There's a common adage in business that states "all industries consolidate over time" and it's true.
A 2002 HBR study offers highly relevant insight into this phenomenon:
"From our study of 1,345 large mergers completed over the past 13 years, we have concluded that, once an industry forms or is deregulated, it will move through four stages of consolidation. Today, we predict, an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker.
But, our research suggests, every company in every industry will go through these four stages—or disappear. Thus, an understanding of where in the cycle an industry is should be the cornerstone of a company’s long-term strategic plan."
What's most intriguing to me in this article is a note on Stage 2 of consolidation:
"Building a scalable IT platform is also crucial to the rapid integration of acquired firms. Companies jockeying to reach stage 3 must be among the first players in the industry to capture their major competitors in the most important markets and should expand their global reach."
Quick reminder - this was published on heels of the "Dotcom Bubble". As software has continued to eat the world over the last 20 years, this pattern has held true. So, let's delve deeper into consolidation within technology-centric organizations.
You're probably familiar with the hub-and-spoke model, which also fits nicely within the concepts of M&A and consolidation. Let the hub go gobble up the spokes, in a sense.
What doesn't get talked about much (and this excites me), are the technical weaknesses inherent in these rapidly expanding organizations. There are continued opportunities to plug the holes in the "hub" as they attempt to cram and shove other technologies into their ecosystem in order to reach the next stage of consolidation.
Simply put, this reality breeds error, gaps, and waste. Companies hire consulting firms to guide them (and take the blame if they fail). That helps some, but we are ignoring something important.
When companies are moving this quickly, their technology needs technology. The aggressiveness has an impact, and the impact is that their own core technology, along with "spokes" they are rolling up into their platform along the way, frequently become sub-par.
I've seen this time and time again.
I was recently evaluating a software in the insurance space for a client. They have grown significantly in the last few years, but their technology needs technology. What does that mean?
They have been so bent on keeping up with competitors, partnering with other companies in the industry, and acquiring other companies that they didn't prioritize things like APIs and dynamic onboarding for their users. They have all this forward momentum, but when you look under the hood they need help!
This reminds me of the active couple in their late twenties who have a couple children. They look up after 3 or 4 years and they have never been so out of shape in their lives. They are busy, their children are flourishing, and work is going well...but they have neglected something integral to their future success - their own bodies. Their own machines.
Many tech companies reaching forward in hopes of remaining relevant through the stages of consolidation have often ignored their own core technology, and again I believe that it's created immense opportunity for those that are willing and able to plug the holes.
So, what am I doing about it? Honestly...probably starting another company to go fix all the problems I'm seeing with that insurance SaaS platform for starters.
-Stephen