Talking IBM i Ecosystem With HelpSystems CEO Chris Heim
June 13, 2016 Timothy Prickett Morgan
There has been a flurry of acquisitions in the IBM i marketplace in the past several years–you might even call it a blizzard. That got me to thinking last week about the changes in the OS/400 and IBM i ecosystem that we have seen in the past several decades, which I talked about in an essay last week.
HelpSystems has built one of the largest software business dedicated to the IBM i platform. Infor could have a larger one, and Vision Solutions might, too, but they are all private companies so we can’t tell. Fresche, with its recent acquisition of Quadrant and BCD Software, which we report on elsewhere in this issue, is building its own conglomerate in the IBM i space, and Oracle doesn’t break out its IBM i-related software sales, either, so we can’t see how it stacks up. But HelpSystems is a big force in the market for sure. Chris Heim, CEO at HelpSystems, which has done a lot of acquisitions in the past decade and a half, reached out to us to chat about these changes and his company’s place in the market.
Chris Heim: We wanted to touch base because one of the things you pointed out in your piece was that at its peak, the market had 8,000 software suppliers and we have bought 14 of them. It’s not like what is happening in the market is being driven by these 14 suppliers. And if you look at some of the companies that we have bought, not all of them have been profitable–and I am not going to name names–but one of the ones that we bought in the last year would have been out of business within 60 days if we had not bought them. So we have to think about what would have happened to those customers if we had not bought the business, they would be in a tough situation. We think in an acquisition like that we are committed to improving, selling, and supporting their product, that is a net good to the customer that we bought it as opposed to a net bad.
I also think that when we bought 14 out of 8,000, we are not having a significant impact on that, but exits are good for the vibrancy of a market. If you think about people starting a software company and trying to go out and get external investment, whether it is from friends or family or professional investment, or taking the leap themselves, them seeing an exit, that they can build a business and then run it for a while and be able to sell it, this is good for the net vibrancy of that market as well.
Timothy Prickett Morgan: I would never argue that this is not the case. I am just saying that I remember when this ecosystem was more vibrant in general, and when there were 8,000 suppliers back in the late 1990s, not everyone was profitable or large. The whole ecosystem was maybe $15 billion and I would be very surprised if it is $1.5 billion now. So I would not be surprised if there has been a factor of 10X contraction in the number of vendors. While it is the case that you have only bought 14 companies out of maybe 5,000 when you started doing acquisitions a decade ago, let’s face it, you have bought some of the cream of the crop, too. Whether or not they were profitable, they were big. The biggest companies in the markets have the biggest marketing budgets, the biggest sales forces, and the biggest customer bases, so I would say that HelpSystems has had a dramatic impact on the market.
Chris Heim: I don’t disagree with that, and you can argue whether or not that impact is a good or bad one.
TPM: I think it has been good, but I wasn’t saying whether it is good or bad, but rather that it is different. I knew the owners of the businesses back then, and when investment in the IBM i community was difficult, theirs was the only way they could found and run businesses. I am a capitalist, so I would never argue against exits. I am not a communist.
But the fact of the matter–and this is just the way it is–there is a difference between relatively small companies that do things a certain way and they don’t feel the same pressures for revenue growth and profit growth and an equity funded or public company. Maybe the vibrancy of the early OS/400 market allowed these vendors to be a little less rigorous financially. Owners of businesses can afford to be a little less aggressive about profitability and scale than perhaps they ought to be.
Chris Heim: We saw this in spades in the last financial crisis. When you have a big tailwind and the economy is growing, people are hiring, and then all of a sudden you have a big headwind, and companies start laying off people. I think there are macro issues that are a bigger factor here than anything else. And the fact that the IBM i market has shrunk as dramatically as it has, we would argue that it has flattened now and we are going to see a long tail here. I think this is the driving force in the market than the impact than we have had.
TPM: I agree, and you tell me if my valuation of the IBM i ecosystem is wrong or not. But the purpose of my essay last week was to encourage those small companies and startups who think that they can’t compete to realize that IT Jungle can help them and get them to the point where someone will want to buy them because that is clearly the way it works now in the IBM i community, and how it works in the economy at large, even if it is not the way it worked back in the OS/400 days. A lot of has to do with the age of the people that started these OS/400 software businesses, I think.
I would agree with you that the market is pretty much flat, meaning that I don’t think it is going to go down much more. But everybody is wondering who is going to be the next HelpSystems, whether it is going to be Fresche or Vision Solutions or someone else. What do you think about that, and what are your plans to further build out your stack?
Chris Heim: We are very committed to the IBM i marketplace, and we are putting our money where our mouth is. When we are buying these companies, a lot of times we are accelerating their investment–we are not cutting investment. If you look at Halcyon and SkyView Partners, there are more employees there then when we bought them, for instance. We are trying to provide them the juice and expertise to grow those businesses and impact more customers.
In terms of the size and direction of the market, we have done our own internal research that says about 2 percent of the customer base is leaving the platform each year. When we got new private equity owners, they wrote a huge check to a third-party research company and they came back and said that. That is so manageable. If you look at the numbers from IBM, they say there are 150,000 IBM i customers, 2 percent a year is nothing, that is 3,000 customers per year. Next year, it will be 147,000 customers, and the year after that it will be 144,000 customers, a year after that is 141,000. So three years from now, that is still a big market for a company like HelpSystems and we think there is plenty of room to grow in this market and that is why we are investing in the market and doing things like educating the market around topics like how do you deal with the coming retirement of people and other newer things that are coming down the chute.
We are big believers in this market and we think it is going to be here for a long time.
TPM: By the way, that bleed rate is not anything out of the ordinary. I have been saying for a long time that at any given time, maybe 5 percent of the companies that have datacenters with midrange or high-end systems are in play. If it was any higher, we would be seeing a lot more chaos and platform changes, and we don’t. And frankly, with the ubiquity of the X86 platform in the datacenter and the fact that those who could move off so-called legacy platforms probably already did, I would not be surprised if it has dropped to 2 percent.
By and large, companies pick platforms and they stick with them for a decade or more. It is not just OS/400. If you started with Windows Server 20 years ago, you are just going to stay there unless something really horrific happens, or a merger or acquisition. There is so much inertia and skill with any platform that you have to have orders of magnitude improvements in performance or price/performance or cost reduction to change. Or you have to be forced to change.
Chris Heim: For me, the light bulb went on when I was talking to a customer and he said, “We are never going to leave IBM i for our core set of applications. They are homegrown systems, and we have millions of hours of intellectual property in there. We could move it to another platform, but there is no ROI for doing that and it is fraught with risk.” So right there, I realized that the people that are still on this platform are still on it for a reason, and I am confident that we are going to see that low leakage rate for a long, long time as long as IBM is committed to the platform as well. And certainly they have done a nice job showing that commitment.
TPM: The other thing to consider is that the remaining IBM i customers are the diehards. Those who could jump, did. Those that were forced to jump, did. So the remaining customers are harder to move, and quite frankly, you don’t have to move Moore’s Law as fast for them for price/performance increases, you do not have to drop your prices fast for them, and it is possibly inherently more profitable and can remain profitable even as the base shrinks. My daughter and son want to go to college, and I am counting on this continuing for a few more years to pay for that.
So what is your strategy? I know you don’t want to give away too much, but you have systems management, job scheduling, document management, analytics, and security as big areas. What do you think about application modernization and development tools or high availability as adjuncts? I think HelpSystems could put together a complete stack. What is your thinking about building out, or do you just sit tight and cross-sell for a while?
Chris Heim: I think we are looking to our customers to tell us what else they want to do. If you look at security, it is such a changing landscape now and people want to go to sleep at night and know they will wake up in the morning with a job if they are a CIO. We are trying to offer a broader and broader suite in the areas we play today: systems management, security, business intelligence. We want to plug some holes where we’ve got some holes, which is not to say that we will not look at some of those other categories, but they are also well served by other players. We think there is plenty to do here.
We also think that the computing environment is increasingly heterogeneous and our research shows that companies used to be an IBM i shop or a Windows shop or a Unix shop or a Linux shop, but now they are all of the above. They have an IBM i system, they have a Linux system running the Web server off in the corner, they have a Unix box running other applications, and they have Windows boxes running Exchange Server and SharePoint Server. We think there is an opportunity for us to offer solutions that span all of these and manage these in a coherent and easy fashion, and bring the capabilities found on the IBM i to other platforms as well.
TPM: It’s funny. With application software, we have not seen a lot of success in that regard, and for no good reason that I could ever identify. Plenty of application software companies that are now part of Infor or Oracle tried to make the jump to Unix and then in some cases to Windows and Linux didn’t make it.
Chris Heim: We have had good success with system automation and job scheduling with our Skybot products, and there are some opportunities to go to our existing customers and solve these problems. But in many cases, though, IT shops are in camps. You have IBM i camp here, and the Linux camp there, and the Windows camp here, and they are all selecting their own tools. So that is a challenge, at least for our business. If people would take a broader perspective–and this happens with job scheduling a lot when they need to have workloads scheduled across platforms–then I think we fit very well. But I think a lot of IT shops are taking a fairly myopic, narrow view of their IT management challenges.
TPM: I know that Linux shops are absolutely allergic to anything that doesn’t come from the open source community, and Windows shops like Windows tools, preferably from Microsoft or some close partner–just as have been the case with the OS/400 and IBM i platform and tools from IBM or its close partners for decades.
The exception will be the Linux or Windows shop where there is already an IBM i box in place, and then you have a good chance of reaching out from there.
Chris Heim: It is a different world out there. In one of our previous companies, we sold Linux tools and commercial software companies are not necessarily embraced by some of that crowd.
TPM: Well, let’s be honest here. You are utterly rejected.
Chris Heim: I was being more politically correct.
TPM: But in all seriousness, I am curious about how the IBM i market will play out, and I want it to continue because it is a special market. It is different, and we have been supported in the work that we do by a very large number of companies and readers for a very long time. It is an amazing thing, and I am grateful. I am just worried that that there will only be two or three large conglomerates rubbing up against each other and that innovation in the IBM i ecosystem slows–by which I mean a new company with a new idea can’t get started.
Chris Heim: I hear you, but they said the same thing about Microsoft. Ten years ago, people were talking about breaking up Microsoft and were saying no one is going to be able to compete against Microsoft, and Microsoft is going to own software. Today, if you look at Microsoft, innovation has a funny way of leveling the playing field.