Software Due Diligence: What If All The Growth Comes from Emerging Markets?

March 5, 2009 at 2:56 pm | Posted in Analyst biz, Globalization | Leave a comment

In a conversation with a major software vendor recently, a product manager got (very) touchy when I questioned a statement that the growth opportunity outside the G7 (top 7 industrialized nations) was much greater than inside.  I hadn’t looked at these figures since the recession reared its ugly head, so I checked and it turns out I was indeed wrong to question it. 

Overall GDP growth figures (I follow the IMF data) show that emerging countries are expected to grow faster than then G7, although the difference has shrunken from the previous eight years when emerging economies were strongly outpacing developed ones.  Reduction in commodity prices, tightening of credit for growth, limits on growth due to carbon controls, and increasing protectionism are having a disproportionate depressing effect on emerging markets, shrinking the gap with G7 growth.  IT spending figures show flat to slightly negative growth in developed countries compared to single-digit to 10% increases in emerging ones (see “2009 IT Spending“).

Still, I could tell I hit a nerve.  It became obvious that a major part of the growth strategy for this large software unit was to count on sales in emerging markets to satisfy a substantial portion of 2009 growth.  Indeed, examples of account wins were much more globetrotting than in recent years.  One product slide listed accounts in China, India, Sri Lanka, and Brazil.  Another product slide listed wins in China, India, Singapore, and Taiwan.  It is not unusual for a large, worldwide software company to have so many accounts in emerging markets.  And the BRIC countries have been reliably strong in this decade.  But I’ve been an industry analyst for ten years and seen hundreds of these presentations and have never seen so many emerging market reference accounts (roughly half of those listed) from a global software firm.  I think emerging market accounts existed before, but didn’t make the cut on the logo slide until the recent dearth of G2000 (the 2,000 largest global companies) wins let them surface.

I think shifting to or enhancing sales focus on emerging economies is a good growth strategy for a large software company in 2009.  If I’m an investor I would be comforted by the efforts of this company to quickly adapt to the economic environment and use global channels to seek penetration in unsaturated markets.  But I’m not a financial analyst – I’m an industry analyst representing the interests of my end user clients who happen to be in large G2000 organizations in developed countries.  For one of my clients, how should I interpret growth figures I receive from a vendor as part of due diligence that show strong growth even in this recessionary period?

It is good practice to evaluate product and vendor growth during due diligence phases of software acquisition and during upgrade, migration, and sunset decisions.  But evaluators now need to dig deeper into these growth figures during due diligence since some of the underlying assumptions have changed if a substantial part of this growth comes form geographic regions different than those of the evaluator.  The evaluator should ask how much of that growth came from “my geographical region” and “organizations similar to mine”.

Why does that matter?  The vendor will surely argue it doesn’t matter since, as a measure of vendor viability (or product viability), growth is growth.  This is true – as far as viability, it doesn’t matter much where the growth is from.  If I’m in France and most of the new revenue is coming from China, that’s still good.  I can be reasonably assured the product isn’t going to be put on life support or have the plug pulled entirely since it’s making money.

But as a proxy for best practices or what my peers are doing, emerging market growth doesn’t suffice.  If I use what my peers do I’m assured that, for technology that doesn’t differentiate my services, my competition doesn’t have a productivity edge.  And we’re likely to be able to find employees, contractors, and ASPs from a shared pool of knowledgeable candidates.  But if the growth is coming from a vastly different market (like Sri Lanka is to a U.S. conglomerate), those assumptions don’t apply.

Growth is also seen as an assurance that the product is likely to keep pace with the newest features.  The assumption is that a vendor is not likely to let a growing product stagnate in light of trends towards web services, rich web-based interfaces, embedded presence, social computing, SaaS delivery models, or contextual collaboration.  But if the growth comes from emerging markets, that assumption may not longer be true.  Companies in emerging markets (often partially if not wholly controlled by the government) may be at very different spots on the technology maturity curve. The weighting for the newest technology on wish lists for the next version may start skewing towards other features.

In short, due diligence for software purchases will now require you to be even more diligent.

Note: This is a cross-posting from the Collaboration and Content Strategies blog.

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