The past year in the high-end accounting software arena witnessed a major shift in vendor strategy: From providing generic, vanilla applications– whether for core accounting or manufacturing or logistics–to targeting vertical industries and market niches. The year also saw a determined effort by vendors to expand their product footprints, adding new functions to their ERP (enterprise resource planning) systems. And, 1998 saw vendors promote new analytic tools for helping their customers digest the vast amounts of data produced by their systems.
Finally, as previously reported in these pages (see “Wooing the Middle Market,” September 1998), all major vendors began training their sights on the midmarket customer–a company as small as $50 million in revenues or as large as $2 billion, depending on the vendor’s definition.
The pursuit of verticality resulted in an orgy of partnerships and acquisitions. Retail, for instance, was an area of major activity among the top ERP vendors. In June, PeopleSoft Inc. acquired Intrepid Systems Inc., a vendor of merchandise management and decision-support software for the retail industry; in July, Oracle Corp. announced a partnership with Richter Systems Inc., which would integrate Richter’s software for tracking and managing retail products with Oracle Financials. In August, SAP AG acquired Campbell Software, whose workforce management software is designed to manage the allocation of sales clerks and inventory people across multiple stores in a retail chain. Also in August, Baan Co. NV announced a joint venture with JDA Software Group Inc. to integrate Baan’s software with JDA’s, which integrates retail point-of-sale and E-commerce data with back-office systems.
There are lessons to be drawn from these examples. All four ERP vendors announced deals that would merge “best of breed” retail software applications with their core software. But what’s striking is how different the functions of the retail applications are, ranging from workforce management to merchandise management to point-of-sale. Similar differences exist among the vendors in other vertical markets that they support. This means that users considering the purchase of accounting or ERP software should not assume that one vendor’s support of their market is a cookie-cutter copy of another vendor’s support.
In a way, the emphasis on vertical markets is a return to the 1980s. At that time, many accounting software packages were developed on an ad hoc basis, to fulfill the needs of, say, a particular beauty salon or a particular engineering firm. These ad hoc packages were then sold to other similar businesses. In time, more standard core accounting functions were added.
However, the new vertical software is different in that the core accounting functions were there first. When client/server systems became de rigueur in the early 1990s, application developers designed generic packages that could fit any business. There were some distinctions–the biggest one being between manufacturing and nonmanufacturing industries–but generally the intent was for a single product to satisfy the needs of any potential customer.
As a result, core accounting applications–general ledger, accounts receivable, accounts payable–are now so similar that many analysts and vendors refer to them as “commodities.” The marketplace for these commodities has become saturated, according to Forrester Research Inc., in Cambridge, Massachusetts. “People have been buying accounting software like it’s going out of style,” says Forrester principal analyst Bobby Cameron. “About 70 percent of large companies worldwide have bought new accounting software in the last five years. For the midmarket, that figure is more like 50 percent.” According to Cameron, the saturation explains why the large ERP players have been entering into various partnerships and acquisitions: to offer new functionality and, at the same time, sustain their growth rates.
However, even this rationale may not justify why Dutch ERP vendor Baan has made so many acquisitions in the last couple of years. The acquisitions include sales force automation vendor Aurum Software, supply-chain optimization software vendor Berclain Software, logistics software vendor Caps Logistics, and financial software vendor Coda Group, plus a minority share in human resources software vendor Meta4.
Trying to swallow so many other companies sapped Baan’s resources. Baan’s troubles were compounded in mid-1998, when it had to admit to some accounting missteps (see “Wooing the Middle Market”). Then, both of the company’s founders, Jan and Paul Baan, left the firm. Following a third-quarter loss of $32 million, the company reorganized, appointing Mary Coleman, formerly CEO of Aurum Software, as the new CEO, and announcing it would lay off about 1,200 employees–20 percent of its workforce.
“This year in general has been challenging,” admits Coleman, who confidently adds, “We will be back.”
Indeed, there is good reason to believe that Baan’s troubles are only temporary, according to Byron Miller, vice president of Giga Information Group Inc., in Park Ridge, Illinois. “I don’t count Baan out yet,” he says. “I think they can get past their financial problems, and once that happens, they have a very good product.”
Baan’s strength is in manufacturing software, especially for the automotive, aerospace, and defense industries, where very complex logistics are required. But Baan has had a weakness in its purely financial software. “BaanFinance is functionally very rich, and scalable to thousands of concurrent users,” explains Dennis Keeling, chief executive of the London-based Business and Accounting Software Developers Association. “But it’s strictly a ledger system, not a financial information system.”
In 1997, Baan announced it would correct this limitation by purchasing technology from Hyperion Software Corp., the consolidation, budgeting, and decision-support software vendor. However, the June 1998 acquisition of Coda indicated a new direction: the Hyperion technology would be integrated with the Coda products.
Trouble is, Coda can’t support as many users as Baan’s core products can, according to Keeling. “Coda Financials is one of the finest financial information systems around, but the technology is not as scalable as BaanFinance,” he says. “Coda has a problem with more than 300 concurrent users, so the company has a dilemma about how to bring the two products together.”
For now, the company doesn’t plan to integrate Coda with BaanERP, according to Gordon Quick, vice president of product marketing for the Americas. “BaanFinance is a financial solution targeted to the ERP and manufacturing sectors, with strong support of supply-chain management,” explains Quick. “We sell Coda Financials into the nonmanufacturing base or services sector. In some cases we sell both BaanFinance and Coda Financials into the same company, with BaanFinance at the plant level, rolling up to Coda Financials at the corporate level.”
Oracle Gets Thin
While Baan deals with serious financial problems, Oracle seems to be putting serious technical problems to rest, starting with last April’s release of Oracle Financials, version 11.
Oracle has faced the knotty challenge of upgrading users of an older version of Oracle Financials, 10.6. That version can support thousands of concurrent users on a simple character-based interface, but it isn’t Year 2000 compliant. Version 10.7 is Y2K compliant, but 10.7 has a Windows-based interface and can support only hundreds of concurrent users, making it unsuitable for Oracle’s large customers.
However, version 11 may have finally solved Oracle’s technical problems, thanks to its Web-based network computer architecture (NCA) user interface. NCA is a “thin client” interface that requires only a Web browser on the networked client. This means version 11 runs not only on Windows but also on cheaper, less-powerful dedicated computers, thus solving the performance problem with thousands of concurrent users. (For a discussion of thin-client computing, see “Commanding the Desktop,” January.)
All the major vendors have strategies for supporting Web browsers as alternative clients, but of the five top vendors, only Oracle is making a browser interface the standard for all its applications. “Oracle has gotten it right at last,” says Keeling, who has been very critical of Oracle in the past. “The Web-based system is a brilliant idea.”
Vinnie Mirchandani, research director for business applications at Stamford, Connecticut-based Gartner Group, also praises Oracle’s new architecture, but adds that users should move carefully. “Oracle showed a propensity to shoot itself in the foot by waiting until 1997 to release a Y2K-compliant version,” he says. “But I’m cautiously optimistic that Oracle is turning around. Version 11 is still immature, but it’s a strong release.”
New features include a strong emphasis on analytic applications and corporate performance management, such as activity-based management (ABM) and the balanced scorecard. Oracle added the former by acquiring PricewaterhouseCoopers’s ABM software, Activa.
PeopleSoft Moves Up
Another top vendor, PeopleSoft, also continues to expand its functionality. PeopleSoft started as a vendor of human resources software, a product that came to be regarded as the industry’s gold standard; and even today it’s mostly known as an HR and financial software vendor. However, the company is beginning to develop some traction with its manufacturing modules, according to CFO Al Castino. “We now have 20 live implementations,” he says.
A major strategic direction for the company is to add E-commerce capabilities to its ERP software. A new business unit, the PeopleSoft Business Network, will develop the “E-business backbone,” software allowing companies to sell over the Web. The company will also deploy its own software and host Web sites called merchant communities, which will be designed to draw customers to the Web sites of PeopleSoft’s customers.
This new, externally oriented initiative was announced on the heels of disappointing earnings results for third-quarter 1998, which caused the company’s stock to plunge 23 percent in a single day. Years of high-flying growth may be harder to come by, given the increasing saturation of the market and waning demand for Y2K fixes. Still, PeopleSoft has done well enough in the past couple of years to displace Oracle as the number two client/ server application provider worldwide, according to International Data Corp. (IDC), in Framingham, Massachusetts.
SAP’s New Territory
The number one client/server application provider, of course, is SAP, which also experienced disappointing results in 1998. Although revenues rose 40 percent, pretax profits grew just 15 percent, well short of the vendor’s original projections of 30 to 35 percent.
SAP’s vertical market strategy has been supported by the release of new application modules and by the acquisition of other companies. “The real story about SAP is that there is going to be a lot more front office and vertical functionality, which is uncharted territory for them,” says Gartner’s Mirchandani.
Last September, the vendor released so-called solution maps for no less than 17 different verticals– industry software requirements that SAP already fulfills or intends to fulfill. Mirchandani notes there’s concern that SAP may be pursuing too many markets in the next few years. “The company may not have infrastructure or R&D to support all of those markets,” he says.
Indeed, SAP is straying outside its former strategy of developing all its applications in-house, according to David Dobrin, director of Benchmarking Partners Inc., a Cambridge, Massachusetts, consulting firm. In 1998, SAP also acquired Kiefer & Veittinger GmbH, a German sales force automation firm, and Ofek-tech Software Industries Ltd., an Israeli developer of software for warehouses and distribution centers. Dobrin says these products are going to need a lot of work before they will be fully integrated into the full R/3 system. “These products have quite a different technical architecture than R/3, and a very different style of user interface,” he says.
In September, SAP co-chairman Hasso Plattner announced to users that products from these and other acquired companies would be “best of breed” applications within three years. But Dobrin has his doubts. “If he says best of breed in three years, then if it’s like most software project it’ll really be four or five years,” he predicts.
One significant product available now is the Business Information Warehouse. Extracting data from R/3 and building a data warehouse has proved challenging for many companies, requiring considerable programming expertise, observes Steve Tirone, senior analyst at AMR Research Inc., in Boston. Tirone says the new product eliminates most of the design and development chores around data extraction, and predicts that it will rapidly become the warehouse of choice for SAP customers.
Adding J to BOPS
A Relatively new acronym has currency in the ERP vendor and analyst community: JBOPS, which stands for J.D. Edwards, Baan, Oracle, PeopleSoft, and SAP. The acronym reflects the growing recognition of J.D. Edwards as a top ERP vendor, not just in market share but in “mind share.”
J.D. Edwards was originally an AS/400 vendor, and like all AS/400 vendors it has had to develop a strategy to move to the popular Windows NT Server platform. J.D. Edwards managed this transition better than all the other AS/400 vendors because of its technology, according to Dobrin: “They have the most easily configurable object-oriented technology of the top five.”
Giga’s Miller attributes the company’s success to its similarity to SAP. “It took them a couple of fits and starts to get the NT product rolling, but the product and scalability are really good,” he says. “They have the same mind-set as SAP–they built the product themselves and emphasized workflow and process integration right from the start.”
As the top five vendors move down market, midmarket vendors, such as Platinum Software Corp. and Great Plains Software Inc., are moving up market. (CFO’s buyer’s guide to midmarket vendors will appear in next month’s issue.) How are the vendors in between responding? A common strategy is to target specific verticals and niche markets. Unlike an SAP, however, these vendors don’t have the resources to target everything, so they must be very selective–even a vendor like System Software Associates (SSA), which ranks just below J.D. Edwards in enterprise application license and maintenance revenues, according to IDC.
“You have to have a certain functionality to play in each market, but the price to enter a new vertical is extremely high,” says Bob Hoyt, vice president of communications operations for SSA. “For example, if we wanted to go into the semiconductor business, we’d have to spend a lot of money, it would take 18 months, and we probably still wouldn’t get it right.”
SSA’s BPCS system had some quality problems that affected profits for about a year, but the company has reorganized and fully come back now, according to Hoyt. A new release is due in March, with E-commerce capabilities and new features targeting the vendor’s strong automotive vertical market.
Targeting verticals is one method that vendors are using to gain business; another is to provide analytics, a relatively new category of application. Analytics enable managers to gain meaningful information from the mass of millions or billions of individual transactions stored in the accounting software database.
Analytics applications typically begin by consolidating the transaction data into a separate database. Online analytical processing, or OLAP, tools may be provided to help users analyze the data, such as comparing profitability across different divisions or product lines. Many analysts consider Oracle to be the most aggressive analytics provider among JBOPS, with its Strategic Enterprise Management, a suite of applications for strategic planning, budgeting and forecasting, and performance management.
Lawson Software is also very aggressive with analytics. Its Performance Indicator suite supports some 500 different measurements, such as scorecards, economic value added, and shareholder value. Forrester’s Cameron calls the out-of-the-box application “a wonderful idea.”
According to vice president of corporate communications Judith Rothrock, Lawson is using analytics to support its targeting of two principal verticals, retail and health care. For the latter, she says, the Performance Indicator application includes “things like nursing hours per patient day and revenue mix by payer type.”
Walker Inc. is also emphasizing an analytics strategy. Walker has been primarily a mainframe financials vendor, with its Tamaris product in the United States. It has been marketing Aptos, a Unix- and NT-based product, in Europe, and is just introducing it in the United States. At the same time, Walker is promoting Horizon, which provides for financial consolidation, planning, budgeting, forecasting, and business performance analysis.
“We’re not adding width to our products by adding manufacturing or distribution,” notes Jeff McEachern, director of marketing. “Instead, we’re adding depth with analytics and Web support.” Walker is also marketing Horizon as a stand-alone package, in competition with Hyperion’s Hyperion Enterprise.
FlexiInternational Software Inc. has responded to the squeeze on financial software vendors by aggressively targeting health care and financial services. Significant in the latter regard was the company’s acquisition in 1998 of The Dodge Group, including its software, its 40 banking clients (mostly in Europe), and its expertise in the banking industry.
“We had already had strength in banks,” says George Dearing, vice president of technology marketing. “Most banks are still running on mainframes, so this acquisition represents a tremendous opportunity for us to move them off mainframes onto client/server systems.”
Geac Corp. still has 3,200 customers of its old mainframe systems. But it also has 800 customers of its client/server system, SmartStream, which it bought several years ago from DBS Software Inc. Geac is targeting public-sector and services verticals for new SmartStream sales, and is using other divisions of Geac to buttress that strategy.
Geac has acquired a number of software products in different fields, and is often thought of as a sort of junior Computer Associates. “We provide the financial component for the customers of our sister companies,” says Colleen Niven, a vice president of worldwide marketing. For instance, “Most libraries use Geac software for cataloging, and we can deliver an entire solution to libraries,” says Niven.
However, Geac is not getting as much advantage as it should from its large installed base of mainframe customers, charges Daniel Sholler, program director at Meta Group, in Stamford, Connecticut. The transition from the mainframe system to SmartStream “is just as difficult as the transition to PeopleSoft,” he says. “They haven’t created the crossover capability.”
Meanwhile, Clarus Corp. (formerly SQL Financials) announced the acquisition of Elekom Corp., a leading E-commerce software vendor, last August. Elekom’s products will give Clarus a competitive advantage in its favored verticals, says Steve Jeffrey, Clarus’s CEO and president. “We’ve historically focused on the financial services industry, as well as on corporate headquarters of industrial companies,” he says. “These industries are very information- intensive.”
The company is looking forward to moving into E-commerce with Elekom’s E-procurement application, says Jeffrey. “We’re not just opening up the back office to the Web,” he explains. “We’re building special applications that are Web-architected. They’re designed for the casual user over the Web, but they integrate back to the general ledger and human resources databases.”
Ross Systems Inc. is another vendor with a new focus on verticals. Ross was formerly the top supplier of accounting software for Digital Equipment Corp.’s midrange computers, in the 1980s. After those boxes lost popularity, Ross moved in a different direction, acquiring a vendor of process manufacturing software in 1992. Since then, Ross has positioned itself as a vendor of process manufacturing software. (Process manufacturing refers to the making of solid or liquid products, such as toothpaste or gasoline, or powders or gases.)
All along, Ross continued to support its old 1980s customers with core financial software. Then, in 1998, “we went back and looked at the heritage of our company,” says Ann Wyatt Browne, vice president of industry marketing. “We found that we’re very strong in health care and public sector, with 250 to 300 customers in each of those markets. Eighty percent of our revenue has been coming from process manufacturing, and now we’re going after the other two markets again. We have strong products to address each of the three markets.”
Tenth on IDC’s list of top enterprise application vendors, British- based JBA International has a strong installed base on the IBM AS/400 platform, but its ERP software also supports Unix and Windows NT. JBA’s automotive vertical is the biggest one in the United States; its apparel and footwear ERP solution is ranked number one in the world by AMR Research. “Any $2 billion company involved in apparel that is looking for an ERP solution will automatically invite us for bids,” says David Graham, manager of business development.
Another British-based vendor, QSP, was historically a mainframe vendor, but now sells systems running on Unix servers as well. With the mainframe market dwindling, QSP is targeting three vertical markets: utilities, airlines, and retail. Even within these vertical markets, QSP is targeting specific niches.
“SAP is also targeting utilities companies,” says Addie Bourne, vice president of marketing. “We’re not looking to be an end-to-end solution provider. We have a major product, a consolidated billing solution, that allows deregulated utilities companies to provide one consolidated bill to their customers, with a lot of bells and whistles. No one else provides this solution.”
Similarly, other vendors pair their financial software with other application software to target vertical markets. Computron Software Inc.’s workflow management software, which it also sells as an independent package to be used with any financial software, allows it to target service firms, where workflow is particularly important. Tecsys Inc., formerly known as Concepts Dynamic Inc., has a project financial management capability that can be leveraged to target service firms.
Most if not all of the top accounting and ERP vendors have a sizable international presence. A smaller ERP vendor, Netherlands-based Scala Business Solutions NV, nevertheless has physical operations in 52 countries and installations in 90 countries. The company has thrived over the years as an international vendor, but it’s done poorly in the United States, largely because the vendor’s U.S. distributor was a separate company (as were the distributors in a number of other countries). Under this fragmented arrangement, Scala delivered 15 or 20 different products around the world, as each local partner customized it to its host country.
Now, however, Scala has acquired the U.S. distributor, as well as a number of other local distributors. “It’s affected sales fairly dramatically in the U.S.,” reports Chris Houle, president of Scala. “Now, we deliver one product that meets all the requirements around the world, and our multinational customers can be working with one company that can coordinate worldwide, rather than multiple companies around the world.”
At Prestige Software International, executives are looking forward to the day the vendor spins off from its parent, Computer Associates International, and goes public–hopefully in the near future, “when market conditions are right,” says Laura Hills, senior vice president for Prestige. Hills thinks Prestige’s product, Masterpiece, will gain more visibility when it is no longer viewed as just another product from megalith CA.
However, CA will still own 50 percent of Prestige after the planned spin-off, and the company gains more than it loses from its association with CA, according to Michael Thompson, analyst with British-based Butler Group. “Their association with CA gives them strength,” he says, pointing out that Masterpiece does well in Europe because of CA’s international presence. “Prestige does well wherever CA does well.” *
John J. Xenakis is technology editor of CFO.