At a time when tech stocks the world over seem to be going south for both winter and summer, mainstream enterprise resource planning (ERP) vendors are posting record revenues. Okay, the outlook isn’t perfect – the continuing downward spiral of tech stocks is likely to hamper the sector’s ability to raise money and Oracle has announced a surprise profits warning – but it is rosy. Even Oracle’s problems seem to be due to flat demand for its database products. The company still anticipates 50% growth in applications revenues.
Just now, ERP is on a high (although the US slowdown may yet scupper growth). And what is putting a spring in the step of many ERP companies is the fact that the so-called “new age” vendors, the e-consultancies who once proclaimed ERP as part of the old, dead economy, are themselves looking dead in the water.
Thomas Ahlerup, director of investor relations and corporate communications at mid-range ERP vendor, Intentia, puts matters rather succinctly. “Twelve to 18 months ago, internet consultants and B2B vendors were being hyped to the skies. Now our industry has flip-flopped, and the chances of it flipping back in their favour look zero,” he says.
Ahlerup likes to tell the tale of a big Swedish e-consultancy which, 18 months ago, enjoyed a market cap of SKr 40bn, while Intentia had a market cap of just SKr 5bn. At the time, the CEO of the e-consultancy was asked why he did not buy Intentia, something his company could easily have done with its paper, Ahlerup remembers. The CEO’s reply was basically: What would we want them for? They’re old economy! Today that same e-consultancy has a market cap of just SKr 30m. Intentia, despite the plummeting market, now has a market cap of around SKr 3bn and rising.
“People have woken up to the fact that e-business is just business. It needs fulfilment and logistics capabilities or all the e-promises come to nothing,” Ahlerup says. That lesson, which blue chip corporates around the world seem to have taken on board, combined with work by the ERP vendors to web-enable their products and to add “front office” features such as customer relationship management and analytics, has transformed the sector.
Nevertheless, as, Ahlerup points out, the up-turn started from a gloomy base. “In the third quarter of 1999 everyone knew there would be a downturn.
The analysts predicted that growth in the ERP market would slow from 40% to 20%. In fact, the market as a whole had negative growth of 20%. The slump was sharper and deeper than anyone predicted,” he says.
At the same time, analysts such as GartnerGroup and Forrester began warning that the ERP market would have to re-invent itself for the new collaborative, extended supply chain world. ERP systems, they pointed out, were all about internal efficiencies within the corporate’s own walls.
The new economy would be about extended chains, partnering with suppliers and clients. Market opportunities would be far too dynamic for big, cumbersome ERP roll-outs taking 18 months to three years to complete. Old-style ERP was dead, they said.
As if to prove them right, a number of traditional ERP vendors turned in some horrendous numbers. Baan, formerly one of the big success stories in the sector, found things going particularly sour. JBA ran into trouble.
Others found profits turning to losses or stagnated.
The two ERP companies that came out best during the 2000 crunch were Oracle and SAP. The latter was helped by the size of its client base and the breadth of its product portfolio. Oracle’s was a slightly different story. The company has always seemed peculiarly blessed in its timing.
It owed its initial success to being in the right place at the right time with one of the first relational databases. It’s success in 2000 came because its boss, Larry Ellison, decided, back in 1996 and way before most other people, that the internet was the future. He ordered that all Oracle’s development effort would be focused on the web.
Oracle communications manager Stephen Millard says that, at first, the new direction was mystifying. “We were walking around scratching our heads saying, should we really be re-developing our product to run through a web browser? Is that really the way to go?” he says. But Ellison was right.
Thanks to his decision, Oracle stole first mover advantage in the dash by ERP vendors to web enable their products. Its announcement of Oracle 8i in 1998 was exactly what the market wanted to hear.
Bolstered by its foresight, Oracle enjoyed growth of over 100% in Europe for the period from June to November 2000, with most of this growth being driven by demand for its e-business suite. SAP went into overdrive to catch up. Other ERP vendors followed. PeopleSoft, in particular, believes it has gone further than most in rewriting its offering for the internet. It launched PeopleSoft 8 in June 2000, well after Oracle, and couldn’t ship product until September.
But, as PeopleSoft communications director Alastair McGill points out, the response has more than justified the horrendous R&D costs.
“Our year end results for fiscal 2000 show a 73% growth in our license revenues. Our net income is up 273% year-on-year for the fourth quarter of 2000 and we took almost half a billion dollars in revenue,” he says.
The question is, why are ERP vendors doing so well right now, while supply chain management vendors and e-applications vendors are hitting a brick wall? According to McGill, what the large mass of companies out there really want are applications that have the look and feel of “whizz-bang, spinning logo” e-sites, but that have the ability to back this glitz up with rock solid integration throughout a complex back-office product line-up. ERP vendors are benefiting from the realisation by corporates that they need to ensure that speed at the delivery stage is not achieved at the cost of divorcing front-end customer-facing systems from back-office systems.
Ahlerup argues that the current resurgence in ERP will probably hold through lean times caused by the slowdown in the US economy, at least for the mid-tier vendors such as Intentia and JD Edwards. “What we are seeing is mid-tier buying habits extending to the global tier one companies,” he says. Mid-tier companies have always prioritised fast implementations and don’t like having to employ external consultants. They look to the vendor to provide a one-stop shop service. According to Ahlerup, vendors with their own consultancy wings and fast implementation methodologies are reaping the benefit of this shift in buying habits.
“Both we and JD Edwards are finding ourselves being asked to pitch on contracts that would have been pure SAP territory before. We are getting on to shortlists we wouldn’t have known existed in the past,” he says.
Even Baan, which was bought by the automation and controls giant, Invensys, at the height of its troubles, has seen a turnaround. Commenting recently on Invensys’s six month results for the period ending 30 September 2000, the group’s chief executive, Allen Yurko was less than thrilled about Invensys’s overall performance (profit was down 5% year-on-year). But he had no qualms about his acquisition of Baan.
“We are increasingly confident that this acquisition was the right move,” he told analysts. Baan, he said, had already cut its cost base from $195m a quarter to under $100m and had seen an upward movement in sales. “We expect our software business to grow well over 10% a year as the ERP market recovers, and, of course, as Baan tackles its opportunities in the supply chain and customer relationship management sectors,” he said.
On 25 January this year, with the announcement of its third quarter figures, Baan proved him right. (Invensys has promised that it will break out Baan’s figures and publish them separately for the first year of trading so that the company’s recovery is visible). Invensys had forecast that Baan would reach break-even in mid-2001. In fact, it did better than break even for the period ending 31 December 2000, six months ahead of schedule. Nor was the improvement all down to cost cutting. The company saw sales increase by 37%; not quite up to the sensational levels enjoyed by some of its competitors, but pretty good.
Of course, no software company can ultimately buck a massive downturn in the world’s major economy if that it what is coming. Nevertheless, given a fair wind in the US, the future still looks bright for ERP.