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Trust is the New Competitive Advantage

TimReynolds Headshot By Tim Reynolds
Tribute, Inc.

Peter Bregman of the Harvard Business Review posted an article explaining Why Small Companies Will Win in This Economy – and stated that “Small is the New Big”. Bregman says that “small companies with low overhead, reliable owners, a small number of committed employees, personal client relationships, and sustainable business models that drive a reasonable profit are the great opportunity of our time.”

Decision makers are moving away from bigger companies as their service providers to smaller, more flexible companies. He argues that this ultimately comes down to trust between people. Clients want accountability – they want commitment to their companies and the ability to pick up the phone and know who to talk to if the work isn’t done to their satisfaction.

Bergman writes that “The gap of confidence between small companies and big ones is growing. We used to rely on the security of big companies … but with the virtual collapse of AIG, Lehman, Citibank, GM, Chrysler and many more, all that’s changed. We simply don’t trust companies anymore. We trust people.”

Bregman’s post brought to mind an article I wrote for Modern Distribution Management in May 2005 on consolidations in the software industry. At the time, the industry was in the midst of a merger and acquisitions frenzy. Smaller software companies that had not reinvested in technology were gobbled up by larger players in the business, usually backed by Private Equity Groups (PEG’s). These acquisitions were attractive to PEG’s because the user base of the acquired software company would continue to pay their annual maintenance fees, support fees, and other revenues related to maintaining the software, without the cost of continued investment in the acquired software package.

In the standard M&A strategy, the consolidating company continues basic support to the acquired clients but pushes them to migrate to their “bigger and better” application. That gives them the benefit of a new sale and the opportunity to increase their re-occurring revenue. While some argue that ERP consolidations have not been a bad deal and that companies end up with a vendor with deeper pockets and a broader geographic reach, many others disagree, citing reduction in the quality of support and the discontinuation of innovations for their particular product or industry.

It is not in the best interest of a PEG to invest in the old software’s redevelopment, so they will encourage their clients to migrate from their “legacy” systems to a new system. In fact, one of our competitors, Activant (now Epicor), states as much on their website. “With such a mix of different legacy ERP systems under Activant’s umbrella, customers might be concerned about how much support they would continue to receive. Activant won’t be abandoning anyone, but it also won’t be continuing development on all those systems.” They go on to say that future development will focus on two of their primary offerings. If you’re the owner of a legacy system under Activant, it’s easy to see what the future holds for you.

How forceful the PEG’s will be about pushing the migration depends upon the length of time since the acquisition. Many of these “legacy systems” are now coming up on the five year mark since acquisition and the PEG’s are drastically increasing support fees as a way to force orphaned customers to migrate to their "newer and better" system.

Distributors on legacy systems today have the option to stay with the large Private Equity Group owned software companies and accept the higher support costs and lower quality service, or they can look to smaller, niche-oriented companies that value relationships, trust, and above all, customer service.

Bregman’s article had a paragraph that summarized my philosophy on business, which I suspect is the same as many other small business owners operating today.

“There are hundreds of thousands of … small companies that aren’t making millions but provide a good living for the people that work for them. Niche companies whose owners are trying to build sustainable businesses they love rather than fast-growing companies they can flip. They have no intention of retiring. They like working in them. And their clients know that. Which is why they have a loyal customer base willing to invest in the relationship.”

In 2005, I challenged distributors to think long term when choosing a software provider and to consider whether their software vendor would maintain a commitment to their industry. Smaller companies like mine can develop and maintain “domain expertise” – a much more difficult proposition for huge corporations with a large and diverse customer base. I urged distributors to talk to colleagues in the industry and refer to their trade associations and suppliers for recommendations.

Today these points are just as relevant and if you’re looking to make a change from your legacy system, think about the level of customer service you’re getting now. With all the layoffs occurring, what are the chances you’ll be talking to someone who understands your system, let alone your company? Think about your level of trust. Are you looking for glitz and glamour or are you looking for people you trust - for a CEO who picks up the phone when it rings?

Today, Small is the New Big, so look to the niche providers to give you the level of service you deserve and expect.

Tim Reynolds is the President of Tribute, Inc., a provider of ERP management software for industrial distributors  in the fluid power, motion control and automation market, and the  former Chairman of COSE - the Cleveland Council of Smaller Enterprises - and the National Small Business Assocation.

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