Four things to keep in mind amidst merger madness

By Tom Pisello, special to SearchCIO.com 18 Jun 2003 | SearchCIO.com

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The recent merger announcements by PeopleSoft Inc. and Oracle Corp. have cast a shadow of fear, uncertainty and doubt in the enterprise software market. Companies that have just made purchases or new deployments are worried that the rug will be pulled out from under them, that they have standardized on a platform that may not be around in two or three years. Others who were on the cusp of making purchasing decisions are rethinking their options.

Many were excited by the news of PeopleSoft and J.D. Edwards joining forces, thinking that one plus one sometimes equal three. The marriage of these companies is likely to provide users with synergistic products that add new capabilities, features and functions.

Unfortunately, the bid by Oracle to break up this competitive duet offers customers less than the sum of its parts. Oracle claims that it will quickly end-of-life the legacy applications from the acquired companies. This forced migration will cost customers plenty in re-implementation and customization. And, worse, the Oracle move will diminish competition. Customers will be left with two choices: SAP AG or Oracle, and many will choose SAP, resentful of being strong-armed by Oracle.

Regardless of whether the deal goes through for Oracle, the move has been a successful one. Rather than fighting the combined force of it competition, Oracle has taken the wind out of the marriage sails and effectively frozen many purchasing decisions. The Oracle offer creates doubt for buyers about the future viability of PeopleSoft and J.D. Edwards. Many IT executives are scratching their heads as to what to do next.

Large commitments

Companies planning to purchase enterprise software are making a long-term investment in standardization and a strategic partnership with a provider. Of course, they want the partner to be viable over the long run. The selection of an enterprise platform is a choice that lasts an average of eight to 10 years, for most companies. Typically, a company will extend the platform over its useful life and perform a minor upgrade every five years or so, but the selection is a stable one -- driven by life-cycle economics and resource limitations.

Enterprise software implementations typically come with seven-figure price tags, and the cost of the hardware and software is only a fraction of the total ownership cost. Other life-cycle cost elements, such as implementation, professional services, customization, user training, business process change management, support and administration, can cost four or five times more than capital purchases. Claims have been made in these acquisition discussions that perhaps customers would be given free copies of Oracle software to make up for the forced transition. Unfortunately for many, this will represent less than 10% of the investment in the solution.

These projects typically take six to 18 months to implement, and they require an enormous commitment of the management team and resources within IT and the business units. If the team is forced to migrate prematurely, resources that are allocated to other strategic projects will likely need to be re-committed, at a high cost to the organization's other initiatives -- and with little new value to the company. And there will be an even larger potential impact on the users who must cope with new training and business processes.

Long-term ROI

Many of these projects deliver payback in the two- to six-year range, because deployments take time, user adoption is typically slow, and business change needs to occur around the technology platform. Many of the investments deliver compelling returns to the organization, which is why the projects were pursued in the first place. However, the majority of these have not been paid for yet.

Enter a forced migration, and unfortunately the payback will be pushed back another two to six years.

In light of this merger and acquisition (M&A) activity, what can be done to minimize the impacts and maximize ROI? Keep in mind these four things:

1. Recognize that uncertainty is certain in the enterprise software space. This is the new battlefield of technology M&A. Enterprise software is becoming a commodity in a consolidating market with little organic growth. As in other technology arenas where this has occurred, such as the infrastructure marketplace, the spoils will go to the large players who can acquire market share through acquisitions, which will drive the economics of this sector over the next five years. Some of the activity will be seen as a benefit to the consumer, while most will lead to uncertainty and increase the difficulty of making the right IT investment decisions.

2. Factor vendor risk into ROI analysis. Risk is an important element to consider for every IT project, and vendor risk can be factored into the decision-making process. If the selection is to go with a smaller vendor that is likely to be acquired, the team can demand a quicker project payback, divide the project into smaller projects with quick paybacks, discount the future benefits, or plan for future costs that may be required to support some type of product migration or transition. The most important thing to remember is that risk can be considered, but do not hold off on making decisions if the investments make sound business sense.

3. Separate the "transaction layer" from the "data layer." Engineer the enterprise software solution so that the business process layer, which is the subject of most of the current tumult in the marketplace, is isolated from the data layer/data warehouse. The data warehouse can be the foundation of the solution, so that the information is the most vital element of the solution, with less investment and customization made to the business process/transaction layer. Web services will help in this endeavor. The IT battlefield of the past was infrastructure. The current IT battlefield is business process efficiency. The new battlefield is knowledge capital and intelligence, and the recent issues in enterprise software can be a great catalyst to migrate focus to the information and intelligence, rather than transactional efficiency.

4. Look twice at managed services. Too much of the risk for IT investment decisions and ongoing management is placed on the IT department. What if these enterprise software solutions were a utility that provided services on demand? The vendor would manage the infrastructure and assure transitions to the latest platforms as part of the contract. Service levels could be constructed to provide required functions, performance, availability, security, accountability and, most important, isolation from M&A.

Tom Pisello is the president and CEO of Orlando-based Alinean, helping CIOs, consultants and vendors assess and articulate the value of IT investments. He can be reached at tpisello@alinean.com.

FOR MORE INFORMATION:

Oracle plans takeover bid of PeopleSoft

PeopleSoft board votes to reject Oracle offer

Oracle ups ante in PeopleSoft takeover bid

Fallout from Oracle's hostile takeover bid

PeopleSoft and JDE sue Oracle, alter merger terms

Oracle takeover caps wild week in enterprise applications market

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