Sourcing Speak

There is no shortage of commentary on why mergers and acquisitions fail or do not live up to their projected potential. The percentage of failed or underachieving deals is astounding with some placing the failure rate over eighty percent.The reasons for this dismal outlook range from ill-advised strategic vision, misaligned expectations and poor execution to cultural clashes, fumbled integration, and (some would say) misguided management objectives.

Over the past decade I’ve observed another factor that contributes to these suboptimal results: poorly planned, constructed and executed transition services, especially in connection with divestitures and carve-outs. The two main factors contributing to deficient transition service arrangements fall into two general categories: (1) a flawed perspective on the importance of transition services; and (2) errant development and execution of the transition service regime.

Let’s explore each of these factors both in terms of how they arise and how they can be avoided, focusing first on what I refer to as the flawed perspective.

News of Alibaba’s cloud investment and a recent software park tour indicate that China’s IT services industry is evolving in its own way.

Alibaba Invades Silicon Valley

The “Amazon of China” is following Amazon’s playbook yet again with their investment in the cloud. Aliyun, Alibaba’s technology arm, already operates five Chinese data centers supporting 1.4 million customers. They cite high performance specs, such as the ability to process 80,000 orders per second during peak shopping season, and a successful defense against the largest recorded DDoS attack in China, which lasted 14 hours with a peak onslaught of 453.8 gigabytes per second.

This is the second of two postings that outline key pricing protections you should consider negotiating with licensors of ERP software to provide flexibility and predictability in managing the ongoing license and maintenance costs associated with the software.  In the earlier posting, we discussed future option discounts, exchange rights, and maintenance locks and caps.  In this posting, we focus on shelving and termination rights, acquisitions and divestitures, and successor products.

Shelving / Termination Rights

Shelving and termination rights provide the ability to reduce annual maintenance spend on unused licenses by either “putting them on the shelf” until needed or terminating unneeded licenses altogether.  There are three basic approaches to shelving and termination rights.  In descending order of desirability, they are:

The licensing and implementation of ERP software is a major long-term investment for any company.  In addition to negotiating favorable upfront pricing for the software, it is important to build in pricing mechanisms that provide flexibility and predictability in managing the ongoing license and maintenance costs associated with the software.  This is the first of two postings that outline key pricing protections that you should consider negotiating with licensors of ERP software.

Future Option Discount

A future option discount provides a right to purchase additional software licenses at a specified price or at a specified discount off the licensor’s then current list price.  This right has a number of benefits:

As a thin guy, I used to subscribe to the philosophy of wearing large clothes to look bigger than I was.  What I actually looked like was a scrawny guy in ill-fitting clothes that were not overly comfortable.

Sourcing of IT and associated services may be falling into a similar trap.  Rather than using agreements that are the right shape or size, purchasing organizations are developing and rolling out standard templates that are supposedly broad enough to cover everything–unfortunately, they often do not cover any particularly purchase properly.  Specifically, we are seeing a proliferation of master service agreements (MSAs) that, largely speaking, come from an IT development context.  These are then begin applied to software licensing, professional services; and cloud services agreements–all of which are different transactions with different needs.

To illustrate, let’s review the application of an MSA to a Software as a Service (SAAS) offering.  As a threshold, the MSA contemplates project style initiatives, whereas the SAAS offering is by its nature on ongoing, recurring offering over a specified term.  Under an MSA, the buyer typically attempts to assert ownership of all developments; this is antithetical to the SAAS model where the supplier contributes IP to continually improve its offering.  Under the MSA, the buyer heavily negotiates the service levels; in SAAS, the service levels are the same for all like buyers–without such consistency, there is no shared offering and no cost benefit of the SAAS model.  We could go on, but the point is clear–a customer MSA is not likely to be a good fit for a SAAS offering.

The trend in Big Data analytics among companies shows no sign in abating, with companies covetously collecting vast amounts of data with the hopes of harvesting market differentiators.  A study by open-source research firm Wikibon, for instance, forecasts an annual Big Data software growth rate of 45% through 2017.  But what tools are companies using to implement Big Data solutions? For purposes of this article, let’s set aside for a moment the intended outcome of whatever Big Data project your company has planned in the coming year (whether it be predicting the outcome of Supreme Court cases or helping a baffled spouse pick out the right lingerie set), and instead let’s focus on the tools available in the industry (and some of the associated pitfalls) in getting your company from concept to solution.

First, consider how you are going store and analyze the data.  For companies with significant internal resources and focus on Big Data, it may make sense to hire an in-house analytics team and invest in the requisite infrastructure and tools.  However, there are many options in the marketplace that require less investment in order to gain actionable insights:

§ Database Marketing Outsourcing: An end to end service often used by retailers in which a supplier licenses data and provides data mining analytics, marketing campaign sales management and analysis, and other ancillary functions.