Bart Perkins : Oracle-PeopleSoft issue highlights consolidation concerns

If your strategic supplier is the victim of a hostile takeover, who worries about your interests?

Oracle Corp.’s recent offer for PeopleSoft Inc. highlights industry consolidation issues. As part of the proposed takeover, Larry Ellison has threatened to stop supporting PeopleSoft applications, leaving PeopleSoft users adrift. PeopleSoft responded with a poison pill, offering to refund twice its license fee if it is acquired and the new owner drops support for PeopleSoft applications within two years. Today, virtually every CIO is worried that a strategic supplier will be taken over and that support will slip.

What can be done? I conducted an informal survey of IT buyers. Many suggested escrowing source code as protection. With smaller software suppliers, contracts often give the buyer rights to the source code if the seller goes out of business or abandons the software.

However, very few software companies will actually allow the source code to be released in the event of a takeover. Even with intellectual property protection, doing so would significantly lower the company’s value. With large software suppliers, escrow clauses are rare, and they don’t do the buyer much good anyway. Few buyers can afford or have the skills to maintain the source code for applications the size of PeopleSoft’s.

Buyers sometimes ask for contract clauses allowing them to terminate their contracts or receive refunds in the event of a takeover. In general, these provide minimal benefit. When you implement new software, you generally change your business processes. Even if you get your money back, you still have to go through the pain and expense of a second implementation, not to mention the time and effort required to select, educate and build a relationship with a new supplier.

Unfortunately, it’s too late for PeopleSoft users to start protecting themselves from the possible Oracle takeover. However, the episode emphasizes the importance of anticipating similar situations. In future sourcing decisions, you can do the following:

– Streamline your architecture. Design the architecture with ease of substitution in mind – use standard interfaces and commodity products where possible.

– Conduct your due diligence thoroughly. Part of your evaluation should focus on supplier viability and business strategy. Is the supplier’s management team involved, committed and hungry? Is the company making money? Does it have enough cash to continue investing in the product if sales decline? Does its business strategy meet your goals? How will its future product line affect your architecture?

– Put all vendor commitments into the contract. Contractual agreements must be honoured, even in takeovers. Include explicit performance and service guarantees, covering things like response time. (One CIO purchased new software only to find that “nightly processing” took four days.) Demand product support for a specified length of time.

– Increase your breadth of knowledge. Industry futurist Thornton May has studied CIO communications and concluded that CIOs “need to get out more.” They spend less than nine per cent of their time talking to industry analysts, other CIOs, journalists and their company’s customers. You must stay current. Read the trade press. Attend conferences. Talk to peers and customers.

– Consider buying through an industry consortium. Buying groups can leverage aggregated demand and swing the balance of power away from the supplier.

– Volunteer for the supplier’s advisory board. Even better, get your business executive sponsor to volunteer. If the software company is acquired, the acquirer will usually ask the advisory board for help keeping existing customers.

– Above all, develop solid contingency plans. Have a backup for every strategic supplier, no matter how solid it seems. Microsoft Corp. and IBM Corp. have enough spare cash to make any other vendor vulnerable to an acquisition!

It’s difficult to protect yourself in the middle of a takeover. The best you can do is to be proactive: Streamline your architecture, write a tight contract and stay on top of industry trends. You can’t prevent supplier takeovers, but you can minimize the effect on your IT organization.

Bart Perkins is managing partner at Leverage Partners Inc. in Louisville, Ky., which helps CIOs manage their IT suppliers. He was CIO at Tricon Global Restaurants Inc. and Dole Food Co. Contact him