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It's Not Just the Economy, Stupid

Why are the innovative companies and markets doing poorly, and the stodgy companies and markets doing well? In this short issue, some stories and impressions that may shed some light.

The IT Gordian Knot. We just came from a meeting at a large CPG company—you've bought their products recently—where we proposed doing an IT review to the CIO. We're not letting out any secrets when we tell you that 75% of their systems are custom-built, many on mainframes, poorly integrated.

Do you remember Alexander and the Gordian Knot? The person who untangled the knot would rule the world. Alexander, 19 years old, took one look at it, pulled our his sword and cut it in half. This company could use an Alexander approach to their systems issues, but they're not going to do it. They can't afford either the capital or the disruption that a full-scale ERP system implementation entails.

You analysts list this company as an SAP shop, and if the fact that SAP software runs there makes them an SAP shop, so they are. But SAP has very few of the total available seats and very few of the total available transactions. So here they are, ripe for the plucking, right? Wrong.

SAP will sell this customer some seats this year and next, but only a few. Case in point. The company is running 47 different HR systems in North America alone. Rather than replace them (lots of seats), they're going to put SAP on top, using it for a corporate central HR system. They'll just batch up the transactions from each system every so often. Seats sold: a few corporate users. (The EAI work will pick up a few dollars for somebody, most likely an integrator.)

Two years ago, I pointed out that companies' abilities to install a full-suite ERP product varied widely, depending on their business, their internal corporate dynamics and the degree of fit with the commercial system. Over time, I argued, costs of implementation would decreaseand fit would improve, so the ERP value proposition would become attractive to a growing number of companies. The adoption numbers would probably go, therefore, in some sort of flattish bell curve.

What we may be seeing now is some sort of discontinuity in the curve, due to two factors. First, complex existing systems are making the transition far harder for these companies than I thought. Second, the particular difficulties that these companies are experiencing exposes weaknesses in the way companies justify (and ERP companies sell).

Who Really Wants PDM? Weaknesses? Let me give you an example. A well-known PDM vendor is trying to sell a major product extension into a large industrial manufacturer. Let me tell you, this is a great match. Romeo and Juliet, J. Lo and Ben Affleck, we're talking that kind of fit. But the sales cycle just slogs on and on and on.

There are two problems. First, the salesperson has never been able to penetrate beyond the level of the initial buyer of the system—who is not the buyer of the new system. Effectively, nobody higher up in the company understands why they should be buying, and every time the project bubbles up, the higher-ups respond with snide comments about the Oracle implementation that is still swallowing up money.

This company requires rapid ROI for any IT project. But this particular project doesn't have any ROI. The justification for the project lies in the need to replace multiple outmoded systems that are on the edge of breakdown. Essentially, the justification is the same as for repairing your roof. (What's the ROI of roof repair, anyway?) Brian tells me that the cost for this system ought to be treated as a sunk cost, but neither this company nor the software company know how to make a case for that kind of expenditure. It's worse than trying to get a state government to invest in road repair.

You can use ROI language, of course, to justify purchases of vitally needed infrastructure, but the standard approaches used by most software companies don't work. You have to be able to treat risk mitigation as something that has ROI; essentially the avoidance of foreseeable and inevitable costs (like repainting after the roof leaks) needs to have some ROI associated with it. I call this risk-adjusted ROI; it would be interesting to see if any of the software vendors start adopting it. (It would probably help sales.)

So, sales are slow because the natural candidates are still mired in the mess they created the last time around and because the software companies can't figure out how to make a case for replacement in this market. Why, then, are some companies doing better than others.?

Laggards Coming Up. Well, let's look at JD Edwards. Maybe they can tell us. Certainly their earnings call told us something.

Clearly, the button-down neo-IBM style brought in by Hank Bonde and Bob Dutkowsky is exactly what was needed to do startling things, like make their numbers and (even more important) increase margins on services.

Clearly, too, JD Edwards has not exhaused the pool of technology laggards—er, conservative companies. These are companies that JD Edwards is pulling in now, for whom the fit was always pretty good, but who were prevented from moving to ERP by innate cussedness—er, conservatism—and by a reluctance to pay what had been rather steep prices. There will always be companies that are out of synch like this, and JD Edwards is most likely to appeal to them. These companies are more likely to be in the mid-market than in the F500, because the high costs of ownership are more likely to dissuade mid-market companies.

And clearly, as long as the pool of laggards hold up, they'll make their numbers. As one of their people said, they'll have to work every waking hour this quarter, but they have a good chance of making their numbers this quarter.

Beyond that, I'm a little worried, and what was said in the earnings call wasn't encouraging. In the call, Bob Dutkowsky acted as if it was the new, innovative JD Edwards 5 which was producing much of the interest. But anyone who knows JD Edwards knows that JD Edwards 5 is just a repackaging. If you've really been following JD Edwards, you also remember that core JD Edwards product development has not produced anything substantial in something like 3 years. Without anything new, JD Edwards falls farther and farther behind competitors like PeopleSoft and Oracle in overall product footprint.

Much was made in the call of the sale to Fidelity of the new CRM package and the development of a new CRM product for financial services. Unfortunately, this CRM product is not much of a product, has had its sales effectively inflated over the past year by SAP-like estimating practices, and is being sold to a company (Fidelity) that is a notorious consumer and discarder of new technologies. It's good news, no doubt, but it feels a bit like a trout announcing that he's just found a bright, glistening object just floating in the water.

It's Not Just the Economy What do these observations mean? Let's take it as obvious that for any technology that can bring ROI (as opposed to most e-technologies, which brought no ROI), there is a natural adoption cycle. Different companies are capable of adopting or are willing to adopt later than others, partly because the degree of fit changes over time, and partly because their particular economics are different from the ordinary.

The stories above suggest that it isn't just the economy that is slowing down the market. They suggest that there is a new and unforeseen barrier to new adoptions. If this theory is right, SAP should be the first to be affected, but the most resilient, PeopleSoft next, and JD Edwards last.

Of course, the economy—availability of capital, willingness to invest, and changes in goals for technology adoptions (cost reduction, rather than revenue increases, etc.)—is affecting the market, no question. It is the economy. But it isn't just the economy. It's also how these packages work and how well.

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