The Business Process Management market segment just got a whole lot hotter thanks to IBM’s announcement of their proposed acquisition of Lombardi - a tier 1, independent BPM vendor.   Twitter and the blogosphere have been jumping over the last week or so for anyone who follows BPM and related markets.   And the acquisition has given the BPM and workflow journalists and analysts a nice New Year’s bonus of news to talk about.

After reading lots of the analysts out there, I must say I am dumbfounded.  Almost every analyst or blogger I have read seems to have missed the main point of this acquisition.  Then again, maybe I’m just seeing the acquisition through the eyes of someone who runs a BPM company and not as a journalist or self acclaimed BPM pundit.

According to Bruce Silver, the acquisition was bound to happen.  But he seems to imply that IBM made the acquisition for technological reasons.  Even stranger is the implication he makes that Lombardi probably needed to accept the offer because the IPO market looks grim these days so this might be the best offer they would get.  Are you kidding me?  What market is Bruce referring to?  The Dow dipped below 6,500 right around March 6th of this year.  9 months later the market is now back over 10,000.  That’s a pretty nice run if you ask me.  If you have a company that is riding high on a cresting market then now is not a moment of desperation by any means.  And if ever there was a market that will be hungry for IPO’s it will be next year’s market (especially for a leading BPM company).

Clay Richardson has also focused too much on the software and the potential overlap.  He gets a little closer to the business side of things by citing something he heard from Lombardi President Phil Gilbert regarding how “Lombardi is doubling down on delivering more powerful tools for business stakeholders to collaborate on scoping and discovery for enterprise process initiatives.”  This is a pretty insightful take away if you look at the way IBM sells and has always sold.  Their consultative sales approach is made for taking advantage of an ever greater depth of tools that can be sold to stake holders working on enterprise process initiatives.  And, it’s pretty obvious that any VC backed BPM company is going to be highly focused on “enterprise initiatives” because this is the place that ARPU is highest and where growth is the most sustained.

Neil Ward-Dutton also seems to get stuck focusing on the product overlap.  He can’t seem to get past the fact that there is lots of product overlap.  Neil says, “Although the strengths of Lombardi’s tools are different from IBM’s there is almost 100% product overlap. What’s more the design philosophy of Lombardi’s offering is almost diametrically opposed to that of IBM’s offering…”

I can certainly appreciate why it seems everyone is focused on how these products will get mixed together and if Lombardi will die a slow death inside the behemoth IBM or not.  And sure, BPMN 2.0 might make it easier for these products to work together in the future as Bruce points out.  But, I think these guys are totally missing the business perspective here.  And these types of purchases aren’t made by techies, they are made from a business perspective.

THE THREE THINGS THAT MATTER IN THE IBM ACQUISITION OF LOMBARDI

1) MARKET SIZE

2) CHANNEL STRATEGY

3) THE END GAME

I’m not going to say anything more about whether Lombardi’s SaaS product is any good, whether BPMN 2.0 means the Lombardi product can eventually work with other IBM initiatives or not, and I certainly won’t talk about product overlap.  None of these issues matter.  So let’s look at what does:

1) The Market - Market research outfit IDC estimates that the market for business process management (BPM) software and services will hit $3 billion by 2013, more or less doubling in size from where it is today at around $1.7 billion.  Ok, so every other blog mentioned this, nothing new right?  But nobody seemed to stop and look at these numbers.  This market size is significant…i.e. every VC in software knows these numbers and every VC will want to get in on this game.  The market is a multi-billion dollar market which means there will be some big exits in the coming 12-36 months.   Also, there are some related markets that will affect almost every VCs portfolio.  Namely, ERP, SOA, EMC - etc.  These are all inextricably tied to BPM.  So, if you’ve got investments in one or the other, you are going to have to invest in all of them just to make sure you’re not throwing money off the table.  I got a call from a VC last week looking to make an investment in a BPM company for the sole reason that he had just invested in a DMS company and realized that their segment was growing very fast and literally throwing cash off to supporting BPM solutions.  So their conclusion was that they needed to take a stake in an appropriately positioned BPM company.

2) Channel Strategy.  If you look back at an analyst call that Lombardi had on 11/18/2008, there is an interesting bit of information hidden in the summary.  In the Column 2 summary of the call, you’ll read that from “a services standpoint, [Lombardi's] own professional services staff is increasing, and they’ve moved from having 5-7 partner staff delivering billable services around Lombardi solutions for every one Lombardi billable professional services staff, to having about 15 partner people to one Lombardi professional services person. They expect this ratio to grow further, and are increasing their efforts in training and certification to support this partner growth.”  Just think about this for a moment.  BPM, ERP, and related software does not get installed by software vendors; it gets installed by partners.   No BPM vendor has a huge number of clients.  How many did Lombardi have when the acquisition was announced.  Maybe a thousand?  Maybe less?  So, how do you really grow a BPM company to the $200-$300 million in revenue mark?  The answer:  partners.  If you want your BPM company to successfully implement in Mexico, Brazil, and China - you better damn well have partners there.  So, if Lombardi was truly able to more than double their ratio of Lombardi staff-to-partner-staff per deployment in 2008, then it means they were becoming very successful in this area.  This ties in well with their focus on their training programs.  So, should I keep going with this line of argument or is it clear?  What does IBM really have globally?  You got it - a pretty nice Channel.  They sell lots of competitive products and that’s ok.  They just need to make sure they have the right solutions so that their “consultative approach” works.  Look at their new Smart Market initiative and BPM - there’s several BPM products being offered on that box ( my company included).

3) The End Game - So what is the End Game for BPM?  That’s just it - NOBODY KNOWS.  This market is very fragmented, growing nicely, and there are no clear leaders.  BPM has not reached anything close to the maturity of ERP.  Most of the buying market still doesn’t even know what BPM stands for - Beats per Minute (no DJs out there?), Business Process Monitoring, Business Process Management, Business Performance Management?  So, if you are a portfolio investment company (yes, IBM is no longer really a software company), then you had better have a number of slightly competitive, slightly overlapping products in order not to get caught with your pants down if the market starts to slide in a slightly unanticipated direction.  Also, if the market is as fragmented as it is, then the only way to get a more interesting piece of the $3 billion market to be is to own a couple of key players.  If you aren’t sure which horse is the winning horse, then you want to have several horses which will all place, right?

You are certainly free to disagree with me.  But think about the way GE makes acquisitions.  They usually are not trying to fit the individual pieces together; rather, they are simply fitting the pieces into the markets.