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Over Wichita

Heard Here and There

A friend who hires salespeople at a second-tier ERP company says that he is getting resumes from the following companies: Intentia, IFS, i2, and PeopleSoft, but few or none from SAP and Oracle. The only surprise here is PeopleSoft.

We heard from SAP after the last Short Take. Let's be clear. mySAP.com is "the platform for the next-generation product." That, SAP has succeeded in establishing. The question is, "Is the 'platform' a technology that you upgrade to and pay for, or is it a brand name?" One generates lots of revenue. The other generates less. The answer is quite simple. It's not a technology that you need for any upgrade.

Only if you buy new Internet applications from SAP, do you pay for mySAP.com seats. Those seats are only the incremental seats for the new application. If you upgrade to R/3 Enterprise or just buy R/3 Enterprise, there is no mySAP.com-based charge. (There are cases where an upgrade of SD, for instance, may involve paying for some mySAP.com CRM seats, but the principle still holds.)

This has two, clear consequences. First, you're not going to see companies upgrading to mySAP.com across the enterprise unless they buy the (good, but slow-selling) portal application. Second, the companies that did buy large mySAP.com licenses under the impression that they were buying an upgrade are not going to be in the market for a while. Some companies are looking at a years-long timeline just to get the portal in worldwide.

It's hard to sort out all the layoff rumors. The i2 layoff rumors are clearly true. It's also true that Glovia (does anyone care?) lost its CEO. I can't tell about the rumor that Siebel is laying off 20% or about the rumor that SAP is instituting a furlough program, though one or two of the sources have been reliable. Our very reliable EC maintains that the Hasso-is-going rumor is true; It's just a question of timing.

Everyone is looking for the magic macro-economic indicator. Is it salespeople resumes? CIO budgets? Something even more esoteric? Something less?

I'd like to point out that any such indicator is NOT likely to be one that was reliable in the past. The software market has changed structurally, and the only reliable indicators are those that are meaningful within the new structure.

Key elements of that change. A) Sales primarily to installed base. B) Lack of belief in transformative value of applications. C)Hence, lack of belief in probability that applications will return high value in a short period of time. D) Swing of the pendulum back from growth as the most important corporate goal to cost control as the most important goal and the inability of the application companies to change their value proposition accordingly.

Is PLM the next big growth area? It's a future. Nobody's getting much traction today. PTC is losing money; MONE is selling new products to existing customers; Dassault is also growing through new products. The innovators are clearly interested in the area, but they're not investing heavily yet.

Have to close with i2's earnings announcement. No surprises here. Given how bad the news was, I thought Bill Beecher and Sanjiv performed creditably. They're doing a lot, though still not enough. But I am still positive about the upside potential.

Structurally, the company is clearly changing the rules about how you run a niche software vendor. Reduce your R&D costs by developing in India. Cut the expensive facilities and people. Qualify ruthlessly. (The reduction in stacks supported is a form of qualification.) Use India (where there are no copy protection laws) to develop customer test beds. All good ideas.

At a valuation of two-plus times current cash (three times future cash) and mature proven products, i2 doesn't have to do much to look good. The products are worth money to people, and they are the best products on the market. And remember, when Sanjiv says that the penetration of these products is very, very low, he is quite right.

Disappointments, too. Little willingness even to acknowledge two key problems: i2's problematic reputation and the marketplace's doubt about the incremental value of i2's products. I talk to people who say, "The products may really be better, even much better, but why pay the extra cost (in effort and time, if not in money) when I can get the equivalent product from my ERP vendor?"

I think there are good answers to those questions, but Sanjiv gave no indication that he thinks he needs to worry about providing the answers. If I'm right, proof is needed. But proof from a company that has always sold vision is particularly hard, not just because people might not believe the proof, but also because the culture is used to working without any need to prove anything.

The sourcing summary has been delayed for a couple of days. Sorry.

A more readable version of this report is at www.b2banalysts.com/new/research/shorttakes/7172002.html. For a full list of recent Short Takes, look at www.b2banalysts.com/new/research/shorttakes/recent.html.