IT Investment Research

Has SaaS Enterprise Software Peaked in Demand?

A Forbes article posted the morning of August 4 begins

“Few doubt that, if all business software currently in use were available through the Software-as-a-Service model 10 years ago, the percentage of SaaS implementations would be much higher today.”

I guess I'm one of the few. The sentence read quickly might mislead you in your enterprise software and information technology (IT) investment decisions. I let the author, Dan Woods, off the hook because he explains the meaning of “all business software” further down when he describes the industry-centricity of the leading ERP packages.  I just hope you haven’t rushed off to bet on a so-called SaaS vendor before you have read the whole Forbes article.

In fact, all business software available through the SaaS model today WAS available 10 years ago; FROM the same so-called SaaS suppliers mentioned in the Forbes article in a tone that implies that the idea is something new in the last few years. And software was also available as a service 10 years ago from the enterprise software market leaders—SAP, Microsoft (MSFT) and Oracle (ORCL)—mentioned in the article.

I don’t even believe the term SaaS vendor is a good one to use in thinking about IT investment but for sake of my blog post, take the list of top SaaS vendors according to conventional wisdom: Salesforce.com (CRM), NetSuite (N), Concur (CNQR), Taleo (TLEO) and RightNow (RNOW). Salesforce.com is exactly 10 years old and the rest are older.

Although Salesforce.com was founded in 1999 there were plenty of other CRM functionality services available before that. For example, just using this list, RightNow was formed in 1995 and its service rolled out in 1997. NetSuite was founded in 1997 and played with various enterprise-software distribution options in addition to SaaS over the years including selling its software indirectly though Oracle, whose founder and major shareholder is also NetSuite’s supermajority shareholder. Concur is 16 years old and has offered its functionality as a service almost from the beginning, most notably via Automated Data Processing (ADP). Taleo was formed 10 years ago but on the back of 1996 Canadian start-up, Viasite.

Scratch most any other so-called SaaS supplier and you’ll most likely find a similar story.That’s because the idea basically dates back to the mists of IT market history with the terms timesharing (the business model, not the computer design concept), service bureau, application service provider, and so forth used at various times to describe the same basic idea. 

That’s why I’d turn the first sentence in the Forbes article into a question and ask

“Since all business software has been available through the Software-as-a-Service model for many years, why isn’t the percentage of SaaS implementations much higher today?”

The fact is that the percentage of what you might call SaaS adoption is already very high in certain industries, community banking and healthcare delivery in particular.   The reasons presented in the article as explanations for slow SaaS adoption are pretty accurate (except for the thing about how it is sold) but they are decades-old problems, not current events. The IT investment research question is whether SaaS—or whatever you called it over the years—has reached its peak or whether it has room to grow in other industries.

I also wouldn’t rush out and buy shares in the listed enterprise-software market leaders based on the prescription Forbes offers on how they can “catch up with NetSuite and Salesforce.com."  SAP and Microsoft have had programs to do all the things recommended also for as long as a decade. See the late 1990s SAP joint venture with Intel (INTL) called Pandesic and the reason Microsoft gave investors when it bought Great Plains in December 2000.

As for Oracle, I think its strategy is to wait and see how NetSuite does and then just fold it – or refold it – back into the corporate structure. But that's even a side bet. Already Oracle is claiming to be the second largest SaaS vendor after Salesforce.com, based on its $700-million OnDemand revenue stream. (That claim is directionally correct but the numbers are not an apples-to-apples comparison. But that’s another blog post if anyone cares.)

-- Dennis Byron

Ballmer Demotes ERP to Third Cousin at Microsoft

In March 2008, I called  ERP a poor second cousin at Microsoft (MSFT).

On July 27 I wrote that Oracle (ORCL) should consider selling the remnants of the J.D. Edwards business to Golden Gate/Infor because the loyal IBM AS/400 (System/36, System/3, etc. working backwards) users probably don't want to "fuse" anytime soon. And sooner or later the old-ERP-product maintenance revenue stream game is going to become counterproductive for Oracle in terms of both bad PR as well as acutal revenue.

Sitting in on the Microsoft financial analysts' meeting on the morning of July 30, I reached the same conclusion in terms of what Microsoft should do with the former Damgaard, Great Plains, Navision and Solomon businesses. Steve Ballmer does not even think of these applications as one of his seven key businesses. ERP is not even a second cousin anymore. Instead Dynamics (which is really the four products listed above plus a CRM SaaS offering) is just an "enabler" of Microsoft's "enterprise infrastructure" business (that is, the Server and Tools division--STD).

Steve Ballmer didn't explain why Dynamics is bolted onto the side of Office division instead of STD if that's the case. But either way, it is clear that Microsoft is not serious about the classic packaged enterprise applications space. And I understand why:

• don't compete with your partners.

• ERP is starting to give way in importance to business process management (BPM), not that ERP is going to disappear but BPM delivers many of the benefits ERP promised 15 years ago but was unable to deliver.

Steve, take Microsoft ERP out of its third cousin status in Redmond. Sell it to Infor.

-- Dennis Byron

Struggling ERP Enterprise Software Suppliers Can Choose Their Parties

The proxy statement filed with the SEC on July 13 by SoftBrands (SBN) concerning Golden-Gate/Infor’s upcoming acquisition of SoftBrands says there was a surprising amount of interest in the almost forgotten Fourth-Shift/AremisSoft, which seems to have been considered the jewel in the company's protracted march to Infor obscurity.  And the proxy illustrates why ERP enterprise software, despite the façade of cross-industry general-accounting and human-resource-management marketability, has always really been a very, very industry-specific investment play.

That Infor and its financiers picked up the pieces is not surprising. I’ve lost count but I think Infor is now well north of owning 50 old and once highly respected enterprise application brands.  But that parties A, B, C, D, E, F, G and H also showed interest, in some cases did due diligence and—in at least two cases—entered bids says other struggling ERP suppliers can find an end game other than dissolution.  (I also wonder if this is where the TARP funds that everyone in Congress is trying to find are ending up—financing risky mergers and acquisition.)

The parties in question may have included the same suppliers that Piper Jaffray used in issuing a valuation opinion to SoftBrands management. These included Agilysys (AGYS), American (AMSWA), CDC (CHINA), Deltek (PROJ), Epicor (EPIC), Exact Holding (EXAH on various exchanges; also on U.S. pink sheets), IFS (on OMX STO), JDA (JDAS), Lawson (LAWS), MICROS Systems (MCRS), QAD (QADI), and Unit 4 Agresso (on Euronext Amsterdam). All except IFS have been involved in recent enterprise software acquisitions already (although it is probably unfair to call rolling Logility back into American an acquisition).  All represent very industry-specific ERP plays; Micros if that name is not as familiar as the rest is the SAP of the hospitality industry. 

The list of acquisitions Piper Jaffray looked at in the same analysis might include some hints as well.  Although the timing of many of these deals would seem to be suspect, since they even go back to Golden Gate’s 2005 acquisition of Blue Martini. (Wow, that brings back memories, Monte.) 

Still the fact that Blue Martini ended up with other old brick-wall retail folks like the guys at GERS is another proof point about the importance of understanding industry centricity in investing in enterprise software. Blue Martini used to tell me they were Amazon; I used to tell them they were GERS or NSB (now part of Epicor).

On its list of “current” acquisitions, SoftBrands’ financial advisor could have included some recent Oracle (ORCL) enterprise application acquisitions such as of Adminserver, AVT, GKS and Skywire. I presume the reason none of these deals were analyzed was because of lack of public information given the size of the deals relative to Oracle’s size.  But maybe it was so as not to remind the investors of the elephant in the room in all enterprise software merger and acquisition activity.

-- Dennis Byron

CDC Software a Bet on the Ghosts of Enterprise Software's Past

At first read, I laughed at the idea filed in a Securities and Exchange Commission (SEC) F-1 on July 16 by CDC (CHINA) that the old Ross, Pivotal, and Industri-Matematik brands might rise like Phoenixes (or should it be Phoeni?) out of the far eastern mists. Can these old enterprise-application war horses really return to the main arena to do battle again with SAP, Oracle and—more important—newer enterprise software companies that were founded two or three decades after Ross Systems was founded in 1972? In fact, much of CDC’s competitive lineup for its disparate brands was probably founded by guys that had not been born yet themselves when Ross started as a DEC VAX value added reseller.

But on second read I recall Ross’ long experience in Asia/Pacific and its dedication to process manufacturing. CDC of course does not stand for Customer Driven Company. Maybe there is something to this investment. Ross had useful distributorship arrangements around the rim in the early 1990s.  And according to the F-1, Gartner forecasts double-digit 5-year CAGRs for that geography for ERP (Ross), CRM (Pivotal) and supply chain management (Industri Matematik).

Worldwide the three markets mimic the overall enterprise software market with CAGRs in the mid single digits. But Gartner's numbers are too aggressive in my humble opinion.  I think all three markets in more developed countries should look for the 2.5% CAGR Gartner forecasts for ERP in Europe (according to CDC) and be happy.

The new company proposed by CDC, which would trade as CDCS, did not even grow that well in 2008 as compared to 2007. And it’s down 15% in the quarter ending March 31, 2009 vs. the same period a year earlier. Further I don’t see a coherent plan in the CDCS F-1 to tie the three brands together with the lesser lights in its multiple-brand stable, a must for success in any geo. In fact, it appears that part of the growth plan involves additional disparate acquisitions.

And Oracle and SAP will not stand still in A/P; they subscribe to the same Gartner forecasts as CDC. 

More important, the shareholder power arrangement is that awful EMC/VMware play where CDC still holds almost 99% of voting control.  So it is totally a bet on the sorts of share increases EMC had hoped for VMware. But the new company is not competing in markets that are likely to grow at all as dynamically as virtualization.

-- Dennis Byron

(Please don’t write me to day the Ross, Pivotal and Industri-Matematik brands never went away.  I mean rise like a Phoenix figuratively.)

Supply chain management enterprise software: And then there was none!

In the beginning, there was Berclain, Chesapeake, Demantra, Distinction, Exe, Industri-Matematik, Interchain, Logility, Manugistics, Nistevo, Numetrix, Red Pepper, Scala, SeeCommerce, Syncra, Synquest, Tilion, Viewlocity, and Yantra. And then there were none.

They were acquired by, in order, Baan/Invensys/Infor, AspenTech (AZPN)), Oracle (ORCL), Peoplesoft/Oracle, SSA/Infor, Symphony Technology Group, which also holds a signficant minority interest in Lawson (LWSN), Kewill, which later disposed of its ERP core, American Software (AMSWA)--in fact Logility was always part of American, JDA Software (JDAS), Sterling Commerce/AT&T (T), J.D. Edwards/PeopleSoft/Oracle, Peoplesoft/Oracle, Epicor (EPIC), Teradata (TDC), Retek/Oracle, Viewlocity, Synquest, Tilion and Sterling Commerce/AT&T, respectively.

Actually I am not sure what Snyquest/Tilion/Viewlocity was called by the time some Australian guys bought it.

This is the saga of the Advanced Planning function in the product supply chain as point product and supply chain management (SCM) in general as a point product. The impetus to look back and try to learn something is JDA's announcement that it would acquire i2. (My nominee for the best blog post headline of 2008: "i2: The software company even Oracle didn't want.")

I am not counting the middleware guys like Categoric and Haht that flirted with the SCM category as a marketing technique and exchanges such as e2Open that basically provide a service not software.

I am not counting warehouse and transport guys like E3, Manhattan, McHugh/Red Prarie and HK that tried to ride the coattails of i2 and Manugistics in the glory days but mostly partnered with the ERP guys until the ERP guys could develop their own equivalent functionality.

Over the years at least three software suppliers glommed on to the acronym SCOPE. Distinction had it first I think before PeopleSoft acquired the company and the brand. SAP briefly floated the acronym in the late 1990s before--I think--being sued over it by PeopleSoft. Now I notice that Manhattan uses it. Perhaps Oracle, which may not even know it owns the brand, could sue Manhattan after it finishes up the SAP TomorrowNow litigation.

How can a $6 billion market--according to Gartner--not include at least one pure play? If it cannot support a pure play is it really a market? Was the SCM market really only a creation of the venture capitalists and the analyst firms (I plead guilty to participating unfortunately)? As a point product, supply chain is like spell checking, of no value standalone without the rest of the word processing/resource planning  functionality (or an equivalent business service).

What can we apply this lesson to? A category called IT Planning/Enterprise Architecture Management (EAM) is coming along as possibly the next example of a function that will not be able to stand alone as a market despite the efforts of Metastorm (on shelf as MTSM) and others. Isn't EAM really part of IT Lifecycle Management or systems management or Project management?

By the way Demand Management appears to be the exception to the finding that SCM functionality can't stand alone. But it will probably be acquired by Microsoft (MSFT). Actually I think Great Plains also acquired some APS software before it was acquired by Microsoft but I cannot find a reference on the Internet.

And Prescient (OTC:PPID) is still traded over the counter but I do not see how it can be used to illustrate anything.

And Waste Management is still using SAP?

Waste Management (WMI)’s claims against SAP (SAP) are another black eye for SAP along with the TomorrowNow/Oracle (ORCL) incident. In fact, a close reading of the related legal filings indicates there is a connection; a TomorrowNow-related Safe Passage agreement between the two was a part of the overall scope of work allegedly not performed by SAP. 

 

Based on the details as laid out in the Waste Management legal documents, I would ask--if I were a juror--did Waste Management really believe there was an “out of the box” enterprise application for “ U.S. waste management?”  The two key phrases in that question are in quotes:

1.      SAP offers the most industry-specific ERP software versions in the market but no enterprise software supplier is that industry specific. There are 9,999 possibilities simply going by the standardized industry classification code at the 4-digit level.

2.      Speaking of customization, “out of the box,” “no customization required,” “rapidly implemented” and SAP are not terms that roll off the tongue together cleanly unless you are great poker player.

Actually the publicized $100 million sought includes estimated lost opportunity costs; in its most recent 10-Q, Waste Management says it would take a $45-$55 million write down “if we decide to abandon the SAP software.”  Only in America do we sue someone for $100 million while we keep using their product.

As for the TomorrowNow connection, the initial SAP press release about the Waste Management deals said WM “joins a growing list of companies that are leveraging the SAP Safe Passage program—a tailored package of solutions, technology and incentives—to migrate to SAP…” The legal filings do not say who the migratee supplier is in this case (and likely loser in the sales process) but given the publicity surrounding the law suit, I can guess. Safe Passage was the TomorrowNow-based offerings from SAP to support “end of life” of Edwards, Oracle, PeopleSoft, Retek and Siebel solutions. That program has been abandoned and SAP considers TomorrowNow a “discontinued operation.”

 

As an aside, the legal filings say Shai Agassi was at some of the sales meetings.  Maybe this is the real reason he left SAP?

Why Infor Scores High in Enterprise-Software Technology Importance?

Everyone loves lists because they make great conversation starters. A recent Computerworld article by Don Tennant about an Aberdeen “list of the 100 most influential technology vendors — software, hardware and service providers — worldwide” asks this question:

“Why is a huge enterprise software player like CA (39^th on the list) eclipsed by Infor Global Solutions (18^th on the list), a company half its size?

Unfortunately, I can’t find a press release about the list on the Aberdeen site, so I cannot answer Computerworld’s question based on methodology or other logical analysis. Tennant says “First, any successful vendor that’s into supply chain management or CRM, even if it’s a niche player, stood a fairly good chance of making the cut.” I wonder if the answer to his question isn’t simpler; last year Aberdeen did a similar report — but without the list — just on supply chain software. Maybe this is really an Aberdeen supply chain report.

But lacking all the facts let me still opine (lacking all the facts is another reason people like to discuss lists). My guess is that a large sample of the Aberdeen survey respondents (4,645 according to Computerworld) is small to medium-size enterprises (SME). SMEs don’t tend to use mainframe-based products from a company like the company formerly known as Computer Associates (CA) but are very likely to have an Infor-brand something somewhere in house.

At last look, Infor was an amalgamation of the following formerly independent companies: Agilisys (out of SC&T), Aperum, Arzoon, Baan, Boniva, Brain, Daly Commerce, Comshare (the Rick Crandall discussed in this earlier post founded Comshare and then sold it to GEAC), Dun & Bradstreet, Elevon, e.piphany, EXE Technologies, Extensity, Formation Systems, Foundation, Future Three, Infinium (nee Software 2000), Ironside, JBA Software, Lilly Software, Marcam, MAPICS, Mercia, McCormick and Dodge (M&D), Ohio Community Library Consortium (OCLC), NxTrend, Octane, Pegasus, Provia, StarBuilder, SunSystems (not to be confused with the server manufacturer), Symix, System Software Associates (SSA), Varial, and Vision.

Infor is at the heart of SME. SSA and D&B were at one time larger than SAP. MAPICS and its predecessors, when part of IBM, were the most popular ERP software for decades before the term ERP was invented. And SME is at the heart of the IT industry when it comes to dependence on enterprise software.

If you are an Infor user and your brand is not listed above, let me know so I can update my list. And if you are an SME and not an Infor user somewhere in your organization (many of the brands listed above were formerly part of GEAC), let me know also. We’ll posit an alternative theory later in the summer.

"Flip" Filipowski re-invents himself and the wheel... again

You have to admire a guy that not only re-invents himself every couple of years but also re-invents the wheel. While getting someone else to partially fund him. The news is that SilkRoad technology (the lower case "t" is apparently not a typo) announced on May 14 that

"...it has closed on a $54 million equity round of capital led by new investor Foundation Capital, and including existing investors Azure Capital Partners, SilkRoad Equity and several individuals."

I say partially fund him because via Silkroad Equity (why not a lower case "e"?), Filipowski has some of his own skin in the game.

The nut of it is that Filipowski is now banging the drum for software as a service [SaaS], the way he banged it for dot.com 10 years ago and RAD 20 years ago. Interestingly he is hyping SaaS in the same week that Oracle (ORCL) CEO Larry Ellison, another guy with his own skin in the SaaS game via NetSuite (N), along with 469 signfiicantly minority "partners" [other shareholders as of February 29, 2008], suggested SaaS would be a slow payback investment.

To Larry, that means a long patient climb for an ERP SaaS offering to a become a billion-dollar business, a process already 10 years in the making. To Filipowski, 10 years is a dozen startups, restarts, renames, mergers, acqusitions, bankruptcies, and so forth.

As for the functionality that Silkroad is offering, it's called talent management software. I doubt if that is a billion-dollar market opportunity, at least on a pureplay basis and as I define the words talent and management. But the company offers more mundane things like benefits administration (called "life events") and hiring (sorry, "onboarding"). According to Filipowski it is:

"one of the greatest opportunities for value creation that I have ever personally observed in the software industry."

Adding such mundane functions does increase the opportunity. That's why a guy named Dave Duffield,, who actually knows something about human resources [HR] automation, is all over the opportunity already.

SAP 20-F documents a company milestone: more customers than employees

The 2007 SAP (SAP) 20-F was posted up on the SEC website April 3 and is full of all the great statistical and IR-spin nuggets an analyst loves. And SAP never fails to deliver.

My nominee for SAP highlight of the year in 2008 is as follows. Sometime in 2007, for the first time this decade at least, and I suspect in SAP company history, SAP ended the year with more customers than employees. The document says:

"As of December 31, 2007, we had 46,100 customers in over 120 countries and employ more than 43,800 individuals..."

At the end of 2006, SAP had 38,000 customers and over 40,000 employees. Hopefully the milestone is a sign that the small/medium enterprise (SME) strategy is beginning to kick in. But with headcount up 12% in 2007, there's a way to go before they really have the SME religion.

For perspective, I point out that back in 2005, with "only" 32,000 customers, SAP crossed the 100,000 installation mark. I don't see a comparable statistic in the document this year but presumably that number is north of 120,000 these days. The customer count includes ERP, NetWeaver and Business ByDesign users and I am assuming it doesn't double count. I'll dig deeper in an upcoming IT Investment Research report.

SAP has a goal of of hitting the 100,000 customer mark sometime in (presumably late) 2010. Do they have one of those big plywood thermometers set up on the side lawn in Walldorf so that you can see it from the Autobahn?

-- Dennis Byron

Microsoft financial analyst presentation highlights business applications' poor cousin status

The March 13 Microsoft (MSFT) presentation and Q&A session for financial analysts, conducted by the Busness Solutions general manager and by the Business Division CFO at Microsoft Convergence, hid the very slow payback Microsoft is realizing from its 2000 and 2002 investments in Great Plains and Navision respectively. Others are picking up my cry from a few years ago that Microsoft unload the entire operation; perhaps Great Plains founder Doug Burgum would come out of retirement and buy it back.

Kirill Tatarinov, Corporate Vice President, Microsoft Business Solutions, says his group is playing in what IDC measures as a $70 billion market. He's referring to the entire packaged applications market. Certainly, at that level, which includes collaboration applications such as Office and so forth, Microsoft is doing great, probably with about 20% of the market.

But Tatarinov went on to say how happy Microsoft was about having a billion-dollar year in "Business Solutions" in the Microsoft fiscal year that ended in June 2007. That's Dynamics CRM plus the former Damagard, Great Plains, Navision, Solomon ERP products (which they now admit they will never try to "fuse" together, in "green" or any other color). That's only about 3% of the market SAP (SAP) and Oracle's (ORCL) applications group talks about when they talk about ERP and CRM.

Microsoft might counter that it effectively competes only in the midmarket. But it didn't. And that's good because certainly it has not made this now going-on-a-decade-long effort simply to compete for such a small slice of the applications market. Especially with SAP coming down market after that same slice.

On the good news side, I estimate Microsoft did about $1.2B in calendar year 2007, 22% growth. And it does have the advantage in that it is already in the midmarket and has great channel partners, something that SAP needs badly. In fact, Doug can stay in retirement. Why doesn't SAP just buy this part of the Microsoft business?

But overall it was a pretty weak status update full of a lot of trivia about how Microsoft is trying to tie its Dynamics users into eBay and online Paypal services. And the usual nod to Software Plus Service.

-- Dennis Byron