Today, nearly all companies invest in assembling digital platforms as a source of significant efficiencies and competitive advantage. Platforms enable a data-driven world and allow companies to create new business value in improving experiences for customers, employees and partners. Multiple platforms and other software components usually comprise the platform a company assembles. For example, a consistent component of almost all platforms is the heavy use of cloud and the rich set of capabilities available from the hyperscaled platforms. But companies need to understand the consequences of the presence of this component in the platform they build.
Fundamental changes are happening to the core set of assumptions that underpin how cloud ecosystems have been operating. Some of the traditional assumptions are no longer true today or won’t be true soon. The changes are for the worse – they raise prices and introduce significant additional complexity for companies that operate in a hybrid and multi-cloud environment.
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.
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.
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.
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.
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.
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.
The fact is that AWS, Azure, and GCP don’t really have industry clouds. These cloud IaaS vendors enable clients to run business applications and services on top of their cloud platforms, but haven’t built industry-specific application or process capabilities. They acknowledge that their clients want to focus more on building applications than infrastructure, which defeats their positioning in the industry cloud market. The core of what they offer is compute, data, ML/AI, business continuity, and security, and they rely on technology and service partners to build industry-relevant solutions. For example, GCP partnered with Deloitte for cloud-based retail forecasting, and AWS joined with Merck and Accenture for a medicine platform. They are also partnering with core business application vendors such as Cerner and Temenos.
Cloud SaaS providers have an edge
ISVs have continued to expand their industry cloud offerings over the past few years. For example, in 2016 Oracle acquired Textura, a leading provider of construction contracts and payment management cloud services, SAP introduced its manufacturing cloud in 2018, and in 2019 Salesforce launched its CPG and manufacturing clouds. Further, Oracle and SAP have built solutions for specific industries such as retail, healthcare, and banking by focusing on their core capability of ERP, supply chain management, data analytics, and customer experience. And while SFDC is still largely an experience-centric firm, it is now building customer experience, marketing, and services offerings tailored to specific industries.
So, what will happen going forward?
Industry cloud will change: Today’s industry clouds are one more way of running a client’s business; however, they are still not business platforms. Going forward, industry clouds will become something like a big IT park where clients, partners, and other third parties come to a common platform to serve customers. It will be as much about data exchange among ecosystem players as it is about closed wall operations. Enterprises in that industry can take advantage of specific features they deem appropriate rather than building their own. And, they will become a “tenant” of the industry cloud vendor’s or ISV’s platform.
Cloud vendors will heavily push industry cloud: AWS, Azure, and GCP will push their versions of industry cloud in 2020 and beyond, with strong marketing and commercial campaigns. They’ll likely be tweaking their existing offerings and creating wrappers around their existing services to give them an industry flavor. But, of course, the leading ISVs have already launched their industry clouds and will expand them going forward.
Channel push will increase: Both the cloud infrastructure service providers and the ISVs will aggressively push their service partners – especially consulting firms like Accenture, Capgemini, Deloitte, and PwC. The cloud vendors will also push their technology partners to build solutions or “exclusively” migrate applications onto their clouds.
Mega acquisitions: Historically, there hasn’t been any major acquisition activity between infrastructure providers and large software companies. But one of the top infrastructure providers might acquire a “horizontal” ISV that’s making inroads into industry clouds, like Salesforce or Workday, rather than buying a vertical industry ISV. Disclaimer: I am not at all suggesting than any such acquisition is in the cards!
So, what should enterprises do?
Be flexible: Enterprises need to closely monitor this rapidly evolving market. Though the paths IaaS providers and ISVs take may not meaningfully conflict in the near future, there may be stranger partnerships on the horizon, and enterprises need to be flexible to take advantage of them.
Be cautious: Because the cloud vendors’ channel partners are being pushed to sell their industry cloud offerings, enterprises need to fully evaluate them and their relevance to their businesses. Their evaluation should include not only business, technical, and functional, but also licensing rationalization, discount discussions, and talent availability for these platforms.
Be open: As the market disrupts and newer leaders and offerings emerge, enterprises need to be open to reevaluating their technology landscape to adopt the best-in-class solution for their businesses. This is as much about an open mindset as it is about internal processes around application development, delivery, and operations. Enterprise processes and people need to be open enough to incorporate newer industry solutions.
Enterprises must consider many different factors when building their cloud adoption strategy. It’s not easy, but the decisions are critically important. Learning the smart – and not so smart – choices other organizations have made can be enormously valuable. Project JEDI is an example of what not to do.
In 2018, the U.S. Department of Defense (DoD) launched the Joint Enterprise Defense Infrastructure (JEDI) project to accelerate its adoption of cloud architecture and services. The contract was written to award the US$10 billion deal to a single commercial provider to build a cloud computing platform that supports weapons systems and classified data storage. With this ambitious project, the Pentagon intends to drive full-scale implementations and better return on investment on next-generation technologies including AI, IoT, and machine learning.
Here are key learnings from Project JEDI that enterprises should take very seriously.
1. Not to do: Pick a single cloud provider without evaluating others To do: Explore a multi-hybrid cloud model
The JEDI contract’s fundamental issue arose from the fact that it considered a single cloud provider to chart out its entire cloud strategy. This caused great stakeholder dissonance, in large part because alignment with just one provider could result in losing out on ongoing innovation from other providers.
Because a single cloud strategy offers advantages including lower upfront cost and streamlined systems, enterprises often adopt this approach. But a multi-hybrid architecture allows them to tap into the best of multiple providers’ capabilities and stay ahead on the technology curve.
A well-planned multi-hybrid cloud strategy offers the following benefits:
2. Not to do: Ignore open cloud options To do: Consider application interoperability and portability in cloud design
Project JEDI is completely dependent on a single cloud model, which exposes it to significant lock-in risks such as threat to transfer of data, application, or infrastructure. All of these can have a lasting negative impact on business continuity.
An open cloud model allows application interoperability and portability, and saves enterprises from vendor lock-in. Enterprises should be open to exploring open source or open design technologies for cloud. They should also consider implementing DevOps tools, container technology, and configuration management tools, as they will allow them to deploy their applications to diverse IT environments. All these options reduce the lock-in risks that stem from proprietary configurations, and enable organizations to easily, and with minimal technical costs, switch between providers based on business objectives.
3. Not to do: Be biased towards an incumbent To do: Evaluate cloud vendors by aligning the service portfolio to workload requirements
The Pentagon recently awarded the JEDI contract to Microsoft. However, in the initial stages, the project garnered massive attention for its alleged preference to Amazon Web Services (AWS,) which has been involved in multiple government contracts for providing cloud support. Critics of the contract cited that an alleged unfair relationship between DoD employees and AWS would lead to inherent bias and rigged competitive bidding.
While existing relationships are important and can deliver strong value, enterprises should carefully evaluate their vendor portfolio against their workload needs. In most cases, a combination of different vendors will provide the most optimum solution. For example, Java workloads are known to work best with AWS, .NET workloads work best with Microsoft Azure, and Google Cloud Platform (GCP) is most suited for analytics workloads.
4. Not to do: Lose sight of stakeholders while moving ahead To do: Have all stakeholders on board
A wide range of stakeholders are involved in selecting a cloud provider, and each of their needs, interests, and pre-existing biases must be addressed to avoid project derailment. For example, President Trump’s distaste for Amazon is cited as the prime reason that the JEDI project was awarded to Microsoft rather than AWS. One of cloud project leaders’ most critical responsibilities is identifying and understanding stakeholders’ vendor biases and bringing them into alignment with business objectives if the biases are based on something other than facts.
The DoD’s approach to Project JEDI led to a prolonged delay in its aspirations in adopting cloud architecture and services and developing leading cloud-based AI capabilities. Avoiding the DOD’s missteps will help enterprises more quickly shape and secure a cloud-based contract that satisfies all stakeholders and supports their organizations’ business agenda.
What are your thoughts around the JEDI case and what enterprises can learn not to do, and to do, from it? Please share your thoughts with us at [email protected] and [email protected].