Where next for enterprise applications?
One manufacturer's story amidst a market in transition
By Kevin Parker, editorial director -- Manufacturing Business Technology, 2/1/2005 7:00:00 AM
When it comes to having and holding an enterprise system, the experience of Basic American Foods (BAF), Walnut Creek, Calif., is in many ways typical.
"Many of the vendors we first looked at aren't around anymore," says Joe Behrendt, CIO. "There's been a tremendous amount of consolidation. Even some of the largest vendors have disappeared or are no longer viable."
The system BAF has today, when purchased, was a product from SCT's process manufacturing division. SCT is better known as a technology provider in markets such as education.
"I don't know what happened," says Behrendt, "but we heard there were disagreements as to the strategic direction of the company. The decision was made to spin off the enterprise and supply chain solutions."
It isn't just former PeopleSoft or J.D. Edwards customers that have found themselves face-to-face with the unknown when their enterprise vendor was acquired. It's said that one of three software companies disappears every year.
As with any emerging market that grows quickly at first, the enterprise applications market—which in 2005 is expected to experience positive growth in the single digits—was no doubt overcrowded and due for consolidation, but rapid change has led to questions.
To wit, how do manufacturers know if they're taking the right steps to avoid costly and unnecessary future system replacements? Are vendors likely to support acquired systems, or are they looking to jump-start the hoped-for emerging replacement market? Will vendors be able, as some claim, to migrate multiple systems into some future unifying replacement?
Many see the enterprise applications market's future residing with companies like BAF—which has about a half-billion dollars in annual revenues and about 1,500 employees—or even with much smaller companies. According to the U.S. Department of Commerce and U.S. Census Bureau, in 2002, there were a reported total of 352,619 U.S. manufacturing establishments, the vast majority of them small companies with less than 100 employees.
"It occurs to me that in high-tech markets up to now," says Roberto Eckles—who has long experience in enterprise applications, and is an industrial markets manager with auto ID vendor Intermec—"by working with the very largest corporations, we've been dealing with the leading-edge users, with resources to expend on pilot projects and development work and upgrades. It's in the midmarket where mainstream users are looking for a true packaged solution that delivers definable value."
Today, BAF's enterprise vendor is Infor Global Solutions.
"Initially, we were very concerned because SCT's sale was to a private equity group, Golden Gate Capital, which might simply have wanted to 'turn' the company and then sell it again," says Behrendt. "But Infor has made further acquisitions, and we believe today it has the critical mass needed to survive."
Slicing the pie
One way of looking at today's enterprise market is by segmenting the players into mega-suite, rollup, regional, and vertical-industry providers.
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The largest vendors, the "mega-suites," are used in a wide range of industries, not just manufacturing. They have global reach and great sales and marketing, but due to complexity, it's been said that implementations can be risky.
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The "rollups" are those vendors that bought a number of fading enterprise vendors and, at least to some degree, intend to live off the maintenance fees associated with the systems. While the strategy has had some appeal for Wall Street, some questions remain unanswered.
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The "regional" vendors have a strong presence in one or another of the world's developed regions, but may have only loose relationships with their affiliates in other parts of the globe. In fact, all regions may not be working off the same code base. As globalization continues, this model may prove problematic.
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A final set of enterprise vendors is focused exclusively on a single vertical market, such as manufacturing. These smaller vendors hope to provide a depth of functionality and domain expertise that can't be matched by those tackling many markets at once. But is the chosen niche sufficient to support continued growth? And those that "niche" others are likely to get "niched" themselves at some point.
Of course, as with any such market segmentation, for a given vendor, the story may be more complex.
Besides its purchase of SCT's process manufacturing division, Infor (which was for a time called Agilisys) has acquired Brain AG, Future Three, infor business solutions, daly.commerce, Varial, and most recently, Lilly Software and Mercia Software.
Yet Tom Lynch, CTO, Infor Global Solutions, would dispute that his company should be referred to as a rollup. "Rollups are consolidators that are putting things together indiscriminately. We're an assembler, not a consolidator. We're bringing together products that are focused on specific industries and customers, and acquiring domain expertise in those industries as we go. The difference between us and the horizontal players, in terms of depth of functionality and domain expertise, will widen over time."
Further, in the last quarter, 29 percent of Infor's license sales were to companies, notes Lynch, "with which we've never worked before."
Working the numbers
According to a late December 2004 alert from Boston-based AMR Research's Bruce Richardson, the total enterprise applications market in 2005 should total near $50 billion, with licenses growing 8 percent to more than $17 billion—"the most robust growth since the bubble burst."
In talking with representatives of many enterprise vendors, their most barbed comments seem inevitably to be reserved for either SAP or Microsoft Business Solutions, or both. Clearly, to their minds, SAP is the epitome of a mega-suite vendor. But it's difficult to argue with SAP's success.
In January, SAP announced that based on a preliminary review of its fourth-quarter 2004 results, its full-year 2004 software revenues are expected to be $U.S. $3.06 billion, representing an increase of 10 percent compared to full-year 2003 software revenues, or 13 percent on a constant-currency basis. Total revenues for the full year are expected to be $U.S. $9.73 billion, a 7-percent increase compared to 2003, or 10 percent on a constant currency basis.
In December 2004, Shepherd said that SAP today has 39-percent market share in the enterprise applications market, compared to $5.5 billion in revenues and 25-percent market share for the combined Oracle-PeopleSoft.
Of course, SAP is best known for its penetration of the Fortune 500 via its strong financials, and more than one plant-centric ERP vendor goes to market on the basis of the ease with which its product integrates with SAP corporate financials. Yet with an R&D budget said to be more than $1 billion, SAP is improving its manufacturing capabilities, and it has made a number of recent moves to capture a greater share of the midmarket.
The 10 largest enterprise applications vendors, based on 2003 calendar-year revenues, were listed in Manufacturing Business Technology'sTop 100 in the July 2004 issue, as shown on page 26 of this article.
As AMR's Richardson has pointed out, what's interesting about the current list of leading vendors is the number of them focused on the midmarket. In the past, the leading vendors were almost exclusively those going after the largest enterprises.
The listing also details a number of the vendor acquisitions that have swept the market.
More recently, Epicor Software acquired ROI Systems, and Infor acquired Lilly Software Associates, both of which were long-time providers of enterprise functionality to midmarket manufacturers.
As to the prominent position in the listing of so-called consolidators, when a software vendor is acquired, the immediate fear is that the new owner will not support the installed base of the acquired vendor. Shepherd has in recent months made the point that going forward, product viability may be more important than vendor viability. In other words, an acquiring company is liable to continue support for any enterprise application product having a viable installed base.
Behrendt isn't sure he's buying that. "Product viability and company viability go hand-in-hand. Some vendors failed just trying to move to open platforms. You need money to keep a product viable."
His understanding is that Infor's goal is to have a common technology platform across products, but unique functionality for different vertical markets—i.e., discrete and process manufacturing. Infor also will roll out cross-platform extensions that BAF is interested in, such as warehouse management and financials integration.
"As long as Infor is viable, we won't look to replace," maintains Behrendt. "As long as it continues to upgrade and modernize the technology, there would be no reason to convert from one vendor to another. That would be a multimillion-dollar project and something to be avoided. We remember the monumental effort it took to put in the ERP system."
Where the value is
Prior to purchasing the system in 1995 as part of a reengineering effort, BAF had no ERP system. "We were basically a company running on spreadsheets, and doing many things manually," says Behrendt.
Return-on-investment came from better management of raw-materials inventory. By 1996, BAF executed materials planning at the enterprise level, rather than at each of its five manufacturing sites. At the time, says Behrendt, "that was quite something."
BAF maintains about 750 clients on PCs or via terminal services, including on the shop floor. The IT department includes about 30 people, with about half of those being technicians. Virtually all employees use the system—centralized across all facilities, including headquarters, five manufacturing plants, a central distribution center, and sales offices throughout the U.S.
