Monday, April 4, 2011

Acquisitions and Product Rationalization

It is not a surprise that most of us in the high technology industry are geeks at heart. Just remembering all the acronyms we use every day requires a brain that resembles a pivot table. And so it is logical that we like to look at acquisitions first and foremost from the technology point of view. “How will the acquired company’s technology add to your existing technology?”, “What holes has this acquisition filled in your existing portfolio?” - those are the typical questions I get from journalists and analysts after we acquire a company.

That’s of course not the complete view of acquisitions. Acquisitions are always about big money and as such they are not decided by software architects but by business people. And business people look at many objectives when they acquire a company - customer base, market share, market presence, strategic partnerships, access to new channels, source of new revenue, margins boost, etc. - all those reasons may be more important than the technology itself.

With all these reasons in mind, it is inevitable that in times of industry consolidation, companies acquire other companies with overlapping or even duplicate products. And this is when our natural instinct immediately kicks in and the geek way of thinking comes back. “How will you rationalize your portfolio?” is the immediate question I get. Or, more explicitly, “Which of the products are you going to kill?”. The industry pundits seem to immediately forget anything but the technology.

With no regards to product line’s profitability and other business rationale, the industry seems to struggle with the idea that a single vendor could have two distinct offerings in one space. There can only be one answer: “rationalization” - which is a fancy word for killing one product and migrating all customers to the other one, right?

As if all those customers wanted nothing more than to be forced to move to another architecture... In reality, customers want that both offerings remain strategic and that whatever innovation the vendor comes up with finds its place in both offerings.

Of course there is one challenge. The vendor needs to avoid having two sales teams calling on the same customer and pitching their respective products against each other. This kind of internal competition is against the overall interests of the company and tends to confuse the customers. But fortunately there is a solution for that problem.

The solution is segmentation - the two products need to focus on solving either different problems, targeting different markets or employing different channels. As long as the segmentation is clear, the vendor can very well market two or more distinct offerings in the same product category. If the segmentation and the respective channel strategy are in place, the respective sales teams will not compete with each other.

There is nothing wrong with having multiple offerings in the same space. Just look at Oracle and their many products. In the ERP category, they have offerings from PeopleSoft, JD Edwards, and the in-house-built Oracle E-Business Suite. Oracle seems to be doing very well as it is. That’s because the products have existing customers depending on these products who don’t want the products to go away. And because the products address different market segments and because they are - probably - quite profitable.

In the end, two profitable products are better than none.

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