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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