ABSTRACT

The US Department of Justice (DoJ) is so intent on blocking the Oracle-PeopleSoft merger that it has sent up a market definition that will go down swinging when the 9th Circuit Court hears the case this month. The DoJ’s case is too selective in defining relevant products, looks at too few customers, and even in their own narrowly-defined market, they miss the presence of several current competitors and many more on the horizon.

For the purposes of antitrust, a market is defined by the list of relevant products and a group of customers that rely on them. The DoJ swings and misses on both counts.

STRIKE ONE: The only competitors that the DOJ includes in its market definition offer both human resources (HR) and financial management systems (FMS). This assumption misses leading vendors who provide HR systems or outsourcing solutions to large enterprises such as Bank of America and Morgan Stanley.

The two applications in question are far more modular and interchangeable than DoJ asserts. Consider that:

The DoJ definition arbitrarily and inextricably couples HR and FMS. 1.) Although it’s possible that the same vendor can be used for both human resource and financial management solutions, large customers often combine HR and FMS products from separate vendors. However, the DoJ finds that the only competitors in the relevant market are those offering both capabilities. HR service vendors like Fidelity, ADP, and Ceridian have won the business of some of the largest enterprise customers in the U.S., including Bank of America, Aramark, and General Motors. This demonstrates that HR and FMS products and services from multiple vendors can be combined and integrated. Some customers do the integration on their own, and some seek help from IT consulting firms that specialize in integrating enterprise applications. If the DoJ were to properly include just one of the HR outsource vendors serving large enterprises today, their case against the Oracle-PeopleSoft merger is lost.

There are no barriers to entry and competition from adjacent product markets. Given the broad nature and expected interoperability of disparate systems, firms are constantly innovating and launching new enterprise application packages to fill gaps in product lines or augment existing systems. Industry stalwarts Microsoft, Oracle, and PeopleSoft have added CRM to their product line while CRM leader Siebel is adding HR functions with its employee relationship management software product. The ease with which enterprise applications vendors are able to move into new product markets demonstrates that the barriers to entry into the DoJ’s defined market are relatively low.

There’s less innovation and change in HR and FMS applications. Historically, payroll and accounting applications are the most basic and static of all enterprise software. The rules and features of these applications are well settled, and customers don’t regard them as necessary for growth, profitability, and competitive differentiation. Growth in the HR and FMS markets is predicted to be slower than growth in the broad enterprise applications market, which includes dynamic products like enterprise resource planning (ERP), customer relationship management (CRM), procurement, and supply chain management (SCM). A consolidation within the FMS and HR segments will mean little to the much larger overall market for enterprise applications.

The DoJ misses many competitors and potential competitors by ignoring HR and FMS-only solutions, outsourcing companies, and the various enterprise application companies that could easily add HR and FMS applications to their current suites.

STRIKE TWO: The DoJ only looks at America’s largest enterprises, representing a handful of potential customers. This definition misses the much larger and more relevant middle market, where many more competitors contend for business.

The majority of future sales growth is in the middle market, not the relatively flat market comprised of the world’s largest companies. (See Fig.2) Mistakenly, the DoJ neglects the breadth and depth of this market segment in its examination and incorrectly sizes the entire market by focusing only on the upper-end. To properly examine this merger, DoJ must include customers in the middle market as well.

At the top of the Fortune 100, pricing power rests with customers, not vendors. As a general matter, the largest companies have more pricing power than the vendors who seek to serve them. A state of quasi-monopsony exists, where a few large customers wield enormous pricing power over vendors. These customers have massive scale requirements, their needs are too specialized, and they spend too much money to give software vendors much sway when it comes to price discrimination.

The application upgrade cycle for the very largest customers is ten years or more, and most completed major Y2K upgrades just five years ago. The Y2K issue compelled many firms to update their enterprise applications in the late 1990’s. Y2K upgrade projects cost so much, and were of such complexity that industry observers concede this market segment should remain substantially static for at least the next decade. Even when the next upgrade cycle does occur, there are only a handful of the super-sized firms that fit into the DoJ’s definition of “customer.”

As a result, the mid-market is the fattest, richest market. Given the market power and extended lifecycles at the upper reaches of the market space, vendors are hoping to capture a growing mid-market cluster. Expensive enterprise applications that were once the sole domain of the biggest of customers are now being pitched to small and medium-sized companies.

For example, relatively new market entrant Microsoft sees this as the most fertile place to start its quest for a share of the enterprise applications market. Its CRM product went from announcement to market in under one year and it has four enterprise products in its Business Solutions Unit targeted at the small and medium-sized business (SMB) market. The world’s largest software company has made no secret of its substantial investment into the enterprise applications space, having already committed $2 billion in research and development with plans to spend $10 billion total over the next five years. This is substantially more than SAP, PeopleSoft, and Oracle plan to spend combined. Even upper-end market leader SAP has moved to the middle, launching an integrated solution for the small and mid-size business market in May 2004.ii

And no matter where they enter the market, vendors can scale-up to serve large enterprises. Vendors who enter with mid-market products are able to scale-up their products to compete for the very largest customers. Orlando Ayala, a Microsoft senior vice president, said the company will compete for clients or subsidiaries with as many as 10,000 employees.iii

When the customer market properly includes middle-market companies, there are far more competitors than the three vendors proposed by DoJ.

STRIKE THREE: Even within the narrow product and customer market defined by DoJ, they somehow missed several major competitors.

Even within the parameters of the narrow DoJ market definition, many relevant players are ignored. Recent deals in the marketplace and an analysis of business needs demonstrate that multiple relevant vendors do indeed exist:

Multiple and competing vendors emerge. The TEC Group (www.technologyevaluation.com) provides independent and publicly available comparison tools for enterprise applications like HR and FMS that use product needs and customer characteristics to determine potential vendor matches. Despite the DoJ’s narrow market definition, these tools suggest there are many more HR and FMS vendors than DoJ identifies. Using the criteria below for the HR and FMS products, this tool yielded thirteen and seventeen viable vendors in each market, respectively, and nine who offer both HR and FMS to large companies. To follow is a breakdown of the criteria used and results obtained:

Total annual revenue – Over $3 billion in revenues ($US)

Concurrent users – 1,001 to 10,000 users

Total firm employees – Over 10,000 employees

Level of presence and localization capabilities- North & Western Europe and North America

Languages – English

Enterprise size and organizational structure – A single enterprise

Time frame to start – 2 to 6 months

Results:

For HR with above criteria: 13 unique vendors (vendor – product):

  • Best Software – Abra
  • Cézanne Software – Cézanne
  • Deltek Systems – Deltek Costpoint
  • Epicor – Vantage
  • Frontier Software Ltd – Chris 21
  • Glovia – glovia.com
  • Lawson Software – Lawson Human Resources Suite
  • Oracle – E-Business Suite
  • PeopleSoft – EnterpriseOne (formerly J.D. Edwards HR)
  • Ramco Systems – Ramco Enterprise Series
  • Ross Systems – iRenaissance.ERP
  • SAP – mySAP Business Suite
  • Smartree – Talent Management Suite

For FMS with above criteria: 17 unique vendors (vendor – product):

  • Best Software – MAS 500
  • Cincom Systems – CONTROL
  • Deltek Systems – Deltek Costpoint
  • Glovia – glovia.com
  • IFS Applications
  • Intentia – Movex
  • Lawson Software – Lawson Human Resources Suite
  • Lilly Software Associates – VISUAL
  • MAPICS – MAPICS ERP for Complex Manufacturers
  • Oracle – E-Business Suite
  • PeopleSoft – EnterpriseOne (formerly J.D. Edwards 5)
  • QAD – MFG/PRO
  • Ramco Systems – Ramco Enterprise Series
  • Ross Systems – iRenaissance.ERP
  • SAP – mySAP Business Suite
  • SoftBrands – Fourth Shift
  • SSA Global – SSA BPCS

In conclusion, the following 9 vendors offer both FMS and HR:

  • Best Software
  • Deltek Systems
  • Glovia
  • Lawson Software
  • Oracle
  • PeopleSoft
  • Ramco Systems
  • Ross Systems
  • SAP

Recent deals demonstrate that there are numerous competitors in the market. Recent history shows that there are indeed far more relevant players than Oracle, PeopleSoft, and SAP when considering FMS and & HR functionality.

  • Payroll and HR leader ADP provides enterprise software to business services giant Aramark, and actually pays one in every six private sector employees in the United States.iv
  • Comerica has signed on with Ceridian to provide HR, payroll, and benefits services for its nearly 11,000 employees.
  • The US Department of Justice closed a $24 million deal with American Management Systems (AMS) for a financial management software system, choosing it ahead of both PeopleSoft and Oracle. Yet, the DoJ’s attorneys claim that AMS isn’t even a competitor in the FMS market.
  • The State of Michigan has recently included Lawson in its IT purchasing decisions and now runs the Lawson HR solution statewide. Lawson is a company who offers robust products in both FMS and HR and should be included as a competitor, even within the restrictive definition used by the DoJ.

CONCLUSION

To fairly assess the impact of an Oracle-PeopleSoft merger, the DoJ must broaden the product and customer definitions of the market in question. The current DoJ case fails to consider the modular and interchangeable nature of available products in the enterprise software market, and ignores current trends in innovation and competition.

Instead, the DoJ chooses to focus on an arbitrary combination of two applications—human resources and financial management systems. With these two products, however, there is ample evidence that the largest of customers frequently select and successfully integrate solutions from separate vendors.

Finally, the DoJ fails to see the shifting boundaries within the enterprise software market, where all vendors are moving to target the rich mid-market of small and medium-sized customers. DoJ seems fixated on the highly-specialized needs of just a handful of enormous customers.

The DoJ wields tremendous power when it acts to prevent mergers and acquisitions. Accordingly, the DoJ should wield that power diligently, resisting the urge to artificially gerrymander market definitions to satisfy complaints from a very small minority of potentially affected customers. In this case, DoJ’s market definition seems intent on finding a 3-to-2 competitor case, when it should be doing a transparent examination of the products and customers served by Oracle and PeopleSoft.

At the very least, this case merits a second look by DoJ. Better still, the DoJ and the suing states should drop their opposition to this merger before they strike out in the courtroom.

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i Automatic Data Processing Inc. (ADP), 2003 Annual Report.

ii ComputerWorld (Singapore) Vol. 10 Issue No. 21, 26 May – 8 June 2004.

iii Bloomberg.com, March 1, 2004.

About the Authors:

Michael J. Tavilla is Research Director for the Association for Competitive Technology (ACT), a Washington-based, national education and advocacy group for the technology industry. Prior to joining ACT, Michael was a Senior Research Associate on the Internet Policy & Regulation Research Team at Forrester Research in Cambridge, Massachusetts.

Steve DelBianco is Vice President for Public Policy at the Association for Competitive Technology (ACT) and executive director of the NetChoice coalition. Prior to joining ACT, Steve was founder and president of a software consulting firm that grew to several U.S. locations before being acquired.