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    Look Out China Manufacturers - An ERP War is Coming Your Way

I love a good catfight. This time, Kingdee is willing to take on SAP and Oracle in its own backyard of China (see InfoWorld's "China's Kingdee wants to take on SAP, Oracle"). As the previous post indicated, SAP intends for Tata to be its second in China as the dueling heats up.

Years ago, SSA worked the China marketplace heavily and had some success there. They may have been a bit early though as the market for ERP solutions is beginning a real growth spurt there now.

This market is not without its challenges, though. Incumbent vendors may have a market and marketing advantage. US and European software firms may be too pricey.

Sales of ERP software to Chinese affliates of foreign companies would be my first sales targets were I driving ERP sales there.

What I foresee is:

- competition will be good for software buyers in China. It will keep pricing low and vendors hungry to do deals

- US software buyers will start asking ERP vendors for their China price. If Wal-Mart can do it to its suppliers, why shouldn't other companies in other countries do this to ERP providers?

- The cash flow from these deals could be interesting. It remains to be seen if these new software buyers will a) pay maintenance b) prefer a hosted solution instead; or, c) use a BPO provider. The proof of this huge market's importance to the software industry is still years out.

I've got my ringside seats. Do you have yours?

Connecting SAP and TCS

                             The Dance of Two Giants

SAP and Tata Consulting Services announced this week that they're getting closer together. The new announcement describes how Tata will help long-term SAP customers migrate to newer SAP architectures. Additionally, Tata will install Business One applications in the growing software markets of India and China.

Because I love history, let's take a trip in the way-back machine and understand how SAP has worked with integrators previously. I've been observing SAP for 20+ years and this is how I see them expand markets. When SAP sees a new market opening up for it in a relatively virgin country, it has followed a predictable path. First, SAP works with the in-country subsidiaries of its pre-existing customers to identify and enhance the software to meet the new country's requirements. Next, SAP courts in-country integrators to promote the solution to their customer base. These integrators sell, implement and somewhat support the product. Third, SAP develops its own in-country support/services organization and begins to thin out some its marginal in-country integrator partners. If it doesn't thin them out, it classifies them into groupings based on their strategic importance to SAP. Lastly, SAP could further cull out even more integrators and retain more of the service revenues for themselves.

At any point in time, SAP may have the same integrator firm in different roles in different countries. Surprisingly, few integrators see this occurring or seem to care. Regardless, I love SAP's strategy as it virtually assures them maximum revenues, minimal risk and maximum market share over time. And, they get third parties to help them achieve great results.

In a InfoWorld article by John Blau (see "SAP, Tata cooperate on Web services"), there's a quote from SAP spokesman Bill Wohl "Tata is an important partner for many reasons; the company has a strong footprint in India and other Asia markets where SAP aims to grow, and it has a huge global IT infrastructure". I believe that quote clearly states SAP's intent.

Here's what I predict:

- SAP will exercise other deals like this to further its penetration in China, India and other markets

- Tata is a good choice for helping European and other Western firms migrate off of R/2 and old R/3 installations. Why? If a company spent tens of millions installing the original SAP solution, they'll want the least expensive route possible to migrate to a newer version. This is a great opportunity for a low labor cost play.

- Migration services have traditionally been a small money maker for integrators. For example, integrators that hoped to win big with M&D conversions to SmartStream didn't make a killing. Neither have others who want to help de-install other software products.

- BPO providers and hosted solutions will be attractive to Indian, Chinese and other software buyers in emerging and developed markets. This will cut into sales of some software licenses. How great this will be is still to be determined.

- Tata should do well with this arrangement and the faster they can expand it into other countries, the better for them. SAP, of course, will win, too.

Are CIOs Really Strategic? Innovative?

                    Where is the Innovation in IT?

"Is Microsoft the next DEC or the next Microsoft?" - attributed to Charles DiBona of Sanford Bernstein (and reported by eWeek)

I'm experiencing a sinking feeling that much is being written about innovation but few are really doing anything really innovative. Look at Ephraim Schwartz's piece in Infoworld (5.15.2006) titled "Gartner on the State of IT". It paints a pretty unspectacular view of CIOs and the IT groups they lead. The callout box on this piece says it all: "IT is keeping the lights on but not demonstrating a compelling reason to be a strategic partner."

Interestingly, the most innovative examples of IT I've run across lately were featured in a BusinessWeek article of 4/17/2006 titled "If You're Cheating on Your Taxes...". This piece looked at how state governments, like Texas, are using external (NOT JUST INTERNAL) data in their data warehouses to identify businesses and other taxpayers who are underreporting revenue or asset purchases.

But, before we cheer governmental IT efforts, there are still some monumental issues on that front. The State of Illinois has created some real problems for (mostly older) tax payers when it comes time to renew their licenses. It seems that the state now matches key license data (like date of birth) to a federal social security master file. If there is any discrepancy, the renewal is denied. The problem is that if someone, eons ago, made a mistake within the Social Security Administration, it  takes many, many weeks before it can be resolved. Apparently, the state believes this data matching process is helping us catch 70-year old potential terrorists. I think it's got some work left.

Another proof point is on pg. 62 of the 5/15/2006 issue of CIO magazine. It shows eight federal IT projects that are failing or failed. These are huge losses in monetary terms and do not show much for IT in this sector.

Anecdotal evidence I've collected from software sales and marketing executives shows many CIOs still behaving very conservatively and taking few risks. CIO innovation is often limited to cost reduction programs (e.g., offshore development and maintenance), reducing the cost profile of IT (via use of open source solutions), minor use of data mining tools and the retooling of custom applications to a SOA platform.

When it comes to really innovative ideas, many CIOs rely on application software vendors and competitors to pioneer these ideas first. I'll never forget a US Defense Dept. IT executive who famously said in the 1980s that her IT group "is innovative. It's just that we don't want to be the first group to try something". That was priceless and I kept that quote on the wall in my office for years.

Innovation is about risk-taking and dreaming up new ideas. While I'll write more on this in future posts, let's say that for now, innovation is hard to find for now.

Comments?

Narcissus Effect

                             I Must Have Hit A Nerve

Every year I attend MR Rangaswami's killer show in Santa Clara. Software 2006 was held just a few weeks ago. While I've made a number of posts to the www.Sandhill.com site, this week Sandhill put a piece of mine on their newsletter and it caused traffic to spike on Services Safari (www.servicessafari.blogs.com) , Software Safari and the TechVentive websites. This morning alone I received emails from a half-dozen software CEOs who felt strongly enough to write me directly. Thankfully, the feedback was positive and very supportive.

The subject of my article was on how traditional application software vendors have had to wear blinders for so long now that they cannot envision new application solutions that are anything more than minor variations on old products. Even with SOA, mashups and other silver bullets, the innovation isn't really there. If you'd like to read the piece, follow this link to Sandhill's site: http://www.sandhill.com/opinion/editorial.php?id=82 . Also, I have a longer version of the piece I you'd like it. Please email me at: brian@techventive.com and I'll send it right out.

Cash In Tech Firms

                             Too Much Cash in Hand

Story:

The previous post looked at debt financing and how it can provide the cash needed to fund acquisitions. This post looks at the amount of cash many technology firms have on hand and asks whether this is appropriate or not. For reference, please look at the BusinessWeek article "Corporate Cash: Use It or Lose It" in the 4/10/2006 issue.

Analysis:

I've been fascinated at the cash generation capabilities of Microsoft for years. Their cash on hand was as high as $60+ billion in 2004 (it was at 37 billion last year). In the BusinessWeek article mentioned above, the author examined the cash on hand as a percent of market capitalization (i.e., share price times the number of outstanding shares). The percentages ranged from 57% for Novell to 19% for BMC Software. In between these two firms were:

- Comverse Technology 49%

- Solectron 43%

- Compuware 28%

- Motorola  27%

and many, many more.

Many tech companies print cash. What to do with that excess cash is another matter though. Traditionally, technology firms use free cash flow to fund new development for new applications, to acquire competitors, to acquire complementary products, etc. But, how much is really enough?

When non-technology firms possess too much cash, it attracts a host of third parties. Greenmailers, leveraged buyout firms and others often pursue these companies. They take over the firm, return a fair amount of that cash to shareholders and sell off portions of the company. They know that the parts of company are sometimes worth more than the firm itself.

Shareholder activists are another group who'll be watching these cash balances, too. Of course, if your cash resaerves are greater than your firm's market capitalization, it's time to close down shop and find a better use for your money.

Comments?

The Use of Debt

                       Tech Vendors Using Debt Financing

Story:

A piece in BusinessWeek on 3/20/2006 titled "Debt Valley Days" is certainly an interesting read (www.businessweek.com). The article describes how large tech firms (like Cisco and Oracle) are utilizing corporate debt in lieu of self-financing.

Analysis:

The use of debt by large tech companies shows a degree of maturity in the industry. More importantly, when one understands why the debt is being used, you see how debt can help drive further consolidation within the industry.

The Siebel acquisition by Oracle is being financed partly by debt, partly by Siebel's existing cash balances and partly by Siebel's customer maintenance revenue.

The time to raise cheap, inexpensive, plentiful debt capital could be tightening up in the near-term. Interest rates continue to creep up and the U.S. dollar's continuing weakness against the Yuan and Euro make debt costs higher within the U.S. Rising oil and metals prices (to name but a few categories) will put inflation pressure on the U.S. economy. This in turn could raise interest rates.

The only factor that will work to the contrary is the extraordinary amount  of U.S. dollars held by persons, governments and central banks outside of the U.S. The trade balance deficit that the U.S. has is so great and with so many dollars floating around the globe looking for a place to be invested, U.S. capital markets should still find many buyers for debt offerings.

Debt is still an inappropriate or inaccessible tool for many mid-size and smaller tech firms. When it is available, it may come with onerous strings (e.g., clawbacks, vulture clauses, etc.). Like it or not, tech companies are volatile businesses and debt holders have usually shunned such deals.

If your tech firm wants debt and can acquire it painlessly and cheaply, do it now. Do it while you can.

Comments?

I

            How Consolidation Hurts Pricing for Software Buyers?

The Story:

Booz Allen Hamilton's publication Strategy+Business is a great publication and highly recommended to this blog's readers. They recently ran a piece titled "The Coming Software Shakeup". It was recently published in their Resilience Report of 4/13/06 (www.strategy-business.com).

Analysis:

Some of the data points in this piece are compelling. The authors remind us that five years ago, 11 vendors controlled 90% of the database market and now only six vendors control that same space. Similar reductions have occurred in the business applications space, too. The authors now speculate that that prices for business applications will increase as a result of the consolidation that has occurred.

What will likely happen is the following:

- pricing will not materially change as more buyers move to alternative solutions like business process outsourcing instead of re-automating with the same old application solutions available today

- software as a service/on-demand applications will continue to take hold in the mid-market and make better (but not always huge) in-roads in the high-end market segment.

- application vendors will not innovate enough to trigger customers to move from one installed product to another. After a firm has spent millions (or hundreds of millions) installing some ERP vendor's suite, how likely are these companies going to be to install a new solution? We're upside down on the cost/benefit ratio for new applications and this will stall market gains for vendors.

While consolidation is occurring in the applications space, other factors will likely keep pricing from jumping much.

Comments?

Divorcing Vendors

                              Divorcing Vendors - An Eventuality

The Story:

InfoWorld had an interesting piece titled "How to Divorce Your Vendor" in the 5/1/2006 issue (www.infoworld.com).

Analysis:

This subject gets almost no coverage by the tech press, research analysts and even firms who make a living connecting buyers to sellers of software. That's a real shame as almost every company must divorce itself from consultants and vendors frequently.

The reasons for this kind of divorce vary although some of these include:

- software vendor has failed to innovate the product

- the customer no longer needs or values the installed solution

- the vendor is too distracted by its own internal issues (e.g., post-merger product integration) and is ignoring the customers it still has

- the vendor is moving its product line in a direction that is incompatible with the customer's stated direction

- etc.

Historically, large firms have de-installed major ERP applications once every 10 years. Desktop applications are only replaced when machines are replaced but this occurs usually every 3-5 years (more frequently if you're tough on your PC like I am).

Software vendors are still in the nascent stages of understanding how to nuture, retain and cultivate their install base for maximum retention. The need for better understanding of this customer behavior should be a higher priority for many application software firms as alternative software solutions (e.g., open source, SaaS, hosted or BPO) are becoming available and starting to reach critical mass with some buyer groups.

For all application vendors, the question should be "How many customers will serve us with divorce papers? Can't we try counseling first?"

Comments?

When Giants Collide

                               Infor to Acquire SSA Global

The Story:

Today, Infor has offered shareholders of SSA Global approximately $19.50/share in cash for SSA Global shares. The deal would create a combined firm with revenues of $1.6 billion and 6,800 employees (source: Chicago Tribune).

Analysis:

ERP, like many application software sectors, is continuing to consolidate and this news shouldn't be a big surprise to many. The consequence of this deal to users of software developed by either firm or their predecessor companies (e.g., Baan, SSA, Infinium, etc.) will be minimal in the short-term; however, longer-term affects will take longer to assess. Post merger assessments would be mere speculation at this time; however, if past deals are any guide, current users need not fear much for now.

We can expect additional deals in the future as some late stage equity firms (e.g., Francisco Partners) have already taken stakes in other application software firms.

SSA Global management deserves some credit. In just a few years time, they grew SSA Global, cut costs and delivered very impressive financial results. Along the way, they made a number of acquisitions and integrated them well enough to prevent customer defections. This competency of SSA's (post-merger acquisition) is one capability of SSA's that Infor should definitely retain.

Long-term, the key to a successful acquisition will rest on a two-prong attack where Infor integrates technology and markets aggressively against market leaders SAP and Oracle. Since both of these firms have been re-architecting their product lines over the last two years (to NetWeaver and Fusion platforms), these market leaders may also have the advantage of time.

Comments?