The Suite Lowdown

Does Oracle's acquisition of Siebel signal the end for best-of-breed software?
Russ BanhamDecember 6, 2005

While prolonged viewing of a diagram of Oracle Corp.’s $5.8 billion double-dummy acquisition of Siebel Systems Inc. may induce vertigo, an aerial picture of the megadeal’s impact on software purchasing is equally unsettling.

The fact is, few decisions give corporate executives more worries than buying expensive business applications. Finance chiefs have long been forced to purchase either a host of integrated applications from an individual vendor or individual applications from a host of best-of-breed vendors. And until recently, siding with one camp or the other was a difficult choice, but not a dire one.

That may be changing, thanks in large part to Oracle’s surprise bid in September of customer relationship management (CRM) purveyor — and best-of-breed poster child — Siebel. As noted in Deals (see “Two Mergers Are Better than One“), the tax advantages of the transaction likely proved irresistible for Siebel founder Thomas Siebel. Nevertheless, the sale of Siebel stunned backers of best-of-breed software. Indeed, some observers believe Oracle’s recent buying binge, coupled with the wave of consolidation rolling through the business-software industry (see “Backfilling” at the end of this article), casts doubt on the long-term viability of specialists in a software universe suddenly tilting toward generalists. “One of the big questions was how big a best-of-breed vendor could become,” notes Jim Shepherd, senior vice president at consultancy AMR Research in Boston. “Now we know. You get as big as Siebel, you start shrinking — and you’re bought.”

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And if Siebel can be bought, experts say, so too can other coveted stand-alone vendors like or Business Objects. “When you get Siebel acknowledging that a company of its size and resources can’t survive as a best of breed,” says Shepherd, “it sounds the death knell for that concept.”

Is Big Beautiful?

The great irony here, of course, is that most ERP (enterprise resource planning) software vendors started out as best-of-breed vendors. By adding an array of modules and bolt-ons — mostly through acquisitions — SAP, Oracle, Baan, Great Plains, and others were able to move beyond their humble supply-chain roots and into the rarefied air of enterprise software.

In recent years, however, the growing dominance of SAP has left ERP rivals with little choice but to buy or die. (SSA Global bought Baan and Microsoft bought Great Plains.) Beyond bulking up, the recent raft of acquisitions by Oracle has also served to patch holes in the company’s product suite. “Oracle is trying to gather up everything and anything it can to expand its product line to do more for the customer,” says Brian Robertson, managing director of IT strategy and transformation at McLean, Va.-based management and technology consulting firm BearingPoint Inc. Adds Robertson: “The big want to get bigger. If I were a CFO, I’d put my dollars with the bigger players.”

Not surprisingly, best-of-breed vendors bristle at the suggestion. Neal Hill, senior vice president of corporate development at Ottawa, Ontario-based business-intelligence specialist Cognos Inc., claims Oracle is hoping to convince customers that business applications are essentially a commodity product. Says Hill: “Oracle wants to ensure that the customer doesn’t have many other options.”

Dealing with one large software publisher does simplify IT portfolio management — vital in this era of Sarbanes-Oxley. But even some Oracle customers have yet to buy into the notion of an industry standard. Tom Strunk, CFO of St. Louis–based World Wide Technology Inc., says the supply-chain services company continues to run a hodgepodge of best-of-breed programs that feed into an Oracle platform. The software mix includes a front-end E-commerce product marketed by Comergent Technologies Inc. and a warehouse-management system from ClearOrbit Inc. “We wanted solutions where we could work closely with the vendors to influence their future product development,” explains Strunk.

Moreover, best-of-breed apps tend to be easier to deploy. Bill Ferko, CFO of Genlyte Group Inc., a Louisville-based lighting-fixture maker with 2004 revenues of $1.2 billion, was keen on purchasing an integrated suite from Oracle back in 1999. But complications with the deployment sent Ferko scrambling to find an alternative. “We had a difficult time with the Oracle implementation, and needed some technology with very fast functionality that promised a very fast payback on a tight budget,” recalls Ferko. “IT recommended best of breed, which we’ve implemented.”

Other corporate executives also see value in purchasing stand-alone applications. “The integrated-solutions providers have very competent modules from a functional perspective,” concedes Mark Settle, CIO of Arrow Electronics Inc., a Melville, N.Y.-based global distributor of electronic components and services. “But in any given industry or company, there will always be one or two business functions where a specialized product will do it better.”

In some instances, best-of-breed vendors seem to sprout up almost overnight. After Sarbox was passed in August 2002, for example, scores of software sellers suddenly materialized, most promising to take the pain out of Section 404 compliance. Another example: research firm Gartner Inc. says that, while 20 best-of-breed CRM software vendors have either been bought or gone out of business this year, 10 to 15 new ones have been launched.

Says Ed Thompson, vice president of research at Gartner: “There will always be some smart entrepreneur with a sharp new application that will make a splash.” Still, in a clear nod to the game of Pac-Man currently being played in the software industry, he adds: “And there [will always be] a tremendous likelihood the company will get acquired and absorbed.”

It’s a variable that finance chiefs must routinely factor in to any software-buying decision these days. “The question CFOs must ask is, ‘Will this vendor be around as long as I need it to be around?’” says AMR’s Shepherd. “The answer is a lot more important than the technology.”

Russ Banham, a contributing editor of CFO, is author of The Ford Century.

Recent acquisitions by enterprise software makers.
Date* Size Target Acquirer APP Bought
9/12 $5.9 billion Siebel Oracle CRM
8/3 $329 million Epiphany SSA Global CRM
7/20 $100 million SRC Bus. Objects Planning
6/3 $480 million Intentia Lawson SCM, CRM
3/14 $1.1 billion Ascential IBM Data Integration
2/28 $496 million Retek Oracle Retail Management
*All 2005
Sources: The 451 Group, company information