What If Your Supply Chain Software Vendor Goes Out of Business?

“I’m afraid my supply chain software vendor might go out of business.  What should I do?”  I was asked this question recently by one of my clients. 

The vendor in question is a rather small supply chain execution (SCE) software provider, with estimated annual revenues of less than $20 million.  My client knows that the vendor has been laying people off, and they estimate that they account for over 15 percent of the vendor’s revenues.  They don’t have good visibility to the vendor’s financial health, their product development roadmap, or the future intentions of the venture capitalist firm that owns them.  At the very least, my client needs to speak with the vendor and the VC firm to gain insight on these topics.    

If the SCE vendor goes under, it won’t be pretty.  My client has standardized on this solution globally, and it is being used at dozens of sites, both internally and by their key supply chain partners.  Further, they have plans to continue rolling out the solution to new sites over the course of the year.  These implementations will end in a few months, after which they have no further plans to implement new sites. 

Over the years, this software vendor has made product enhancements at my client’s request to make the solution more useful to them.  However, this has been a point of contention because too often my client has had to pay for custom work to get this done rather than having these enhancements be part of the vendor’s ongoing product development plans. 

My client uses a leading ERP as their backend solution, and one option is to start using the ERP vendor’s SCE application in combination with supporting technologies.  However, based on conversations with the ERP vendor, my client estimates that it will take at least two years for the ERP vendor to provide the SCE functionality they require.

My client could turn to another software vendor that appears to have the functionality they need.  However, switching to this supplier would not be easy or cheap.

My client negotiated access to the source code in the event the vendor goes out of business.  If this occurs, they could turn to an offshore IT provider like Tata Consultancy Services or Cognizant to provide level one support, and then continue to use the offshore provider to make enhancements to the solution.  They would need to do some contingency planning to prepare for this scenario.

If the SCE vendor does enter bankruptcy, could the maintenance arm of the company survive the bankruptcy?  Should my client consider taking an equity stake in the vendor just to keep them alive for a few years until the ERP product is viable, and then sell their stake even if they lose money on the investment?   There is another financially healthy software vendor my client uses for other supply chain planning applications.  Is there a way to approach this software vendor and suggest they explore an acquisition?  Even if they could convince this supplier to acquire the vendor, would this software supplier continue ongoing product development or just provide support?  My client could get together with other customers at the vendor’s annual user conference to explore these options. 

In short, there are lots of questions and potential solutions , but no optimal answers.  It’s clear, however, that in today’s economic climate, many companies will find themselves facing similar dilemmas, if they aren’t already.

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