An Industry in Transition
Whither the applications industry? The recent earnings season
shows it is not in complete collapse. But the bits and pieces we're
hearing suggest that the industry is still changing very quickly
and in ways that challenge us all.
SAP "Leadership"
If there is a post-ERP applications world out there, SAP is in
by far the best position to make the transition. (If history is
any guide, most won't; remember, 10+ years ago, ASK and Dun &
Bradstreet were leading vendors.) To make the transition, though,
they will need vision and leadership.
Recent performances don't show any great surplus of either commodity.
At the SAP earnings call, much was made of SAP's "leadership"
in CRM. The reaction of one reader? "We're all adults. We know that
the only thing SAP is doing in CRM is redefining what 'CRM' means."
But if we're
all adults, doesn't that make loud claims about CRM leadership,
well, childish?
The European Correspondent weighed in on the earnings call this
way. "SAP made its profit numbers because maintenance revenue
increased 10 percent. Since there is no additional cost, this all
goes to the bottom line. I expect SAP will use this
to compensate for the profit impact of slow license sales."
"SAP is also trying to increase service revenue. They are
cancelling contracts with hardware
vendors on the provision of services under the SAP franchise. They are
also pushing standard services, such as Safeguarding, harder."
In the US, the move toward increased service revenue is real, but
only incremental. Sales management now has P&L responsibility for all
revenue, including consulting and training, so it has a say in how that
is provided and sold. But the big emphasis is still on revenue from licenses;
we have not gone to a service revenue emphasis, the way Oracle has.
Again, one has to ask, "Is this leadership?" The companies in their
declining years are the ones who make their profits from maintenance revenue. A company
with leadership, faced with fundamental structural changes in the market (e.g.,
declining license revenues) responds forcefully and with a vision of how
the market will morph.
Part of what is slowing them down, of course, is the
lack of allegiance of some of their customers. An expert market researcher
that we know well
asked three big SAP clients, including
Whirlpool and Allied Signal, about their interest in a best-in-breed sourcing
application. All the companies were still finishing up very long implementations,
and all were very negative on the idea of buying more software from SAP and were
more than open to looking at new products. The old line, "SAP does everything,
so it does nothing." was resurrected. This level of antipathy is surely
not all that common; it's doubtful that it's at even a plurality of the SAP American customer base.
But good leadership means real focus on account management
at major companies like Whirlpool, and a clear plan for bringing new products (SAP
has announced a competitive sourcing product) into those accounts.
Let the European Correspondent have the last word. "Hasso Plattner is not likely
to renew his contract in 2004. Henning Kagermann is not likely to renew his in 2007.
But then who will lead? Leo Apotheker will be too old. Shai Agassi is too young. The
most likely candidate is Gerd Oswald, now 50, owner of SAP's largest revenue stream."
Enterprise Asset Management
A person intimately involved with license sales of EAM (maintenance) software
weighed in last week. "Datasweep was struggling most of last year, but has come
up noticeably in the last 4-5 months. MRO is still the company to beat in most
of the manufacturing area. Have not seen Oracle at all, anywhere. SAP is
a factor, as always. Mincom is sold
only to Australia. And Indus's new products have not had much traction. Indus still
is strong only at big utilities."
Two things are important about this. First, people continue to buy
best-in-breed maintenance software, just as they always have. JDEC and
Oracle's new offerings are as yet invisible, and SAP picks up only what
it deserves to get. Second, what appeals to the buyer is quite different
from what appeals to the analyst. In analyst briefing quality,
Mincom and Datastream are probably the strongest of the group. Does
this mean that analysts are not getting the real story any more?
Sell-Side Products
We recently completed a mini-review of the space, picking out
four vendors (out of roughly 20) for detailed analysis. As always,
some nuggets emerged:
- Click Commerce has just not made the transition from being a
service-intensive, pseudo-software company to being a vendor that
can sell a software product off the shelf. Significant improvements
in the product haven't helped as much as they might because other
vendors are also improving quickly. The cash at Click Commerce
has attracted interest from potential acquirers, but the response
from somewhat mercurial CEO Michael Ferro has been pretty much
what yours or mine would have been, to try to sell the IP, but
keep the cash.
- The best-in-breed vendors certainly have a problem competing with Siebel.
They are winning some of the time. Our favorite of the bunch, ChannelWave, which does
multi-tier lead management, beats Siebel if it can do a demo, even if Siebel
cuts the price. (It should; their product is clearly superior.) But the amount of
difficulty they are having suggests that Siebel's sales strength continues to be
great. Most application vendors have a problem selling any products that lie outside
the core. But Siebel (and PeopleSoft) seem to be able to sell from a rather large catalog.
- Despite this strength, several vendors nominally competing with Siebel
have reached the 10-20 customer range relatively easily. All of
them say that their biggest problem is getting leads. To me, this is
just another sign of the widespread skepticism about applications.
These days, it's harder and harder to
capture anyone's interest just with an idea. Geoffrey Moore is
now arguing that traditional marketing techniques are pretty much dead.
For the small software vendor, the only marketing that is likely to work is one-to-one
or highly focused, highly personalized marketing. If true, don't expect any small companies
to grow as quickly as their VCs want them to grow.
JDE Earnings Call
The market reaction to the JDEC earnings call was tepid, the analyst
reactions unilluminating. The clear theme was that operational
improvements have made a marginally failing property into a marginally profitable ($0.05/share)
one, an achievement in this market.
There was one real negative and two pieces of equivocal news. The negative was that service
revenue did not reach estimates. There were some "everybody's spending less on consulting" excuses,
but overall, the explanations were not satisfactory. JD Edwards has made increasing
service revenues part of its strategy, so this was a failure in execution. And a worrisome
one: any software company should be able to
increase its consulting (as PeopleSoft and Oracle have), because customers want to buy services
from the software vendor.
Three reasonable explanations. One, sales was overly focused on selling
licenses and was not managing the services sale appropriately. Two, management was using consulting
to buy license revenue; hence, utilization fell. Or three, JD Edwards is not managing its
partnerships with consulting companies so as to insure that JDEC gets its "fair" share of
service revenue.
Equivocal was the wide dispersion of types of customers. When you have Electrolux, Ralcorp
Holdings, and Honolulu Water Supply as new customers of a mid-market manufacturing package,
the product line is not exactly coherent. The core problem: the Numetrix APS product has a natural
home in consumer packaged goods and the Youcentric CRM product has a natural home with companies
for whom call centers are strategic, whereas the base JD Edwards product belongs in the mid-market
manufacturing, oil and gas, and construction industries. Selling different products into different industries
is expensive. How is this equivocal? Well, at least the products are selling.
Also equivocal was the announcement that JD Edwards is no longer a net capitalizer of software
development costs. Without the $5 million net amortization this quarter, they said, EPS would have been
$0.07, so the decision to stop capitalizing has some bottom-line consequence. It's equivocal, of
course, because it's unclear what they were capitalizing before. Was it the highly expensive and
ultimately unsuccessful Siebel acquisition and implementation? Was it the overly expensive acquisitions?
Was it, saints preserve us, costs related to development?
IBM Global Services
One odd trend that I want to call to everyone's attention is the fact that
three tiny software vendors in a row told us last month that their biggest competitor
was IBM Global Services.
What they mean is that Global Services is using WebSphere and sweat
to build custom applications that do what these software vendors
claim to do.
This is odd because we're constantly being told that the big enterprise
applications vendors own the software market and that even best-in-breed
vendors can't compete. What this suggests is that a significant
number of customers a) recognize that the enterprise application
vendors are not going to provide them with strategic applications
and b) have enough money to invest in custom apps, which are far
more expensive than best-in-breed.
Sarbanes-Oxley
Both PeopleSoft and Oracle have recently claimed that Sarbanes-Oxley is
now a driver for new purchases of enterprise applications. Bob Dutkowski (JD
Edwards) threw some cold water on that in his call, but it still seems to
be widely believed.
I think it's a minor driver at best. But to the extent that it is a driver,
I'd like to remind readers that Hyperion and Cognos (especially after its
recent acquisition of Adaytum) are likely to be much heavier beneficiaries.
The simple and fast way to get more visibility into financial processes is to have/
build a data warehouse.
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