Vendor viability: Buyer beware
The CMMS/EAM industry is no different from any other packaged software marketplace. Profitability is the ultimate measure of vendor success. Having the slickest solution on the block is no consolation for not making money. If a vendor cannot consistently turn a profit, its economic viability must be questioned. Companies that can’t make money eventually go out of business.
Apparently most CMMS/EAM vendors have come to terms with this elementary fact, since they continue to peddle their wares year after year. The high industry vendor turnover rate of the early years of CMMS has given way to a relatively stable marketplace with only a few new additions and departures annually.
Importance of viability
Why is vendor viability important? Having its CMMS/EAM vendor go out of business is not the end of the world for a maintenance department. I know of some organizations that get a lot more using DOS-based packages from defunct vendors than other enterprises that employ the latest solutions from industry leaders.
But vendor viability does matter for both prospective and existing CMMS/EAM customers. In many ways a software package is like a physical asset. It can break, or its performance can degrade due to software bugs or external changes in other software, such as operating systems and databases. Upgrades may be necessary to take advantage of new functionality or technology. New services might be required to obtain some new performance benefits. The solution to all of these challenges is generally more forthcoming if the original software manufacturer is alive and healthy.
The topic of vendor viability came to mind when I saw an October 24, 2002, press release from the ARC Advisory Group ( arcweb.com ) on a recent update to its EAM/CMMS Solutions Worldwide Outlook study. The study update predicted a CMMS/EAM industry annual growth rate of 5.3% over the next five years. While this is hardly a high growth scenario, it is still a reasonably healthy prediction given the maturity of a software industry that is approaching its twentieth year. The study expects industry revenues to reach $1.6 billion by 2006. My initial reaction was that the study’s projected industry growth rate was more than adequate to sustain many healthy vendors.
But the study did have some caveats. According to the study’s author, Houghton LeRoy, “the majority of asset management market growth will come from application service providers (ASPs), web hosted solutions, and electronic maintenance, repair, and operations (eMRO) procurement. The EAM marketplace has matured causing software license sales to decline and customers to demand more services for better performance and continuous improvement.”
As a practitioner, I found that these statements made intuitive sense. Certainly the impact of both ASP and eprocurement solutions on the industry will continue to grow. The former can offer a low entry cost, lower total cost of ownership, and a more rapid implementation timeline than the traditional customer owned and operated approach. The latter promises to reduce material procurement costs and increase maintenance responsiveness by streamlining the MRO supply chain.
The attractiveness of these solutions will only continue to grow as their technological and economic foundations become more familiar to the marketplace.
But I must admit the prediction that traditional CMMS/EAM license sales will actually decline gave me a bit of a start. It is not that I don’t believe that this will be the case. Intellectually I accept the fact that in a maturing software marketplace, license revenues may decline. With approximately 20 yr under its belt, the CMMS/EAM industry can certainly be classified as mature. While there are still plenty of maintenance operations that do not employ a CMMS/EAM package, the pool of these potential customers is definitely not as broad or deep as it once was. Vendors can also target maintenance operations looking to replace an aging CMMS. But there are limits to this potential source of buyers.
Furthermore, the competitive landscape of the CMMS/EAM industry is changing. While it is still dominated by “pure” CMMS/EAM package providers, more ERP vendors are beginning to offer their own plant maintenance (PM) modules. This is a natural evolution for another maturing software industry that continues to grow beyond its original core functional boundaries. But the existence of ERP-based PM modules does represent serious competition to traditional CMMS/EAM solution providers. ERP vendors are clearly targeting their existing customer base with their PM modules. Any sale they register is one less for traditional CMMS/EAM vendors.
The ARC study clearly points out other revenue streams for CMMS/EAM vendors. But these sources may look quite different from vendor to vendor. The revenue potentials of eprocurement, ASP solutions, integration services, and additional consulting support for a vendor depends highly on its business model, product functionality, and targeted customer base. The economics of offering these additional services is different for a vendor that provides the infrastructure for these services than for one that relies on external organizations for this support. An ASP solution provides a different set of economic variables to a vendor that provides its own hosting services than one that employs data centers owned and operated by a third party.
Being able to succeed in these areas is not necessarily a given for any CMMS/EAM vendor. The business model presented by these services is different from traditional software licenses. Also, there is plenty of external competition for these new service dollars. Many IT consulting service organizations pursue CMMS/EAM integration and consulting contracts. There is a plethora of MRO eprocurement solutions offered by sources external to the CMMS/EAM industry.
So what does this all mean to the industry over the next few years? It means a modestly larger revenue base that is pursued by more players. Some of these vendors will be able to successfully navigate through the changing landscape to take advantage of new income sources. But for all those that flourish there will be many others that will struggle. Some of these will contract in size and services. Others will fold or be acquired by other companies. It may be the best of times and the worst of times for traditional CMMS/EAM vendors.
Any enterprise that uses a CMMS/EAM solution or is contemplating purchasing one should be concerned about the viability of current and prospective software solution providers. Performing due diligence on the financial health and prospects of potential vendors should be part of any selection process. Existing CMMS/EAM users should also pay attention to the financial stability and market position of their software vendor.
A maintenance operation depends on a CMMS/EAM vendor to meet both its current and future maintenance information needs. Its ability to meet these future needs in a timely and cost-effective manner is directly related to the viability of its software vendor.
Even if the industry is stable, vendor viability should factor into any CMMS/EAM selection process. Furthermore, any existing CMMS/EAM customer should keep an eye on the health of its software provider.
But assessing the current and future economic viability of a CMMS/EAM vendor is not a clearcut task. It is complicated by the fact that many vendors are privately owned and thus do not publish quarterly earning statements. Furthermore it is usually not a comfortable task for maintenance operations that are typically more attuned to evaluating the technical features and prospective benefits of CMMS/EAM packages.
The ultimate business success of a CMMS/EAM vendor depends as much on the soundness of its business model and effectiveness of its sales and marketing efforts as it does on the technical capabilities of its package. The viability question is further complicated by the fact that past success is no guarantee of future survival.
|Tom Singer is an information technology consultant who specializes in designing, developing, and implementing systems solutions that meet client operational needs. He has worked both as a developer and integrator of CMMS solutions. He is a principal of Tompkins Associates, a total operation consulting firm. He can be contacted at 630-472-1524 or firstname.lastname@example.org|