UNIT4 is best known for its Agresso ERP system, its Coda Financials system, and its majority ownership of cloud ERP provider, FinancialForce (with minority investment by Salesforce.com).
UNIT4 has been a well-regarded ERP provider for years, focused largely on the services sector. Like many traditional vendors, UNIT4 has been transitioning to cloud delivery and, fair to say, has been more successful than many of its peers. At a time when many traditional ERP providers have less than 10% of their revenue from the cloud, UNIT4 claims to have more than half of its 450M euro annual revenue derived from subscription services.
New Leadership for the New Strategy
UNIT4 has a new CEO, Jose Duarte, who came on board seven months ago. He served as co-CEO alongside Chris Ouwinga until January 1, when the board appointed him as sole CEO. Duarte came to UNIT4 from a 20-year career at SAP, which including roles as President of the EMEA & India region and President of the Latin America region.If UNIT4 had announced its new growth strategy without making any management changes, I might doubt its seriousness. The top management change, therefore, is a good sign.
Core Message is Familiar
UNIT4 has long had a message of enabling its customers to "embrace change," and it touts its offering as being highly flexible and adaptable to changing business conditions. In its new growth strategy, that messaging does not appear to be different.Duarte does point out that the pace of change is increasing--not only from economic and regulatory pressure, but also from the pressure of new technologies, such as the so-called "SMAC" technologies (social, mobile, analytics, and cloud). Yet IT leaders spend 80% of their budgets on "keeping the lights on," leaving only 20% for innovation. UNIT4 intends to help its customers transition from transaction-centric to people-centric systems.
In my view, this message is good but it is not particularly distinctive. Most other enterprise software providers have adopted this story--not just newer providers, such as Salesforce.com and Workday but incumbent providers, such as SAP, Oracle, Infor, and Microsoft. Whether they actually accomplish that is another question--but the message is the same.
Vertical Solutions May Be Differentiating
When it comes to UNIT4's industry focus, however, I do see something that may be distinctive. Unlike many enterprise software providers that attempt to cover a broad range of markets, UNIT4 is distinctly focused on services businesses (including public sector), as shown in the schematic nearby.Notable, there are no manufacturing sectors in UNIT4's target verticals. ERP has its roots in the manufacturing industry, and that ground is fairly well covered by other providers. By focusing on less crowded verticals, UNIT4's growth strategy has a better chance of success. Some of the sectors--such as financial services, investment companies, travel management, housing authorities, real estate, and insurance companies--have many fewer competitors targeting them. On the other hand, some of the sectors, such as professional services, are targets for some of the newer cloud-only providers, including UNIT4's own FinancialForce investment.
Overall, I am bullish on UNIT4's market focus.
Willingness to Buy or Partner instead of Build
There is another piece that represents a change in UNIT4's product strategy, and that involves partners. To fill out its offerings for some industry sectors, there are some pieces that UNIT4 may not build directly. This is especially true when addressing sector-specific processes. Duarte didn't mention claims processing in the insurance industry, but I would suspect that might be a good example. In such cases, UNIT4 will be more willing in the future than it has in the past to partner for or even acquire complementary solutions.Private Ownership May Facilitate the Strategy
In November, UNIT4 announced that it had been approached by private equity firm Advent International in a cash offer to buy all issued and outstanding shares of the company--effectively, to take UNIT4 private. Duarte more or less implied that this transaction, which UNIT4 had not solicited but nevertheless was recommending to its shareholders, was not directly related to its growth strategy, although the growth strategy was one of the things that made UNIT4 attractive to Advent.Whether related or unrelated, I find a potential departure from public ownership a positive step for UNIT4. Software vendors transitioning from on-premises license sales to cloud subscription revenue often face pressure on financial results as money that would have been collected up-front is now spread out over the subscription period. Taking away the need to report quarterly results gives UNIT4 breathing room to make the transition to cloud.
Private ownership may also give UNIT4 more flexibility in making those niche acquisitions for complementary products that are essential for its target industry sectors, as they would be able to be completed more quickly than would be the case where public shareholders would need to be involved.
UNIT4 has already made substantial progress in its migration to the cloud, but that is only one of the transitions needed. Hopefully, under private ownership, UNIT4 will be able to fulfill all the elements of its new growth strategy.
Update: Over at Diginomica, Phil Wainewright summarized his half day briefing with UNIT4 in a curiously titled post: Unit4 updates Agresso to SMAC the BLINCs
2 comments:
Frank,
It is an interesting scenario, but there are some warning signs here. My sense has been that Unit4 has had more successful implementations (on time, on budget, ability to change) than tier 1 ERP vendors. Some signs:
1. Unit4 has or has not transitioned profitably to the cloud
The transition from licenses or subscriptions has reduced quarterly profitability by most ERP vendors. Unit4 claims to have managed the transition elegantly. Meaning that private equity should not be needed for growth.
2. Exactly how vertical is the vertical strategy?
This notion of focus on 'just a few' verticals is a bit dubious. Frankly, it doesn't make any sense to consider the public sector with commitment accounting and budget-centricity as a variation of a services ERP focus.
3. Throwing in the towel in the consolidation world
Private equity either means cutting to the bone or selling to an incumbent, or both. Is there really a future hear or does Unit4 think that private equity will turn them into an acquirer with a broader portfolio of solutions running on different technologies - complete loss of economies of scale. I can't help but think that new management is thinking overly conventionally.
Doug, thanks for the comment. UNIT4 today is a public company, so anyone can investigate how profitable it is. My point, however, is that even if UNIT4 could fund its growth strategy out of existing cash flow, going private does have the benefit of taking the pressure off quarterly results.
Regarding the vertical strategy, UNIT4 uses the term "services" the way economists use it, to refer to non-goods producing sectors. In other words--non-manufacturing. I note that this is how ISM uses the word. So, yes, government is a services sector.
Finally, I don't see the options for private equity so narrowly. There are many other options besides cost-cutting or turning UNIT4 into an acquirer. I have seen many cases where private equity firms come in, provide the capital for growth, and then either continue to benefit as a shareholder or plan for some sort of exit through either an IPO or by selling the firm. Until there is evidence to the contrary, I would simply take UNIT4 at its word that Advent agrees with UNIT4's growth strategy and intends to support it.
Post a Comment