Monopoly Rent Seeking

Open Source software advocate Ned Lilly continues to track ERP industry consolidation in his ERP Graveyard Blog. His two most recent posts highlight one completed acquisition of open source ERP firm Compiere by Consona and point to a survey on Oracle’s most likely next acquisition (which is no longer available at the link). Ned offers one explanation for the sale of Compiere:

Compiere failed as a company because it turned its back on open source – on its community of free users, and partners and customers who wanted to be full participants in the ongoing development and maintenance of the software. It’s just especially ironic that the bullet was fired by someone like Consona. [highlighting in original post]

Turning one’s back on a community of users, partners and customers is not a success strategy for any organization – let alone an ERP vendor (open source or otherwise). Acquisition by a consolidator such as Consona or Oracle is the usual end state for an ERP vendor that ignores its customers. Ned’s Scorecard provides visual support for such results.

The question not asked – why do the consolidators acquire failed ERP vendors? After all, each consolidator already has at least one ERP system to offer the market. They must have some other plan to make money from redundant ERP products. The foundation of that plan is in the consolidators’ view of their customer bases – each product is a local monopoly from which economic rents (maintenance fees, additional user licenses, cpu transfer licenses, etc.) may be extracted. (Less formally, each acquired customer base is viewed as a new batch of open wallets). The fastest way to extract more rent is to grab more local monopolies. To show investors consistent growth and profits, consolidators must constantly acquire ever larger local monopolies. That speculating who will be a given consolidator’s next target is a fun diversion is the main benefit of this process to the rest of us (and yes they do acquire each other to get the appropriate heft).

Once a consolidator acquires a new revenue stream by grabbing a troubled ERP firm, they need to make it (more) profitable. Profit has two levers – cost and revenue. Reducing costs of an acquired ERP firm is easy. Step one is to eliminate functions the consolidator already has plenty of: executives, accounting and administration, sales and marketing, new product development. The two remaining costs may then be reduced: product bug fixes and support. This cost reduction takes place day one. Raising revenues starts next.

The trick to raising revenue of your acquired ERP firm is that there really isn’t a trick. Remember, to the consolidator this is not a community of users, customers and partners — it is a local monopoly. The monopoly is enforced via license agreements and the recognition that the customers believe replacing an ERP is prohibitively expensive. To increase revenue, the consolidator simply raises the maintenance price as high as they can. The customers will pay the new rate – they are captive to the local monopoly. [Oracle and SAP recently found that a ceiling may exist for how high a price they can edict, but it is not clear all consolidators understand this lesson- ed.].

This is not the way all ERP vendors operate. Some ERP vendors view their customers as community members with a common interest in increasing the value they receive from ERP products.  (A partnership dedicated to fatter wallets for all).  HarrisData created a Software Customer’s Bill of Rights and Customer Zone to deepen our relationship with our customer community. Ned Lilly adopted the open source approach at xTuple. Both ERP vendors focus on the creation of value for the customer by working in partnership with the customer as success strategies.  By providing value to the customer community both ERP firms continue to be successful.

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