Philadelphia, PA
October 19, 2004

New Pans for Old

"It will all work out."
"How?"
"I don't know. It's a mystery."
-- Tom Stoppard

SSA is as good a story as there is in the software business these days. The only real question is, "What kind of story is it?"

For customers, that story comes right out of the Arabian Nights:"New pans for old," SSA is saying, nothing more, nothing less. For prospective investors, the story also sounds almost too good to be true: here is an application company that isn't SAP, is making money, is growing substantially and promises to grow more. For business partners, SSA is again the stuff of dreams, a story about untapped markets with huge pent-up demand.

So why do I get a big thud from the other end of the line whenever I talk about that SSA story? Mostly, I think it's just that the story hasn't gotten out. The letters "SSA" left such a sour impression before they disappeared into bankruptcy that nobody pays any attention. When people do, they think, "SSA = CA," and they picture a holding company for faded assets, which treats its customers with the benevolence of a mine-owner in the company store.

Now, both of these ideas are clearly dead wrong. The SSA that came out of bankruptcy is not the SSA that went in. And the SSA that exists today is not CA. Like CA, SSA does indeed own faded assets (including some of CA's), but its attitude toward its assets is creative, innovative, and progressive. It may share with that mine-owner a certain favorable view toward accumulating money, but it thinks (rightly) that the best way of milking a cow is to feed it, too.

So, most of the time when I talk about SSA, I'm trying to clear up gross misinformation. I end up repeating this great-sounding story, which at one level is clearly the right one.

But it makes me a bit queasy. For too many years, I've had innovators walking into my office, telling me some version of "New pans for old," and waving their hands whenever I say, "But how?" Most of those guys couldn't answer, and most are out of business now.

So is SSA too good to be true? It depends on the story you tell. I'm pretty sure that the Arabian Nights version is not very accurate and not very interesting. The real story is grittier and much more complicated. It may indeed be a happy story where everything works out. But just how is not yet clear.

Let me start this piece by explaining what I think SSA is up to. I'll go on to give a view of some of the complications I see. And I'll conclude by returning to this question.

SSA Global: The Elevator Story

I'll start at a pretty high level.

SSA sells enterprise application software to companies that need to automate their businesses. These applications do things like keep track of inventory, write orders, and manage the books.

Most companies that sell these applications have a single product (or "technology platform") that does all these functions; for the past ten years, the fact that these functions are "integrated" on that single platform has been a major selling point. People are willing to put up with functionality that is quite inferior to the best in the market, if the functionality is "integrated."

Usually, this platform is built from scratch by the company that sells it, and they continue to add to it every year. Sometimes, these companies do acquire technology rather than build it, but in many cases, they'll rewrite the technology so that it fits on their platform.

SSA sells the same kinds of applications that the other major ERP companies do: financials, HR, inventory management, CRM, SCM, etc. But because SSA Global grew by acquisition, they are not all on the same platform; they are on many, many, many.

If I may trot out an analogy that SSA might well object to, you can think of SSA as a kind of retailer of enterprise software technology, in the way that, say, Circuit City is a retailer of consumer electronics. Like a retailer, they have many, quite disparate products on their shelves.

SSA's competitors in the ERP space are more like manufacturers of consumer electronics. They make many products, but they have a certain consistency among products, and the product line as a whole has some coherence.

The analogy would be even more exact if the consumer electronics market were vertically integrated, so you could only get Sony products at a Sony store. The SSA store, then, would carry remainders and overstocks, products from companies that had tried to make it on their own, but gone out of business.

Now, if you're in SSA's business--not a bad business, since it can be very profitable--what do you do? Well, one idea is to say, "Sit back and collect your profits, customers be d---ed."

But that's not SSA's idea. They have decided that they're going to morph themselves into a company that looks a lot like their competitors, one that sells a modern, integrated suite of products based on one or two (or three) platforms.

Now, from the point of view of both the shareholders and the customers this is exactly the right thing to do. If you succeed, you give the customers shiny, new, modern, highly functional software at a cost that is significantly lower than what they'd get from the competitors. At the same time, you keep those customers happy and give the shareholders a very good return on investment.

There's only one trick. Somehow or other, you have to take all those software packages, refurbish them, upgrade their underlying technology, give them (roughly speaking) common user interfaces, data models, etc., etc., etc., all without spending a lot of money or making the customers unhappy.

And unfortunately, nobody knows how to do this.

So suddenly, this vendor of faded technologies is willy-nilly an innovator. An innovator in technology (for migrating to a common platform). An innovator in business model, since you've got to persuade people to use your new technologies without the traditional sticks. And an innovator in service and support, since they'll end up with zillions of products, product versions, countries, and platforms to support, but they can't afford zillions of specialists. They even have to be innovative in their marketing, since they have to promise people enough to keep them from switching, but not so much that they end up being jerks.

SSA the Innovator

The notion that SSA is an innovator may astonish people who think SSA is CA. But nothing I'm saying would surprise SSA at all.

From the day Mike Greenough, the CEO, took over, he's been running a software company that is decidedly and self-consciously different from the others.

One event on that first day has already passed into SSA lore. (Several different executives told me the story.) A group of senior executives were holding a meeting to decide which versions of the flagship SSA product would no longer be supported. Greenough, the new CEO, walked in and ended the discussion. "No version will be sunsetted. We will support every version for as long as any customer is willing to pay for support," he said. And this has been policy ever since.

Over the next year, or so, he expanded the policy into a set of promises, all of which are innovative in themselves and will require innovation in order to keep.

• We will support every bit of software we've sold for as long as any customer is willing to pay a fair price for support.
• We will continue to produce new versions of every product.
• We will migrate to a one- (or two- or three-) platform model, but we will never force any customer to migrate.
• We are and will continue to be profitable, because we will bring efficiences to our operation that our competitors do not.
• We are and will be a metric-driven company.

Essentially, as Greenough loves to say, we will be doing what the Sainsbury's and Tesco's in Greenough's native England did for the ordinary consumers who lived outside of London. Bring them more choice and better goods at lower prices.

At this year's user conference, Greenough could get up and say, several years after that first day, "We're doing what we said we would do." And not one analyst would laugh.

It's a Mystery

Including this one. But I am wondering, "How?" How is Greenough managing to run many different platforms, when companies like PeopleSoft find it hard to run two or three? How is he managing to be profitable, when even single-platform application vendors are finding that hard? How does he turn around a company like Baan, which had already cut its development and support staff many times, suddenly make it profitable, improve support (or so he claims), and simultaneously put out a new release?

Is there a little man behind a curtain somewhere?

My guess is, "No." Every time I look deeply into one of the questions above, what I find is a lot of scrambling, a lot of choices, a lot of energy, and a lot of snap decisions. A lot of complexity, in other words, but nobody imposing anything on me.

Let me take a fairly core example; forgive me if even my attempts to simplify leave the story a little convoluted.

One of SSA's aims is to provide its current customer base with a way of modernizing its applications at a relatively low cost by making available so-called "extension" applications (CRM, SCM, etc.) that are preintegrated with its ERP solutions.

Laudable--and potentially very profitable. If you can pick up failed best-in-breed players for a song, then introduce them to all of your captive customers, you ought to do pretty well.

Is SSA succeeding; is it going to succeed? Well, it's complicated, because you really have to take it on a case by case basis.

So let's take an easy case. One of Greenough's core customer bases is the old SSA customers who make food or perishable consumables. The largest manufacturer of pasta in the US is a happy SSA customer, so far as I know, and there are many others.

What kinds of extension products can Greenough offer them? I'm not sure. On the surface, there appears to be a whole array of them. Manufacturers of consumables often need help managing customers, managing supply and demand, managing warehouses, and managing transportation. Greenough has acquired many extension products in these areas. From Baan, last year, for instance, he got a CRM package, a supply chain package (the old Berclain), and a transportation/logistics package (CAPS Logistics). In separate acquisitions, he also got Ironside, a web CRM package, and EXE, a warehousing package.

Good to go, right? Well, not exactly. The fit between what these extension packages do and the needs of the consumables customers is not all that obvious. Most consumables manufacturers are really process manufacturers, and Berclain doesn't do planning and scheduling for that kind of manufacturing.

The consumables manufacturers might want to start moving order management to the web via Ironsides, but in consumables, there are a lot of problems associated with this. Orders and pricing are exceptionally complex, and it's not easy to manage dual systems, the non-web-based BPCS back office and the Ironsides front office, because you have to figure out where the control resides.

For logistics, there is CAPS. But CAPS is a complex package with a highly specialized market; its successful installations are at retailers and very large CPG manufacturers--far larger than most consumables companies. An expert might be able to tell where the fit might be, but Baan fired all the CAPS salesmen, so there aren't many experts around. It will be a slog to set up a new CAPS sales force, then go through the SSA list to find the ones that might buy.

Warehousing? Always a possibility. But the leaders in that area, like Manhattan, have always made a case that you don't need integration, and they are known for having features that give them an edge in the CPG business.

What does this add up to? Well, it certainly means that the Arabian Nights story isn't right. More important, it means that cross-selling into this segment isn't a slam dunk. Before it can grow by cross-selling into what is really quite a fertile market, it will have to do some very careful analysis, some pretty good sales training, and some honest customer education.

Quite a task, especially when you consider that there are hundreds of business segments like consumables, and there are tens of products that might fit customers in each segment.

Quite a problem. So how can a company that is run very lean spend resources on solving a problem like that? I don't know. It's a mystery.

Let me put it another way. At some point, SSA ought to have an account plan for each of its 13,000 customers, a plan that identifies what the customers have and what they're going to need next. How many years will it take before SSA has such a plan? I don't know.

Bear in mind that most companies who confront this problem never figure it out, even for a small number of acquired products. I remember some years ago when JD Edwards bought Numetrix, claiming that it would give them supply chain planning functionality that their customers needed. I told several new-to-JD-Edwards executives at the time that the fit really wasn't all that good for their customer base. They laughed. But in fact, sales of Numetrix tailed off after the purchase, and after the PeopleSoft purchase, the Numetrix functionality was taken out of JD Edwards' control.

If JD Edwards had wanted to, they could have made Numetrix work for them. But in the end, they were simply unwilling to do the work: modify their sales compensation system, their pricing, and their marketing to take into account the realities of what Numetrix could and couldn't do.

Wrapped in an Enigma

Unfortunately, this is only one of many mysteries.

Here's another. For SSA to succeed, they will have to be really good at customer retention. So far, they've been very good indeed, though just how good is a bit of a mystery. But can they keep it up?

It seems to me that it depends on a lot of imponderables. To what extent do SSA customers value the upgrades and migrations that SSA will offer? To what extent do they value good customer support? Right now, the basic SSA strategy appears to be to gradually diminish support, but compensate for this with attractive migrations.

Take what's happened to the Baan customers. Once Baan was taken over, the support staff was reduced significantly. (The number of people in support was roughly halved, but partly this was because some of those people and their functions were transferred to development.)

SSA would say (and did say) that this RIF was not all that harmful. Offices were closed, redundant personnel dropped, technology was improved, etc.

But at the end of the day, it seems pretty clear that some people who had known the Baan customers and the Baan product were being replaced by people who did not know either nearly as well. It is very hard to see how support could stay at the same level for a customer when his account rep was dropped, and the person replacing him didn't know the business, the installation, or the product. Certainly JD Edwards customers I've talked to have run into this problem, and they were ticked.

Interestingly, though SSA is a metric-driven company, there seem to be few metrics that are designed to measure quality of support. So just how much support has diminished is a bit of an enigma.

SSA is hoping that this simply doesn't matter. While it was reducing support, it also put on a big push to give the Baan customers something else for their support dollar, a spanking new version of Baan. I had gotten a good overview of that product before Baan was sold, and I was surprised to see that almost all of it was kept by the new owners.

I wasn't all that impressed when I saw that new Baan product two years ago. It was a mish-mash--lots of things that were corrections of old mistakes, a lot of infrastructure stuff that might not be necessary, some things I didn't really see the point of.

But when I talked to a long-time Baan IV customer, I realized that my assessment was probably unduly harsh. He was excited--ready to start an upgrade now, when a year ago when I talked to him, he was planning on waiting for several years.

For him, the crux was a set of capabilities that I had pooh-poohed. (These were the new integration and messaging capabilities.) At this conference, he'd gotten a close look at them, and he liked what he saw. He and I both agreed that the Baan people themselves had done a terrible job when describing them. But the actual products were an important advance. Did it make up for poorer support? "I just haven't used Baan support for years, so I don't care."

So, for one Baan customer, Greenough is making the right tradeoff. Is this true on the macro level? Well, there seems to be a lot of evidence that big Baan customers, like Flextronics and Boeing, are buying. But in Europe, it also seems that Navision is making inroads into the Baan customer base; according to our European correspondent, SSA may not have helped things when it severed relationships with several Baan channel partners by sending them a letter.

And what about customers who are using other ERP packages? Well, I know of at least two BPCS (the original SSA flagship package) who are planning on switching: one, 3M, announced the fact at the recent PeopleSoft Conference.

Does this mean anything? In my 20 minutes with Mike Greenough (a very enjoyable 20 minutes, I might add) I asked him that. At 3M, he said, the new CIO had just finished a successful PeopleSoft implementation. He wasn't surprised that she wanted to switch. "You win some; you lose some."

If those kinds of things are the major cause of switches, I agree that Greenough doesn't need to worry. The real worry is customers who switch because they want a more modern system.

What is Greenough doing about that? A major weakness in all of their packages has always been the financials. Replacing financials is a good reason to get rid of some current BPCS or Baan installations.

So at this conference, SSA announced the availability of a "world-class financial package" that will eventually be what any customer seeking better financial management in multiple countries will upgrade to. Will this help with retention, I wondered?

I thought perhaps a demo of the package, which derives from another SSA acquisition, Masterpiece, would answer my question. What I saw was admittedly incomplete; it's still an upgrade for PRMS customers and designed mostly to satisfy fairly specialized needs, such as the need to have a financial package if one opens up a factory in Eastern Europe.

But it was enough to make an assessment. I did indeed see that a) Masterpiece has some flexibility that was lacking in the core ERP applications and b) it will be a better package in the Czech Republic than the original PRMS financials.

I also saw that c) Masterpiece is about as world-class as Gonzaga University's basketball team.

So will this help keep BPCS, Baan, and PRMS customers and provide a "compelling" reason to upgrade? Well, it's a lot better than nothing. Will it end up keeping retention high? I don't know. It's an enigma.

Follow the Money

Since our company does not take money from companies we cover, we feel that it's OK to press the innovators when we can't figure out how they're doing it. We're not selling them anything, so we don't have to make them feel good. A few of them do indeed get mad and walk out. Many of them talk loud and fast and then tell us that they have to go over to Forrester. And a few leave us feeling that even if we don't know how, it may work out for them.

SSA is definitely in the latter category. But when I came back from the conference, I thought that perhaps a review of the financials would help me go a little deeper. I would be looking for organic growth in sales of each product line, strong margins, etc., etc.

So I decided to print out and read the S-1A for SSA Global. I found the filing on Edgar (this was the August filing, not the October filing). I hit the print button. And ran out of paper on my printer. Filled the printer with paper. Again. Opened a new ream. Ran out of the ream. And nearly ran out of toner. 954 pages of S-1A.

954 pages and alas, for me, not much help. Even with all that detail, it was quite difficult for me to understand whether there was organic growth in the key product lines or even how the profitability is being achieved. Even simple comparisons were hard, because SSA changed its fiscal year recently.

And even simple facts required some thinking about. Take the frequently made assertion that SSA is profitable. Yes, there does appear to be an operating profit of about 8% last year. But the company as a whole lost money because it paid out some of the profit in interest on loans made by the venture capitalist owners and paid out the rest in dividends on preferred stock issued to those same owners. Both are paybacks for the cash that financed all these acquisitions.

Nothing wrong with that, you might say, as long as operations are profitable. But software companies are funny beasts. If SSA had spent the same money to develop the software that they spent on acquiring it, those expenses would show up as operating expenses, and their operating profit would go down substantially. (In effect, you can think of the money paid out in dividends as analogous, in some ways, to money paid out as development fees to a development subsidiary or even a separate development house.)

So what does that mean? Nothing, really. All it means is that if you're doing apples-to-apples comparisons between SSA and some of the companies that they compare themselves too, the comparison companies have operating expenses that SSA does not incur. Is it still an apples-to-apples comparison? I don't know. It's a puzzle.

The puzzles don't stop there. If you look at the S-1A, you'll see that SSA has been pretty good at taking failing companies like Baan and converting them quickly into money-makers.

But just how is a bit of a question. There are some well-known strategies for doing this that produce good short-term numbers, but have little consequence for the long term. Was SSA using them?

One thing you can do, for instance, is buy out leases at a money-losing company and include the cost of the buyout in the purchase price (or capitalize it in some other way). The result gets rid of reported expenses and actual cash outlays, but it is not a change in fundamental operations.

Something else you can do is to institute a rigorous audit program for the customers of your acquired property. Usually, the failing company you acquired had been a little easier on customers, so you can get a one-time bump in revenue.

Reliable people have told me that SSA has done both these things. (I'd be astonished if they hadn't.) But how much? I don't know. It's a puzzle.

The Mystery, the Enigma, and the Puzzle

Now, if you pull off the covers of almost any company that is taking a new approach to its market or developing innovative technologies, you're pretty likely to see a jumble. Companies like that move fast. They make decisions involving complex tradeoffs quickly and move on. Baan support down, Baan upgrades up. OK. Hard to say they're wrong. Hard to be sure they're right.

And ditto with most of the other things I'm bringing up. Masterpiece financials a migration target? Well, it's hard to love it, but it may be the right pragmatic solution.

Most of the time, when I dig in, I don't find this kind of thing; I find stuff I actively hate. For me, 8% operating margin, achieved no matter how, in a company pulled in so many directions is a minor miracle.

So what kind of story is SSA? It isn't the Arabian Nights; it's more like Zola or Dreiser, a gritty story about a company that's trying to keep a lot of balls in the air.

My guess is that it's a pretty good story, one that will work out. If the S-1A is to be believed, it may work out well for the current investors and Greenough before it works out for post-IPO investors. But that's in the nature of Zola stories.

How will we know that it's working out? Well, there won't be any music and credits rolling. But if you see any of the following happen, I think you'll know they're on the right track.

• SSA actually does the hard, painful work of figuring out account plans for its customers. They figure out what the customers can legitimately use; they don't just foist whatever they have on customers that can't use it.
• SSA starts spending money on intangibles that drive business long term. Right now, SSA is a hard company to do business with or partner with, because it is running very, very lean. In Europe, firing your channel partners with a letter will cost you in the long run.
• SSA avoids facile claims about what they're doing. It's admittedly a hard story to tell, but if you settle for claims (like "world-class financials") that are easily seen through, you lose credibility.
• SSA improves its metrics. If you're going to reduce support, you have to measure the cost, somehow or other.

If you do see that, it will be a good thing for them, but also for the rest of us. The world can use software companies that are customer-centric and provide good functionality at a fair price. If you can make money doing that, not only do you deserve praise, but you keep the other guys honest.

To see other recent Short Takes, click here for a listing.

What kind of story is SSA? A good one. But a complicated one.