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Abhishek Mundra

Koch Industries’ Takeover of Infor Signals Key Bet on Cloud ERP Market | Blog

By | Blog, Cloud & Infrastructure

Infor – a global leader in business cloud software specialized by industry – announced on February 4, 2020, that Koch Equity Development (KED) LLC, the private investment arm of Koch Industries, Inc., has entered into a definitive agreement to acquire Golden Gate Capital’s equity stake to take 100 percent ownership of Infor. Before the agreement, Koch Industries owned about 70 percent of Infor. While the official figures are not out, public sources peg the deal at close to US$13 billion, including preferred shares.

Why did Koch do this? Here’s our analysis of the key reasons.

  1. Riding the ERP demand bandwagon: Our recent analysis indicates that ERP-focused process transformation and modernization drove over 30 percent of all digital transformation initiatives in 2019. While Oracle and SAP are the largest players in this space, more than 35 percent of the market is still comprised of a long tail of bespoke ERP, where there is likely to be huge churn and consolidation. Infor promoters wanted to ride this growth opportunity through an IPO.
  2. SAP/Oracle in the equation: SAP is the largest player in the ERP market, and its current licenses are reaching end of life in 2025. Also, it’s well known that SAP is currently offering significant incentives to nudge enterprises to accelerate their move to S/4HANA, especially its cloud version. Oracle is using a similar incentive-oriented approach for its cloud-based applications. Promoters of Infor probably saw how this competitive dynamic would play out.
  3. Taking the private route instead of IPO: In a market driven by incentives, a privately-owned organization backed by a diversified cash rich promoter probably gives Infor a better shot at competing with its much larger competitors. For a listed firm, navigating a growth-oriented strategy (by de-emphasizing margins) would have been a tough nut to crack. Plus, competing with larger peers will require a significant investment in product modernization.
  4. The Koch portfolio companies: The jury is still out on whether Infor can credibly compete with SAP and Oracle in the broader ERP market. However, as the second largest privately-owned conglomerate in America (Cargill is the largest), the parent Koch Industries can enable a captive market for Infor to start with.

Deal implications

For Infor – potential growth through synergies: As we’ve already noted, this acquisition may give Infor access to a captive customer base in Koch Industries’ subsidiary and partner network. Given Koch’s presence in more than 60 countries, this may also allow Infor to expand the geographic footprint of its client base, especially in markets outside of North America where it has limited presence. This is coming at a time when enterprises in Europe and APAC are beginning to embrace SaaS offerings.

For Koch – potential RoI: We see this takeover as a typical private equity play to improve the value of an existing asset by riding the ERP demand wave. While Koch Industries has been making investments in its portfolio on the technology sector, we do not see this tweak in ownership as a sign of change in Koch’s portfolio mix. Given that a large chunk of Infor’s client base is still struggling with aging on-premises applications, Infor will need strong investment backing to convince its existing user base of its long-term cloud ERP vision.

For systems integrators – potential opportunities: Koch industries generated over US$100 billion in annual revenues in FY19. While we do not have estimates for the ERP transformation opportunities within Koch portfolio companies, it is likely to be a significant opportunity for systems integrators to focus on, using an Infor playbook.

For enterprises – better incentives, more supply-side investments: If Koch backs its investment with a large innovation fund, enterprises may gain on the following parameters:

  • Better incentives: Due to intensifying competition, enterprises may see more creative financial solutions and incentives around cloud-based ERP
  • Verticalized product offerings: Industry-focus and verticalization is gaining traction in the ERP space. Koch’s expertise in industries including manufacturing, chemicals, energy, petroleum, finance, and commodities may lead Infor to accelerate micro-vertical solutions faster than its competition.

The path forward

Infor has seen almost flat growth of around 3 percent over the past five years, due primarily to its long-term focus on SaaS revenues, which directly cannibalized its existing license revenues from on-premises offerings. In FY19, Infor’s SaaS revenue – which is about 20 percent of its overall revenue base of US$3.2 billion – grew at approximately 21 percent, while its licensing fees declined at about 12 percent. Given this strong focus on SaaS, Infor is well positioned in the manufacturing and allied verticals to overcome some of the critical cloud migration challenges and cater to some industries’ process-specific demands.

However, over the past year, there have been multiple big-ticket acquisitions in the enterprise platform market, geared to improving product capabilities – especially in areas related to cloud and analytics. In this hyper-competitive space, it will be challenging for Infor to compete credibly at scale based only on promoter-backed cash flow. Watch this space for more on how this move pans out.

Oracle Wins Over Microsoft and SAP in the Cloud ERP BigTech Battle

By | Blog, Cloud & Infrastructure

As part of our enterprise platform services research, we reached out to 15 global IT service providers and some of their key enterprise clients to understand their views on the leading cloud ERP vendors: Microsoft Dynamics 365, Oracle ERP Cloud, and SAP S/4 HANA.

We then analyzed their input against five important parameters.

Who’s the winner? Oracle ERP Cloud.

Here’s a drill-down on our analysis of the five parameters.

Technology sophistication/product excellence

Microsoft and SAP are still struggling to migrate all the on-premise functionalities to their cloud offerings. In fact, many of the enterprises we spoke with consider Dynamics 365 and S/4 HANA simplified versions of their on-premise offering, but with some functionality gaps. On the other hand, Oracle has made significant headway in its migration and is stepping up to integrate emerging technology capabilities into its cloud offering. Microsoft and SAP also lack case study-based proof points that demonstrate the maturity of their solution.

Ease of implementation and integration

Although implementation completion time is consistent among the three vendors’ cloud offerings, there are significant variations among their ease of integration. Because of its Fusion middleware, Oracle ERP Cloud is considerably easier to integrate with on-premise systems and other third-party applications than the others. SAP ranks lowest on this parameter, mainly because of challenges associated with integrating other SAP cloud offerings, such as SuccessFactors, Ariba, Concur, and Hybris, with the core S/4 HANA and on-premise SAP products.

Commercial flexibility

Here, Microsoft fares better than both Oracle and SAP. It has a friendlier licensing model wherein it bundles its cloud ERP offering with CRM and other Microsoft products. In comparison, SAP’s limited features and functionalities make mid-sized enterprises its largest buyer group. And Oracle’s hosting environment isn’t particularly flexible; it is pushing to keep the NetSuite and Oracle ERP Cloud workloads in-house on the Oracle platform.

Talent availability

Because of Oracle’s and SAP’s strong presence in the on-premise ERP market, there’s an abundance of talent with the knowledge to be upskilled to implement, integrate, and manage their cloud-based offerings. In fact, supply is larger than demand. But Microsoft is struggling here, with a ~20 percent demand-supply gap for trained developers and integration consultants.

Overall customer experience

Over the past few years, Oracle has been able to improve its end-user experience with software updates. Microsoft is trying to create a better customer experience with its integrated enterprise offering. Dynamics 365 engagements are no longer just standalone ERP or CRM engagements; instead, oriented around a transformational impact message, they also encompass Office 365, Azure cloud services, and the Power platform. SAP is creating a better customer experience by collaborating effectively with its clients on implementation and maintenance issues. But it still delivers an inconsistent user experience between its on-premise and cloud version. While all three vendors have made strides in delivering a better customer experience, Oracle rose to the top on this parameter.

Our analysis shows that Oracle ERP Cloud is the clear, present winner in the war among the top three vendors. Although Microsoft and SAP are catching up with Dynamics 365 and S/4 HANA, and are doing great in specific niches, it will take some time before they evolve their offerings and establish some credible proof points across different industries.

Watch this space for additional blogs on the kind of challenges enterprises are facing with cloud ERP adoption, and what they should do to tackle them.

What has been your experience with cloud ERP? Please write to us at [email protected] and [email protected].

General Electric and the Harsh Realities of Digital Transformation | Sherpas in Blue Shirts

By | Blog, Digital Transformation

Last week, General Electric (GE) replaced CEO John Flannery (after just 13 months in the top seat) with former Danaher chief Lawrence Culp, in response to Flannery’s slower-than-expected turnaround efforts.

GE has been a lynchpin of the American economic narrative, having pioneered the light bulb and the jet engine. During its vast and distinguished history, it has survived the Great Depression, the dot-com bubble, and the 2008 financial crisis. It was one of the original components of the Dow Jones Industrial Average, and had the longest continuous presence on the index before being removed from the index in June 2018. GE’s shares recently nosedived to fall below the $100 billion market cap threshold, effectively wiping out US$500 billion in value since its peak market cap of ~US$600 billion in August 2000. For such as iconic enterprise, the fall could not have been more dramatic.

GE Stock Prices blog image

How Did We Get Here?

While much of the market commentary has tried to blame GE’s decline on everything from short-sighted leadership (even under the legendary Jack Welch), expensive (and often inexplicable) M&A deals, and poor cash deployment, the truth is that it has suffered from a not-so-uncommon problem… lack of a future-proof digital operating model.

The company has struggled to reorient its portfolio in time, something for which Welch, Immelt, and Flannery were criticized. It has witnessed sluggish growth, despite divesting what it perceives are “non-core” businesses. Over the years, it overpaid for assets in “legacy” businesses – a typical sign of hubris – e.g., its US$9.5 billion acquisition of Alstom, which represented a doubling down on fossil fuels.

A combination of these short-sighted decisions has led to sluggish growth in emerging areas, such as healthcare. Its healthcare unit is now looking to spin out into a separate and independent company by 2019, despite being an important profit center with US$3.4 billion, or 18 percent in profit, in 2017. Essentially, it accounted for 16 percent of GE’s sales, but ~50 percent of its operating profit in 2017, which is a prime example of the misplaced bets GE has made over the years.

This not to say that GE has failed invest in upping its digital game. It has positioned itself as an industrial leader of the digital revolution, with major bets in software players and the Predix industrial IoT platform.

Digital is still a US$4 billion business for GE, but its aspirations seem dramatically cut short. Former CEO Jeff Immelt established the GE Digital business in 2015 as a part of a grand vision to transform the conglomerate into a “digital industrial” company. And yes, invested US$4 billion into the unit. After Immelt’s resignation last year, Flannery has scaled back these ambitions to focus on what it considered the “core” businesses. As of July 2018, GE was reportedly looking to hive off its digital assets, including Predix.

GEs top line bottom line blog image
GE Portfolio blog image

But is GE Alone?

Not really. Our recent research on the evolving digital services market reveals that three in four enterprises have failed to realize sustained returns on their digital investments. Leading enterprise executives singled out the operating model – or lack thereof – as the most important crucial determinant of success in this journey. Amongst various issues, 69 percent of enterprises consider organization structure a barrier while scaling up their digital initiatives.

GE digital transformation hurdles blog image

Enterprises that do not meaningfully reimagine their operating models cannot sustain digital transformation initiatives. Most organizations take a half measure by just focusing on digital strategy. If the enterprise operating model is not aligned with the digital strategy and business model, the desired returns from a transformation initiative cannot be achieved.

GE Returns Time blog image

A Future-Proof Digital Operating Model

Enterprises need to focus on five key areas to evolve their digital operating model and sustain transformation initiatives:

  • Organization structure: Leaner organizational structure aligned with the business model and digital strategy
  • Organizational culture: Ownership-driven culture with focus toward experimentation to reduce the fear of change
  • Communication channels: Decision-making aided by 360° communication involving internal and external stakeholders
  • Technology: Broader scope of technology adoption involving the entire value chain
  • Governance: Portfolio-based technology investments with aggregate business benefits such as ROI.

Adding F.I.R.E. to Scale

To achieve digital-first success, enterprises should embrace a F.I.R.E. operating model framework that defines a blueprint to scale up their digital initiatives:

GE Fire blog image

  1. Fluid organizational structure: Simplifying the organizational structure and its processes in selected pockets of the organization that require agility
  2. Innovative system and culture: Redefining existing processes needs a culture that is driven by innovation and experimentation
  3. Responsive workplace: Creating a workplace aided by intelligent automation and collaboration practices can act as a foundation for any transformation project
  4. Experience-centricity: Moving beyond customer-centricity to focus on the experience of the ecosystem.

Related: Learn more about our digital transformation analyses

Enterprises need to stop looking at digital transformation as an end-goal in and of itself. Rather, it’s a means to an end. When undertaken for short-term incentives and playing buzz word bingo, digital initiatives are more often than not doomed for suboptimal returns if not outright failure. Enterprises need to define the objective functions, and work backwards to establish a resilient and nimble operating model in order to stay relevant and thrive.