No, I am not talking about environmental sustainability, I mean financial sustainability. A potential client tried to judge the financial sustainability of its future software partner last week. Food companies more so that other industries are a little bit more sluggish when it comes to technology investments and adaptation, at least most companies that I deal with. Technology purchases are hard on them. They require normally between .25% and 1% of annual revenue as investment into something that is hard to grasp for them and has a significant risk associated with it. Next to actual project failure, most companies worry about the long-term financial sustainability of their partners.
It is very hard for traditional companies to judge future performance of technology companies. Remember MySpace? AOL anybody? Did you notice that Facebook is currently trading at around 50% of its current stock value? The problem in technology today is, that it is utmost hard to judge the financial stability of technology organizations, since technology itself is moving just too fast. Attempts to utilize company’s visions and future roadmaps proof fatal, since these change faster then ever. Do you actually think that Microsoft had their ‘Metro Style User interface’ (which btw. Since yesterday or so shall not be called metro style anymore) dreamed up 5 years ago? I mean that was pre-IPad Time!
No, technology companies cannot be judged by their visions and their plans. This would be a huge gamble to take. Now, what would be parameters that one should consider when choosing a partner. Here are my top 9 factors influencing the future success of food industry specific ERP providers:
- Historic long-term financial performance: A company that stayed in the technology business for more than 25 years or so, must have the ability to adapt to change. They must have changed Operating Systems, Development Technologies, Programming languages and different platforms and infrastructure. Companies that do not have that experience have not proven that they could deal with significant change.
- Dependence on the Industry: A Software company specialized in a certain industry needs to make a certain share of their revenue and profits from that industry. A company that derives more that 25% from the food industry is highly dependent on the food industry. A company that derives 25% of revenue from the meat industry depends on that sub vertical heavily. This creates the economic incentives to provide innovative technologies for these specialized markets that must drive revenue for the software company and efficiency gains for the food industry.
- Ongoing revenue streams: I would venture to guess that companies in the food industry replace their core corporate IT systems approx. every 10 years in average, perhaps even longer. With maintenance revenue hovering around 20% of the software list price annually, you can easily do the math and find out that a software company most like derives double the revenue from ongoing maintenance fees compared to new software license fees. Which leads to:
- Health of existing client base: An eroding customer base indicates the most serious threat to ERP companies, see number 3. It is therefore important to see not only recent performance, but customers that have been using the system for the past ten years or more and still commit using it for the foreseeable future.
- Independence: I would not consider a food company financially sustainable for the next 5 years or so, if their supply depends on a single ingredient, a single vendor, a single product or a single customer. A single point of failure outside of an organization is the biggest threat to its competitiveness. A software partner or system integrator that solely relies on Microsoft, SAP or Oracle can fail very quickly, as others have done in the past. Fullscope was one of the leading Microsoft Integration partners for the food industry, which silently disappeared in an asset purchase by Microsoft, which absorbed the intellectual property to incorporate it in future releases. This is not only an example for dismantled ISV’s, this also represents a major threat to others in the Microsoft ecosystem, to those that build their products based on similar intellectual property. Speaking of which…
- Intellectual Property: Software is as a matter of fact intellectual property. It is like a book full of knowledge. In general, the more intellectual property, the more knowledge you buy, the better the bang for the buck. More specifically, the intellectual property should be relevant for your organization! It does not matter if a software company does have great intellectual property for web retail, if your company does not engage in it. Software patents, proprietary technology relevant for your industry and your business and build in knowledge into the standard software are clear indicators of the value of a software package and the value of its owners.
- Interoperability: There is no software that can do it all these days. While some features and functions need to be tightly integrated into the business applications, the software needs to play nicely with others. We like to call for teamwork in our organizations, and software needs to play well in a larger team as well. To mitigate dependency, it should not only play well with one team, but with any team in the targeted marketplace. It should support multiple databases (such as Oracle and Microsoft SQL Server), should play with different email systems, run in different web browsers and support different internet servers. It should not only play nicely with different software systems, but different hardware as well: it should play nicely with different scales and scanners, different manufacturing and logistics equipment. It should support mobile platforms, that run Blackberries, Apple or Microsoft devices, not only one of them. It should play with legacy communication technologies like phone and fax as well as with current communication technologies like Skype, Google Voice and other Voip systems.
- Ownership: I think that CDC software has been sold three times by now, I am not sure but the latest purchase of bankrupt CDC (aka Ross) happened in April of 2012. I don’t want to imply that this is a bad company, by no means! It is just a company that is consistently in the public eye. The company has either been public or as been under private equity ‘conservator ship’, which isn’t any better. In both instances, you talk about and organizational structure whose first and foremost goal are short-term profits. These companies are flipped on stock exchanges and in private equity purchases in a heartbeat. There is no longevity built into the DNA of such organizations, they are just trading goods. If these turn bad, they are shuttered, sold, repackaged whenever the current owner needs or wants it.
- Product Portfolio: A company needs to have a healthy width of products to its ecosystem. I mean own products, not resold products. Resold products are exchangeable and so is its reseller. It is important that there is significant value in the own products of that organization.
Now, if you plan on doing your due diligence, make sure that you understand these core values and risks of technology companies. These are some core parameters that may be helpful in finding a partner for the long-term for your food company.