downloads.jpgCDC's battle to create a world-class Chinese player in enterprise software is brave but quixotic.

The market is consolidating as companies increasingly choose to standardise on one of the better-known tier one vendors. Big business opts either for German giant SAP or US rival Oracle, which now also owns the JD Edwards, Siebel and PeopleSoft customer bases. 

Meanwhile, SMEs are increasingly likely to go with Microsoft, whose enterprise software offering is improving.

There are a clutch of second-tier vendors left fighting for the crumbs — CDC already owns three and is trying to buy another, Onyx Software of the US. But in the west, enterprise software is not the boom industry it was in the 1990s and smaller vendors are feeling the squeeze.

While in China, CDC's home turf, the market is still at a difficult early stage. Strip out the Chinese JVs of multinationals, who probably already use the same software as their western partners, and the number of Chinese companies that are ready to use sophisticated enterprise software is limited.

So why does CDC want to buy another second-tier enterprise software company?

Onyx specialises in Customer Relationship Management, a technology that has its origins in the late 1980s when US pioneers like Siebel, Onyx and Clarify developed systems to capture sales leads and automate call centres.

After hitting a tough patch in the post-dotcom era, the CRM market is still around. But it is maturing and businesses that do not already have CRM are these days more likely to buy it from a broad-based enterprise vendor like SAP, Oracle, or Microsoft rather than from a CRM specialist.

Incidentally, CDC recently signed an alliance with Microsoft covering the latter's CRM offering, which makes me wonder why CDC now wants to buy another CRM company.

There are also new software-as-a-service CRM offerings — see yesterday's post — to complicate the picture.

The result of all this upheaval is that the days look numbered for traditional stand-alone CRM vendors, particularly loss-making ones like Onyx — and their shareholders know it.

This week, CDC filed a lawsuit against Onyx alleging its directors breached their fiduciary duties in not considering CDC's hostile bid. CDC's offer is at a premium to a rival “friendly” bid, from a small US enterprise software company, which the board had previously recommended.

The filing is interesting on two counts. First, for the sophistication of CDC's tactics. Even the merest hint of negligence by the officers of a US listed company is guaranteed to bring action — or class-action suits — in these post-Enron times .

And second, its interesting because it shows the strength of CDC's determination to be taken seriously as enterprise software player, despite its overtures having been rebuffed three times by Onyx.

Those late to the party may not know that CDC is better known as Chinadotcom and in 1999, at the peak of the dotcom boom, it became the first of the Chinese internet companies to list on Nasdaq.

But in recent years, CDC's internet business has been eclipsed by the better-known Chinese portals like Sohu, Sina and NetEase. Two years ago, CDC's CEO, Peter Yip, decided to ditch most of the “legacy” internet business and instead build the company into an enterprise software vendor.

To do this, CDC has hit the acquisition trail in a big way. In quick succession, it has snapped up Ross Systems, a mid-range ERP vendor of the US; another US firm IMI, which specialises in supply chain software; and Canada's Pivotal, a mid-tier CRM vendor that Onyx also tried to buy. Now, Onyx could also join the clan.

Bruce Richardson, veteran enterprise software analyst at AMR Research, says some software companies, have had a lot of success playing this “roll-up” game and he sees no reason why it will not work for CDC. But he admits he raised his eyebrows when CDC made it first move on Ross Systems.

In a roll-up strategy, a deep-pocketed software company buys up a collection of struggling second-tier vendors with loyal customers and well-liked but mature products.

The buyer then commits to maintain the ageing software programs in return for the support revenues they generate. Many businesses, particularly SMEs, are happy to keep running ageing software as long as they believe the vendor will continue to support them.

SSA, a big US software company, has become a master at this art, acquiring nine mid-range vendors of enterprise software in four years. Its revenues now run at $700m. SSA, ironically, is itself now being acquired by Infor. Microsoft has also bought a clutch of second-tier ERP vendors, although the jury is still out on this one.

CDC insists there is more to its strategy than “milking” the installed base of the companies it acquires. It says 40% of its software licence revenues comes from new customers.

Of course, CDC is also well positioned to exploit the China growth story, but everyone tells me its very much a “jam tomorrow” market for enterprise software vendors.

So, without a truly transformational deal, it is difficult to see CDC being taken seriously as a tier one contender — at least by businesses in the west. Perhaps Yip will prove me wrong.

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