some time about the future of vendors that have good solutions and an established customer base but not the resources to bring their products up-to-date in terms of technology. What is the future for such packages?

A new investment approach
Last week I met an associate who has started a private equity fund to specifically address this need. The idea is to acquire such vendors--not to consolidate them or squeeze out costs--but to upgrade their technology and increase their value to existing and new customers. Such an approach may be attractive to private owners who don't have the resources to reach the next level or who are simply looking for an exit strategy that continues to do the right thing for their customers and employees.

If you know of someone who might be interested in more information on this investor, let me know and I'll pass on his contact information.

It's an interesting investment approach and one that recognizes that there is value in legacy systems beyond merely milking the client base for recurring revenues. It will be interesting to see whether other investors begin to recognize these opportunities.

by Frank Scavo, 1/24/2007 07:48:00 AM | permalink | e-mail this!

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Independent analysis of issues and trends in enterprise applications software and the strengths, weaknesses, advantages, and disadvantages of the vendors that provide them.

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