As the technology economy has adapted to the current economic environment, there has been much debate within the vendor and investment community about vendor consolidation. While there is no doubt that businesses have generally cut spending in response to economic uncertainty, startups in particular are feeling the impact of shrinking budgets and investor reluctance.
Thanks to the Foundry team, I was able to get input from those whose opinions matter most: the senior IT executives at mid-sized and large companies who place purchase orders and determine which vendors to leverage – and which to cut. We recently conducted a survey of the CIO Tech Talk community to ask questions and gauge feedback on the topic of vendor consolidation from a buyer’s perspective: how real it is, how much and whether it is a permanent change or just a short-term incident. .
Our survey received excellent feedback: in addition to receiving a significant number of respondents, a number of community members provided additional feedback. Although I expected this exercise to confirm that consolidation is real, I was pleasantly surprised by the extent to which the CIO Tech Talk community has confirmed it – and how they are taking steps to realign its procurement and supplier management strategies.
Supplier consolidation is real
We got straight to the point with the first question – “Is your organization planning to consolidate its suppliers over the next 12 months” – and the response we received from the community was incredibly clear and unambiguous: 95% of those interviewed confirmed that yes, they were considering regrouping.
When we asked what was driving this consolidation, financial reasons were near the top, but not at the top. An even more important reason was the desire to consolidate systems architecture and reduce the number of “point solutions” – which 80% of respondents cited as a driver for consolidation – while 69% of respondents cited finance-related cost reduction.
As buyers consolidate, pressure on sellers increases
There is clearly pressure for consolidation – both internal and external. When we asked about the intensity of this pressure, 83% cited a moderate to high degree of pressure.
The implications are clear: organizations and IT environments have both reasons and motivations to reduce the number of vendors they work with. Although respondents were more evenly split on whether they preferred working with smaller, more innovative suppliers rather than larger suppliers, for the more established ones, I would say it is highly likely that smaller suppliers will be most affected. By definition, of course, larger suppliers offer a greater degree of capability: if organizations are reducing the number of suppliers they choose to work with, it makes sense to focus on eliminating those whose footprint functional is the weakest, even if there are a few suppliers. degree of preference for innovation.
10 times in 10 years – can this continue?
Vendors continue to proliferate – for example, venture capitalist Matt Turck of Firstmark Capital built an annual “landscape” of Machine Learning, Artificial Intelligence and Data (“MAD”) offers since 2012and the number of sellers increased from 139 in 2012 to 1,416 in 2023. At present, one must ask whether such a rapid increase in number of suppliers is sustainable. Based on feedback from the CIO Tech Talk base, at least in the short term, the answer appears to be “no.”
When we asked respondents how long they expected consolidation pressure to last, the result was a more normal distribution centered around early/mid 2024 – but a significant number expect this pressure continues.
Consolidation has advantages – at least for buyers
Comments on the survey were numerous: members of the Tech Talk community had a lot to say on this topic, and their comments were enlightening. It is clear that many buyers view consolidation as a GOOD thing – although sellers and venture capitalists are obviously less optimistic.
Among the advantages mentioned from the buyer’s point of view:
Price/cost reduction
- “By bringing our suppliers together, our company can negotiate better pricing and volume discounts because we have greater purchasing power”
- “Supplier consolidation can reduce costs by centralizing purchasing, simplifying contract management and minimizing administrative efforts”
Efficiency
- “By working with fewer suppliers, we can save time and resources on communication, negotiation and administration tasks”
- “Efficiency by streamlining procurement processes and reducing complexity and variability in your supply chain”
- “Supplier consolidation is a good way to manage resources”
- “Supplier consolidation can lead to greater efficiency and consistency”
Improved supply chain management
- “Relying on too many suppliers leads to higher risks related to quality control issues, delivery delays or supply chain disruptions. »
- “Improving supply chain visibility is very important”
- “Supplier consolidation can be a great way to simplify our supply chain and reduce costs”
Economic outlook
- “Economic Outlook and AI Lead to Greater Supplier Consolidation.”
- “The importance of AI in industry is irreversible”
- “Inflation and the economy are also key factors”
Sustainability
- “By working with fewer suppliers, we can more easily track and manage our environmental impact, and potentially negotiate better deals on sustainable materials and practices. »
- “I think supplier consolidation could help us improve our sustainability efforts”
Improved communication/collaboration with suppliers
- “Supplier consolidation can lead to better communication, mutual understanding of business objectives, increased trust and ultimately more reliable service from suppliers. »
- “With fewer suppliers to manage, organizations may be able to build stronger, more collaborative relationships with their remaining suppliers. »
Quality of service
- “It is difficult to manage service quality for companies that have many suppliers”
Other
- “We consolidate our suppliers when we can, but in many cases we are not able to do so due to costs or the product offerings of each ISV. »
A few customers were also concerned about consolidation.
- “If we rely too much on a single supplier and they experience problems, it could have a significant impact on our operations. »
- “I am concerned that supplier consolidation could lead to a loss of diversity in our supply chain.”
- “Personally, I am against consolidation, but in the company the board of directors also opts for the consolidation of suppliers. I think this poses some risk in the long term, because if for some reason you have to change providers in the future and many services are consolidated with them, it will be a laborious, expensive and time-consuming process.
- “Reducing the number of suppliers may result in a loss of competition, which may result in less innovation and lower quality of products or services”
- “Supplier consolidation could lead to less innovation or limited choice for companies seeking specialized solutions.”
And after?
I think there are some potential implications.
The most obvious is the significant number of mergers and acquisitions (M&As) in the supplier community. Of course, mergers and acquisitions in the technology sector are not particularly new, but unless there is a radical change in economic conditions, we can expect a dramatic acceleration over the next 12 to 24 months, as many Venture capital-backed companies are dangerously short of funds and venture capital is running out of money. Capital providers triage their portfolios to preserve funds for the most likely survivors. Private equity has played and will continue to play an important role in this consolidation, a Synergy Research survey earlier this year strongly indicated this, with private equity accounting for 91% of M&A deals closed over the past year..
Of course, some startups will also close their doors. According to recent data from Carta, The third quarter of 2023 saw the highest number of startup closures due to bankruptcies or dissolutions.
Another longer-term implication is the extent to which organizations are moving toward vertical, business-specific applications rather than more general, horizontal platforms. By definition, any vertical solution will have fewer alternatives, a larger functional footprint and will be less likely to be consolidated. For example, in a manufacturing company, manufacturing-specific applications will be less likely to be consolidated than horizontal IT platforms. I will discuss vertical and horizontal solutions and their respective defensibility in a future article.
Of course, what most in the industry are hoping for is a continued economic recovery. I expect the economy to continue to improve – despite the turmoil the world is currently experiencing due to conflicts in Eastern Europe and the Middle East – and the possibility of further conflicts in Asia and elsewhere, election years tend to be good for the economy as a whole. Furthermore, the recent moderation of inflation and the IPOs of companies such as Klaviyo, Instacart & Arm are encouraging signs that financial markets are at least somewhat beginning to normalize.
However, economic recovery does not imply that financial markets will start creating as many startups again as we have seen in recent years. I expect – and CIO Tech Talk readers clearly seem to agree – that the “new normal” will be fewer, more financially strong providers.
