This summer, the heavy drumbeat of software industry consolidation has accelerated to a frenetic tempo as one vendor after another has announced new acquisitions. Now, IBM has joined the party by launching three acquisitions of its own. The company's latest purchases have broad implications for System i users and the software industry as a whole.

In the days leading up to IBM's acquisitions, several System i application vendors made significant purchases of their own. In mid-July, Kronos announced that it is buying Unicru, a $40 million provider of hosted solutions for evaluating and acquiring new employees. Kronos also scooped up SmartTime Software, an $8 million vendor of applications that let manufacturers optimize their shift schedules for maximum productivity. The acquisitions are part of Kronos' plan to double in size by 2010 and become a leading provider of end-to-end human capital management solutions. That plan could elevate the vendor's standing with System i users, many of whom use the timekeeping and scheduling products that Kronos developed for the server.

In early August, ever-expanding Infor whipped out its credit card again to purchase Extensity, a $550 million vendor of financial and performance management applications. Many of these products used to belong to Geac, a longtime provider of System i applications that Infor acquired last November. Since Infor declined to purchase all of Geac's assets at the time, Extensity was formed to market the unwanted applications. Now, Infor has changed its mind and come back to pick up what it left on the auction block last fall. Since that time, Extensity itself has purchased Systems Union, a competitor that markets its products to medium-sized companies. That made Extensity more attractive to Infor, which intends to become the leading mid-market ERP vendor. The company is well on its way to doing so, as it now has 70,000 customers and gets 90 percent of its revenues from mid-market companies. Speaking of revenues, Infor now is a $2.1 billion vendor that ranks third behind SAP and Oracle in ERP software sales.

Two days after Infor's latest purchase, content management vendor Open Text entered into an agreement to purchase Hummingbird, a longtime competitor, for $489 million. The acquisition creates a content management giant with sales of around $670 million that can compete more effectively with rivals such as EMC, the owner of Documentum. Both Open Text and Hummingbird have a history of enabling their products to access and organize documents residing on the System i and its predecessors. However, Open Text has not yet said how combining the two firms will affect their respective System i offerings.

Big Blue Weighs In

Not to be outdone, IBM unleashed a barrage of acquisitions in August. In what turned out to be a warm-up for bigger acquisitions, the company purchased Webify Solutions at the beginning of the month for an undisclosed sum. The vendor creates tools that help companies optimize their business processes by implementing service-oriented architectures. The 120-person firm and its tools will become part of IBM's WebSphere group.

One day later, Big Blue uncorked a much larger acquisition by purchasing MRO Software for $740 million. An IBM partner since 1996, MRO has grown to become a $220 million vendor of enterprise asset management (EAM) solutions. Its Java-based Maximo software suite, which runs on any system that supports WebSphere Application Server, manages and tracks not only physical assets, but also service and IT assets as well. This is what gained IBM's attention, as the computer giant sees a future in which physical and IT assets will be closely linked through technologies such as sensors embedded in production equipment. The MRO product line will become part of IBM's Tivoli portfolio of IT management products. While IBM is not saying how the acquisition will affect Maximo, the EAM suite will probably experience little change.

On August 10, IBM pulled off an even bigger buyout by gobbling up FileNet for $1.6 billion. For years, FileNet has been one of IBM's strongest rivals in the content management market. Indeed, many of the firm's products are quite similar in functionality to IBM's solutions. As such, the acquisition was more about gaining new customers than gaining new products. That said, FileNet has done more to tune its products for vertical industry business processes than IBM has. By acquiring those products, IBM could have more clout when competing with Open Text/Hummingbird and EMC/Documentum. For the moment, IBM will continue to sell and support both its own and FileNet's products. However, I anticipate a significant amount of consolidation between the two product lines down the road.

A Brave New Software World?

The latest shopping sprees by IBM and other software vendors have spurred further reflection on my part about the implications of industry consolidation for all of us. As I see it, the rising tide of acquisitions is reshaping the software market in ways that are both promising and frightening. On the positive side, consolidation is creating a world in which vendors are spending more time integrating the diverse offerings that they are purchasing. It is also motivating them to adopt open standards and service-oriented architectures that make such integration easier. These efforts, in turn, are making it easier for companies to break down the application and data silos in their organizations that hinder business process transformation.

While consolidation may be spurring much-needed integration, it also threatens the lifeblood of the software industry: innovation. The market is increasingly falling under the influence of giant firms that assimilate smaller vendors before they can become serious competitors. In such an environment, there is a significant danger that the giants will become more interested in expanding and defending their customer bases than in creating revolutionary products.

There is another danger that a consolidating market poses, and that is one of increasing conflict between expanding software megafirms. Over a decade ago, IBM sought to avoid such conflict by ceasing to be an applications vendor. By acquiring MRO Software, however, Big Blue has put a foot in the door of the applications market. While MRO's products do manage IT assets, the bulk of the vendor's revenues are still derived from products that manage physical assets. That is exactly what similar products from Oracle, SAP, Infor, and several other vendors do. In all fairness, these companies and many of their counterparts are increasingly entering markets where IBM is a leading vendor, such as middleware and content management.

In short, the rise of software megafirms could create a world where companies can buy everything they need from one or two vendors and enjoy high levels of integration out of the box. To gain that convenience, however, they will likely have to sacrifice choice and bargaining leverage. They may also have to deal with declining levels of vendor cooperation as the megafirms find that their product lines increasingly overlap each other. If you don't believe that such a thing could happen, consider the fact that the American auto industry looked much like the software market before it began consolidating. Of course, we all know what consolidation did to that industry. The same strange brew of positive and negative consequences could end up haunting our own neck of the woods.

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology. You can reach him at This email address is being protected from spambots. You need JavaScript enabled to view it..

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.

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