This post originally appeared on NetSuite's blog and has been repurposed with permission
That iceberg the size of Delaware now floating free isn’t the only one people need to worry about these days. There’s a virtual armada of icebergs out there today taking the form of legacy ERP providers.
These ERP icebergs show many of the same characteristics as their Arctic counterparts. They’re old and have been frozen in place for decades; what you see is not what you get, the bulk of the iceberg is hidden; they continue to shrink and ultimately disappear; they remain a hazard to anything that gets too near.
Businesses evaluating ERP platforms need to be very careful with iceberg ERP. They can look attractive until you get closer and discover they are just the same old legacy products, now with a thin modern veneer. In fact, the companies behind them are slowly disintegrating as their lack of focus, innovation and relevance to the modern company sap away at their business.
The problem for many of these iceberg companies is they have spent years buying up customer bases and products. Most of these products are based on old technologies that cannot be modernized. Their large customer bases now pay ever increasing maintenance and get little in return, often netting an empty promise that they will be able to “seamlessly” move to a new product – at some time in the future. Most of the time that new product is just another old product with a different façade or a different story that does less than their existing product, but will cost them as much to move to it as buying a completely new solution. For example, they’ll hear “Product X now available in the cloud,” when in fact it’s just the same old on premise product X in a hosting center, probably being accessed using a terminal server.
Moreover, the existing products see little development and have fewer experts to support them. A telltale sign of an iceberg ERP company? Many times the customer will know more about the product than the support team.
Take a look at the website for one iceberg company. On the surface, it sells products ranging from printing and packaging, retail, to manufacturing and multiple flavors of distribution. Most of these solutions are full ERP solutions including Financials, Order Processing, Inventory and SCM. All run on different technologies and platforms ranging from Windows and SQL Server, .NET and Progress through to Unix and Cobol.
On the surface this is an $800 million company. However, even the most superficial view of the website shows it is made up of a large number of completely different solutions diluting the focus, resources and the value of the maintenance customers are paying. This is the visible part of the iceberg. Looking under the surface on their website and user group websites you find that there are more than 40 other ERP solutions with maintenance paying customers. All with different technologies all with their own inventory, order processing, reporting, etc. technologies that need to be supported and maintained.
A customer may think they’ll be working with a billion-dollar company focused on their industry, when in fact they are buying a product that drives a fraction of revenue with a tiny development, consulting and support team. Keeping up with the massive changes in technology and business models that are happening in the market today will pose significant challenges.
Others, although larger, are even more fragmented, selling over 60 products in the market. And it is staggering what sits beneath the surface. Never mind the products, just looking at the more than 26 companies acquired, not including the many companies those businesses acquired themselves.
Compare this to companies like NetSuite, which was approaching a billion dollars in revenue when it was acquired by Oracle and is devoted to enhancing a single solution. NetSuite is one of the few companies where all of the more than 40,000 organizations using its product are on the same release.
When evaluating iceberg companies through the added lens of which release the customer is on, the danger becomes exponentially worse. The vast majority of the products have been sold “on premise.” Which means that the customer determines when they will upgrade to the latest version, service pack, patch or hot fix. Once on stable ground with these type of products, customers don’t want to risk issues by taking on new releases. So, these products tend to have customers on multiple versions, making it difficult to support, especially if they have customized the solution as well. The visible part of the iceberg then becomes even smaller. For many, the latest version of the product, where the limited investment in new features is, has very few actual live customers using it. The vast majority of maintenance paying customers are on products that aren’t being developed or on old versions of the product that are not being maintained.
To follow the iceberg metaphor through to the titanic conclusion, there are only enough lifeboats for the few customers on the latest products and versions, the vast majority of fee paying customers are treading ice water wondering why they paid for their ticket. Most of the maintenance revenue isn’t used supporting or maintaining the customers paying it.
Cast Off Course by EBITA
Like their arctic counterparts, ERP icebergs also slowly melt and disintegrate. Many of these companies are now owned by private equity organizations focused on driving EBITA. With large maintenance-paying customer bases, the easiest way to drive EBITA is to reduce cost, which is often done by offshoring or reducing experienced expensive staff. The sheer number of different technologies and products, combined with a reduction of cost, means that the solutions start to become less competitive, driving less new revenue, which in turn means more costs need to be cut, ultimately continuing the spiral. The senior management in iceberg companies tend to be more distant from the products and customers they support as there are so many different products and industries to understand. One day they are focused on the cloud with Product 1 in discrete manufacturing. The next day it’s on-premise with Product 24 in retail. This leads to bland direction and a group of leaders who don’t really know their products or markets. They then tend to concentrate on the easiest thing to focus on and control – EBITA. The spread of true cloud technologies warm the waters around them, making the legacy systems obsolete.
If you find yourself “attracted” to, or already been struck by an iceberg company you should ask the following questions:
-How many developers, support people and consultants are working on just my product and how many of the developers are working on new features?
-What is average tenure of my products support people? (Are they offshoring my support people who will know less about the product than me)
-How much revenue does my product produce and how much of that is new customer revenue? (How big is my product, is it only a $5, 10, 20, 50, 90, 200 million company?)
-How many customers are on the latest release of my product?
In the end the safest thing is to steer well clear of the iceberg company.