SimCorp Blog

Thought Leadership

Software Boneyards

How software vendors approach acquisitions, and what it says about their approach to product development and quality.

I recently learnt of a house in the United States that has been built in part using the wings and fuselage of a decommissioned Boeing 747. Architecturally, it’s beautiful. Environmentally, it’s admirable, and economically, well… that may be subjective.

Depreciation means the value of an aircraft reaches a point where it ceases to make economic sense as an airline asset. When this occurs, it is retired and, usually, purchased by another company (at a scrap value price based on its principal material - aluminum) who seek to turn a profit on it themselves. Retired aircraft are parked in dry desert “boneyards” and await purchase in a corrosion free environment. In the rare case above, one has been used as building material.

This entire process reminds me of the large multi-brand vendors that purchase legacy software and in doing so build a substantial portfolio of products and brands under a sole parent company moniker. They buy them for their “scrap” value – the value of the people, Intellectual Property, existing clients etc. and attempt to return a profit on that basis, seeing them only as cash-cows. The acquiring companies are economically successful. Analysts like their operating models, shareholders are happy with returns and on paper at least they go from strength to strength. But what’s behind the façade? What happens in the sales lot portacabin where the business is run from? Importantly, how does their approach differ from companies like SimCorp that make acquisitions to improve and build on the existing solutions they offer?

What’s it like being scrap metal?

Let’s consider the boneyard type company first, where, in general, the acquired company suffers immensely and the motivation for the purchase seems to be purely financial. To realize ROI quickly, shared services are stripped out of the acquired business immediately. This means the people in legal, HR, marketing etc. are no longer required and the remit and responsibility of the parent company’s incumbent teams, if they exist, increases. The new product is added to the roster of solutions that the existing sales people are required to sell resulting in a corresponding reduction of sales staff in the acquired business line and a less-informed sales team.

Then (and this doesn’t happen as quickly) as the product then sits within a stable of competing solutions, it vies for attention from management and product developers, often losing out to the high performing “big hitters” that the company already own that enabled them to make the acquisition in the first place.

Much of the remainder of a once happy and engaged workforce decide to leave, as their own career and personal development aspirations can no longer be met. Consequently, corporate history, product knowledge and expertise, and the quality of client relationships deteriorates. The new company, that didn’t “build” the software, lose their knowledge of its background, and, as they don’t understand original design decisions, struggle to make any improvements or upgrades as development becomes difficult, perhaps even impossible.

Subsequently, clients begin to leave, creating an unstoppable downward spiral that signifies the end or more dramatically, the death of the product. The scrap value of the purchased company diminishes and it ‘sits on the shelf’ gathering dust whilst the parent company aggressively ‘upsells’ conversion to another product and makes promises that they likely cannot or will not deliver until the last client leaves.

Existing clients will notice service levels drop. Issues will take longer to resolve, if they are resolved at all. New voices will be heard that do not understand the businesses they are working with. Increasingly, the product fails to deliver expectations or needs, creating a functionality gap and ultimately forcing the client to choose an alternative path. Potential clients will be promised the world alongside a decreasing ability to deliver it.

Acquisition done right

Now let’s consider a company like SimCorp, who have made acquisitions opportunistically to improve and enhance their product suite and ultimately deliver better solutions for their clients and prospects alongside the declared strategy of organic growth. The acquired companies do not merely function as new revenue streams, they are brought into the fold of the SimCorp family and they flourish there.

SimCorp have made two acquisitions in recent years: the remaining shares - SimCorp already owned 20% - of Equipos Ltd. (now SimCorp Coric) in 2014 and APL Italiana (now SimCorp Sofia, principally run by the new Italian entity, SimCorp Italiana) in 2017. SimCorp Coric bolstered and improved SimCorp’s reporting and communication functionality and has increased revenue year on year since acquisition.  Consultancy services are delivered more efficiently and professionally, and client relationships are stronger now than they ever were. SimCorp Italiana forms the basis of SimCorp’s new Italian market unit and is tasked with strengthening our position in the country over the coming years and beyond.

No redundancies were made and no client has decided to end contracts with us because of either acquisition. Staff turnover at SimCorp is at a healthy rate and alongside welcoming the industry’s newest and brightest minds to our employee ranks, we regularly celebrate long service jubilees. In May 2018, two people at SimCorp reached the notable milestone of 20 years’ service, three people reached 15 and ten reached ten. In June 2018, the figures are six, three, and 11, respectively.

SimCorp’s acquisitions have and always will be made to improve the solutions we offer. Of course, there is a financial element to each purchase, but our decisions are not influenced by those alone. Increased revenue occurs when the new business line operates with the existing product suite, not in isolation, and the expertise, knowledge, intellectual property, etc. is shared and utilized through true collaboration. This results in trust and strong relationships with our clients, which creates the opposite upwards spiral of success.

The functionality gap

The below diagram illustrates a typical vendor/client relationship journey impacted by acquisition of one of the large, financially driven multi-brand vendors, or “boneyards” as we are describing them here.  Essentially, from day one of the relationship onwards there can be an increasing gap between the client’s needs and expectations versus what the software is able to deliver. Or, to provide greater clarity, the client’s needs and expectations change – they usually increase – and the development and functionality of the software might not keep up, because the owners are simultaneously addressing the needs and expectations of multiple clients.

SimCorp minimizes this gap through substantial investment in R&D and delivering the functionality that’s required before it’s asked for. However, when software is acquired by a boneyard this gap increases exponentially because, as explained earlier, generally, functionality does not change, despite the increasing needs and expectations of the clients. 

Needs & expectations gap

Needs & expectations gap

A typical vendor/client relationship

The point at which the size of the void becomes too big is situational, but you can probably plot yourselves somewhere on the line already. If that’s the case, you can predict with some confidence what’s going to happen in the near future. It wouldn’t be wise to arrive at this point and be forced to make a decision. Those who have a clear and decisive strategy will take ownership, plan and act well in advance of this occurring.

But why did this post start by referring to architecture? 

Well, the Wing House is an architectural masterpiece. It’s won numerous awards and is discussed around the world for its merits. Yet its construction involved the closure of highways and transportation of the larger parts to the mountainside build-site via helicopter, and the use of one of only two in the United States that were able to carry such a load. Ultimately, for the owner and many others, the beauty of the house itself outweighs its total cost and the environmental impact its construction had. If the owner is happy and has achieved what they set out to then the project is considered a success.

When it comes to software purchases, creating a thing of true beauty is rare. There are not many of us who look at a software landscape, operating model or system design and think “wow” as you probably will if you click the link provided below. Function, the foreseen partnership, and cost drive purchasing decisions in a much greater way than aesthetics or dreams and seldom will you see such passion, vision, and personal sacrifice that must have been present in the owner, the architect, and construction teams involved in the Wing House.

Whilst, therefore, you can see the similarities and understand the analogy between an aircraft boneyard and some of the multi-brand vendors in the financial technology space, there is an important distinction that you must remember; unlike the wings of that airplane, “scrap” or “legacy” software cannot be used to create something that will turn heads - it just rusts.

Folklore suggests elephants have a graveyard they visit to die. Norse mythology explains how Vikings who die in battle travel to Valhalla for their afterlife. Even a domestic cat will seek solitude when it suspects its time is up. If your great software has gone or is going somewhere to die, the time to make a change may have already passed.

You can see pictures of the Wing House and learn about its construction here