5½ weeks ago Datatel+SunGard became Ellucian and Blackboard purchased Moodlerooms and Netspot. So let’s talk about what drove them here. Let’s start by being clear this doesn’t have to be about Ellucian and BlackBoard specifically. It’s about the enterprise software market in higher education as a whole which is affecting all vendors. That’s why I chose to use a generic story to describe many of the broad issues occurring today which might help explain the journey of Ellucian and BlackBoard.
Enterprise Software Market
Imagine you are a one of the dominant enterprise software companies in higher education having completed about a decade of strong growth. You have enjoyed strong revenues from sales of your core products, add-ons and professional services as well as a solid base of recurring revenue from license fees. You may have even diversified a bit through acquisitions of managed services companies or related software.
Then it happens. You realize that selling proprietary software with an incredibly high cost of development from a heavy code debt is being threatened by market conditions. The market segments your products serve are saturated and your customers are questioning the affordability and quality of your product amidst a global recession.
Worse yet is that although you have a proprietary software product, the value of that asset in terms of its technologies and intellectual property is limited. Meaning there is no real secret sauce in its capability or functionality that differentiates it in the market or that would offer your customers a competitive advantage.
Your market position is also under assault from new entrants offering lighter weight products with a higher perceived value due mainly to competitively lower prices and lower ongoing support costs. But the real threat is due to their use of modern technologies and architectures and from them delivering a higher quality user experience.
The knowledge that your new competitors are unencumbered by legacy code and some are using open source software to build their products weighs heavy on your mind and the minds of your investors. Unfortunately, your product development team fails to respond to the totality of the situation stubbing their toe on enhancements and new versions.
Your investors also demand a financial return which moves you into an international strategy to fuel growth. If you have access to capital you may use acquisitions as part of your strategy for growth. But if you don’t have access to cash your only option is a cost cutting campaign and higher margin products and services.
Meanwhile customer satisfaction with your products and services are lower than ever forcing you into fire fighting mode. The economic downturn and your performance are cutting into renewals and margins as you make concessions to avoid further losses.
You invested in several new features and capabilities to address customer concerns and needs but you can’t convince customers to upgrade in order to realize these benefits. This stalemate drags down product acceptance even further.
If you are in the SIS or ERP segment chances are the cost of conversion is the only thing keeping your customers from switching in larger numbers but you sense it is only a matter of time. If you are in the LMS segment the cost of conversion is much less of a hurdle for your customers who may already be running competitor or open source software in parallel.
Revenues and Margins
So what do you do now? You are projecting continued reductions in perpetual growth and your product’s carry value is teetering on the edge of their fair value. You have seen little improvement in your brand’s intangibles and you have suffered major goodwill impairments.
You are finding it increasingly difficult to compete on price due to pressures from lower cost and zero price open source software and cloud computing based competitive products.
Your ability to respond to pricing pressures are hamstrung by the accounting rules used to value your product and your high cost of development and your high cost of professional services for implementation despite using off shore resources. This results in continued erosion of your revenues and margin.
In some areas your higher margin professional services revenues remain strong but at a time when IT outsourcing drivers are at their highest, you’re struggling. You respond with a strategy to grow your high margin application support services and managed hosting where the major selling point it so relieve customers of their burden and cost of running your own product.
Then in a crazy twist of fate it turns out your customers can support your product better than you can. To add insult to your injury it also turns out your customers can run your product at a lower cost and without all the performance issues and downtime.
You know the open source movement and cloud computing isn’t going away and you will surely see continued competition from your market’s smaller competitors and competitors crossing over from other industries.
Political and economic uncertainties are likely to delay customer decisions on purchases and renewals. Meanwhile additional budget cuts will create additional pressure for customers to seek out lower cost products and service providers even if it means dropping to a tier 2 or tier 3 vendor.
Even if things did settle out, your sales cycle is very seasonal with long lead times. And because your actual results trail under revenue recognition rules you won’t be out of the woods for some time.
So you consider alliances with companies offering complimentary products and resale opportunities. You consider additional options for mergers and acquisitions and continued pursuit of the international market. But you are ever mindful your current customer base will be concerned the M&A activity and quest for international growth will be the source of major distractions for senior management which will be to their detriment.
You realize you need to continue supporting a duplicative legacy product because the math of discontinuing support could snowball the situation given the ROI of your flagship product versus your competitors. But you also decide to secure an interest in the open source options just in case.
This generic story could go on and on and include specifics for both Ellucian and BlackBoard and several other companies. But I will end it here.