BI Market Changes

It’s been a busy summer for the BI industry. On July 18 Business Objects announced plans to acquire Crystal Decisions for $820 million. The following week, Hyperion Solutions disclosed their deal to acquire Brio Software for $142 million. In addition, Informatica announced it will stop selling its analytical applications directly to customers.

Some of these changes make a lot of sense; others raise concerns for IT managers trying to make the right decisions about products and directions. Let’s take a closer look.

General market trends

As financial analysts have pointed out, the BI software segment is a bright spot in the software industry and continues to grow even in a tough economic climate. The BI segment is composed of firms specializing in BI and those offering BI as part of their product offerings such as ERP and database vendors.

There are three strong trends in the market today:

• Solid market growth - Overall BI market growth is solid. At this point, however, the market is splitting into a group of haves and have-nots. Many smaller vendors are experiencing slowing growth rates and are bleeding money. This creates a vicious circle. Potential customers shy away from them because of their poor financial position, limited customer base, and concern about their longevity. Under these conditions, many BI firms and their customers are looking for an exit strategy with a larger firm acquiring them and incorporating their products into their offerings. Computer Associates, Oracle, and Hummingbird are just a few examples of firms acquiring BI firms.
  
  
• Ripe for consolidation – A mature market like BI with many competitors is ripe for consolidation. Stronger players acquire smaller players for their customer base, technology, and people. It’s assumed that BI software companies need to reach $1 billion in sales to have sufficient depth to continue expanding and enhancing their products, support, and services. The Business Objects and Hyperion deals, at least partially, are examples of this.
  
  
• Pressure from all sides - BI vendors are under pressure from ERP vendors on the high end and Microsoft from the low end.
  
  
  • High end - In a effort to jumpstart their growth and capture more client dollars, ERP vendors like SAP, Oracle and PeopleSoft have expanded their reporting offering to include data warehousing, business intelligence, and analytics applications. Their attempts to win clients threatens the expansion of the pure BI vendors. Although some ERP vendors have included pure BI vendors’ tools in their analytic offerings, this still threatens the BI vendors. First, these OEM deals are usually not very lucrative for the BI vendors. Second, the ERP vendor may ultimately switch over to its own or a competitor’s tools. Finally, the ERP vendor wins the account and is most likely to get all future BI business from it.
    
    
  • Low end - From the low end of the marketplace, Microsoft is going to be a key competitor. It continues to develop and offer BI capabilities through SQL Server and its Office products. Its next version of SQL Server, Yukon, will include SQL Reporting Services. Keep in mind that Excel is the business analyst’s primary analysis tool – despite the millions spent on BI tools. In addition, Microsoft’s next release of SQL Server, although still in the future, may provide significant BI capabilities at a great value proposition (free)!

Software deals

Let’s quickly look at the deals themselves.

Business Objects buys Crystal Decision. Market Reaction: A+

This acquisition is receiving very positive market reaction because of market perception that the product lines complement each other and that both companies are strong financially. There are three main reasons why this is a good move:

• The move toward production reporting - You can differentiate product capabilities into two categories: query & analysis (Q&A) and production reporting (PR). Both categories perform queries and produce reports, but cater to different end users and deliver different types of information.
  
  
  • Q&A offers strong OLAP and ad-hoc functionality. These tools are oriented to power users who prefer a self-service approach. Vendors in this category are Business Objects, Cognos and MicroStrategy.
    
    
  • PR strengths are repetitive queries that can be scheduled, and distribute “pixel” perfect reports to large numbers of users. Vendors in this category are Crystal and Actuate.

  Q&A vendors recognized that PR is an important extension of their products lines and are rushing to fill the gaps. Cognos and MicroStrategy have recently introduced these capabilities. Business Objects, doing a classic build-versus-buy analysis, chose to purchase Crystal. There is some minor overlap between Business Objects and Crystal, but good execution of the product line merger should ease the transition.

• The strong get stronger - Often, a company being acquired is being bought at a distressed price due to some company misstep that made them vulnerable to a takeover. In this case, however, Crystal was financially secure and was one of the fastest growing BI vendors. Crystal brings robust market share and a solid company to the table. Business Objects’ opportunity was made possible when Crystal was bought by Seagate, which then then spun it off to be a private entity and was in the process of going public through a IPO. Business Objects was able to offer a deal to the private investors that was more appealing than the current IPO market.
  
  
• It’s the partnerships - In addition to picking up products and market share, Business Objects inherits Crystal’s large block of partnerships ­ 2500 resellers and 300 license/OEM agreements. Although a few partners, such as SAP and Hyperion, may drop out, most of these partners will stay. These agreements will extend the reach of the merged company and its products.

Cautions: Mergers are always challenging, and software companies present their own set of difficulties. First, the acquiring company needs to balance the desire to retain the customer base of the acquired company while integrating the product lines. How do they handle the migration of existing customers from tools that may be dropped, as well as tools that they change to accommodate integration? The product transition always takes longer than anticipated. A market-tecture needs to be developed to lay out the path and explain how customers will benefit from any changes encountered. Second, the merger needs to keep developers, sales, and support personnel happy, even while reducing total personnel. Reducing administration and overhead costs is almost always a smart idea. Consolidating, development, sales, and support is where it gets tricky.

Bottom Line: 1 + 1 = 3

Hyperion buys Brio. Market reaction: C

This acquisition is receiving a mixed market reaction. It’s not a surprise that Hyperion bought a BI vendor nor that Brio was acquired, but do these two companies together make sense? Sort of.

• The products have to work well together even be an integrated suite - Hyperion is very strong in its niche of offering OLAP to finance groups within Fortune 1000 companies, and it has naturally expanded into BPM. Its technology is its biggest strength, but it holds the company back as it tries to expand into general purpose BI offerings. Brio certainly has the general purpose BI tools, but their product line has two products (Insight and SQR) that overlap and are not well integrated. How will Hyperion get the product lines to be complementary? I don’t think they have to be fully integrated to be successful, but they do have to work well together – at least from the end user’s perspective - and do more than just share data. Except for “power users,” people do not want to spend time learning new tools much less three (Essbase, Insight, and SQR).
  
  
• The weak get bought by the strong - In addition, whereas Business Objects and Crystal Decisions are coming from a position of financial and customer strength, that is not the case with this acquisition. Brio was taken off many evaluation short-lists due to company financials and assessments from industry analysts.
  
  
• Mergers are tough and the mutual track records are poor - Based on both companies’ track records for acquisitions, I’m concerned about this one. Their previous acquisitions didn’t offer all the synergies that they could have. Hyperion’s purchase of Arbor Software brought the eventual gem of the company, Essbase, into the fold, but didn’t produce the financial solutions juggernaut that was anticipated. Brio’s purchase of Scribe expanded their product offerings, but despite the great technology offered by both companies individually, the resulting Brio product set was never truly integrated.
  
  
• Visions and market-tectures are nice but not as many people are buying brochures anymore - The 1990s are over! The company’s combined product lines have to offer value to the customer – not just the seller. The marketing materials say that the combined company will be a powerhouse in business performance management (BPM). That’s great on paper, but the market is very young and immature. Piece parts may sell successfully now, but I believe that’s already starting to change as the market matures and larger players increase their market share by selling integrated products. The answer is we’ve done that and it may be too early for history to repeat the 1990s boom again.

Bottom Line: The total is less than the sum of the parts (for now).

Informatica withdraws from analytics. Market reaction: Yawn

Many people wondered why Informatica got into this market to begin with and feel they should concentrate on their strength – ETL tools. Why did they get into this space? In order to increase their product offerings/sales they expanded first into BI and then analytics applications. Informatica maintained very strong partnerships with system integrators who wanted to provide solutions to their customers. But several factors worked against this strategy:

• System integration spending contracted (especially for large projects)
• System integrators experienced consolidation of their own
• System integrators were not prepared to build and support software solutions
• The expansion into BI and analytics alienated several of Informatica partners who went out and bought their own ETL tools to bundle with their BI tools and analytic offerings.

The market perceives this as an intelligent move back to Informatica’s strengths.

Bottom Line: Net Plus

Conclusion

Consolidation in this market will continue.

Cognos is a likely acquirer for size (revenue) and reach (customers and technology). They are likely to acquire Actuate or Informatica. With Actuate they gain a solid production reporting product and its clients and revues of approximately $100M. There would be significant overlap, however, with Cognos’s new ReportNet product. Acquiring Informatica would provide Cognos with the premier ETL vendor, its customers, and about $200M in revenue. Cognos would have to decide what too do with its own ETL offering and Informatica’s BI offerings – both would are weak sisters in the merged company’s product offerings.

Other potential acquirers include SAP, IBM, and Microsoft. At this point, however, each has some good reasons not to buy a BI vendor. In addition to Actuate and Informatica, companies likely to be bought are Information Builders and a host of smaller companies. Enterprise application or analytical application vendors are also very likely to be purchased with ERP vendors, as well as other BI vendors.

How should this impact company purchases? Many BI and analytic application sales are tactical in nature, purchased by a line-of-business within a company. The business can produce a return on investment in the short-term and will probably base its decision on how close the vendor solution meets their short-term pain. For companies looking to consolidate the BI offerings they use or trying to select strategic vendors, vendor size will matter.

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