Saturday, February 28, 2004

SAP plugs hole in Business One

A couple of years ago, SAP decided that it needed a completely separate offering for small businesses. So it acquired an Israeli firm, Top Manage, and renamed its product SAP Business One. However, the package lacked much of the manufacturing systems functionality required to serve small manufacturers. Now, rather than develop this functionality from scratch, SAP is forming a strategic relationship with SoftBrands to integrate its Fourth Shift manufacturing modules with SAP Business One.

On the negative side, this move is an acknowledgement that SAP's Business One has not been a complete offering. Even if SAP resellers offer the combination of Business One and Fourth Shift as a single sale, it's not clear how well prospects will receive the news that they need two packages to meet their needs. Especially when there are so many other complete solutions out there for small and mid-size companies, such as Microsoft's Great Plains, Solomon, Navision, and Axapta.

On the other hand, maybe SAP's primary objective is not to sell Business One to the general population of small businesses. In reviewing SAP's web site, there are hints that SAP's first priority is to sell Business One to its large customers, as a solution for smaller divisions where its flagship product, SAP R/3 (mySAP), is simply too big. For example, one scenario on SAP's web site shows how a company could run Business One at a small sales subsidiary and interface it seamlessly with a central SAP R/3 system to check product availability and place orders. Another scenario shows divisional purchasing and sales performed in Business One, with centralized cash management and accounting performed in R/3.

So, if I am right, SAP's primary market for Business One is its own customer base. This allows SAP to claim a larger piece of the corporate IT spend and keep other vendors from establishing a foothold. To complete the strategy, SAP should develop a well-defined migration tool to move users from Business One to mySAP, when they outgrow Business One.

For more analysis on SAP's Business One, see my posts on Jan. 22 and Nov. 17.

Friday, February 27, 2004

Cure for the U.S. tech economy

Bob Cringley thinks he's found the answer to putting IT professionals back to work, and it doesn't involve new laws, regulations, tax breaks, or migration to India.

Thursday, February 26, 2004

U.S. to block Oracle's takeover of PeopleSoft

Not a big surprise, but DOJ has made it official. In his announcement, Hewitt Pate, head of DOJ antitrust division said, "We believe this transaction is anti-competitive -- pure and simple. " Oracle has not yet indicated whether it will sue the Justice Department over its decision.

For my take on the competitive aspects of this deal, see my post on Feb. 13.

Update, Feb. 27: Oracle says it will sue the Justice Department over its decision to oppose the merger. "The Department's claim that there are only three vendors that meet the needs of large enterprises does not fit with the reality of the highly competitive, dynamic and rapidly changing market," says Oracle in a press release. It is also extending its tender offer until June 25.

Update, Feb. 27: Just got this tidbit from the San Jose Mercury News. It looks like Oracle is going to have a hard time explaining this:
In the court filing, the Justice Department included a 2002 quote by Oracle co-president Charles Phillips -- who then worked as an industry analyst for Morgan Stanley -- saying that the "back-office applications market for global companies is dominated by an oligopoly comprised of SAP, PeopleSoft and Oracle.''
My point exactly.

Tuesday, February 24, 2004

Risks of offshore outsourcing

I've been trying to take a balanced view of outsourcing. On the one hand, I want to acknowledge the market forces that are driving companies to outsource IT services offshore. On the other hand, I want to identify the risks, so that clients may understand what they are signing up for and make rational decisions. I am concerned that the benefits of outsourcing have been overhyped, while the risks generally have been minimized.

Meta Group has made an attempt to itemize the risks of outsourcing. Executives that are planning to outsource significant parts of the IT function or back office processes should pay attention. The following is my paraphrasing and further elaboration on some of the risks that Meta Group points out.
  1. Risk of unmet cost savings. Too many executives think that if Indian programmers are paid 80% less than U.S. programmers, then they will save 80% of their IT personnel costs. They forget that outsourcing introduces an additional management layer and inefficiencies. Yes, you will save money. But not as much as you might think. Meta Group estimates typical savings of 15-25% in the first year, and 35-40% in year three. Nothing to sneeze at, but keep reading.

  2. Risk of insecurity and loss of intellectual property. If you are outsourcing software development, and software is important to your business, this is a huge risk. As my friend David Harding points out, some countries that are high on the list of outsourcing destinations are the same countries that have an extremely poor track record in respecting IP rights. Be sure you are not the next Ishoni Networks.

  3. Insufficient discipline to manage the vendor. Interestingly, many offshore service providers are more disciplined in their business processes than their US customers. They have to be: they depend on standardized, repeatable processes. But if you have been running your IT function in an ad-hoc fashion for years, how are you going to manage the outsourcer? Meta Group points out that in such cases, offshore service providers will need to compensate by putting some of their resources on site at your facilities, adding cost.

  4. Loss of business knowledge. Having worked in IT for over 25 years, I have observed that a tremendous amount of organizational and business knowledge resides in the application development groups of many companies. If you outsource application development, you are effectively transferring that knowledge to a third party. Is it worth the cost savings? Maybe, but recognize what you are doing.

  5. Risk of vendor failure. Smart companies do not put all their eggs in one basket, but rather choose to outsource to more than one service provider. If the vendor goes out of business, at least it won't be a complete disaster. Do your outsourcing plans address contingencies in the event that the outsourcer cannot deliver?

  6. Risk of non-compliance. Government regulations are placing increasing demands on the IT function. This has been true in military contracting and life science industries for years. Now, HIPAA, CA 1386, and other privacy regulations add new demands for compliance on IT systems. Can compliance be ensured if the IT function is largely outsourced to a third party, thousands of miles away? Massachusetts congressman Ed Markey has already sent letters to 16 U.S. regulatory agencies raising privacy concerns over offshore outsourcing. Markey's press release refers to one anecdotal example of such risks to privacy:
    According to press reports, last year a Pakistani woman who had been hired as a subcontractor to perform medical transcription work for a Texas company engaged as an outsourcing firm for a California hospital threatened to post sensitive patient medical records on the Internet unless she received certain payments she claimed were due to her. Press reports indicated that the Pakistani woman actually posted one confidential medical file onto the Internet, demonstrating her willingness to carry out her threat if her demands were not met.
Meta Group has identified four additional risks. Read Meta's whole article on CIO Magazine's web site for more details.

Sunday, February 22, 2004

Outsourcing: the next bubble?

Rebecca Fannin thinks that outsourcing is over-hyped, like tech mania of the 1990's:
How do you know when another bubble is about to burst? The signs of an overinflated tech boom were evident back in the late 1990s but no one paid much attention until it was too late and millions of dollars were sunk in ill-fated ventures. Now another peak and valley are on the horizon—not in Silicon Valley but far away in India, and not among dot-com startups but among providers of outsourcing services, from call centers to software development houses.
According to Fannin, signs of a coming shakeout in the outsourcing industry include venture capital flooding into the Indian tech sector, unsustainable growth rates, competitors luring away top talent from one another, rising hourly rates ($150/hour for some Indian software developers), and outsourcing firms going out of business or being acquired by stronger competitors. Already, many U.S. companies that have outsourced to India are now looking to other locations, such as China.

Why should U.S. executives care whether the outsourcing market is a bubble? The risk is that all the assumptions you've made in the business case for outsourcing may be invalid. The quality of service may become unacceptable. Or, cost savings won't be there. Or, worse, just as you've outsourced your software development, call center, or back office processing to an offshore provider, your partner goes out of business. Of course, bringing it back in-house won't be so simple if you've let go of your internal staff.

Fannin quotes M.R. Rangaswami, who heads the consulting firm Sand Hill Group:
"We are seeing a hyper-market with a lot of consolidations and mergers." He also points to some "quiet failures" among outsourcing providers, which are related to quality service issues rather than excess supply. As one high-profile example of failure due to service issues, he points to a recent decision by Dell to stop routing corporate customers to a technical support call center in Bangalore after it received numerous complaints about thick accents and scripted responses."
So, is the offshore outsourcing trend really a bubble about to burst? Usually, bubbles are only obvious in hindsight. Regardless, companies need consider all aspects of the outsourcing decision--such as loss of flexibility, and risk--not just cost savings.

Thursday, February 19, 2004

RFID coming to the pharmaceutical supply chain

The US Food and Drug Administration (FDA) has just published a report that lays out its intention to require radio frequency identification (RFID) tracking in drug manufacturing and distribution within three years. With this move, the pharmaceutical industry will join the trend to RFID in other industries such as consumer products, led by Walmart's RFID mandate, and the defense contracting industry, led by the US DOD initiative.

FDA indicated that its intention is to implement "mass serialization" of prescription drugs, which it defines as "assigning a unique number (the electronic product code or EPC) to each pallet, case and package of drugs and then using that number to record information about all transactions involving the product." It appears that FDA intends to require implementation of RFID first at the pallet and case level, starting in 2005, and ultimately to the individual package level. The agency wants to see the ability to track pharmaceuticals at the manufacturer, distributor, retailer, and hospital.

From a information systems standpoint, FDA's direction would required drug manufacturers to implement serial unit control, in addition to traditional batch record or lot number control. Drugs are typically manufactured in batches, and finished pharmaceuticals are typically identified by their batch or lot number. The assumption is that all units within the batch are uniform. Tracking at the serial unit level is well beyond the capabilities of many enterprise systems implemented by pharma manufacturers. This may drive new investments in information technology by drug manufacturers who distribute in the U.S., especially in systems such as warehouse management.

In spite of the obvious costs that this direction will impose on the drug industry, supply chain participants are for the most part upbeat about FDA's intentions. Perhaps this is because drug manufacturers and distributors see something in it for them: ability to stop counterfeit drugs and unauthorized imports from Canada, which is costing the industry a fortune and can only get worse. It is no coincidence that FDA's report is entitled, "Combating Counterfeit Drugs." This would indicate that FDA's primary objective is not so much to improve efficiency but to provide the ability to authenticate pharmaceuticals. When fully implemented, the RFID scheme would stop both counterfeit drugs and drugs from Canada not authorized for distribution in the U.S., at least at the retail level.

Computerworld has a short summary of FDA's report along with reactions from industry.

Wednesday, February 18, 2004

The new customer-friendly Oracle

Maryfran Johnson, in a Computerworld editorial, points out that there will be delicious irony if the US Department of Justice blocks Oracle's takeover of PeopleSoft:
If you have a taste for irony, Ellison's predicament is a gourmet treat. After years of urging and supporting DOJ actions against Microsoft, he's likely to end up competitively hobbled by the same agency -- all while struggling to position his company for future battles with the convicted monopolist. If the PeopleSoft acquisition founders, Oracle's chances of taking on market leader SAP in the $20 billion enterprise application space will founder as well.
Johnson goes on to point out that the takeover battle between Oracle and PeopleSoft has made both vendors more eager to gain and win customer approval. She writes,
Oracle has suddenly seen the light about providing a more open application-integration strategy, with tools coming later this year to help IT managers tie eBusiness Suite 11i software into other systems. And at the Oracle AppsWorld Conference last month, Ellison was pitching the importance of software vendors providing customers with clear, predictable costs of ownership....Of course, it could be a coincidence that these user-friendly changes are popping up now. But I suspect not.
I analyzed Oracle's application integration strategy on Jan. 28 and Jan. 29.

Monday, February 16, 2004

Customers pushing back against enterprise software maintenance fees

Last week I wrote about customers pushing back against Microsoft's software maintenance program for system software and the Office suite.

Now it seems that the same sort of backlash is coming in the enterprise applications market. The problem is that as new license sales have slowed, vendors have been looking more and more to their existing customers for revenue, and have increased software maintenance fees to a point where they are out of line with the perceived value. According to a recent research note by AMR, customers "are furious about the cost to maintain those products and the policies that the vendors have established for enhancements and upgrades."

Vendors had better wake up. AMR's research shows that because of maintenance policies, 22% of customers are considering switching vendors, 21% intend to stop taking upgrades, and 12% will discontinue paying maintenance.

AMR has some advice for customers that are fed up with paying for maintenance that delivers little or no value:
  • Purchase applications in smaller increments. Don’t license more than you can use in the next six months.

  • Negotiate harder for maintenance terms than license discounts. The upfront discount has a much smaller effect on total cost of ownership.

  • Every purchase is an opportunity to renegotiate terms and structure. It is much easier to get the vendor’s attention when you are spending money.

  • Flexibility is the most valuable concession you can get; you will never be able to forecast your license requirements accurately.

  • If you can’t use the enhancements, don’t pay for them. Consider self-support or renegotiating with the vendor instead.

For more insight, read AMR's whole article.

Friday, February 13, 2004

What exactly is the market for enterprise systems?

By all accounts, it appears that the US Justice Department's decision on whether to block Oracle's takeover of PeopleSoft will hinge on an interesting question: how do you define the market in which Oracle and PeopleSoft compete? PeopleSoft wants to define the market narrowly: large companies, such as the Fortune 1000, that are looking for a single application suite to serve the entire enterprise. PeopleSoft argues that this market is essentially served by three vendors: SAP, Oracle, and PeopleSoft. Allowing the deal to go through will reduce that number to two, a duopoly.

In the opposite corner is Oracle. According to an article Wednesday in The Deal, Oracle is expected to argue that there aren't any antitrust issues, because in fact, many other vendors serve the Fortune 1000 market:
Oracle is expected to argue the Justice Department's definition of the software market affected by the deal is too narrow and without legal merit. [Oracle] also will try to show that companies similar to those complaining about the deal have alternatives to Oracle, PeopleSoft and Germany's SAP AG for enterprise software solutions. This will include examples of companies that design their own systems and those that buy software from other vendors such as Microsoft Corp., IBM Corp. and Lawson Software Inc....Another line of attack for Oracle is likely to focus on whether the DOJ staff appropriately limited the market to software sold to large companies. It is expected to show it would be easy for other enterprise software companies to reposition their products to serve this market. Microsoft, for example, intends to market its enterprise solution to one-third of the Fortune 1,000.
I find this argument unpersuasive for two reasons. First, Fortune 1000 companies shopping for a complete enterprise system across multiple business units and even multiple countries do not consider writing custom solutions. It just doesn't happen. Second, to consider Microsoft's enterprise solutions (e.g. Great Plains, Navision, Solomon, and Axapta) on the same scale as SAP, Oracle, and PeopleSoft, is ludicrous. Microsoft's products are targeted for the small to mid-size company market: good solutions, but they do not scale up for companies that require tens of thousands of users. Similarly, Lawson often goes up against PeopleSoft in some deals, especially in some key Lawson verticals such as healthcare, but usually only for HR systems or perhaps financials, not the complete suite of enterprise-wide functionality. And IBM doesn't develop enterprise application software, so I don't know how IBM got lumped in as an example. (IBM competes with Oracle in the database and application server markets, but not in application software.)

SAP, Oracle, and to a lesser extent, PeopleSoft, have become entrenched in large organizations. Other vendors such as Lawson, QAD, Microsoft, or SSA, often co-exist at the divisional or plant level. But it is the rare exception for one of them to rise up and displace SAP, Oracle, or PeopleSoft, at the enterprise level. If anything, other vendors tend to get displaced when the corporate office moves in to standardize on fewer applications. This is why, among large companies, the big three continue to gain market share, not lose it. When large companies merge, and one is running SAP and the other is running SSA's BPCS, guess which system gets replaced. I know I'll get feedback, pointing out the exceptions, but those are just that, exceptions.

I agree that in the future other vendors may join the ranks of SAP, Oracle, and PeopleSoft, but it won't be easy, and it won't be quick. The enterprise applications marketplace has gone through three major transitions in the last twenty years, each tied to a major shift in underlying technology: from host-based architecture (e.g. COPICS, AMAPS, MANMAN, MAPICS, J.D. Edwards, BPCS, PRMS) to client/server architecture (e.g. SAP, Oracle, Baan, PeopleSoft, J.D. Edwards), to Internet architecture (e.g. SAP, PeopleSoft, Oracle). In the transition from host-based to client/server based systems, there was a nearly complete turnover of leadership, with J.D. Edwards as the only major vendor that successfully made the transition--but only after learning from the mistakes of other vendors, and even then, nearly failing in the attempt. But notice that the transition from client/server to Internet architecture has been different. The three current leaders -- SAP, PeopleSoft, and Oracle -- all started as client/server offerings. And all three have now completed the transition to an Internet architecture. This will ensure their dominance in the large enterprise market for at least the next five to ten years, or until some other architectural shift takes place.

Therefore, it will be difficult to understand if the DOJ decides in favor of Oracle.

Update, Mar. 1: Read my follow up post regarding the argument that DOJ actually makes in its complaint against Oracle.

Wednesday, February 11, 2004

Oracle: It ain't over till it's over

Oracle's attorney, James Rill, responded yesterday to PeopleSoft's statement that US DOJ staff have recommended filing suit to block Oracle's proposed takeover of PeopleSoft,
Over the course of my 45 years of antitrust practice I have seen many instances in which the Assistant Attorney General's decision differed from that recommended by the investigating staff, including several instances during my three years as Assistant Attorney General. In my experience, the Assistant Attorney General will take ample time to review the facts of this situation with an open mind and meet with Oracle before coming to a decision on the matter. This process simply is not complete.
Separately, it looks like a similar investigation by the European Commission is likely to drag on beyond PeopleSoft's annual meeting on March 25, further complicating Oracle's plan.

Update, Feb. 12: ComputerWorld has more reaction from Oracle and also from several PeopleSoft clients. Says one PeopleSoft user, "I won't be able to relax until they drive a stake through the heart of this deal."

Tuesday, February 10, 2004

PeopleSoft: Justice Department staff recommending halt to Oracle's takeover bid

PeopleSoft issued a very brief statement today:
PeopleSoft, Inc. (Nasdaq: PSFT) was informed late today by the U.S. Department of Justice that the staff of the Antitrust Division has recommended that the Department file suit to block Oracle's (Nasdaq: ORCL) proposed acquisition of PeopleSoft. The staff recommendation has been submitted to the office of the Assistant Attorney General. PeopleSoft was also informed that the Department will make its decision no later than March 2, 2004.
I'm not clear if it's normal procedure for DOJ to give the target of an acquisition this sort of early indication of its intention. Either way, things don't look good for Oracle's plan.

Monday, February 09, 2004

Customers pushing back against Microsoft licensing program

It seems that Microsoft is encountering quite a bit of resistance to its Software Assurance program, where customers pay an annual license fee in return for getting upgrades to Microsoft system software products, such as Windows and Office, at no charge. InternetWeek reports,
"The thing they're having problems with is getting renewals on enterprise agreements," said one financial analyst, noting that customers are holding back on software-assurance licenses and playing the Linux card to get discounts. "June is the big test. Everyone is lined up [for renewals] in June." ....

"Software Assurance is fundamentally broken," said one East Coast partner who requested anonymity. "Microsoft claims that three years of Software Assurance non-perpetual upgrade rights is less pricey than negotiating a product upgrade in year four. Given what's happening with [its] deferred revenues, it's hard for me to believe Microsoft will stick it to me on the license upgrade if I choose to defer purchase."
I predicted over 18 months ago that Microsoft's attempt to increase its revenue through maintenance agreements was going to have unintended consequences. As the cost of computing hardware continues to drop, Microsoft's products are making up an increasing percentage of the total cost of ownership of a desktop machine. There has to be a limit somewhere. I continue to believe that economics will drive more and more business customers toward Microsoft alternatives, such as Linux and other open source products. Microsoft is already cutting special deals to keep large customers from defecting. As customers just say no to Microsoft's money grab, watch for Microsoft to cut license fees in general.

Update: Paul DeGroot, analyst at Directions on Microsoft, points out the advantages of not being committed to stay with Microsoft for the duration of the maintenance period. In a ComputerWorld article, he says,
"If you don't think Microsoft is going to come out with anything compelling enough that you will want it, you will wait. The industry is maturing. People are happy with older products," he said. "Without locking yourself in for an upgrade, it becomes easier to switch away from Microsoft. My guess is that the Linux desktop will look a lot better three years from now than it does today."
I think this is a bigger deal than people generally recognize.

Wednesday, February 04, 2004

ASPs making a quiet comeback

The Application Service Provider (ASP) model, which many had given up for dead during the dot-com bust, is making a comeback. This article from CIO Update reports,
In the late 1990s, the birth of the ASP industry was marked by newcomers touting a radical, alternative software business model: selling the use of applications in a pay-as-you-go, a la carte model. Three-to-four years ago, at the peak of the dot-com boom, more than a thousand ASPs set out to change the IT world. Then, reality set in.

Vendors, exposed as being more hype than substance, were focused on growth rather than profit. And the quick signing of dot-com customers, which drove the financials of many early ASPs, proved to be the undoing of many service providers as the Internet bubble burst. By 2002/2003, the ASP market seemed all but dead, with a whopping 90 percent failure rate, according to industry analysts.

Despite the doom, a handful of players survived, because the basic software-as-service concept was viable despite poor execution. Pioneering pure-play vendors such as USinternetworking (USI), Corio, BlueStar Solutions, and Surebridge retrenched quietly as a number of mergers and acquisitions helped reshape the market, according to Gartner.

The pure-plays, however, aren't alone in this market. There is a second-wave of ASPs represented by vendors who deliver software over the Internet, or net-native service providers, such as, NetSuite and Salesnet to name a few.

Rounding out the ASP industry are independent software vendors (ISVs), such as Oracle, PeopleSoft and SAP which have had their fits and starts in this market. "In the past, ISV hosted applications was done more as an obligation of doing business. Today, it's a growing piece of their business," said Jeffrey Kaplan, managing director at ThinkStrategies.
Although all three types of ASPs are enjoying an uptick in business, I have long felt that greatest potential was in that second category--the "net-native service providers." To me, for the ASP economic model to really prosper, it needs web-based solutions that are built from the ground up for delivery by an ASP. In other words, a single instance of the application serving multiple clients. I never saw the economic benefit of taking an application that is normally delivered as a software license, and moving it to an ASP, with a separate instance of the application required for each client. There is too much overhead required from the ASP for the numbers to make sense.

But when a single instance of the application can support multiple clients, the entire implementation effort, not to mention infrastructure costs, are cut dramatically for the ASP, allowing a true pay-as-you-go model.