Do You Have a Plan B If Your VMS Provider is Sold?

468346811You have just learned that the company providing your contingent workforce vendor management system (VMS) has been acquired. What impact will that have on you? The sad truth is that numerous studies examining thousands of mergers and acquisitions have concluded that the failure rate is greater than 50 percent, with some studies pushing that percentage up to 70 percent. Of course, in these studies “failure” refers to an inability for the acquirer to achieve the anticipated financial and business results. As a company whose vendor has recently been acquired, your definition of failure focuses on the level of disruption that occurs and the degree to which the disruption adversely impacts the quality of service you receive.

At this time, merger and acquisition activity in the contingent workforce procurement and management space is heating up, and we can expect to see additional acquisitions in 2014. Vendor management system (VMS) providers, managed services providers (MSPs), procurement outsourcers (a.k.a. BPO firms) and vendors providing procurement and ERP software are all showing increased M&A activity. While some acquisitions are beneficial to clients, trends have emerged tying the type of buyer to the post-acquisition experience.

When private equity (PE) groups take a majority share in a company, the aim is to increase the profitability of the acquired firm in preparation for resell at a premium price. Ownership changes and reorganizations are very common for these companies. In the worst case scenarios, the PE group minimizes their investment, funding the deal through debt. In these cases, the debt burden precludes them from investing in new technology, worker skills or organizational improvements. Private equity firms typically hold companies for four to five years, and the two largest VMS providers are both owned by PE groups, and were both acquired more than three years ago. Another sale, and further disruption, may be expected in the near future.

The dynamic is often different when a company acquires another in its industry. In these cases, companies must guard against the acquirer discontinuing the acquired product entirely or incorporating its capabilities into one of their own products, forcing customers to transition to a new product.

As each deal is struck, the acquirer issues a press release explaining their desire to enter new markets, increase market share, and better serve their clients. When a VMS provider is acquired, they generally promise clients that the integration of their combined capabilities will result in faster development of new releases, increased product quality, and an expanded team of resources devoted to each client.

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To protect your interests, steps should be taken when the letter of intent is issued, or when you first hear of a potential deal. What questions do you need to ask, and what steps should you take, to be sure that the vendor makes good on these promises? In our experience, the following course of action has provided the best outcomes.

1. Get the facts. When you first hear of a potential acquisition, begin gathering information. Contact your incumbent VMS provider and the acquiring firm and request whatever information they have about the merger and its possible effects on the products you use. Solicit information and opinions from industry analysts, financial analysts, and the trade press.
2. Review your contract. While litigation should be a last resort, your attorneys should review your contract to understand the implications of when your VMS vendor merges with another company or ceases to exist legally. Typically, the contracts survive, and the acquiring company inherits the obligation. However, some contracts contain explicit language prohibiting the transfer of the obligation to the new owner. What protections does your contract afford you? Under what terms can you – and the vendor – terminate your agreement? Is your Statement of Work or Master Services Agreement specific enough to protect against major changes in assigned personnel, release schedules, support hours, or other factors?
3. Request a joint meeting with the acquiring firm and your incumbent vendor. Ask specific questions, and document the answers given by both parties. Critical questions to ask in this meeting fall into six important categories:

      • What do you know about the company that acquired your VMS vendor? How long has the acquiring firm been in business? What market reputation do they have? How many acquisitions have they been a party to in the past five years? (A company that primarily grows through acquisitions tends to attach priority to optimizing their balance sheet.) What is their track record regarding previous acquisitions? Have they forced customers to ‘migrate’ to their software, or have they invested in the acquired vendor? How have other customers faired when they took over their vendors? What is the acquiring vendor’s strategy this time?
      • What is the purpose of the acquisition? Go beyond the statement in the press release to learn more about the acquirer’s long-term goals. What are its growth plans? Is there funding for capital investments? Are there plans for changes in the immediate future?
      • What will be the impact on the VMS? Will the product be discontinued, leaving a system that quickly becomes outdated? Will any services or product offerings change or be eliminated? Will the product survive, but only with minimum attention from the new owner? Will the new vendor try to force your organization onto a new platform? Is the new owner committed to honoring any planned enhancements or product upgrades? Do product roadmaps indicate that the new owner may be taking the product in a direction that is inconsistent with your priorities? Will the VMS provider commit to maintaining the current application for a specified period of time? Is the vendor willing to place software in escrow with a third party so that you will have access to source code, if needed?
      • Will your account team change? Where do you rank in terms of customer size? Will that affect the way in which your account will be serviced? Will there be a new account representative or technical staff? Do you have the right to approve any changes to the account team assigned to you?
      • Will service levels suffer? What is the average tenure of technical personnel? If the acquirer offers a product set, what is their track record in terms of service interruptions and downtime?  Will there be changes to the availability and modes of available technical and user support?
      • Will prices change? Will there be a price increase for existing offerings? Will a different pricing structure be used? Will features or services that had been part of the core offering be carved out and available at an additional cost?

4. Make your wishes known. In the joint meeting with the acquiring company and incumbent vendor, discuss the current status of your program. Describe what works well, and where you would like to see improvements. Clearly articulate those program elements of greatest importance to you that should remain unchanged. In many cases, the period immediately following an acquisition provides the best opportunity to influence product direction, support strategies, pricing and team composition.
5. Leverage your buying power. Reach out to your vendor’s other clients and discuss your concerns. If the vendor has a customer advisory board, use that forum to express concerns and gain assurances that there will not be a change in the product direction, quality, or level of service. By using your joint influence, you may be able to affect policies more effectively than any one client could alone.
6. Consider your options. Determine whether the timing might be right for an RFI or RFP to evaluate solutions offered by other vendors. Structure the tender in a way that balances services to be provided with level of effort involved in making the change. Many clients tolerate poor service from an incumbent who has been acquired due to fear of the disruption associated with changing to a new VMS. In reality, the best VMS providers offer an implementation methodology that ensures a smooth transition without affecting daily operations.
7. Look for early warning signs of danger and be prepared to act. While it can take a year or more to determine the effect that an acquisition will have on your operation, look for early warning signs that may be indicative of future poor performance. For example, did the two companies proactively reach out to you at the time of the acquisition? We know of companies who learned of the change by reading a press release or when their accounts payables department received a letter indicating that checks needed to be sent to a different account. If the account executive didn’t contact you directly, you are probably not viewed as a “strategic account”. Carefully monitor your program, notifying your account executive each time there is an indication of a change in service so that issues can be addressed immediately.

During the Initial period following the acquisition, it may be appropriate to “wait and see.” However, you must be prepared to implement your transition plan if needed. Either way, if you have considered the points above and have a Plan B, you will be in a much stronger position.

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Debra Bergevine

Debra Bergevine
Debra Bergevine is marketing vice president at DCR Workforce. She can be reached at debra.bergevine( at) dcrworkforce (dot) com.

Debra Bergevine

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