PM software in a bear market
by Chris Vandersluis,Contributing Editor
It's impossible lately to escape the stories of stock market woes. Every front page of every paper in virtually every country carries some article on the bad news. Does this mean the end of the expansion in project-oriented software systems? There is an impact, that is certain, but where exactly does it occur?
Merger and Acquisition Frenzy. First of all, let's tackle the merger and acquisition frenzy that is under way. Last year, at the peak of the stock market valuations, there were a number of companies that realized the entrepreneur's dream—they went public in an IPO. This is the golden ring for many entrepreneurs because it means a huge cash-in of stock, tremendous returns that often result in instant millionaires or, in some cases, billionaires. Most of us watched with envy as these companies’ stocks went through the roof.
Will the problems of the NASDAQ affect the project management software market? You bet!
Companies that succeeded in an IPO last year ended up with two things: First, they got big checks from the underwriters—sometimes adding up to hundreds of millions of dollars. Second, these companies had high stock valuations with strong trends for them to get higher still. With that valuation in hand, a company is often pressed into expanding rapidly through acquisition. In last year's high-tech business environment, this was exacerbated by a shortage of high-tech resources, which meant that the resources a company needed to expand were also only available through acquisition. Our own firm was the target of at least two of these offers last year. The problem with the offers was not the money; it was that the essential point of the merger was a recruiting exercise, not a complement of ideas. It's a formula that doesn't make for long-term partners.
Chris Vandersluis (firstname.lastname@example.org) is president and co-founder of HMS Software, based in Montreal, Canada. He is a member of PMI and the American Association of Cost Engineers. He has appeared in publications such as Fortune and Heavy Construction News, and is a regular columnist for Computing Canada magazine's project management column. Comments on this column should be directed to email@example.com.
Sure enough, ABT, a venerable player in the project management market, was scooped up by Niku, a hot new publisher in the PSA (Professional Services Automation) market. For a mix of stock and cash, Niku snapped up a couple of other companies at the same time. Late last year Artemis was bought by its own distributor, Proha from Finland. How would the child be able to absorb its own parent, you ask? Well, because Proha had been able to go public on the Finland stock market. With publicly tradable stock to use as its currency, Proha was able to snap up Artemis from Gores Technology (you may remember Gores as the Colorado-based company that bought Artemis from Computer Sciences Corporation). Proha stayed in the buying mood long enough to snap up the French and Italian Artemis distributors, again for a mostly stock deal.
Even the veteran Primavera has announced investment deals. According to Primavera press, both i2 and Intel have taken equity positions in the company.
Oh, did I mention Microsoft? As I've noted previously in this column, Microsoft also caught the purchasing bug, snapping up eLabor's Enterprise Project product and then reinvesting cash into eLabor itself. Microsoft has promised we'll see the Enterprise Project functionality in the next major release of MS Project.
Ok, so the change of ownership of major players in the market is bound to have an effect as the new owners impose their own priorities on development and distribution of the products. But wait, there's more ...
Bear Market Woes. With the downturn in the stock markets over the last year, the flavor of investment deals has changed. I've talked before about the remarkable investment in a range of new project management software companies that have leaped into the market with both feet. Companies that started with $40M to $50M in seed capital were able to get a tremendous running start into the market, hiring some of the best employees from older, more established firms and almost buying market share at often unprofitable ratios of marketing-to-revenue.
Well, big surprise, a number of these firms have now evaporated and the bad news isn't over yet. Our little firm up here in Montreal received no less than three different requests to purchase project management software companies in trouble, and I understand from talking to our investment bankers that they regularly receive quite a lot more. The most extreme case I've seen this year was a company with $450,000 in revenue and $8,800,000 in expenses for the previous 12 months. Needless to say, we didn't jump at the chance to buy that company. With a financial statement like that, the company is essentially unbuyable. There's not much point. They don't have a going concern to purchase; and it doesn't matter what technology they've invented, with the company in the shape it is in, the personnel have got to be leaving in droves. Software is virtually useless without the people who wrote it being around somewhere.
There's nothing like a recession (oops, did I say the “R” word?) to bring out an interest in project management from the executive.
There's more bad news to be had in this market. The ball got rolling on this expansion a couple of years ago with the publication of an analysis by someone at the Gartner Group who said that the PSA market would grow to over $11 billion (yes that's billion with a “b”) within four years. That's significantly larger than the last report on the project management software industry that pegged the size of the market at around $850 million. Well, $11 billion is enough money that venture capitalists streamed toward it and some of these firms we're talking about are the result. Of course, that analyst at Gartner didn't have to actually sell any of the software to make up that $11 billion, but you can bet that if he had to do a new report that number would be significantly lower. After all, some of the “professional service” firms that were to be automated no longer exist, and of those that do, they're not expecting huge growth supporting high-tech expansion over the next couple of years.
But wait ... isn't PSA just another variant on project management software? Of course, but PSA publishers don't like the “project” handle because they find it limiting in some way. Yet, the PSA market and the project management software market run across each other every day competing for the same business. So what we've been saying about the PSA market also affects the project management software market.
The bottom line on all of this is that you'll see a range of new players disappear over the next few months and a few more over the balance of the year. Startups that have burned through venture capital at a reckless rate are much more likely to collapse than are well-established companies. Some will survive, of course, but which ones aren't at all certain.
Those that do survive may do so through mergers. Unlike the phenomena where the rich public firms felt that to expand required acquisition (a sellers’ market), this phenomena is creating mergers based on a huge drop in valuations of the firms that actually are worth buying (very much a buyers’ market). New technology resulting from the investment of large amounts of venture capital can now be picked up for a tremendous discount. Look for a range of these types of mergers over the next year or so.
Project Management Loves a Bear Market. There's a more fundamental factor at work across the project management software industry that can't be ignored. As skittish as instability in project management software companies will make purchasers, I predict overall growth in this industry. Why? Because the downturn in the economy is affecting everyone and when times are tough, companies look to how they can be more effective.
There's nothing like a recession (oops, did I say the “R” word?) to bring out an interest in project management from the executive. The questions that come from the board of directors now include things such as, Can we be sure that the project will come in on budget? Can you give us certainty on when this new product will be available? Are our resources effective distributed? Can we cut resources anywhere without a major effect in deliverables?
Sound familiar? These are questions that project managers ask every day. The same management that insisted on delivery at breakneck speed only a few months ago with the slogan “Innovate or Perish” is now keen on a new leaner, more effective directive, and project managers are the ones to deliver it.
Project management tools are going to be more in favor than ever and this kind of “Be Effective or Perish” directive may be just the impetus that some companies need in order to get the management support required to do enterprisewide project management.
WILL THE RICH get richer? With high-tech purchases of any kind being risky in this economy, it's reasonable to expect that the largest most stable project management software vendors will do well and the newest, least established vendors will get the roughest ride.
It's a truism that when pressed, people retreat to what is familiar and you can expect that in spades from the project management community over the next couple of years. We've had an innovative face over the years, but in our hearts, we're pretty conservative. ■
PM Network June 2001
Organizations must invest in building a culture - and project teams - that can turn cutting-edge ideas into reality, according to new PMI research.