Behind the buy
Vendor stability, reputation loom large in application selection
By Roberto Michel, Editor -- Manufacturing Business Technology, 1/1/2002 12:00:00 AM
When Millennia Technology went hunting for a new enterprise resources planning (ERP) system, a number of factors were in play, with the functionality of the software just part of the equation. Also factored into the search were the stability of the software vendors, and their ability to execute on product development and support—according to Anthony J. Pavlik, vice president and general manager of manufacturing operations for Millennia, a Cheswick, Pa.-based contract manufacturer to the electronics industry.
"Certain functionality is critical to us," says Pavlik. "At the same time, we were looking for an ERP vendor with what could best be described as good infrastructure—good people, and a track record of successful implementations."
Pavlik's dual emphasis on the vendor's product functionality and ability to execute is a common approach to an enterprise applications buying decision, says Dick Kuiper, a vice president with Meta Group, a Stamford, Conn.-based information technology (IT) analyst firm. With the down economy hitting enterprise applications vendors hard, the importance of vendor stability is heightened.
"The big criterion right now is vendor viability," says Kuiper. "With vendors going out of business or being acquired, viability can quickly outweigh other factors. With Tier 1 companies, viability is extremely important. The Tier 2 and Tier 3 companies still are interested in vendor viability, but the smaller the company, the more important it becomes to get extensive functionality at good value."
The enterprise applications market and vendor pricing strategies have changed in recent years. Extended enterprise system vendors now are large public companies with financial track records that prospects can study at length. Traditional user-based, per-seat pricing is still around, but a number of other variations have emerged, such as revenue-based, roles-based, server-based, and value-based pricing models. This may seem daunting to companies looking to make a software deal, but experts say the overall economy and level of competition in the enterprise software market currently play in favor of the buyers.
"It's a buyer's market," says Jon Ekoniak, a senior analyst with U.S. Bancorp. Piper Jaffray, a New York-based financial analyst firm that studies enterprise software companies. "There definitely is pricing pressure on vendors right now. At least through the first half of 2002, we'll continue to see a buyer's market for enterprise apps."
Of course, manufacturers themselves are hard-hit by the economy, with most companies keeping purse strings tight on IT investments. Understanding current pricing strategies, as well as how to balance selection criteria to minimize risk, is more important than ever.
Function still matters
Make no mistake about it, says Pavlik, functionality was important to Millennia's ERP selection. The company used a feature checklist with more than 100 specific functions in evaluating ERP packages, with those specific functions spread across broad areas that included order management, procurement, forecasting, production planning and scheduling, financials, product data management, and shop-floor control.
Of particular importance was the ability of an ERP system to handle backflushing—a method of recording labor, material consumption, and costs to jobs by reporting information at only certain points in the production process, and typically toward the end of the process. "We're an electronics manufacturing services provider, so we have a lot of parts that we deal with on the plant floor, and many inventory transactions," says Pavlik. "Accommodating that complexity with backflushing was crucial to us."
After narrowing down its ERP choices to a handful of packages, and further analyzing them, Millennia chose ERP for Extended Systems from Atlanta-based MAPICS. According to Pavlik, ERP for Extended Systems' flexibility in setting up backflushing—which allows reporting points to be defined by the workcenter—was a key feature. Millennia's managers also liked the way the system defined and managed inventory on the shop floor, and handled costing. "The software showed itself particularly well on many of the core functions we'd use heavily on a day-to-day basis," he says.
At the same time, Pavlik says Millennia liked MAPICS' long history, its support services, and ability to execute on product development. "We asked specifically about the number of people it had in R&D [research and development]," says Pavlik. "Basically, we knew that MAPICS is a solid company that's going to be around for a good long while."
Software industry executives agree that prospects are asking more questions about vendor viability these days. "Features and functions aren't as important as they once were," says Michael Maquire, a vice president with SAP, a Newtown Square, Pa.-based vendor of extended enterprise system software. "Companies are looking for a vendor that can offer best-in-class functionality, but they also are looking for a vendor with the resources and long-term standing that ensure its solutions will continue to stay best-in-class."
The sheer size and clout of a vendor can be a decision-driver on its own, but even vendors that haven't yet reached the multibillion-dollar revenue mark say prospects check out their resources for R&D and services. "Functional content of a package still is very important, but so is company strength," says Bruce Kirschenbaum, director of business solutions consulting for Chicago-based extended enterprise system vendor IFS. "Manufacturers are much better educated buyers of enterprise applications than they were six or seven years ago.
"A big part of looking beyond the software is examining the implementation team," Kirschenbaum continues. "With our prospects, many of them want to meet the individual consultants who'll be on their project."
Getting to TCO
Fully scoping the amount of implementation services needed—even before a contract for the software is signed—is an indicator of greater buyer sophistication, says Kirschenbaum. "We use an analysis tool to accurately gauge what's needed in terms of data migration, report writing, and other factors," he says.
Kirschenbaum says the fact that IFS does most of its own services helps it develop accurate bids. The component-based software also addresses the desire of prospects to limit solution costs. "In the classic ERP system, the modules are written in routines that bind all the modules together in such a way that all the modules need to be purchased, installed, and maintained—even if your company only wants to use a handful of them," he says. "With IFS's component-based structure, if a company doesn't need a particular function, it doesn't have to purchase that component. This cuts down on cost."
Celia Fleischaker, a product director with Irvine, Calif.-based extended enterprise systems vendor Epicor, agrees that keeping down implementation costs is of keen interest to buyers. Epicor offers an "up-front guarantee" program that pledges the cost of implementation will not exceed the cost of the software.
While such programs gained popularity in the late 1990s—after publicity surrounding costly implementations, especially at large companies—Fleischaker says capping the cost of services still is popular. "It all goes back to total cost of ownership," she says. "Companies have a budget they need to stick with."
Nearly all the extended enterprise system vendors offer solutions for customer management, supply chain planning, business intelligence, and e-commerce. ERP vendors tout their ability to offer pre-integrated extensions as a "one-stop" shop for enterprise applications. "Offering a broader functional footprint definitely is one of the selling points the ERP vendors have," says Kuiper.
The flip side of controlling costs is ensuring return-on-investment (ROI). Greensboro, N.C.-based iWork Software offers its InventoryNow! solution under a money-back guarantee program that promises 120-percent ROI in 120 days. The program, says Ken Hamlin, iWork's chief technical officer, is no gimmick, because "it forces us to have 'skin-in-the game' with the implementation."
As the first step in the program, says Hamlin, iWork analyzes areas for inventory management improvement for the prospect, and recommends remedies. "At the end of this fixed-fee preassessment, the prospect gets a deliverable in terms of recommendations for improvement, whether they decide to go with our software or not," says Hamlin.
InventoryNow! addresses inventory and cycle-time reduction in two ways: via notifications and alarms that alert managers of potential inventory problems and resolutions, and via access to real-time inventory information. Using a "value-based" pricing model for both the software and implementation services, the amount of ROI scoped out for a project is used to determine fees for the solution, says Hamlin. An analysis 120 days after go-live quantifies the ROI.
Hamlin says the intent of the program is to eliminate risk on the part of buyers. However, for the program to work, some reverse due-diligence takes place. "We not only have to make sure the implementation will remove enough manufacturing and inventory management constraints to ensure 120-percent ROI, but we're also looking for a culture of continuous improvement and top management buy-in from the customer," he says. "We're becoming true partners, so we have to ensure the project will be driven from the top down, or it simply won't work."
Deals and strategies
User-based pricing is the traditional means of licensing transactional systems such as ERP. In some cases, the users are specific "named" users, and in others, the deal places a cap on the number of concurrent users allowed on the system. In either case, user-based pricing is common for ERP systems, but has limits for other types of applications, says Kuiper.
"With the expansion of solutions from ERP vendors into areas such as supply chain planning and analytics, there have been shifts in pricing because a supply chain planning solution may only be used by two or three people," says Kuiper. "If supply chain planning is priced per user, all of sudden the price per user is out of the ballpark."
The result, says Kuiper, is that vendors have devised revenue-based pricing models in which the cost of an application varies based on the user company's annual sales, or by a financial metric such as per million dollars of cost of goods sold. "A lot of vendors are using a revenue-based model for supply chain planning," says Kuiper.
SAP's Maguire says SAP offers roles-based pricing. "For supply chain management solutions, we sell the roles," he says. "For instance, someone with the title of production planner in an organization may need access to our supply, demand, and transportation planning applications. Or, it may be that a role calls for access to a combination of transactional modules and a planning solution."
Additionally, says Maguire, SAP charges for the base software engine. For instance, there is a base charge for Advanced Planner & Optimizer (APO)—SAP's supply chain planning engine—and charges stemming from roles-based users of APO.
Server-based and processor-based pricing models also are gaining popularity, especially for capabilities such as Web-based self-service portals that may have a high number of external users that only need to use the portal occasionally. "We use a processor-based pricing model for our Web storefront and our portal solutions," says Epicor's Fleischaker. "The intent is to charge based on what's needed to run those applications."
Most observers, however, say that enterprise software deals still hinge on whether the bottom-line total is acceptable to both parties. There simply are new or multiple pricing models involved in getting to that bottom line. "It's not the pricing models that dictate better deals," says Kuiper. "Better deals happen because of competition, and right now, that level of competition is high."
| FOR MORE INFO: | ||
| Epicor: www.epicor.com | IFS: www.ifsworld.com | iWork Software: www.iworksoftware.com |
| MAPICS: www.mapics.com | SAP: www.sap.com | |
