Computer Economics: our new acquisition

My business partner, Dan Husiak, and I are now the proud owners of Computer Economics, a 27 year old IT research and advisory firm. The deal closed on April 1, 2005.

As some of you know, I have been a contributing research analyst for Computer Economics for over two years. Through that relationship, Dan and I got to know a bit about the firm. So, when the opportunity presented itself for us to acquire it, we jumped at it.

Who is Computer Economics? Its research and advisory services are focused on the strategic and financial management of information systems. The firm is best known for its annual Information Systems Spending and Technology Trends report, a 700 page study published annually since 1990 that is the definitive source of IT spending, staffing, and related benchmarks across multiple industries and government sectors. It is also well-known for its IT Security Study, and its report on The Impact of Malicious Code, which has been referenced in such publications as The Wall Street Journal. The firm also maintains extensive data on current pricing and forecasted residual values for computer hardware as well as fair market values for used equipment.

Since 1978, Computer Economics has published one of the longest running journals in IT, the Computer Economics Report, which is a recap of some of its best research each month. Computer Economics clients include several of the major consulting firms, as well as a number of large and mid-size corporations and governmental organizations.

Dan and I are excited about this new opportunity, and we believe that Computer Economics is a great complement to our management consulting business at Strativa. We look forward to working with the staff of Computer Economics and continuing and strengthening its proud tradition.

If you'd like to know more about the acquisition, read the press release on the Computer Economics web site.

Quick poll: the advantages of open source

If you have a moment, please stop over at Computer Economics and vote in our monthly survey:

In your opinion, what is the most important advantage (if any) in the deployment and use of open source software?

The survey is in the right hand column of the Computer Economics home page. It will take about five seconds to answer.

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Software on demand: small companies still don't "get it"

Small and mid-size businesses (SMBs) should be a fertile market for software vendors such as NetSuite and Salesforce.com, that sell software on-demand, that is systems hosted by the vendor and sold on a monthly subscription basis. However, a recent research report by AMI Partners indicates that adoption of software on-demand might take longer than on-demand vendors would like.

The study found that the typical small business averages less than one full-time IT headcount, while the average medium business has five full-time IT staff. So, SMBs ought be welcoming software on-demand as a way to deploy systems without increased need for IT staff. Furthermore, SMBs are growing in their use of the Internet, and most of them already have high-speed Internet connectivity. This means that they already have most, if not all of the infrastructure needed to implement software on-demand.

However, the study found that the majority of SMBs currently have no plans to adopt software on-demand. Why? The study points to a lack of awareness and education concerning software on-demand vendors and solutions.

In my opinion, software on-demand is the way of the future, especially for small and mid-sized businesses. But vendors are going to need to do a lot more marketing and education before adoption reaches a tipping point.

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PeopleSoft deal drove Oracle's renewed interest in retail apps

Evan Schuman, writing for eWeek, has an interesting post-mortem on Oracle's acquisition of Retek, a leading software vendor for the retail industry. According to recent interviews with parties on both sides of the deal, Oracle's interest in the retail sector was revived when it discovered that it had picked up about 400 new retail customers through its PeopleSoft acquisition.

Schuman writes,

This is all part of what some Retek insiders describe as a growing Oracle awareness of two market facts: Retail is really important; and retail-specific apps are really difficult to do well.

Ironically, Oracle had a reseller relationship with Retek that, according to Retek insiders, ended in 2002 because of Oracle's lack of understanding of the retail market.

...there was certainly a concern from some at Retek that Oracle at the time didn't appreciate the importance of the retail vertical, nor the difficulty in servicing it. In this context, servicing retail doesn't mean selling operating systems or business databases or payroll platforms. It means providing the kinds of retail-specific apps—such as POS, supply chain and merchandising—that Retek did all day.

With its acquisitions of Retek and PeopleSoft, Oracle has the opportunity to cross sell its products to the customer base of both acquisitions. Something like 80% of the Retek customer base runs Retek apps over Oracle technology. This should facilitate further penetration of these accounts for Oracle.

Furthermore, many of those 400 retail customers that Oracle picked up in the PeopleSoft acquisition are only running PeopleSoft HR and financial applications, along with applications from Retek competitor and former PeopleSoft partner, JDA. This represents an opportunity for Oracle to cross sell its E-Business Suite to those customers and take opportunities away from JDA.

The strategy is clear, but whether Oracle can capitalize on these opportunities will depend on how well it executes.

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SAP leading the pack with strong earnings

SAP's financial results in the first quarter surged ahead of other major tech vendors, such as Oracle, IBM, and Siebel that are reporting less than stellar performance.

SAP is reporting an increase of 11% in Q1 net income, with sales up a whopping 27% in the U.S. Revenue in the reset of the world is up only 6%. The only significant trouble spot seems to be Germany, where sales were down 2%, mainly because of sluggishness in the German economy.

Breaking down the numbers further, worldwide software license revenue is up 17%, beating analyst estimates. Software license revenue is, of course, a leading indicator on future performance in that it drives future maintenance revenue, service revenue, and additional seat license sales. In terms of sales by product line, SAP's ERP sales, which account for the bulk of its revenue, were up 12%, while supply chain management software sales were up 9%.

But it's the results in the U.S. that are really striking. Perhaps buyers were really alienated by the Oracle/PeopleSoft hostilities and really did view SAP as the safe choice. If so, it would indicate that SAP's "Safe Passage" program to entice PeopleSoft and J.D. Edwards clients could do further harm to Oracle.

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SAP dismisses talk of merger with Oracle

SAP was full of denials at its press meeting this week. In addition to its denial of plans to launch a hosted CRM service, it also denied a report in a German magazine that SAP and Oracle were considering a merger.

According to the San Francisco Chronicle, however, SAP CEO Henning Kagermann said he would listen to Oracle CEO Larry Ellison if a merger was proposed, and that it's an everyday part of his job to consider all proposals that could benefit shareholders.

Because of anti-trust laws, I can't imagine the U.S. Department of Justice would allow an Oracle/SAP merger, but...I also said that about Oracle's hostile bid for PeopleSoft.

Kagermann also played down the significance of Oracle victory over SAP in the bidding war for Retek, a leading software provider for the retail industry. He indicated that because SAP didn't really need Retek to continue development of its retail industry functionality, it was free to walk away from the deal if it got too expensive. On the other hand, he said that Oracle was so desperate for Retek that it was willing to over-pay.

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SAP denies plan for CRM on demand

SAP is denying a report by Brent Thill, analyst at Prudential Financial, that says SAP is planning to launch a hosted CRM offering to compete directly with Salesforce.com. "We believe SAP is close to announcing a new hosted CRM application that is priced on a subscription basis — possibly as early as 27 April during the Sapphire '05 Copenhagen conference," Thill wrote.

However, SAP is denying the report, and in the process takes a swipe at the whole software on demand trend that many see as the future for business applications. In a press briefing, SAP CEO Henning Kagermann said,

When on-demand came up, we at SAP felt we should be careful...that on-demand is not the next locked-in strategy. With on-demand, the customer hands his destiny to someone else and then he finds out after two or three years he cannot get his destiny back.

SAP's Shai Agassi, head of SAP's product development and technology, piled on the criticism of software on-demand, and of Salesforce.com in particular. Quoted in the San Francisco Chronicle, he said,

I think some of it is over-hyped. You have to put it in perspective. Salesforce.com in Q4 of last year added something like 19,000 users to their customer base. We added more than one million users....There are some people who make big noise. Talk is cheap.

SAP's reaction strikes me as a bit overly dismissive. At the risk of betraying my age, it reminds me of the attitude 25 years ago of mainframe programmers toward personal computers.

If I were Salesforce.com right now, I would be breathing a sigh of relief that SAP is not planning to launch a hosted on-demand CRM service.

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Management shakeup at Siebel

Siebel CEO Michael Lawrie agreed to resign yesterday, less than one year after taking over the top spot from founder Tom Siebel. Siebel's board was clearly unhappy with the Siebel's latest quarterly result, and held Lawrie accountable.

The Board also announced that board member George Shaheen will take over as CEO. Shaheen is former CEO of Webvan, roadkill of the dot-com bust. He was also the former head of Andersen Consulting (now, Accenture).

Analysts are surprised by the move, and generally give Lawrie good marks in his handling of the situation at Siebel, which is having a rough time making the transition from multi-million CRM deals to a market that favors the pay-as-you-go approach of on-demand vendors, such as Salesforce.com. Siebel has launched its own on-demand service, based on its 2003 acquisition of Upshot.

There's more in the Siebel press release.

Update. Josh Greenbaum points out that Siebel's woes are strategic:

The customer record is now such an essential part of managing the supply chain, the logistics chain, after-market sales and service, strategic procurement and business forecasting that integration to the rest of the enterprise is no longer just a good idea. And this integration can be enormously costly when the enterprise is trying to link a standalone CRM product like Siebel to a broad-based set of back and front-office systems.

It's so much easier and logical for customers to try to hook their big suites -- like SAP and Oracle -- to these respective vendors' CRM offering than take on the complexity challenge that Siebel offers. Especially as most existing Siebel customers also are SAP and Oracle customers.

And don't forget the Salesforce.com challenge at the low-end.

If you are a company running a major ERP suite, do you buy Siebel and try to integrate it, or do you just go with your ERP vendor? And if you really are looking for a CRM point solution, why not just go with an on-demand vendor, such as Salesforce.com? Granted, Siebel has its own on-demand offering, but in that market it gives up its leadership position.

Update. According to CNET, one group of Siebel shareholders met yesterday, demanding that Siebel to do more than simply replace the CEO. They are demanding that Siebel use its $2.2B to work to buy back shares and to position the company for a merger or to be acquired.

"There was a feeling that this was a vote for the status quo from an entrenched management," [Providence Capital President, Herb] Denton said. "If Lawrie, given his credentials, couldn't cut the ice, there are questions over whether Mr. Shaheen could."

If so, Siebel's problems aren't over.

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SAP expands grab for PeopleSoft and JDE customers

Since the beginning of this year, SAP has been luring PeopleSoft and J.D. Edwards customers to jump ship from Oracle, with its "Safe Passage" program for SAP customers that are also running PeopleSoft or JDE. As part of this program, SAP acquired a third-party PeopleSoft/JDE maintenance and support organization, TomorrowNow.

SAP's Safe Passage program elicited a veiled threat from Oracle CEO Larry Ellison.

Now, instead of backing down, SAP is expanding its Safe Passage program to extend the offer to all PeopleSoft and JDE customers, whether or not they are currently customers of SAP. According to SAP, the expanded pitch is aimed at "businesses concerned about the challenges of facing the eventual sunset of their existing PSFT/JDE solutions; the migration to yet-developed, future Oracle offerings; and disruptions from the integration of multiple platforms, technologies and corporate cultures faced by their current solution provider."

SAP's offer is enticing from a financial perspective. SAP is offering annual maintenance at 17% of the SAP license fee, which is significantly lower than Oracle's pricing. But here's the kick: SAP's maintenance will cover both SAP products and any PeopleSoft or JDE software that the customer is running. Furthermore, customers that want to migrate to SAP will receive a whopping 75% credit on the cost of their PSFT/JDE licenses.

I'm not able to find whether any PSFT/JDE customers have yet taken advantage of SAP's offer. But I've got to believe there are a lot of discussions taking place. If any readers have insight into how SAP's offer is being received, please let me know.

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Yet another study of Microsoft vs. Linux

Yankee Group has produced a study showing that Microsoft now surpasses Linux in the war of perceptions. The study, by Yankee analyst Laura DiDio, has some surprising findings:

• In terms of total cost of ownership, respondants rated Windows and Linux nearly the same.


• In terms of quality, performance and reliability, 88% of the respondents said Windows was equal to or better than Linux.


• In terms of security, Windows is catching up with Linux. Respondants rated Microsoft's security at 7.6 on a scale of one to 10, double the rating in a similar survey conducted last year. Linux's rating was better than that of Windows, but nearly the same as last year's study, at 8.3.

The study also found that Linux and Windows are both growing in market share at the expense of Unix.

Computerworld has more.

Update, Apr. 27. In the comments, reader Paul points to a post on Groklaw refuting the Yankee study. The Groklaw post links to an article by Steve Hamm in Business Week, The Truth about Linux and Windows. Hamm talks directly to Yankee analyst Laura DiDio and other Yankee researchers and finds much to criticize about Yankee's research methods in this case.

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Duffield comes to aid of former PeopleSoft employees

David Duffield, founder and former CEO of PeopleSoft, is putting to good use some of the millions he made in the takeover of his firm by Oracle. He's started a fund, "The Safety Net Fund," to provide grants of up to $10,000 to employees that are facing financial hardship from the layoff associated with Oracle's takeover.

In an open letter on the fund's website, he writes,

The shock we all felt late last year has diminished somewhat, and I know some of you have found new jobs and are adjusting to new routines. Many of you have taken advantage of the available out-placement services and are relying on severance packages and unemployment benefits as you job hunt.

There will be a small number of people who will have difficulty finding jobs. It’s to you that this program, The Safety Net, is dedicated. The Safety Net will make cash gifts to people who demonstrate a serious need. The gift is intended as a “bridge” to help you through a tough time. Please be assured that all transactions with The Safety Net will be kept strictly confidential.

This fund is something that Cheryl and I — both former PeoplePeople — wanted to set up as a way to acknowledge your loyalty and dedication to PeopleSoft.

I was tempted to find something humorous in this. But if you've ever been out of work you know that unemployment is no joking matter. Duffield didn't need to set up this fund, but his actions show why so many employees were so dedicated to PeopleSoft.

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i2 fires 300, struggles to refocus

New CEO Mike McGrath says he was given a mandate by i2's board to "resize and refocus" the company. McGrath has started the effort by announcing a 15% cut in headcount, or 300 heads. He also indicated that additional expense reductions are coming.

So, why is i2 still struggling? i2, along with Manugistics, were leaders in point solutions for supply chain management. But when major vendors such as SAP and Oracle developed their own supply chain functionality, the need for such point solutions diminished. There's still a market for best of breed supply chain management solutions, especially in companies that have not standardized on a major ERP platform. But there are fewer and fewer of such companies today, especially at the high end. That's i2's first problem.

i2's second problem is the complexity of its products, which are designed to optimize production and distribution schedules around constraints in key resources. In other words, i2's products are an elegant solution looking for a very specific problem. When your problem fits an i2 product, you may see great results. But in most companies, the problems are not so elegant.

In most companies, problems in supply chain planning are not primarily due to the lack of sophisticated scheduling algorithms. Rather they are due to incomplete or inaccurate data, poorly defined ordering and fulfillment processes, and perverse incentives that encourage one function to optimize its performance at the expense of the whole organization. These are organizational problems, not technical problems. Therefore, they can't be fixed with software.

In my opinion, i2 would be best served by turning itself into a niche professional services firm. Its mission should be to help clients optimize their supply chain, whether or not it means selling them software. Software would be only one part of a complete solution that includes consulting to address the organizational problems that prevent companies from improving their supply chain performance. In a February interview with Computerworld, McGrath indicated that i2 planned to make its consulting services "more robust," but he didn't give any details apart from "working with consulting partners."

If i2 cannot make this transition by itself, then its best path might be to sell out to a professional services firm.

There's more on i2's resizing in i2's press release.

Update. A previous employee of i2 called me with additional insight into i2's problems. First, i2's struggle today can be traced to its origins in the supplier side of the supply chain, providing technology to optimizing the push from raw material suppliers to customers. In the years since, however, it has become clear that the best way to optimize a supply chain is by starting with the demand side: a demand-pull approach. Therefore, i2's basic perspective on supply chain planning is less attractive today.

The second problem is the diversity of i2's product offerings, which are poorly integrated, if at all. In its heyday, i2 acquired a number of point solutions, such as Aspect Development, for which it paid a whopping $9.2 billion in 2000. This diversity of products looks good on paper, but there are not enough synergies between them to allow i2 to really sell them as an integrated suite.

My source indicates that it would not be easy for i2 to make the transition to professional services. Over the past few years, i2 has lost many of its consultants, who are now working for other vendors, various system integrators, or working on their own. Some of the best people, who stuck with i2, were now let go in this latest round of cuts this week. So, there's not a lot of bench strength at i2 to make a serious push into professional services. This leaves partnering as its main alternative. However, many of the systems integrators and professional services firms that formerly partnered with i2 are no longer on board. Therefore, the professional services strategy that I proposed is not a simple solution.

According to my source, it's a mystery why some consulting firm or systems integrator has not yet snatched up i2 for a song. It still could happen.

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