Over the past two years, many carriers, either to their dismay or bewilderment, saw key software vendors fall under new ownership. And it hasn't been simply a case of small fish being eaten by larger fish. Some of the largest names in the software business have been caught in the net. PeopleSoft and Siebel Systems, giants in their markets, for instance, were scooped up in acquisitions.Mergers and acquisitions are always sprung on the market by surprise, and it's difficult to predict or sense when a change in ownership may be pending. What's certain is that such market moves can disrupt even the most meticulously laid plans of IT executives.

The recent rash of acquisitions and mergers reads like a Who's Who of the software industry. Oracle Corp. has been grabbing the most headlines lately, scooping up Siebel Systems to build its customer relationship management (CRM) portfolio. Prior to that, PeopleSoft, an enterprise software vendor, which had bought out JD Edwards, was also acquired by Oracle.

Symantec, the computer security provider, merged with Veritas, a storage management vendor. IBM took the reigns of DWL. Enterprise software provider SSA Global Technologies acquired Epiphany, a CRM system vendor. And Attachmate, a provider of legacy system access tools, merged with WRQ, its fiercest competitor.

Past consolidations are still being digested as well. HP, which swallowed Compaq whole in 2003, continued to feel the ramifications for some time, which included the resignation of HP's CEO. Compaq itself was still wrestling with technology acquired through its acquisitions of Digital Equipment and Tandem Computers.

While grabbing fewer headlines, vendors specializing in the insurance space have been doing their own share of changing ownership hands.

Plano, Texas-based IT services provider Perot Systems, for example, recently acquired Technical Management and its subsidiary, Transaction Applications Group, which provides back-office administrative support to life, health and annuity companies.

EMC Corp., a Hopkinton, Mass-based storage management provider, is acquiring Captiva Software, which provides tools that convert paper-based documents into digital formats. Jersey City, N.J.-based ISO, acquired eLIENS (a business unit of Xtria LLC), which provides lien holder and mortgage notification services for insurance carriers. Brookfield, Wis.-based Fiserv Inc. acquired Interactive Technologies, a provider of fee management and billing software.

Unanswered Questions

Some industry analysts see the recent merger and acquisition wave as the result of the confluence of two trends: the growing commoditization and standardization of software, and an increasing trend toward narrowing the range of relationships maintained by customers.

"The IT industry is undergoing massive restructuring and consolidation in all segments. Much of this consolidation is driven by vendor strategies, focused on positioning for the shift to the next generation of IT," says Frank Gens, senior vice president with IDC, a Framingham, Mass.-based research and advisory firm.

"But the massive consolidation we are witnessing is not just about major vendors reshaping their strategies and offerings. It is also about customers shifting strategies for managing their increasingly strategic relationships with IT suppliers."

Meanwhile, end users that have been relying on an acquired or merged vendor's products for critical business functions are often left with unanswered questions:

* Will the new owner continue to move the product along the same path, providing support and upgrades?

* Will the product be discontinued in favor of the acquiring company's technology?

* Will customers be forced to move to a new platform or database?

* Will the product be allowed to survive, but limp along in an IT purgatory, with only a minimum of support and attention from the provider?

* What will be the fallout in product pricing and maintenance costs?

* How will the morale of vendor representatives affect service levels?

No relationship with a vendor-no matter how large, well regarded, and financially stable-is without such risks, IT executives point out.

"There are two risks that you take when you purchase any new technology," says Ben Moreland, vice president of information technology with The Hartford Financial Group, Hartford, Conn. "The first risk is whether you will face a lot of rework if [the vendor] is bought out by a company you don't do business with-or if the vendor goes under. The second risk is [if the vendor] is bought out by a company that takes it in a different direction than why you bought the product in the first place."

Customer Angst

Oracle's acquisition of PeopleSoft Inc., a competing ERP software supplier, is perhaps the most visible example of such customer angst.

"A lot of our customers run PeopleSoft, and they were all frightened or very anxious about the Oracle acquisition," says Ashif Mawji, president and CEO of Upside Software, a contract management systems supplier based in Edmonton, Canada. "What's Oracle going to do? Is PeopleSoft gone? What happens to our investments? Do we have to be retrained? Do we have to bring in the new Oracle product?"

Adding to the angst, vendors' plans for an acquired product line also may remain a mystery for some time following an ownership change.

While changes in vendor ownership are difficult to predict, IT executives need not be caught off guard. The most effective way to survive and thrive through a software vendor change of ownership is being prepared beforehand, and asking the right questions in the wake of a merger or acquisition announcement, according to sources.

This requires an informed grasp of existing contracts with current vendors, and doing homework on the financial situations and technology roadmaps of potential or renewing vendors. In addition, close communications is the best tool-before, during, and after an ownership change.

Safeguards need to be embedded in contracts up front, in the form of change of control provisions, says Patrick Hatfield, attorney and partner with Lord, Bissell & Brook LLP, an Atlanta-based law firm that specializes in insurance and financial services.

Such provisions are intended to ensure a continuation of product support if ownership changes, as well as provide an opportunity for the carrier to renegotiate for assurance from the acquiring party that they won't stop supporting the product.

"The more significant the software system being implemented, the more important it is for a carrier to address this risk," says Hatfield.

Two Vital Safeguards

Industry executives point to two vital safeguards to assure the ability to maintain a software product through any merger or acquisition scenario: access to source code and adherence to standards.

In many contracts, the product's source code is placed in escrow, usually to ensure that the customer will be able to maintain the software if the vendor goes out of business. But many experts say this practice can also safeguard IT investments against a major shift in business, such as a merger or acquisition.

While it's not common practice to escrow source code for this purpose, it would enable the customer to take advantage of third-party services for software maintenance, says Hatfield. "A company can support itself if it has source code," he says. "It's not at the mercy of a product change or a strategy change in the event of an acquisition."

Such a practice provides a backup plan for IT executives who find themselves at the mercy of new owners. Country Financial, for example, runs Siebel applications. So it has to wait to see what Oracle's intentions are for Siebel software.

"I don't have the Siebel source code, but I sure would like to have it," says Alan Reiss, senior vice president of service operations at Country Insurance and Financial Services, based in Bloomington, Ill.

Reiss acknowledges he might have to pay for access to a vendor's source code, but it might be worth it. "Would I be willing to pay extra for the right to buy that source code if the company were taken over? I don't know. It might be an interesting option to have in the contract."

Another trend that has gained considerable momentum in recent years is the adoption of open standards in software products. This also can go a long way toward a smooth transition if there's a disruption in a product line, according to sources.

With the increasing prevalence of standards such as XML Web services, companies can more easily move parts of their operations onto other applications and platforms, says The Hartford's Moreland. With open standards, business functions are no longer tied to a vendor's proprietary applications and interfaces.

"With standards, we can recover from mistakes much easier than in the past," says Moreland. "Twenty years ago, making a bad enterprise decision was like playing with a grenade. If you made the wrong move, you blew up your career. Ten years ago, with the advent of standards, it was like playing with a shotgun. You might blow your foot off, but could take time off and recover, and resurrect your career."

Today, it's more like playing with a pistol, he says. "I could shoot myself in the foot, but it's not going to stop me from continuing to move forward. Standards are maturing to the point where it's more like dropping a notebook on my foot. I might wince, but it's not going to be disastrous. "

Consider the Reason

Still, a vendor merger or acquisition can create havoc-and there may be ways to foresee what's to come following a change-in-ownership, according to Country Financial's Reiss. For example, the motivation for the acquisition or merger can indicate what the vendor may eventually do with the product line.

"Consider the reason for the merger," he says. "If the reason is that the new product line fits in with an existing product line, that may bode well." For example, "with Oracle acquiring Siebel, the reality is that Oracle didn't have a strong CRM presence. So Oracle may be looking at the acquisition as a way to expand its product line."

By contrast, if a vendor buys out a direct competitor, such as Oracle buying PeopleSoft, the future of the competitor's product line may be up in the air, Reiss continues. "If a company buys a competitor, they aren't buying the software," he says. "They want to knock the competitor out. That means they're not likely to support two versions of the same kind of software over the long term. They're likely to force the customer base, over time, to convert."

Of course, not all acquisitions and mergers are bad for end users. In many cases, IT executives can expect improved support from a more robust vendor. That's what Stephen Kessler, assistant vice president of New York-based Metropolitan Life Insurance Co., sees in IBM's recent acquisition of DWL, MetLife's data integration vendor.

"Time will tell on the execution side of it, but it looks like there's a lot of good work going on over at IBM," Kessler says. "They seem to be focusing on application infrastructure, as opposed to trying to build out the monolithic applications of the future. They seem to have a pretty good story to tell around how they're going to design a master data strategy."

Kessler acknowledges that MetLife's new relationship with IBM may an exception rather than the rule, however. "In other acquisitions, we've seen the whole culture of the previous company just disappear. That's usually what we are concerned about when acquisitions happen."

What to do When your Vendor is Under New Management:

Become familiar with the provisions of your current contract. "Make sure you understand what's being delivered," says Greg Chestnut, partner with Bermuda-based Accenture. Look at service levels, and what the vendor should be delivering to you, he says. What are the delivery points? What are the timetables? What is the pricing structure? At a minimum, you want make sure they deliver what they've already agreed to deliver.

Study the financial situation and product roadmaps of current and prospective vendors. "Look for a company with very strong managerial leadership that has a clear vision of where they want to take their product," advises Ben Moreland, vice president of information technology with The Hartford Financial Group, Hartford, Conn. Ask them directly, if they were to be acquired, what kind of company are they looking for?

Choose a vendor that adheres to open standards. "Make sure you choose a company that not only adheres to the standards, but is actively involved in the standards committees," says The Hartford's Moreland. Adoption of standards-based systems reduces the risks of having a product phased out, since it can more easily be replaced.

If possible, get access to source code. Discontinuation of products from an acquired or merged company should trigger the carrier's right to get the source code, says Patrick Hatfield, attorney and partner with Lord, Bissell & Brook LLP, an Atlanta-based law firm specializing in the insurance and financial services industries. The carrier then can employ third parties to assist in support of the system. "To make that happen, the carrier may want to insist on the source code being deposited in an escrow account on Day One," he says.

Add language in software contracts addressing change scenarios. This may include putting source code in an escrow account, or guaranteeing support if a company will not have the resources to maintain source code, says Hatfield. Upfront contract language can also call for advanced notice of product discontinuation in the wake of an ownership change, he says.

Prepare for possible changes in pricing, maintenance, and support. Ask what will happen to your product-even if it is continued by the new owners. For example, says Arun Katash, senior director of products for Ketera Technologies, a Santa Clara, Calif.-based company. "Companies are extremely nervous about how long the PeopleSoft line of products will be maintained by Oracle-and at what point Oracle will inject a platform change, which will change the total cost of ownership picture for the customer."

Joe McKendrick is an author and consultant specializing in information technology, based in Doylestown, Pa.

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