from upside today---ERPs and SEBL
In the scheme of technology, ERP companies are old, so they are remarkably steeped in history.
The Y2K problem that initially boosted them: history.
The client/server architecture they advanced: history.
Applications that cannot extend outside a single enterprise: history.
The phenomenal growth these bygone forces produced: history.
While ERP companies have learned these history lessons, they nonetheless lag behind companies
who saw the future of enterprise applications years ago. ERP is now in the fight of its life to catch
up.
You can think of the Big Five of ERP as the British Empire circa the early 1940s or IBM in the
early 1990s. They are in that era-ending process of getting shocked by a swifter foe, assessing the
damage, and emerging from the ordeal not crumbled but certainly humbled.
Britain and IBM both recaptured a respectable fraction of their respective glories, but the future of
the ERP vendors is less clear. In analysts? eyes, only Oracle (ORCL) is on safe footing, followed
closely by SAP (SAP) as a probable survivor. The prognoses for PeopleSoft (PSFT) and J.D. Edwards (JDEC) are still
serious, while Baan (BAANF) isn't likely to survive independently.
"It's really not about ERP anymore," says analyst Rod Johnson of AMR Research. It is about companies -- many of which
have already implemented ERP -- jumping at the chance to find quicker and bigger returns than are produced by ERP's
mammoth efforts to automate basic business functions.
No one believes that new application areas -- customer relationship management, supply-chain management, and
e-commerce -- are beyond the market purview of the ERP vendors. Their problem is that by not laying claim to them early,
they may never be able to.
To grow again
Analysts point out that the aforementioned applications involve how companies can actually make money from the terabytes
piling up in their ERP systems. "Scalable back-office infrastructure is key, but it is a cost of doing business," Johnson says.
Front-office, supply-chain, and e-commerce applications put companies in touch with customers and partners, while ERP
does not extend outside a company.
PeopleSoft CEO Craig Conway notes that people like himself and Oracle chairman Larry Ellison are used to winning. The
only way to restore growth rates for their like-minded investors is to become vendors of high ROI products. The problem, of
course, is that they are far behind the companies that already knew this years ago.
Tom Siebel knows this because the sales-force automation product that Larry Ellison declined to sell a decade ago has
spawned a company with a market value more than three times greater than that of PeopleSoft: Siebel Systems (SEBL) (see
"The King of CRM"). Supply chain trend-setter I2 Technologies (ITWO) celebrated this success during its stock's run-up
of 556 percent last year.
This was reinforced for CommerceOne (CMRC) when its head-start in procurement forced PeopleSoft to share the spoils
of a new apparel trading exchange with clothier Guess (GES). For these smaller companies, there was a clear opportunity to
do what even a large ERP vendor, caught flat-footed, could not do alone.
Both Siebel's CRM software and SAP were in place at computer retailer CompUSA (CPU) when CIO Honorio Padron
arrived two years ago. At that time, he says, he never heard a peep about SAP's CRM strategy.
Although Padron is now rolling out SAP Retail and its CRM module to automate much of the company's back-office and
call center operations, that will not necessarily mean Siebel Systems' demise at the retailer.
Padron is currently evaluating how or whether Siebel and SAP will fit together. "I think in our business model we see
opportunity for both of them," he says. He regards Siebel's product as far better, and far more forgiving when it comes to
integration with other products.
Sharing the market
The ERP giants must get used to sharing the market, but make no mistake -- they will share it. SAP and Oracle in particular
are far from dead, as was sometimes glibly assumed at the end of last year. They still have armies of smart developers and
coffers full of cash. If they can use those resources to produce good products in the next year or two, the more patient
members of their vast, loyal customer bases will stick with them.
The ERPs will hang on, if not as the avant garde, then at least the avant rear garde. As such, they can swing the gate shut and
perhaps lock out of the enterprise applications market any more upstarts.
The larger of these players are the "best of breed" in their niches: Siebel and E.piphany (EPNY) in CRM; CommerceOne
and Ariba (ARBA) in procurement; and I2 and Manugistics (MANU) in supply-chain management. Their early vision
and good execution allowed them to rush in while the gate was still wide open and the guards were asleep.
The ERP companies are merely beginning to give chase, Johnson says, rather than taking the inadvertent business advice of
hockey great Wayne Gretzky: Skate to where the puck is going to be, not to where it is.
The Y2K hangover
In 1999, the ERP vendors were slipping rather than skating. Until sales hit the Y2K rocks last year, PeopleSoft, for example,
had been on a decade-long streak of 80 percent annual revenue growth. The big ERP companies that had been booming
were no longer making their numbers, says analyst David DuChene of Soundview Technology.
As the hiccough of Y2K slowed cash flows to a relative trickle, ERP companies were still only
beginning to solve their real problem: software confined to their customers' proverbial four walls.
Corporate buyers wanted applications that would put them in close, efficient touch with their
suppliers and customers. Replacing client/server architecture with an HTML interface was literally a
fa‡ade.
"They thought they had it all figured out when they put a Web browser on the front end," says
George Gilbert, vice president of business-to-business equity research at Credit Suisse First Boston
in San Francisco. But really rearchitecting applications for inter-enterprise data sharing and
communication means bringing companies closer to partners and customers, he says. That takes a
little more work -- feverish work.
That work produced an average 32.5 percent increase among SAP, PeopleSoft, and J.D. Edwards in development spending.
SAP added 700 developers to its previous regimen of 6,800 codesmiths, says Chris Larsen, president of SAP America.
Under financial pressure, Baan consolidated its development operations, which resulted in an 11 percent drop in spending.
Oracle's applications development spending could not be separated out from its other divisions.
PeopleSoft's predicament
"We didn't sit around and just twiddle our thumbs in 1999 when we were all impacted," Conway says, insisting that the work
has been productive. The company invested 25 percent more in product development in 1999 than in 1998.
Toward the end of 1999, it began rolling out the new Internet architecture of PeopleSoft 8, which among other things
features a new HTML client and revamped server-side guts. It also struck a partnership with CommerceOne and shelled out
$433 million in stock for CRM vendor Vantive (VNTV) and its 850 customers.
Nevertheless, PeopleSoft revenues declined $45.6 million in 1999, and restructuring moves left the company with 9.2
percent fewer workers and a $177 million net loss for the year. "We're happy to have 1999 behind us," Conway told
analysts during the company's fourth quarter earnings conference call in February.
PeopleSoft now hopes to fully integrate Vantive and make a strong approach to mid-sized businesses with an application
service provider play.
SAP upgraded
The company's third quarter results were so discouraging that CEO Hasso Plattner stated, "Even though we are in a difficult
market environment, we are still disappointed by these results."
Its fourth quarter was redeeming enough, though, that SAP shook off some hold ratings it had merited while sales grew
more slowly. The company's revenues rose 18 percent for the year, but mostly because that fourth quarter produced a jump
in license revenues of 45 percent, compared to the same quarter in 1998.
The company credits early adoption of its mySAP Internet software. "The aircraft carrier made a right turn,' Larsen says.
SAP's year-end recovery inspired Coleen Kaiser and Daud Khan at Merrill Lynch to report, "The growth of SAP's Internet
business has shown strong roots in the fourth quarter. We believe SAP is a must-own stock in the business-to-business
space." In particular, they were inspired that about $129 million, or one sixth of the quarter's licensing revenue, came from
customers who will migrate to mySAP.com, which extends R/3 to the Web by linking users in a community of
marketplaces.
SAP's fourth quarter also convinced DuChene that the company has a good enough base to build on, and that he, too, should
let go of his hold rating. "SAP has not had a lot of success with its front-office product yet," he says. "[But] they're able to
throw money at it and they've got a lot of people to throw at it. They'll work to win back the minds of customers."
Despite the optimism, analysts don't think mySAP is the whole cure to SAP's problems. AMR warned that mySAP
marketing costs would drag down SAP's profits in the first half of this year. And while Gartner Group's Bruce Bond
predicted that mySAP would meet the needs of many SAP customers, it will not on its own reproduce the explosive growth
rate of 40 percent that SAP saw in 1998.
Some SAP customers have been slow to warm up to mySAP, too. If it fails, SAP could end up consigned to big-system
legacy oblivion with companies like Burroughs and Sperry, he says.
MySAP is a 1.0 release, analysts add, meaning it could be buggy and lack important features. Larsen counters that it was
tested at 50 customer sites before being rolled out late in 1999.
Oracle on a roll
Like SAP, Oracle applications grew in 1999 at an 18 percent pace. Application and services revenues grew each quarter. In
the 12 months ending November 30, applications and services sales rose to $2.52 billion. But analysts praised Oracle in
1999 because, unlike its competitors, the company had already demonstrated a thorough understanding of what
Internet-exploiting enterprise applications are all about.
"Of all the ERP vendors, Oracle is the one who's had its act together the most," AMR's Johnson
says. "The important thing about Oracle is they really have embraced the Internet companywide."
The company's ERP and newer applications have been infused with Larry Ellison's big-server,
small-client zeal.
The flagship example of this is Oracle 11i, which after a delay from the end of 1999 is due out in
the first half of this year. It culminates the company's efforts since 1996 -- "when most people
thought we were crazy" -- to make a completely Internet-based suite of applications, says Ron
Wohl, vice president of applications development. Wohl says the software provides a global view of
data from a centralized store accessible from anywhere.
Credit Suisse's Gilbert says he was already impressed with Oracle's procurement and supply chain
products in version 11. He says they are about as competitive with best-of-breed products as an ERP vendor's applications
had yet been.
Meanwhile, Oracle claims its CRM product grew 248 percent in 1999. With the financial backing of a cash-cow database
division, Gilbert added, there is good reason to be optimistic about Oracle's onward march into battle with Siebel and the
other upstarts.
Baan voyage
As hopeful as business seemed at the end of 1999 for Oracle and SAP, it was just as bleak for Baan. The company's sales
dropped to $635 million for the year compared to $736 million the year before.
As if the sudden resignations of CEO Mary Coleman and CFO James Mooney at the beginning of 2000 weren't startling
enough, the company announced a net loss of $281 million in the fourth quarter of 1999, with only $197 million in cash and
securities. The company cut four percent of its workforce and closed 14 offices.
Only an equity funding commitment of $215 million from Fletcher International is keeping the cash shortage from
becoming an immediate concern, analysts say.
"We don't think they'll survive, not in their current form," says Gartner's Bond. Johnson was more direct about the paradox
that many analysts see. "Their products have never been healthier," he says, but "the perception is that most CIOs in their
right mind would not buy Baan."
The company's broad and functional technology portfolio is in large measure the product of a shopping spree in which Baan
bagged at least 10 major companies in three and a half years, including four in 1999 alone. But much of the acquired
product and talent, from companies such as Aurum Software and Caps Logistics, was not sufficiently integrated to give
Baan any advantage.
"It's hard to sell [the group of products] as one package," Gilbert says.
Baan revised its integration approach at the end of last year to address exactly those concerns, according to Katrina Roche,
Chief Marketing Officer for the company. The company sped up the effort by using XML to markup the data exchanged
among the applications. An integrated package of ERP, CRM, and supply-chain applications shipped in January, she says.
It may be too late for Baan to recover, even with great products, analysts warn.
Survival strategies
Aware of the huge financial challenge it faces, Baan in February hired the investment bank Lazard FrŠres to explore ways to
repair its balance sheet. Within weeks the company had already sold its CODA accounting business to a partner for $50
million, raising a net $30 million for Baan.
Baan's preference, Roche says, is to continue operating independently and perhaps to raise more revenue by licensing its
technology. At the end of the day, Roche says, the quality of the company's products will allow them to persist, regardless of
whether the company persists.
"There is no question in our customers' minds," Roche says, "that Baan in one form or another will be a supplier of
enterprise applications."
On the day in February that it announced its fourth quarter losses, its biggest customer Boeing offered a statement of
reassurance: Baan would continue to meet its commitments to the company despite its troubled financials.
If Baan's survival requires a wholesale sale, Bond says, then PeopleSoft may be one of the best candidates to be a buyer.
Conway did not dispute that, noting that Baan's strength in manufacturing and overseas would shore up his company in
areas where it is relatively weak.
"It's hard for me to understand how they will survive without the action of somebody like PeopleSoft," Conway says. "There
are some parts that I'm sure will interest somebody."
Analysts say Conway is smart to be tentative about swallowing a $1.5 billion company in a highly competitive market.
Soundview's DuChene adds, "It's an expensive company. I'd imagine that there are companies that are looking at this, but
with that kind of a price tag you'd have to be really convinced."
J.D. Edwards tackles the mid-market
Compared to Baan and PeopleSoft, J.D. Edwards' experience escaped 1999 in good shape, but its milder troubles
nevertheless showed that the higher growth market of mid-sized companies still could not shield a company from the year's
ravages.
Despite having a sharper focus than other vendors on that segment, the company saw revenues only
inch up during the year to $944 million, up just 1.1 percent. Meanwhile, J.D. Edwards lost $39.2
million. The consensus estimate for the last three months of 1999 was that the company will lose a
little more.
Nevertheless, analysts are cautiously optimistic that the company will resume its growth because of
its ongoing investment in the development of its core products. "They went through a five-year
rewrite of their application suite and it's flexible and modern," says analyst Chuck Phillips of
Morgan Stanley Dean Witter. "It is the newest suite on the market."
The joys of owning the platform
Regardless of what shape an ERP giant is in, analysts say, it has a couple of ingrained advantages to
exploit. It has a big installed base and it can integrate better than anyone else with that installed base's IT backbone.
For that reason, vendors such as SAP and Oracle are churning out software rather than taking Baan's approach of trying to
buy it all. Oracle used to rely on partnerships with best-of-breed or "bolt-on" vendors, but not anymore, Bond noted. When
possible, customers prefer one vendor.
"They've realized that integration is something people don't want to have to deal with," he says. "The problem with the
bolt-ons is you've got to bolt them on. People prefer to have one throat to choke."
The challenge for the ERP vendors, at least in maintaining their hold on their installed base, is to develop products that are
eventually comparable to the best-of-breed vendors, and good enough in the interim to keep customers hanging on,
DuChene says.
Conway agreed: "Historically, when product categories were large enough for large [customers] to standardize on, they
looked to large [vendors]." If the large ERP vendors can match their upstart competitors' features, then the tide will turn. "In
a tie, we win."
DuChene says SAP scored an early victory along these lines in 1998. Simply by announcing its supply-chain management
product, APO, it succeeded in freezing the market that its customers would have provided for supply-chain specialist
Manugistics, he says.
The loyalty of each vendor's customer base has certainly been tested by the legendary pain of an ERP rollout. CIOs live in
fear that they could be hit by system failures like the notorious one at Hershey Foods (HSY) last year.
For two quarters in a row, Hershey blamed a chunk of its sales and profit declines on problems with its newly installed order
fulfillment and customer service modules. The backbone of the system was SAP R/3, but Siebel and Manugistics software
were also installed.
The cost of the glitches was an unwelcome add-on to the $112 million Hershey was already paying for the software, but
observers say that neither the ERP concept nor the vendor's software is usually to blame in these instances.
"Its failures have been well publicized," Bond says. "[But] the reasons for the failures had nothing to do with ERP per se. It
had to do with [internal] project management."
DuChene added that ERP is a requirement of enterprise computing: "It's your price of admission to do anything else. The
demand for these systems is not going to go away." He predicts that the ERP market will resume growing this year at a
modest 15 to 20 percent pace.
The salvation of ERP companies will not be simply avoiding blame for sporadic failures at customer sites or by recovering
moderate growth for its back-office applications, analysts say. They need the new markets in which they have fallen behind.
The scary part for SAP in the Hershey example, therefore, is that the candy company looked as well to Siebel and
Manugistics. Even where the ERP partnerships are intentional, as in Guess' venture with PeopleSoft and CommerceOne, or a
joint sale by J.D. Edwards and Ariba to Cargill in February, the ERP vendors are sharing a pie that they would rather eat
themselves.
J.D. Edwards, however, had little other choice than to partner with Ariba for procurement, Tradex for marketplaces, Siebel
for CRM, and Numetrix for supply-chain management, says Phillips at Morgan Stanley.
"It would clearly be better if they had these applications for themselves, but given that they are somewhat unique in this
approach ... it is translating to greater opportunity than they would have had by waiting three years to get an application out
in these areas," he notes. "Having Siebel and Ariba recommending your product can't be all bad."
J.D. Edwards is even willing to part with services revenue to gain the recommendations of the Big 5 integration firms in
partnership deals, added analyst Douglas Crook of Prudential Securities.
Other than PeopleSoft in its partnership with CommerceOne, the other vendors haven't been as
willing to cede revenues to the best-of-breed companies. Where they have not been willing or able
to develop their own technology, they have sought and bought.
Acquisitions not a magic bullet
Acquisitions, however, have proven tricky. Baan took two years to successfully integrate the Aurum
CRM technology it bought in 1997.
AMR analyst Johnson has identified smooth integration of Vantive as a top priority for PeopleSoft.
If they do it, they have a strong front-office product to sell to their 4,000 customers.
But, he says, "Their history of integration acquisitions is not good." In fact, in the fourth quarter of
1998 the company took a $13.9 million charge to write down the value of development efforts it acquired when it bought
Intrepid Systems. Intrepid provides merchandise management and supply-chain decision support to retailers.
While the ERP vendors have all recognized how to revamp their products to take advantage of the Internet's power to
facilitate supplier and customer relationships, they have still not done enough. Once they have developed competitive
products, which will mean hitting the moving targets that are the best-of-breed companies, they must convince customers.
At the most, Bond gives SAP two more years to whip its product line in to shape. But Gilbert suggested a little more
urgency: "They got blindsided, though, so they'd better hurry."
Cold comfort customers
So far many users do not look at their ERP vendor as the supplier of the new breed of enterprise applications. Therefore,
every quarter is another one in which the upstarts blaze
In a quarterly survey of corporate IT buying preferences released last December, Salomon Smith Barney predicted weak
sales for ERP vendors over the next 12 months. The 50 large-enterprise IT executives who responded to the survey rated
their likelihood of buying from each vendors on a scale of -10 to +10.
The best performer was Siebel with a 5.6 rating, compared to a 4.0 for Oracle, 1.6 for PeopleSoft, and ?0.7 for SAP. No one
planned to buy J.D. Edwards software, although a handful had declared such plans a quarter before. Even worse for the
sector was that the survey found ERP to be the lowest or second-lowest priority for 26 of the 50 respondents.
The silver lining was that supply-chain and front-office automation appeared to be low priorities as well, leaving the ERP
vendors more time to improve their products.
What really counts when
Ultimately, CompUSA CIO Padron tells the whole story: To protect his SAP rollout from Hershey-style problems, he is
taking great care not to do too much customization or integration of third-party products. That means SAP's nascent CRM
product will be used in areas where reliability and high-performance integration are imperative, such as in the company's
order-taking call center.
"I'm an agent on the phone and you are giving me five minutes to do an order for you," Padron offers as an example. "I've
got to err on the side of performance and integration. As long as I have the minimum food and shelter functionality in SAP,
I'd rather have the integration than have Siebel, with all the extra bells and whistles."
Where functionality is more crucial, however, such as in the company's help-desk outsourcing centers, "Siebel wins hands
down," Padron says. "I wouldn't dream of going with SAP in that situation. ... [Siebel] is an excellent product. It's hands
down better than what SAP is going to have for the next couple of years." So SAP must share the market with Siebel, even if
that means sharing the same customers.
That will likely happen time and time again in the enterprise applications business, where evolving needs are compelling
customers to look beyond their ERP software.
If the ERP vendors do their jobs really well, then the customers will ultimately find them again. But right now their glory is
past and their goal is to recapture their empires.
URL: upside.com
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