Since Y2K, the tech crash of 2000, and the recession, businesses have been reluctant to spend money on information technology, and acquisition announcements in the software industry appear almost daily. The latest round of consolidation is driven by economics; shrinking distribution populations, outsourcing, vertical markets that can't support the number of existing software companies, and integrating the supply chain have all played a major part in this trend.

So now what? Let's review the past to understand where we are today.

In late 2001, Dataquest, an IT research firm, predicted that the IT industry would experience a period of "massive consolidation" in 2002 and 2003, and it appears they were correct. Not only are high-profile consolidations, including Peoplesoft's acquisition of JD Edwards and Oracle's attempt to acquire Peoplesoft, making headlines, but the consolidation efforts have been accelerating in the distribution arena as well.

In 2002, Intuit acquired Eclipse. In 2003, NxTrend acquired Dimasys, and Prophet 21 acquired Faspac and Systems Design. In 2004, this trend has become a torrent: Prophet 21 has acquired Trade Service Systems, Dynamic Data Systems, and Distributor Information Systems Corp. Agilysis acquired NxTrend, daly.commerce and Aperum, and then changed its name to Infor. Prelude, a longtime supplier of distribution software, was recently acquired by Speedware Corp., a provider of ERP software.

According to Michael Honig, director of business development at Intuit Distribution Management Solutions, this strategy of acquisition has been extremely positive.

"Our acquisition is two years behind us, and so our business is in an execution mode rather than determining the impact [of] the acquisition. Under Intuit's ownership, we have successfully launched new services and products that continue to raise the bar on how we help improve business operations for wholesale distributors," Honig says.

Distribution-centric software companies provide the core business software that distributors use to manage accounting, order entry, inventory control, invoicing and other business processes. Competition for new business is stiff, as many distributors already have software systems in place. Most of the sales of new software come from replacing existing products or selling additional modules to existing customers.

Despite market conditions, software companies must continue to invest in developing new applications and enhance existing applications. Some companies have also had to make substantial investments in new programming technologies, databases or architecture.

With the opportunities for new sales limited, the trend is for companies to get bigger by acquiring other software companies. Their goal is to develop the revenue needed to support the costs of maintaining the existing software, develop new features, and provide customer support, training and other professional services needed to make their customers successful.

Chuck Boyle, president of Prophet 21, is a proponent of this strategy, as P21 has made five acquisitions since 2003.

"These acquisitions are part of Prophet 21's long-term strategy to add quality companies with deep vertical market penetration to our growing product line," says Boyle.

For other companies, consolidation offers an opportunity to develop new and improved technologies, says Don Webb, president of Prelude Systems.

"The acquisition will provide capital, so that Prelude can grow through expansion of existing product sales and services, and by acquisition of competitors," says Webb.

Intuit's Honig says that by utilizing the "world-class leadership and resource network of Intuit, we can help build processes and services that improve operations and scale to meet the changing needs of the wholesale distributor."

Some companies have responded to this challenge by partnering with larger firms to leverage their investment in technology, while others have specialized in vertical markets that can sustain reasonable growth. To maximize their development resources, distribution software provider IST utilizes Microsoft business applications as the foundation for its product, according to Don Kolker, president of IST.

"Microsoft has the resources to provide not just the base software, but also many aspects of the supply chain, which allows us to use our resources for specific distribution functionality," says Kolker.

If only we had the crystal ball that could tell us what to expect, we'd let you know what's around the corner. Instead, we're forced to wait and see like everyone else. We do expect this trend to continue. It's no longer good enough to select software based upon functionality only. If you're making a software decision now, or plan to do so in the next year, you should take this trend into consideration and study the software vendor as much as the software product.