This acquisition is another step in a series of moves by Software AG to strengthen its position in the market for business process management (BPM) technology and services, and to accelerate its revenue growth. IDS Scheer's products expand Software AG's reach into the enterprise architecture (EA) and business process analysis (BPA) tool markets. These are complementary to its business process management suite (BPMS) and service-oriented architecture (SOA)-enabling application infrastructure offering. We outline the implications of the deal for customers, prospects and competitors.

• This acquisition complements Software AG's existing product lines and takes them into EA disciplines, which are especially important to enterprises pursuing BPM as a strategic program.
• Software AG gains strong consulting services in application package implementations and BPM, as well as deep knowledge in several vertical industry sectors.
• This deal will help Software AG meet its goal of becoming a €1 billion company by 2011 and a larger player in the worldwide market for BPM disciplines and technologies, as well as application infrastructure technology.

• ARIS BPA customers and prospects: Continue to use or evaluate these tools with confidence, as we expect Software AG to continue to expand relationships with IDS Scheer partners.
• ARIS EA customers and prospects: Focus on current tool capabilities, rather than any anticipated enhancements specifically for EA. We expect that the top product road map priority will be further enhancements to ARIS for the BPA tool market and integration with Software AG's BPMS offering. Enhancements for EA use will be a second priority.
• webMethods BPMS customers: Push Software AG to better facilitate collaboration across EA, BPA and BPM roles throughout the entire process improvement cycle to create a tighter feedback loop from strategic planning through to process execution and back.
• Competitors: Watch this deal closely, as it has the potential to increase Software AG's market share in the EA tool, BPA tool and BPMS markets.

This document was revised on 4 September 2009. For more information, see the Corrections page on gartner.com.

We believe that Software AG's primary motivation for this acquisition is to advance it toward its goal of leadership in the overall market for BPM capabilities, delivering consulting expertise in addition to technology. The acquisition will also help Software AG meet its goal of becoming a €1 billion company by 2011, making it a bigger player in the worldwide markets for BPM and application infrastructure.

From a technology perspective, this acquisition adds a leading EA/BPA product (ARIS) to complement Software AG's BPMS. The deal also gives Software AG access to IDS Scheer customers to cross-sell its webMethods-branded products (including BPMS, enterprise service bus, business activity monitoring and application composition capabilities) and its CentraSite product (supporting SOA governance requirements). Software AG will also have the opportunity to sell ARIS to the business constituency in its customer base. Yet, to realize these opportunities, Software AG will need to overcome a number of challenges.

On 13 July 2009, Software AG signed a contract with two major IDS Scheer shareholders to acquire almost 48% of the outstanding shares in the company.

This acquisition advances Software AG's strategic BPM objectives and capitalizes on shifts in BPM adoption. Our numerous interactions with end users show enterprises expressing interest in using BPM to transform their businesses. BPM adoption is shifting from tactical projects that improve current processes to a more strategic investment in BPM as an ongoing program. This trend is particularly prevalent in the U.S. and Europe. In addition, this acquisition underscores the codependence of enterprise BPA and BPMS tools to support a closed-loop feedback cycle to convert strategic plans into changes to executable processes with results cycling back to be incorporated in the next iteration of the strategy plan. This type of closed loop is of high value to a growing number of enterprises.

This acquisition is in line with Software AG's desire to provide the technology elements required for implementing a business process platform (BPP) model, as well as gaining a capable consultancy to drive BPM competencies deeper into organizations. Tactically, this rounds out its BPMS offering to be a stronger integrated composition environment for a BPP model by adding leading EA/BPA capabilities with a strong client base to tap. In addition, if Software AG desires, it could use ARIS (modeling) to manage business rules to drive the management and use of agility further. The use of PPM (activity monitoring) augments the back-end link to SAP and enables process discovery opportunities.

This acquisition advances Software AG's financial objectives. Software AG set stock market expectations for becoming a €1 billion company by 2011. IDS Scheer's revenue is in the range of €339 million, so buying IDS Scheer helps Software AG meet its goal, and become a larger player in the worldwide markets for BPM and application infrastructure.

In the short term, this acquisition will help Software AG improve its ability to establish dialogue with new customers and further penetrate its established accounts through the business and vertical expertise of IDS Scheer's business consulting arm. The deal also gives Software AG access to 7,500 IDS Scheer customers to cross-sell its webMethods and CentraSite product lines, both of which can help organizations turn ARIS process models into software applications. Software AG will also have the opportunity to sell ARIS to the business constituency in its 4,000 or so customers.

The deal will also strengthen Software AG's professional services business, a stated area of focus for Software AG's growth.

From a financial perspective, Software AG will have to tackle four critical business issues:

• IDS Scheer's revenue is roughly half of Software AG's, and the acquisition will almost double its workforce. This will put pressure on Software AG's management. Although Software AG successfully managed the webMethods acquisition and set a positive precedent, the IDS Scheer acquisition has a different scale and nature. Consulting and professional services are typically a much less profitable business than software. Thus, the acquisition will likely have a negative impact on Software AG's profitability until the company can regain efficiency in the IDS Scheer business.
• IDS Scheer competitors are likely to attempt an assault on the ARIS installed base, possibly in partnership with Software AG competitors, by leveraging the inevitable uncertainty that acquisitions generate. To counter this, Software AG will have to release a credible product road map and go-to-market strategy for ARIS soon after it finalizes the acquisition.
• Software AG needs to provide proof points of its progress to accelerate new license growth for ARIS. Almost 80% of IDS Scheer revenue is from business consulting and professional services. New license revenue had declined 18% in 2008 vs. 2007.
• Most of IDS Scheer's consulting/professional services business is in Europe. The business relationships generated by the consulting arm will likely be minimal in other geographies during the next year. Competitors will try to exploit opportunities given IDS Scheer's narrow market penetration during this period.

Potential longer-term revenue growth opportunities include:

• ARIS is the "de facto" standard modeling environment for SAP. Moreover, a significant amount of IDS Scheer consulting revenue derives from SAP implementation services, especially in the small or midsize business segment. The acquisition may strengthen Software AG's relationship with SAP in this segment and pave the way for further collaboration in areas such as middleware, SOA governance, legacy modernization and cloud computing.
• IDS Scheer has a wealth of industry-specific process knowledge in sectors such as automotive, chemicals, consumer packaged goods, defense, financial services, healthcare, insurance, media, pharmaceuticals, government, retail, telecom and utilities. Software AG has the opportunity to leverage IDS Scheer industry skills to improve the penetration of its products in the vertical industries it covers marginally or sporadically.

Gartner's view of EA is that it is "the process of translating business vision and strategy into effective enterprise change." For some years, ARIS has been a leading EA tool because it provides many useful EA capabilities. Approximately 20% of IDS Scheer's ARIS license and maintenance revenue in its 2008 revenue was attributable to EA use.

In Gartner's opinion, a key differentiator of ARIS for EA has been its ability to import information from SAP Solution Manager and Oracle Fusion Middleware, helping enterprise architects to maintain an up-to-date view on how SAP and Oracle applications are configured and implemented. But Gartner believes the Software AG acquisition will make Oracle nervous about its dependent relationship, as this acquisition could make Software AG a stronger competitor to Oracle in the broader BPM market.

Any lessened emphasis on EA by Oracle field sales personnel or by Fusion Middleware product management could impact ARIS's market leadership position. In addition, Software AG does not understand the strategic role of EA as well as it understands the BPM market; so an EA vision will certainly take a back seat to its BPM vision. Given the small proportion of total revenue represented by EA sales, we believe there is a risk that ARIS will not keep pace in this small, but rapidly growing, market.

IDS Scheer's ARIS tool is the most recognized product in the BPA tool market, after Visio, with about 15% of market share. With strong functionality and strong alliance partnerships, ARIS commands premium pricing. ARIS offers an integrated repository and a universal client interface that integrates various aspects of BPA, such as Six Sigma, dynamic simulation, Unified Modeling Language, SOA, workflow orchestration, business rules, key performance indicator dashboards and model-based process monitoring.

However, the rigor of IDS Scheer's event-driven process chain methodology, and the company's traditional focus on senior and technical architect roles, has adversely affected its ability to appeal to the growing number of business process analysts engaged in process modeling, especially those looking to implement solutions in a BPMS. ARIS does not yet have the same ease of use and role-appropriate capabilities of some competitors' products targeting this growing audience. Many business process analysts consider ARIS too complex and costly for their needs. To expand its use in this fast-growing segment, Software AG must continue to enhance ARIS with capabilities that are more appropriate for emerging business roles, especially business process architects and analysts. This will require significant R&D investment and targeted sales efforts. (IDS Scheer intends for its recently announced ARIS Express to address the needs of these more occasional users.)

Nevertheless, clients that bought ARIS because it can support BPA for all types of business process modeling in support of process improvement (regardless of implementation approach — internal application development, application enhancement, application package purchase and use of any BPMS) can expect "business as usual" in the short term.

Those who bought ARIS as a BPA tool specifically because it was the strategic partner's tool for their SAP or Oracle packages, development environments or BPMSs will need to see what SAP and especially Oracle do in response to the acquisition.

IDS Scheer also has two tools that target the IT modeling market: ARIS SOA Architect and ARIS UML Designer. These tools account for approximately 1% to 2% of IDS Scheer's revenue. We expect Software AG to continue to support these in the short term. Because these tools are not critical to Software AG's BPMS or critical for ARIS tool sales to EAs, we see these as being of greatest risk for defocus or end of life.

In addition to its relationship with Oracle, IDS Scheer has developed partnerships and OEM agreements for ARIS with many partners, such as Fujitsu, IBM, Microsoft, Pegasystems and Tibco, which compete in the BPMS and SOA application infrastructure markets with Software AG. Although Software AG intends to keep ARIS as a "BPMS-neutral" modeling platform, it also wants to integrate its webMethods BPM and CentraSite products with ARIS to create a closed-loop feedback cycle from enterprise and business architecture plans (modeled in ARIS) to the execution of those plans in its BPMS and SOA governance products. Software AG will face the dilemma of whether to converge ARIS metadata with its runtime environments for competitive advantage or keep ARIS neutral.

IDS Scheer's relationship with Oracle is most likely to come under pressure. Oracle will continue to sell Oracle BPA Suite to EA-minded clients in the short term. But we anticipate that Oracle will look for other EA tool partners, even though its development road map includes further metadata integration with ARIS, and changing partners would be disruptive. Despite this dependence on ARIS, we expect that the codevelopment dialogue between Oracle and IDS Scheer will diminish.

In addition to OEM relationships, IDS Scheer also has strong alliances with Capgemini, Accenture and Deloitte. And there are other marketing relationships with a broader set of BPM technology providers. Software AG has stated its plans to continue to OEM IDS Scheer products and pursue other partner relationships. However, the growing number of partners and diverse relationships will require significant attention to ensure value for all partners and customers.

Significant cross-sales of IDS Scheer's products into Software AG's customer base will likely drive greater sales of its webMethods BPM, webMethods ESB and CentraSite products because of the interdependencies among EA efforts, BPM initiatives and SOA redesign efforts. This would improve Software AG's position in the EA tools, BPA tools, BPMS, SOA application infrastructure and SOA governance markets. Greater interoperability between IDS Scheer products and Software AG's webMethods and CentraSite products with the potential to deliver a high-value, closed-loop feedback environment will position Software AG as a more strategic supplier.

Software AG, along with its webMethods brand, has a big presence in "SAP shops." With the addition of IDS Scheer products and existing SAP customer relationships, Software AG becomes a bigger threat to SAP's new NetWeaver BPM.

IBM will need to pay attention because of IDS Scheer's BPM consulting expertise and Professor August-Wilhelm Scheer's reputation as a thought leader in process management. IBM has made significant investments in BPM training and university outreach. In Europe, Software AG can now make similar claims to help drive more process professionals to its tools. In terms of influence on (at least) European BPM market opportunities, Software AG will have a bigger role than Oracle, Tibco and SAP.