Anyone who has followed the treasury management system (TMS) market over the years has seen distinct periods of innovation, followed by waves of acquisitions. Large organizations without a track record of successful software development have acquired small, independent firms that were exceptionally good at building innovative treasury solutions. We have seen many instances of this, including examples this year.
If you were (or still are) a client of an acquired software company, you don’t need to be told that there has been an effect on service levels, pricing practices, and innovation. Ironically, the very reason many of these successful treasury software providers were acquired in the first place was thanks to the success that vendor enjoyed due to pioneering a product or market innovation. And yet, that innovation has often been the first candidate to be rationalized as a result of the acquisition.
Does that mean that all the innovation has been acquired out of the TMS market? The answer is a resounding “no”. It has, however, been redistributed to other firms that recognized opportunities to succeed in the market.
Despite the degree of consolidation the TMS industry has seen, there remain as many viable providers of treasury management technology as ever before. If the industry had stood still, if no new innovators had entered the market – we would have a duopoly on our hands with every prospective TMS client choosing to buy from one of only two firms. Anyone who has purchased treasury software recently knows that is not what’s happening.
Corporate treasury is a feature/function market
Innovative software companies succeed in the treasury technology market and continue to emerge after others are acquired because corporate treasury teams demand a distinct – yet broad – set of complex features. There is no such thing as ‘nice to have’ features. There are features that add value and those that do not. The list of those that add value is lengthy, ranging from simple bank connectivity, to cash forecasting and bank analysis. More recently, both working capital and risk management have emerged as ‘must haves’ within every treasury system. While price and other factors are always important, functionality is often the key factor in making a shortlist of vendors.
Because treasury management systems are not a commodity and because the costs of making a poor technology choice are quite high, the treasury software firm that can differentiate by delivering meaningful functionality to the treasurer will win a lot of business. Those that rely on other factors – such as price – will not survive long.
New technology enables better systems
The newest technology available to treasurers is delivered via the cloud, in the form of software-as-a-service (SaaS) solutions. Cloud solutions reduce hardware requirements and introduce mobility to every aspect of our personal and business lives. SaaS models are also quicker to develop as they are built upon newer programming languages, use more advanced software components, and most importantly feature multi-tenant hosting so that software can be tested and implemented in a minimal amount of time.
As a result, it takes less time and resources to build software than it used to, especially in comparison to non-cloud software developers. This means that software providers can react more quickly to new market requirements and distribute software updates more efficiently and with less cost. In a world where, according to the Financial Times, there is a new financial regulation every 22 days1, time to react is a critical consideration for every treasurer when making decisions about their treasury software providers.
Will my technology provider stay innovative?
Perhaps the first question to ask is: will the innovative treasury software provider I selected be acquired by a less innovative firm? Hopefully not, for the customer’s sake! Fortunately, there are some obvious signs to look for if you have concerns about your technology provider being consolidated by a larger entity.
The first sign is an organization’s finances. What do their balance sheet and income statement look like? How much of total revenue do their very largest clients represent? Just like assessing creditworthiness of a customer or the counterparty risk of a financial partner, the treasurer can identify if a current or potential financial challenge may make the software provider vulnerable to illiquidity or an easy takeover.
Another telling sign is the ownership and management of the software provider itself. Is the company well funded or relying exclusively on annual revenues to grow the company? Are there long term, strategic investors, or is the company funded by venture capitalists with a predetermined timeframe and exit strategy? What is the profile of ownership and management, and if tightly owned, what succession plan is in place should an ownership change occur?
Presuming that you are confident that your TMS provider won’t be acquired, there is one final check that is important in assessing just how focused on developing new and innovative features your provider is – and that is product partnerships.
Strategic alliances are forged for many reasons, but the intent behind product integration partnerships is very important to properly understand. Product partnerships may be a precursor to development of a technology ecosystem, for example. Or they may be a signal of lack of innovation forthcoming; that the company has given up on a key area of development. Usually the best way to tell is if your software provider entered into partnership for capabilities that other competitors have – or if the alliance offers functionality unique within the market. If the latter, the intent is likely a good sign they are on the top of innovation. If they’re just filling competitive gaps, however, that is likely a very different story.
Innovation exists – if you look at the right indicators
Acquisitions of TMS providers have been impactful to the treasury technology market and have sucked some of the innovation and creative development from the market over the years. Fortunately, independent software providers – both veteran and new entrant organizations – continue to push the envelope with their combination of newer technology, cloud business models, and strong financial investment to continue innovative product development and achieve market success. As a result, corporate treasurers still have choice when it comes to treasury management systems.
1. “Biggest challenge is not to stifle legitimate goals” Financial Times
This article first appeared in gtnews.