The Impact of Consolidation
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VOL. 38, NO. 18 SEPTEMBER 25, 2008 ■ State of the Distribution Software Industry, Part I INSIDE The Impact of Consolidation Market looks vastly different from a decade ago; is this good or bad? Commentary: To better understand the dynamics in the it comes to marketing and development. Software Evolution distribution software market, MDM spoke with Still, many distributors openly ques- More competition means distributors and more than a dozen software tion whether industry-specifi c needs are better choices. providers. This is the fi rst in a series of ar- being met in this new rolled-up environ- Page 2 ticles based on those interviews. This article ment. Some were working with software focuses on the relatively recent consolidation companies specializing in their distribu- MDM Interview: in distribution software and its impact on the tion segment; now they are working with Legacy Systems distribution industry. Part II of this series will larger companies with a different style of Challenges in upgrading run Oct. 10, 2008. management, a much broader reach in the technology. distribution market and a different set of Page 6 By Jenel Stelton-Holtmeier corporate objectives. and Lindsay Young Has this sea change been good or bad for distributors? What tradeoffs have dis- Health Insurance Take a snapshot in 1995 of software for tributors had to make in this new environ- Costs Up 5% distributors. The picture is fragmented. ment? High levels of sector-specifi c service The latest study on cost For the most part, there were small provid- has in some cases been sacrifi ced for more trends for employers. ers, most focused on one or two product generic attention. But distributors have Page 7 sectors. The landscape today looks very gained more stability on the fi nancial and different from even fi ve years ago – not to software development fronts – arguably Monthly Wholesale mention the vast shift we’ve seen over the a good thing when it comes to long-term Trade: July past decade. value and support for their systems. Sales down slightly. Consolidation of software providers Without question, competition has Page 8 in the early part of this decade resulted in intensifi ed as the universe of software fewer distribution-only software players providers into wholesale distribution Stock Building and the phasing out of the smallest solu- grows less fragmented. Distributors are left Supply Sale? tions. The small independent ERP provider with fewer options, but according to one Wolseley conducting a is still going strong in only a few subsec- industry veteran, the new class of software review of U.S. subsidiary. tors. providers has an opportunity to make Page 1 of Industrial and Large software providers such as SAP, those options better as they grow and learn Construction Markets Oracle and Microsoft have grown more in the industry. Update competitive in the distribution space. In part fueled by the pressure to grow, Acti- Factors Driving Consolidation Market Analysis: vant Solutions and Infor both bought into Three factors fueled a wave of selloffs of Fluid Power MRO the market in the past fi ve years by acquir- smaller distribution software companies at Fluid Power MRO ing long-time distribution software provid- the start of this decade. represented a market of ers, Prophet 21, NxTrend and daly.com- First, a major recession that started $32.1 billion in 2007. merce. Intuit – which buoyed its position at the end of 2001 and continued through Page 3 of Industrial and in distribution with its purchase of Eclipse the next couple of years in the U.S. hit the Construction Markets – sold the platform to Activant last year. manufacturing, distribution and software Update Many of these software companies industries hard. now see distribution as a high-growth op- The Internet bust and Y2K also had a portunity with industry-specifi c needs. In big impact on the operations of software many cases, distribution is no longer being lumped with retail or manufacturing when continued on page 3 Copying or reprinting all or parts of this newsletter without specifi c permission violates federal law! MODERN DISTRIBUTION MANAGEMENT / VOL. 38, NO. 18 / SEPTEMBER 25, 2008 2 PERSPECTIVE ■ Commentary by Thomas P. Gale Software Evolution Has Been Good for Distributors Some of us attended Gordon Graham seminars The range of software providers to distribu- in the 1990s. He is widely regarded as the father tors looks completely different today. I think of distribution inventory management principles distributors have benefi ted. There’s a better and the driver for getting those principles built chance today to fi nd software out of a box that into most of the fi rst- and second-generation dis- matches most of your needs. There is a new tier tribution software packages. He helped defi ne of specifi c tools to complement a primary busi- state-of-the-art in information technology for ness system more effectively than a few years distributors for more than a generation. What a ago (see p. 6 for the Luke Bucklin interview on new world today by contrast. updating legacy systems). Consider that in the mid-1990s, only a few This is not a one-dimensional story about providers had revenues more than $10 million. the big acquiring the small. Wholesale distribu- The three biggest were Prophet 21, NxTrend and tion has long benefi ted from large-scale, leading- Eclipse. Prophet 21, estimated to be the largest, edge IT development as well as the focus of reported 1996 revenues of $36 million. By 2005 the niche solution provider. IBM’s longtime when it was sold to Activant, its revenues were involvement in this industry comes to mind. pushing $90 million. Today it is part of a com- More recently, other large software companies pany several times larger (and includes Eclipse). have targeted wholesale distribution as a growth There are parallels between how whole- market. In turn, their networks of independent sale distribution sectors consolidated and how resellers have driven industry-specifi c develop- software providers into this industry evolved. ment not just for specifi c platforms, but for the Small, undercapitalized software providers entire industry as competition has increased. were losing customers through consolidation. It That’s translated into better value. doesn’t take too many lost customers for a small The increased rate of change in technology company to feel large constraints on its ability to and providers means distributors have to be support and grow. While any IT transition holds more hands-on in managing IT platforms. But its share of pain, weigh that against trying to get without a doubt, distributors have won from adequate service, support and development of the entrepreneurial forces at work in today’s IT new features from a company required to cut environment. back on resources to survive. ■ MODERN Contact Information DISTRIBUTION Questions, comments, article proposals, address changes MDM Editorial Advisory Board MANAGEMENT or subscription service to: Kevin Boyle Founded in 1967 Gale Media, Inc. Vice President Industrial Distribution and Channel by J. Van Ness Philip 3100 Arapahoe Avenue, Ste 500A, Boulder, CO 80303 Tel: 303-443-5060 Fax: 303-443-5059 Management for the Loctite Industrial Division of Website: http://www.mdm.com Henkel Technologies Publisher Subscription Rates Thomas P. Gale Larry Goode [email protected] To subscribe to Modern Distribution Management, please call 303-443-5060, email [email protected] or http://www.mdm.com. CEO of RT Dygert International, Inc. Editor Lindsay Young Subscriptions are available by online delivery and/or fi rst-class mail. Julia Klein [email protected] Three-year archives of MDM are available online to subscribers. Previous-year archives are available at a President and CEO of C.H. Briggs Company Associate Publisher discounted rate to current subscribers. Craig Riley Stuart Mechlin [email protected] Published twice monthly; $345/yr., $365 U.S. funds other Senior Vice President, Industrial Supply Division of countries; $169 each additional subscription to a company Affi liated Distributors Marketing Director ($189 other countries). For group subscription rates and site licenses, Kim Sorensen please contact Tom Gale at 303-443-5060. [email protected] Walter W. Norton Jr. Copyright © 2008 by Gale Media, Inc. All rights reserved. Modern President and COO of Norton Electric Wholesale Staff Writer Distribution Management® and mdm® are registered trademarks of Jenel Stelton-Holtmeier Gale Media, Inc. Material may not be reproduced in whole or in part [email protected] in any form whatsoever without permission from the publisher. To Doug Savage request permission to copy, republish, or quote material, please call President and CEO of Bearing Service Inc. 303-443-5060. ISSN 0544-6538 Copying or reprinting all or parts of this newsletter without specifi c permission violates federal law! www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 38, NO. 18 / SEPTEMBER 25, 2008 Impact of Software Consolidation 3 Continued from page 1 companies, according to Tim Reynolds, presi- distribution for customers, Winger does not be- dent of Tribute Inc., a niche software provider to lieve there will be a resurgence of smaller niche fl uid power and hose distributors. “What Y2K software companies in the distribution space did was take two years of forward demand and anytime soon. “I don’t see the opportunity that move it backwards,” Reynolds says. Many dis- was there 12 years ago when I fi rst started my tributors had upgraded their computer systems company. It is tough to compete when the com- to protect their businesses from what was sup- petition is no longer just 100 or so niche players. posed to be (but wasn’t) a widespread system Today you’re competing with a handful of large breakdown when the clock struck midnight on companies with more resources.” Jan.