Chinese Enterprise Software: CDC Software Acquires its Way Into the Supply Chain

Last week, CDC Software Corporation announced a potential new acquisition in the supply chain sector. According to their press release, CDC "signed a term sheet to acquire a leading provider of on-demand software as a service (SaaS) supply chain management solutions," which represents "the latest move by CDC Software to expand its growing portfolio of SaaS solutions." Even though the move appears to be aimed at the supply chain planning or transportation space based on its description, I highly suspect we'll see CDC become more active in the broader procurement and sourcing sector as well, given that the "transaction is part of CDC Software's acquisition strategy to increase its maintenance and SaaS recurring revenue to about 70 percent of total revenue over the next few years." Simply put, organic growth rarely comes that fast.

Late in 2009, I wrote a post questioning whether CDC Software would target the buy-side applications. Clearly, I was on to something here, but where should CDC expand next if they're interested in the broader procurement and sourcing market? I would suggest four areas of key interest: spend analysis, sourcing, supplier management and P2P. All four areas are logical beachheads to expand and there are multiple options in each area to consider for acquisition. Moreover, each has proven out a successful business model in SaaS already (and some, like supplier management, are dominated by a SaaS business model, with what Spend Matters estimates is SaaS market penetration over 90% compared with installed or single-tenant hosted models).

I suspect CDC will have significant competition for deals in the procurement area this year and next if they pursue the Spend Management sector. I've had numerous conversations with private equity/venture investors, CEOs and corporate development types in recent months that suggest the M&A cycle is heating up in this sector. Large companies with a dominant position like Ariba are looking to consolidate the market and build logical extensions; others are looking to break into it; and best of breed vendors are looking to round out their capabilities. It might be challenging for an offshore provider to compete in this mix, but I don't think we should count anyone out of the M&A hunt.

I also believe there could be a strong case to be made to buy from China-based software companies in these areas as well. Especially if CDC can tie potential solutions in the supply chain and Spend Management arenas to broader solution and content offerings, including unique insight into Chinese suppliers or the types of activities necessary to better manage global suppliers, they could differentiate their capabilities in the market. Regardless, I suspect that in the next few years, that just as we have the option to buy manufactured goods and services offshore, that we'll have greater opportunity to buy software as well.

Jason Busch

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