IBM announced yesterday that it will acquire Sterling Commerce from AT&T for $1.4 billion in cash. According to the analyst call yesterday, IBM was the catalyst for the deal, approaching AT&T with the opportunity. IBM views this acquisition as a path to growing its WebSphere business. After the acquisition is finalized, Sterling Commerce’s approximately 2,500 employees will be integrated into the WebSphere organization within IBM’s Software Group, managed by General Manager Craig Hayman.

As with all acquisitions, there are many questions to answer and many details to figure out. I’ll stay out of the weeds today and focus on the big picture.

Simply stated, this deal is a strong validation of our Supply Chain Operating Networks model that we first outlined in 2003. Here is an excerpt of what we wrote back then:

Companies are no longer masters of their own destiny. They’re dependent on suppliers, service providers, customers, and many other external parties to succeed.

 

Whereas in the past business processes were relatively self-contained, today they’re highly distributed across time, geographies, and trading partners. Business processes are also becoming more dynamic, flexible, and creative as companies try to differentiate themselves in the market and achieve financial success.

 

In addition, mobile resources (inventory, assets, and people) are playing a more critical role in supply chain management as cycle times and product lifecycles continue to decrease and companies become more services oriented.

 

Unfortunately, many companies are struggling to operate efficiently and cost-effectively in this environment because (among other things):

 

  • Many external partners are small and mid-sized businesses (SMBs) that do not communicate electronically and lack the ability to automate their internal processes, thereby constraining the overall responsiveness and efficiency of supply chains.
  • Poor interoperability of software systems, which creates integration challenges that are generally costly to implement and maintain.
  • Many companies lack the ability to track and manage mobile resources or they haven’t effectively integrated this flow of information with their other enterprise systems and decision-making processes.

 

A new class of hosted, network-based solutions is beginning to emerge that addresses these issues. ARC calls this category Supply Chain Operating Networks (SC-ON) which is actually the convergence of several existing technologies and services [including trading partner connectivity, mobile resource management, and software-as-a-service transportation management and global trade management systems]. 

During the call yesterday, Craig Hayman talked about how the modern enterprise is a network of complex interactions between multiple parties and that today’s business pressures demand dynamic business networks. He also said that companies used to think that if they could get down to one ERP across the enterprise, they would be done. But in reality, the real challenge is managing business networks. He cited research showing that 68 percent of executives report that integration challenges impede collaborative relationships with partners.

Software is not enough.

For example, you can have the most powerful software running on your laptop, but if you’re not connected to the Internet or an internal network, you have no ability to communicate or collaborate with others. It’s the same with enterprise software. You can have a best-in-class enterprise software platform within your four walls, but without an adequate B2B connectivity network and associated capabilities, you can’t effectively manage end-to-end supply chain processes. Many companies are plagued with poor data quality, a problem that I’ve called the Achilles’ heel of supply chain management, which is a key a symptom of poor network connectivity and management capabilities.

A subplot of this acquisition is IBM’s further expansion into supply chain software. IBM acquired ILOG back in 2008, a provider of supply chain network design and inventory and transportation optimization solutions. Now it will add Sterling Commerce’s portfolio of warehouse management, transportation management, and distributed order management solutions. This will put IBM in direct competition with key partners like SAP, Oracle, and some best-of-breed vendors. It will be interesting to see how IBM walks this tightrope, and how its current partners respond.

But as IBM made clear in yesterday’s call, it is aiming to “create powerful new cross-channel solutions [and] provide a selling and fulfillment capability across sales channels,” so IBM is not drawing a line in the sand with its current partners; it’s blurring the line even further.

Oracle and SAP currently partner for connectivity, Oracle with E2open (for logistics connectivity) and SAP with Crossgate. Will this acquisition prompt Oracle and SAP to rethink their strategy and make an acquisition in this area? Will other network providers like Descartes, SPS Commerce, and GT Nexus become acquisition targets?

The bottom line: When it comes to supply chain management, companies need to think beyond software. This is particularly true, for example, in transportation management and global trade management, as we highlighted in “An Overlooked (But Critical) Component of Transportation Management Systems” and “Beyond Software: The Role of Content and Connectivity in Global Trade Management.” There’s no guarantee this acquisition will be successful, and as I mentioned earlier, there are a lot of details to sort out. But years from now, if supply chain operating networks are the norm and widely adopted, we might look back to this acquisition as the tipping point.

(Note: IBM, Sterling Commerce, Oracle, SAP, and Descartes are ARC clients)

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