Risks to customers when a small software company is purchased by a large industry company

Recently I had a longer discussion on this topic with CPQ stakeholders and realized this is something that should be discussed in more detail to be helpful for more CPQ customers and hence the blog post. Let’s start with an example that probably every reader knows and is not related to CPQ, so I do not offend anyone, the acquisition of Mulesoft by Salesforce in 2018. That acquisition happened in March 2018 (see this article) and approximately 18 months later techcrunch.com provided their take on the results of that acquisition (see this article). What is getting clear when we read the acquisition announcement is that Salesforce wanted to focus all development efforts on integrations within Salesforce. This also meant that development requests from Mulesoft customers, that had no Salesforce Solution, were a lower priority.  When we look at techcrunch’s take 18 months later it becomes clear that Mulesoft’s development efforts were in fact focused on Salesforce products because they state that “Mulesoft is beginning to resemble a Salesforce company” and that the products and services they announced integrate more deeply into Salesforce’s products. Which brings us to the first key point to remember

  1. The acquiring company is focusing the bulk of their development efforts on making the acquiring company stronger!

 Aside from that it is important to keep in mind that both companies will be busy with Merger & Acquisition (M&A) tasks for a considerable time. This means that products (which includes Software), services, people and processes need to be aligned across both companies. For customers this means that they may get less attention than usual for their support and development needs since the companies may be busy with themselves and their M&A tasks. Plus, on top of that 70-90% of M&A’s fail according to an HBR article (see here). Which brings us to the second key point to remember

  1. M&A’s can be challenging times for customers, and they are not a guaranteed success.

Now let us have a closer look at the customer risks when a small software company is purchased by a large industry company by breaking it down into products incl. software, people and processes.

Products incl. Software

  • Product Alignment: As we already saw in the example above the software solution (Mulesoft) will most likely be closer aligned to the acquiring company (Salesforce) and not to the industry at large. While this is good for customers on one side because they get more software out of one hand and hence have less worries about integrations this also has some draw backs which need to be considered. Most notably that the customer becomes more dependent on that vendor. This is a serious concern for some customers since they can’t diversify their risks anymore. This may be even worse when the acquiring company is not in the technology or software space but is acquiring a software or technology company.
  • Priority of Software updates: The focus of the acquiring company (Salesforce) will be on their strategic initiatives and not on the priorities of the acquired company (Mulesoft). In case of Salesforce and Mulesoft this has provided benefits to both customer bases, but it does not have to be this way. It can further be expected that the response time for software enhancements and bug fixes will, at a minimum, increases due to the focus on the acquiring companies needs. Which also means that customers of the acquired company have a lower priority
  • Support: Support for older software versions is uncertain and will receive less priority than the new go-forward software versions. This is especially true when a non-software company acquired a software company. Non-Software companies are typically less inclined to support older software versions, especially when these older software versions are used by industry competitors. In general budget decisions must be made and if the proposed development does not benefit the acquiring company there is a good chance it won’t receive funding. The acquiring company and the acquired company may also come up with a concerted effort to move customers to newer software versions instead of supporting the acquired company legacy products. That way they can free up resources for new software developments instead of supporting a product they prefer to retire.

This brings us to the third key point to remember

  1. Customers of the acquired company should thoroughly review if the new product still fits their needs by looking at the roadmap of the new, combined company and product

People

  • Differences: As in every M&A transaction there is the question if employees really buy into the M&A. That can be because they are concerned or have questions about company culture, wage disparities, new/better job opportunities, new/better career perspectives, new/better training or skill development and much more. The potential customer impact is that key employees may leave the company which in turn may impact the support of the software and the knowledge that is available within the company.
  • Focus: Executives, Sales and Marketing teams of the acquired company may spend considerable time explaining to existing customers why the M&A is good and what customers can get out of it going forward. This may considerably reduce the time these teams have to acquire new customers.
  • Reorganization: There is a high likelihood that teams need to be reorganized or merged into existing teams. For example, the Marketing team from the acquiring company and the marketing team from the acquired company may be merged into one larger marketing team. There may be job changes or job reductions or other changes within that team.

This brings us to the fourth key point to remember

  1. Customers of the acquired company should determine if the people changes at the new, combined company are positive to their business processes

Processes

  • Process Reengineering: This means business processes like Sales incl. CPQ, Finance etc. in both companies will be different and need to be reviewed and aligned. That can mean that each company keeps running their own processes or that they align their processes over time or that they come up with temporary processes. In many cases this means that business operations are a little slower, at least for some time, to adjust to the new processes
  • System adoption: To support the various business processes companies use systems like CPQ or CRM. In our example Salesforce uses Salesforce CRM to manage their sales process. If the acquired company (Mulesoft) used for their sales process (only as an example) MS Dynamics 365 a decision needs to be made if both CRM Solutions are supported or if one platform is to be retired. In most cases these tasks will take considerable time and focus from the acquiring and the acquired company and may impact the user experience for customers of the smaller/acquired company.

 This brings us to the fifth key point to remember

  1. Customers of the new, combined company should determine if and how process and system changes impact their business

Conclusion:

For customers this means that they should pay close attention when their CPQ software solution provider is acquired by a large industry company. They should not just accept the M&A at face value but reevaluate themselves if their current CPQ Solution is still their best option. With the five key points mentioned above any CPQ customer should be in a good position to make this assessment. Let me know if you have any questions or other feedback.