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Bits and Pieces

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.


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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