Acquisition addiction – is there a better way to expand to meet customer demand?

CTOs and IT leaders are inclined to provide their team members with best-of-breed apps, because they know they'll use them.  The problem is that creating an organization-wide solution made up of single apps from multiple vendors is expensive and introduces substantial integration challenges. Luckily there's a second option: adopt multi-app, multi-service suites that are pre-integrated, covering every business requirement, thereby unifying the whole office. Option two is where the demand lies today - customers want contextually integrated platforms. Unfortunately, most vendors are not set up to deliver such a diverse, complicated offering. Many of these vendors, in fact, started out as best-of-breed, single-app companies themselves.

In order to meet customer demand, vendors are racing to expand capabilities, fill gaps in their native offerings, and deliver a unified enterprise platform. They want to do this quickly to box out competition and secure market share. The most common path vendors take to achieve this - and the easiest - is through acquisition.

But just like cobbled-together solutions, mergers and acquisitions present integration issues - both cultural and technological - often yielding Frankenstein solutions, which fall short of the promise of application consolidation. Watching the market go through a string of acquisitions in haste can also unnerve customers, who begin to worry about whether the vendor they bought from will be acquired by an unfamiliar company, or even worse, one that they dislike and would not trust with their business.

It is typically public companies that acquire in order to inherit massive customer bases and expand sales to satisfy investor demands for constant growth. If you look at the tens of billions of dollars that some of these high-profile acquisitions fetch, surely that money could be better spent. Vendors should be asking themselves if acquiring software is the best decision for their customers, rather than investing in developing their own software and services based on customer feedback.

When M&A deals fail, customers suffer

Unfortunately, it's the customers who stand to lose in one way or another when technology vendors prefer to shell out on externally acquired expertise and consciously choose not to invest the same amount of time or resources on innovating in-house. The array of complications that M&A deals usually bring onboard - including culture clashes, redundancies, office politics, increased attrition rates, and tech integration challenges - ultimately affect end-users. A 2016 Harvard Business Review article took it one step further, saying, "M&A is a mug's game, in which typically 70% - 90% of acquisitions are abysmal failures." If it was a "mug's game" then, conditions certainly haven't improved since.

Take Microsoft's Skype acquisition in 2011, valued at $8.5 billion. Even though Microsoft primarily bought Skype to keep competitors like Facebook and Google at bay, it also had plans to integrate Skype's telephony architecture into its then user communications platform and a few more services. The integrations turned out to be a time-consuming effort and ended up in the market with huge flaws that prompted redesign after redesign. Customer confidence took a great hit. And then, when Microsoft launched Teams in 2016, it finally developed its own video-calling feature in-house instead of leveraging Skype's capabilities to ensure aesthetic consistency as well as a more streamlined fit among its enterprise collaboration solutions. It was literally a billion dollar lesson for Microsoft that investing in R&D and taking the necessary time to build products that work seamlessly with the other apps in your suite is preferable than acquiring a best-of-breed, one-off app that doesn't work well within your offering. 

The alternative is building in-house

For a company to study prevailing market conditions, identify a future need, develop an idea, translate it into a working concept, experiment, fail, finally build the perfect solution, package it, and keep it ready to offer the moment a customer comes looking, it takes years and years of patient R&D. A market requirement like an integrated suite of solutions that's built on a unified tech stack requires even longer periods of religious investment across in-house innovation capacities, homegrown talent, and resource upskilling.

Vendors who willingly immerse themselves in the overall process of building future-ready capabilities from scratch also forge stronger connections with customers. First off, a vendor building in-house shows commitment for the long haul, automatically building trust and brand credibility. Next, the technological expertise gained through R&D breakthroughs slowly but surely equips the vendor to build intuitive solutions that solve business problems better. Paying constant attention to developing native tech stacks and common data models further allows the vendor to swiftly serve the market with complementary technologies when needs evolve, without having to worry about cumbersome integration troubles. Customers also benefit from a set of applications that work in perfect unison to drive better organizational processes, foster synergy, and improve cross-functional systems collaboration. 

Conversely, vendors who take the acquisition route shift the odds of failure onto their employees, customers, and shareholders. For this to change, and for customers to begin to see more solutions that meet their requirements, the industry needs to quell its addiction to acquisitions and put more effort and dedication into home-grown development.