Tuesday, April 26, 2005

Does Company Size Matter? - Where the Risk lies in buying Global Commerce software solutions.

I had a talk with Larry Lapide at the Council of Logistics Management convention in Chicago about the perceived risk by many companies, large and small, in buying software solutions from small and medium sized software vendors. His comments were extremely interesting.

Larry said that he is advising students and industry execs that the risk factor of doing business with “smallish” firms that have longevity in business and good client references is significantly lower than doing business with medium size or larger firms that are relatively new to the business area, have few if any referenceable clients in the business area, and have no longterm track record for profitability.

So who is Larry Lapide and why should what he says matter. Larry currently research director at the MIT Center for Transportation & Logistics. Prior to joining MIT he had a career and reputation as a leading analyst in the supply chain practice at AMR. Larry has not always held this position, but upon reflection and experience over these past 10 years, concluded that size, although a factor, must be looked at critically when assessing risk in the selection of software solutions.

Larry’s point is particularly important when evaluating solutions to manage your global commerce. The past seven or so years have seen many small/medium sized software solution providers in the area of global commerce come and go. In fact there are very few solutions providers, large or small, that exist in this area.

This point would seem to support the contention of small companies are at risk of not surviving long term and therefore not being able to support the clients that invested in their solutions. However, a review of the industry will reveal that the companies that failed to survive did so not because they were small but because their business concept was wrong for the market, the market was too small, and their business plan was ill-conceived. Most of these solutions providers built their business plan around an IPO supported with large VC investments.

Companies that have littered the global solutions software landscape – Syntra, Celerex, Open Harbor, IMC, Rockport, Vastera are among the few that come to mind. Each focused on growth at the expense of managing their business based on market size reality. They all had revenue streams from solid clients. But each failed to build a business to support its base and chased after the growth and the potential IPO … the mantra of the industry.

This reality is not only that of small companies. One only need look at other players in the Supply Chain or ERP area to realize that failure to pay attention to matching revenue with expenses can lead to failure. I2 and Manugistics are clearly poster children for companies that have large customer bases, relatively large revenues, and are on the brink of going out of business.

In the space of global commerce management there are relatively few players that have a proven track record of delivering successful solutions over the long term. Up until recently it can be argued that the market has been uninteresting to a large number of companies – large, medium or small. The percentage of a company’s business that was dedicated to global sourcing or sales was often less than 10% of their overall business and didn’t warrant the attention of senior management.

The Wal-Mart factor has changed all this. With the drive for lower prices across all industries and markets, companies have been forced to go off-shore for raw matierals, semi-finished and finished product. No longer can they sit back and pass on prices to customers and consumers without risking competitive disadvantage. The need to globalize is driven by the need to constantly maintain low cost operations.

Managing the global landscape is now gaining “C” level attention. Over the past 18 months there is a dramatic increase in the number of executives with the word “global” in their titles; Chief Global Supply Chain Office, V.P. Global Supply Chain, Director Global Supply Chain, V.P. Global Sourcing, etc. The large ERP solution providers (SAP) and Microsoft (Axapta) and the large TMS (Trade Management Solutions) providers (Red Prairie, Manhattan Associates, Catalyst) have not been slow to recognize that this is an area that is potentially huge and they are all trying to carve their niche in this space.

There are also some new global solutions providers that have started up with significant Venture Capital backing. Over the past 3-4 years TradeBeam has been on an acquisition binge supported by about $35 million in 1st and 2nd round VC money. Their method has been to buy the assets of failed global solutions companies and try to provide one integrated solution. In November they announced another $18 million in 3rd round VC financing. This model is one that SSA is also pursuing.

Then there are the smaller companies that have been providing global commerce management solutions successfully for over 10 years. They have focused on this area and built up significant global commerce expertise, highly robust solutions, strong client relationships and references and solid business models. They are small but deep with experience and expertise in the area.

So where does the greater risk lie? With companies that are large but have no significant expertise in delivering solutions in the area of global commerce but see this as an opportunistic area of growth OR with companies that are small or medium size but have a proven track record of successfully delivering and deploying solutions with clients over many years.

If the market doesn’t provide the size and revenue opportunities that these large ERP and TMS companies envision will they continue to invest in the area? Will they limit their involvement in the area if this proves to be less financially rewarding? Do they have the expertise and experience to deliver integrated solutions that provide the real value proposition?

What is absolutely clear is that companies that have been involved in this space over many years, have a solid business model and good strong clients will be there for the foreseeable future – whether they are large or small.

Large firms have almost always opted for large size solution providers because it gives them comfort. However, in the area of global commerce management the level of expertise in the area and the ability to develop, deliver and deploy proven solutions that deliver value is where the real risk lies.

I would argue that in this area size is significantly less important than expertise and past performance. Global commerce is new to many companies. In the United States understanding of this area is relatively limited and the expert resources are a scarce commodity. The number of solutions providers with proven deliverables and value is relatively few.

The risk for clients lies in not taking the time to understand what is required to deliver successful solutions in the area of global commerce management. Size may matter…but not the way one generally thinks.



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