Chief information officers said they are concerned that an increase in business technology acquisitions will cause vendors to shift their sales strategies in favor of larger and more expensive software bundles.
Chief information officers said they are concerned that an increase in business technology acquisitions will cause vendors to shift their sales strategies in favor of larger and more expensive software bundles.
VMware is one of the latest companies to do this, following its recent acquisition by Broadcom. The provider of basic “virtualization” software has transitioned from more than 160 individual products to two major bundled products. Broadcom’s VMware Cloud Foundation division says the new bundles offer better value because they include more features.
Hello!Reading premium articles
VMware is one of the latest companies to do this, following its recent acquisition by Broadcom. The provider of basic “virtualization” software has transitioned from more than 160 individual products to two major bundled products. Broadcom’s VMware Cloud Foundation division says the new bundles offer better value because they include more features.
But in these cases, CIOs say they have to pay more even though they don’t actually want all those features.
“We’ve created a product that overlaps with the Venn diagram and is very difficult to manage,” said Todd Florence, chief information officer of Estes Express Lines, a Richmond, Va.-based truck driver. We don’t need all of that.”
Chad Simpson, CIO of Florida-based home furnishings retailer CITY Furniture, said he’s seeing a similar phenomenon at Salesforce. “They’re acquiring a lot of smaller companies to expand their core capabilities, which ultimately drives up their pricing models over time,” he said.
Salesforce said it recently announced the Unlimited Edition+ bundle, which provides access to Slack, Tableau, Sales Cloud, Service Cloud, Einstein AI, Data Cloud, and the entire Industry in one product. Bill Patterson, vice president of corporate strategy, said in a statement that a bundling strategy delivers better value to customers, helping them move faster, reduce complexity and improve competitiveness.
Any transaction can generate a cascade of questions and concerns among customers. Consolidation allows CIOs to deal with one less vendor and potentially reduces complexity. At the same time, a trade may drive up the price or your favorite tool may eventually become obsolete. So was his acquisition of Macromedia by Adobe, which ultimately led to the obsolescence of Flash and other tools.
According to Barry Brandsman, principal at KPMG’s CIO Advisory Group, IT vendors frequently make acquisitions to strengthen their portfolios, combining new tools and feature sets and selling them at higher prices to drive business profits. It is said to increase. “Technology vendors are like any other type of business. They’re interested in finding ways to increase their share of wallet and share of heart with their customers,” he said.
More acquisitions are likely. 2023 was a disappointing year for M&A, with deal volume and total market value of deals well below 2021 highs, but a handful of multibillion-dollar deals led by Cisco, IBM, and Hewlett-Packard Enterprise. Ultra-enterprise technology deals are showing signs of a trend. The shift to M&A is progressing.
However, CIOs are concerned that M&A events could lead to even larger and potentially bloated bundles.
CITY Furniture’s Simpson said it’s a perennial problem in the software industry that vendors try to sell Ferraris when all they really need is Toyotas. M&A exacerbates that trend, he says. When a new feature is added, the unit cost increases regardless of how much customers use the new feature.
He said he would like to see software vendors offer more flexible, modular, menu-driven products, similar to how cloud is sold and priced. “They basically want to sell the whole menu and they want you to use the whole menu of products, but the reality is most companies can’t do that and don’t want to do that. I have no intention of doing so.”
“I think about this all the time,” said Satish Muthukrishnan, chief information, data and digital officer at Ally Financial. Typically, when an acquisition occurs, customers lose pricing influence and at the same time the vendor shifts from a focus on growth to a focus on capital. That change could come with the risk of reducing service to customers, he said.
Muthukrishnan expects more M&A to occur this year as the cost of capital is higher than in recent years and startups are under more pressure to show profitability rather than just growth. He said there was. In many cases, they are looking at acquisitions to make that happen, he said.
There are several areas where CIOs want vendor consolidation. Cybersecurity is one of them. Dominic Lajoie, CIO of AI search and personalization company Coveo, says that by using fewer vendors, each offering more functionality, his company can reduce its attack surface and negotiate better discounts. and develop deeper expertise in the systems they use. It also allowed the company to avoid the sometimes expensive integration costs of stitching together so many disparate systems, he said.
Consolidation also helps companies reduce duplicate services. For example, Rajoy said Coveo uses both Slack, which offers a similar chat service, and Salesforce’s communication tool Chatter. With Salesforce integrating Slack and him using Slack as a complete replacement for Chatter, Coveo will be able to reduce complexity.
That said, Lajoie added that any M&A event raises many question marks for CIOs, and it’s never clear how well products will actually integrate and how stable prices will be.
Mr. LaJoie said: “We are asking ourselves: The landscape is changing and what is on offer is changing. Is it still the right thing for us? Yes or no? And depending on our conclusion , either work with that vendor or part ways.”
Email Isabelle Bousquette at [email protected].