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Wednesday, March 30, 2005

Software Industry Consolidation -Role For Outsiders?

Mike Nevens, Ex Mckinsey managing partner opines,interests of executives, board members, bankers and private equity firms is coming in the way of the"Interlocking overdue restructuring and consolidation in the software industry". Excerpts with heavy edits:
The hyped up demand for software is gone. Some of the software companies are investing for a future they can never reach. They need to be restructured – downsized, merged, acquired or liquidated. The consolidation has begun but the problem is that it is not happening fast enough or at sufficient scale. The biggest constraint is that management and directors of many companies are not thinking clearly enough about the reality in front of them. These small coalitions are self-interested & despite their modest size, these coalitions can change the course and pace of progress. They slow down decision making, introduce complexity, and often lead to increased constraints on thought and action that limit the range of options open for consideration by the senior management and boards of the companies infected with these informal coalitions. Many private equity firms are caught in the same informal web of these informal, self-interested coalitions. They depend on the cooperation of managers and executives for ideas for deals and for the management talent to run these ventures.

The potential benefits of consolidation are substantial. Restructuring could spur the software industry to do a better job for its customers. Customer spending will likely pick up only when enterprises become convinced they can get distinct benefits from their IT investments. Customers need solutions that are tailored to their industry and their current state of internal capabilities, and help in changing organizations, business practices, policies and processes to become more productive. The myriad of small tech companies cannot deliver this value proposition. They simply throw more technology at the problem –which exacerbates the situation. Mike concludes by saying,"As it happened in the energy sector, people and firms outside the circle that formed around the prosperity of the 1990s will lead the reform of high tech". I actually wanted to point to this a little later but could not resist. My views on software industry restructuring(written before Mike's view appeared),slightly different in expected outcome but, in total agreement on the basic facts and on overdue consolidation could be published shortly,as part of this series. More on this topic next week here.

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"All views expressed are my personal views are not related in any way to my employer"