Election Day In Software

The consolidation trend, which saw a handful of vendors snap up almost 40 other companies this year, "is throwing off some of our traditional partnerships," said Dave Gilden, COO of Acuity Solutions, a Tampa, Fla.-based security-focused partner. "It's a big issue, since partners like Acuity have made huge investments with specific vendors."

Rory Sanchez, president of SL Powers, a West Palm Beach, Fla., solution provider, said the buyouts can create real issues in the channel. "The problem is we make investments to get certified and are loyal to these vendors and then they make these acquisitions without really letting us know what's going on or explaining it to us," said Sanchez. "Then we are left to our own devices to figure out what is going on and how their strategy is going to affect us."

After Oracle completed its near-$6-billion-dollar buyout of Siebel Systems in January, many thought the software M&A boom was over. They had another think coming.

Year to date, Oracle has purchased 10 companies and Microsoft has bought 12. EMC—trying to expand beyond storage to security and information life-cycle management, has bought six, including two Microsoft solution provider partners. IBM Software has bought at least four, including FileNet.

The deals—Google's $1.65 billion buyout of YouTube not included—are not all huge, but they're still flowing. And they are strategic, solution providers and other industry watchers say.

Take Oracle's shopping list as an example. The Redwood Shores, Calif.-based database giant snapped up four small companies in June alone: Demantra, Telephony@Work, Sigma Dynamics and Sunopsis. These companies brought demand management expertise, IP-based call-center savvy, realtime analytics and data integration wherewithal, respectively, to Oracle's apps and middleware fold.

Microsoft, Redmond, Wash., filled in a "group policy gap" with its acquisition in early October of DesktopStandard. A week later, it bought Colloquis, a maker of customer query software typically used by online services to automatically answer customer questions or, failing that, to route the call efficiently. That acquisition is part of Microsoft's attempt to build out its software services infrastructure.

That's all fine and dandy on paper. But when vendor buyouts happen, solution providers have to read between the lines and look after their own interests and vote their business accordingly.

One fear among VARs is that these companies, all of which regularly tout their R&D largesse and innovative zeal, are really relying on acquisitions for fresh technology and a leg up on the competition. The feeling is these big companies are out of big ideas, so they're looking outside.

Closer to home, solution providers realize that as a vendor adds more and more products, or more layers to its stack, they will be affected. They must scrutinize how their vendor partners—whether they are the buyer or seller in a given deal—will be affected by the transaction. Of particular concern to security VARs, for example, is EMC's buyout of RSA Security. Acuity, an RSA partner, is watching for the impact of the deal on its own business. Another deal under the microscope is IBM's buyout of Internet Security Systems (ISS.)

Don't Sit On The Sidelines
Vendor M&A should not be a spectator sport for VARs, said Andrew Plato, CEO of Anitian Enterprise Security, a Portland, Ore. security specialist.

"Assuming you resell the acquired company's products, you really have to spend some time figuring out what the buyer's strategy is. Will what they're doing align with our business or will they try to poach our business?" Plato noted.

He was initially concerned with the news of Armonk, N.Y.-based IBM's buyout of ISS, one of his strategic vendors. "In that case, we ended up thinking it's a good thing because ISS needed deeper pockets and a better internal organization. IBM will probably poach some real high-end business, but there will be a lot more midtier business for us," he said.

Plato was less enthused about Symantec's earlier buyout of Sygate, which he felt confused the market. "What is their strategy? Am I going to keep selling Symantec Client security only to find out when I book the order that it's now Sygate and, by the way, costs more money?"

Acuity's Gilden said his company was very worried about EMC, Hopkinton, Mass., folding in RSA. "We are a big RSA partner and we are not a big EMC partner," he noted. "How will those two coming together affect our RSA business? Is Dell going to be selling RSA now? And what is IBM going to do with ISS?"

VARs that pride themselves on knitting together collections of "best-of-breed" software modules from many vendors now see the most powerful vendors—IBM, SAP, Oracle, Microsoft, EMC—offering fuller stacks on their own. One VAR that may have fielded, say, BEA application servers, Oracle databases and Microsoft applications might decide to cast his lot with one vendor that now covers all those bases, for example. And he might worry that as vendors consolidate wares from many companies, they're also consolidating channels. Infor, for example, an ERP software giant built on myriad acquisitions, is requiring its channel partners to dump competitive ERP products to retain their status with the Atlanta vendor.

Longtime industry watcher Judith Hurwitz says as these infrastructure leaders fill holes in their lineup they're also seeking bigger footprints in their existing big accounts. So if Oracle sells a lot of its database to Acme Tool and Die, it's now trying to sell a helluva lot more of its app servers, its middleware and its applications—be they J.D. Edwards, PeopleSoft, Siebel or Oracle's own e-business suite.

"It also goes without saying that each one of these vendors with a partner program wants some commitment from their partners to focus on them," said Hurwitz, president of Newton, Mass.-based Hurwitz and Associates. While few demand total exclusivity from partners, many expect partners to do well by them and will reward them with better margins and other perks if they devote more resources to their products over competitive offerings.

Of course some vendors—Microsoft comes to mind—push a broad-based volume approach to partnering. Some call it carpet-bombing, and several Microsoft Business Solutions ERP partners complain loudly—if anonymously—that Microsoft's partner recruitment fattens the ranks of partners but causes VAR-on-VAR competition that thins margins.

SAP, Walldorf, Germany, is pickier, even in its BusinessOne midmarket push. "SAP isn't going after all the partners; they're cherry-picking select partners in each area," Hurwitz said.

Likewise at Oracle OpenWorld this week in San Francisco, the company will talk more about its expanding All Partner Territory game plan that will reward qualifying partners with big opportunities. Partners in these territories will act as an extension of Oracle's field sales teams and be tightly linked into the pipeline. The opportunity could be great, although large, named accounts will be excluded.

Take The Good With The Bad
Some VARs see what could become a worrisome trend: vendors increasingly red-lining enterprise accounts for their own direct sales forces—even when smaller solution providers are already in those accounts—and forcing partners to concentrate on SMB business.

Others say this is not a bad thing. "There is more than enough opportunity in small and midsized businesses for my company," said one East Coast Oracle VAR.

Said Anitian's Plato: "A lot of VARs now realize as these companies consolidate, what's really happening is they're getting pushed out of the Fortune 500 or 100 companies. But they see tremendous opportunity in the midmarket where the large [vendor] providers won't waste their time and money."

Rob Wolfe, CEO of Avcom East, a Vienna, Va., solution provider, takes an optimistic view. For him, consolidation "means some of our key vendors now have more robust, more complete and more comprehensive offerings. The dilemma that creates for us and some other partners is that we've already picked multiple software companies because they all have things that were the best in certain areas. Now they're filling the gaps so there will be overlap by our vendor partners."

On the Oracle-Sun-BEA-IBM axis, a fear of locking into one vendor is allayed somewhat because all of those vendors base their wares on Java and standards. "It's fair to say some customers don't want to lock into one vendor but, counter to that in today's market, there are open standards and you know that if you write things to J2EE you have portability," Wolfe said.

VARs say the trend toward Web services and service-oriented architecture takes some of the fright out of aligning with a smaller vendor that might get bought or disappear. "There are alternatives," said Wolfe. Microsoft likewise touts standards, although some solution providers in the Java camp eye Microsoft's integrated soup-to-nuts software stack with a bit of trepidation.

Still, VARs keep coming back to the central point in a world where vendors engulf and devour each other (and then occasionally divest in another disconcerting wave.) Simply put, VARs need to spend as much time studying and weighing their vendor partners' strategies as they do their technologies. Their primary concern must be about the value they themselves add and their own brand.

"The real key may be to become more vendor-agnostic and vendor-independent so acquisitions won't affect us," said SL Powers' Sanchez.

In other words, for their own survival, VARs must vote for themselves.

STEVEN BURKE contributed to this story.