Chinadotcom rolling up enterprise system vendors?

Less than a week after announcing its acquisition of Ross Systems, Chinadotcom is announcing its acquisition of Industri-Matematik International Corp (IMI) a vendor of supply chain management systems. As with Ross, IMI is being acquired by Chinadotcom's subsidiary, CDC Software.

IMI is a well-regarded name in SCM solutions for consumer product distributors, with an enviable client base that includes GE, AT&T, Starbucks, Campbell Soup, Dial, Frito Lay, and Kelloggs. Six month revenue ending June 30 were nearly $22M. Unlike many other enterprise system vendors, IMI is profitable.

Is this the beginning of a trend? Chinadotcom makes it clear that Ross and IMI are just the beginning of an acquisition strategy. In its press release, CEO Peter Yip says, "The acquisition of IMI fits our overall strategy of developing and assembling a suite of related premium enterprise software solutions that allow for synergistic cross selling opportunities as well as the ability to enhance mid and long term profit by transferring key cost centers to China."

In other words, as was the case with Ross, moving software development to China is also part of the plan for IMI. Why just provide outsourcing for the software developer when you can buy the developer outright? With weaknesses throughout the technology marketplace, it's a buyers market with few disadvantages and lots of upside.

The Chinadotcom press release has the details.

Ellison's analogy hints at Oracle's attitude toward PeopleSoft customers

In a recent interview with San Francisco Chronicle editors, Oracle's Larry Ellison made an interesting, but telling, analogy in talking about Oracle's takeover bid for PeopleSoft. Ellison objected to the questioner's use of the phrase "hostile takeover." Ellison said,

The use of the word "hostile" I find utterly fascinating because the question is: hostile to whom? If you're renting a house in Pacific Heights, and I go to the owner and offer him $10 million for an $8 million house, that offer is not hostile. As a renter, I may feel that's not a welcome offer, but all we're doing is giving the owner a choice. So we want to go directly to the shareholders. The only people who consider this hostile are the renters, the managers who don't own the company, whose jobs in fact will be lost.

Let's see, Larry sees three parties as stakeholders in the deal: the owner of the house (PeopleSoft shareholders), the bidder (Oracle), and the renters (PeopleSoft managers). Hmmm...who is missing in this analogy? Maybe...PeopleSoft customers?

A better analogy might be a bagel shop in Pacific Heights that is being taken over by Winchell Donuts with the intention of turning it into a donut shop. The bagel shop owner gets his price, Winchell's gets the store location, and the bagel shop managers lose their jobs. But there is one more stakeholder in this analogy: the neighborhood customers that want bagels, not donuts.

PeopleSoft's customers have a legitimate concern that Oracle's intention is not to better serve them but to eliminate an Oracle competitor. Ellison's poor choice of an analogy just reinforces that perception.

Ross Systems gets "Shanghai’ed"

Ross Systems, a process-manufacturing ERP vendor, is being acquired by Chinadotcom and will operate as a part of its CDC Software unit. It's an perplexing move. Ross’s iRenaissance suite is one of the few ERP packages focused purely on process industries, such as food and beverage and chemicals. Although, like most enterprise software vendors, Ross been through some hard times recently, it has become profitable in the last few quarters. Just three months ago, it signed up Chinadotcom as a reseller in the Far East. Now, it's selling them the store.

So who is Chinadotcom? Based in Hong Kong, it was originally a Web hosting provider. But it has been turning itself into a software developer and offshore services provider, competing with the large India services firms. Therefore, I suspect that cost savings from offshore software development is the driving force at work here. In the Chinadotcom press release, CEO Peter Yip hints at this: "Ross Systems is expected to achieve certain cost savings and synergies by outsourcing to our low cost software development center in Shanghai and developing synergies in various aspects including cross selling within the chinadotcom group of companies."

There is a nearly universal trend for enterprise system vendors to move software development offshore, avoiding high programming costs in the U.S. and Europe. Ross, selling itself to an offshore provider, just takes this trend to the next level.

FDA finalizes guidance for 21 CFR Part 11

FDA has just released the final version of its guidance document "Part 11, Electronic Records; Electronic Signatures - Scope and Application." At first glance, there are not many changes from the draft guidance that FDA released in February. I do note, however, that FDA has clarified that users of legacy systems (systems in use prior to Aug. 20, 1997) are not totally off the hook. The guidance now says, "You [must] have documented evidence and justification that the system is fit for its intended use (including having an acceptable level of record security and integrity, if applicable)." The term "documented evidence," in my opinion, points to some level of system validation to ensure that the system is trustworthy and reliable.

The final guidance document is available on the FDA web site.

For more background on 21 CFR Part 11, see my post regarding the draft guidance in February. For perspective on how software vendors are addressing Part 11, see my post on Oct. 16, 2002.

I will be speaking on this subject later this month at the joint meeting of APICS and ISM in San Diego.

2003: a dismal year for IT budgets in large organizations

According to a research note by Computer Economics, 44% of large companies (over $750M in revenue) reported declines in their IT budgets in 2003--the highest number of declines reported since Computer Economics began tracking this statistic in 1989. At first glance, it doesn't look so bad when one notes that 40% of large companies reported budget increases. But a more careful look shows that the magnitude of the cuts are greater than the magnitude of the increases. In other words, in 2003 more companies cut budgets than increased budgets and the magnitude of the cuts was greater than the magnitude of the increases.

But hope springs eternal. Computer Economics is forecasting a recovery next year.

All over, except for the shouting

In an interview with CNet, PeopleSoft CEO Craig Conroy says he's no longer concerned about Oracle's hostile bid for PeopleSoft. He points to the fact that, so far, Oracle has received tenders for only 8% of PeopleSoft's stock, and also to PeopleSoft's shareholder rights provision and staggered board of directors--corporate measures that make it all but impossible for Oracle to achieve success. Indeed, at this point, no one I know thinks that Oracle will win.

In a related note, prospective buyers are getting a bit tired of the takeover actions of the big software players. I attended a software demo recently for a prospective buyer. After the initial introductions, one executive in the back of the room spoke up, "I just have one question. Who are you buying, and who's buying you?" Enterprise system investments are supposed to last at least 7-10 years. Therefore, customers are looking for stability and predictability in their software vendor relationships. Amidst all the noise about who's buying whom, vendors had better remember that the ultimate stakeholder in these deals is the customer.

Who's next on SSA's shopping list?

According to Michael Dominy, senior analyst with the Yankee Group, SSA may target additional vendors in the supply chain management space, following its acquisition of EXE Technologies announced yesterday. Quoted in an article in the Daily Deal, Dominy specifically mentions Adexa, Prescient Systems, and Optiant. Adexa (formerly known as Paragon) is a supply chain vendor with strength in the automotive and high tech electronic verticals. In 2001, Freemarkets nearly acquired Adexa for $340M but called it off due to weak market conditions. Adexa would certainly go for less today. Prescient Systems is a small (50 employees) supply chain planning vendor focused on the consumer products vertical. Early in 2003, Prescient announced it had doubled its license revenue over the previous year, bucking the negative trend generally. Optiant (formerly SupplyChange) is small (42 employees) provider of supply chain analytics and optimization solutions. With overall supply chain technology spending flat, niche vendors such as Adexa, Prescient, and Optiant are probably better off as part of a larger portfolio, such as SSA's.

Update, Aug. 22: ARC Advisory Group's John Moore speculates that MAPICS (MAPX) may be SSA's next target, based on the fact that General Atlantic Partners (GAP), which owns 25% of SSA, also has a "sizeable stake" in MAPICS. However, in my opinion, MAPICS is not acting like a company that wants to be acquired. It just made the strategic move to acquire Frontstep, giving it a full product suite based on Microsoft .NET architecture. And it has lowered its cost structure, allowing it to maintain profitability even in these weak market conditions (see my post on August 5). Although GAP's 30% stake in EXE Technologies was, no doubt, a major factor in SSA's acquisition of EXE, GAP only owns 6% of MAPICS--not enough to ensure a deal, although they surely could initiate a discussion. Watch whether GAP tries to increase its stake in MAPICS. That would be a sign that a deal might be coming.

SSA is buying EXE Technologies

EXE is a well-regarded provider of supply chain execution and warehouse management systems. The company was formed as the result of the merger of Dallas Systems and Neptune Systems in 1997. The company went public in 2000. In the most recent quarter, EXE had a loss of $822,000, on revenue of $19.8 million. SSA GT is offering just over $47M for EXE, significantly less than its last year's sales of $70M.

EXE Technologies is generally considered one of the Tier I players in the warehouse management space, although it has been losing ground to Manhattan Associates over the past three years. I evaluated EXE's EXceed offerings a few years ago and was quite impressed with their functionality. But with EXE's weak financial position, the acquisition by SSA makes sense. SSA makes no secret of its strategy to acquire weaker vendors. And EXE surely has been having a rough go of it these past few years. On the other hand, SSA already has a good warehouse management system in its portfolio, in Warehouse BOSS. But Warehouse BOSS is limited to the IBM iSeries (formerly AS/400) platform, whereas EXE claims deployment across all of IBM's hardware platform. In fact, IBM is a strategic partner for EXE. This fits well with SSA's strategic alignment with IBM.

There's a press release on SSA's Web site. The same press release appears on the EXE web site.

Interestingly, starting early this morning, before any news reached the wire, the Spectator suddenly began getting web site referrals from Google for users doing searches with the words "SSA," "exe" and some variation of the word "acquisition." Obviously, the word got out before the announcement.

Wal-mart suppliers face October deadline for Internet-based EDI

In about two months, many of Walmart's suppliers will reach Walmart's deadline for adopting Internet-based EDI (EDI-INT, AS2), in place of older VAN-based EDI. Many of these suppliers have already made the switch, mostly with help from a few software vendors that provide interoperable solutions, such as iSoft (which Walmart uses), Webmethods, bTrade, Cleo Communications, Cyclone Commerce, IPNet, and Sterling Commerce. As I've written previously, Walmart's mandate is a huge shot in the arm for such software providers. And as I predicted last September, other retailers (Home Depot, Lowe's, and others) have followed Walmart's lead in converting to Internet-based EDI, creating strong incentives for adoption of these standards throughout the retail supply chain.

Internet e-commerce is not getting a lot of buzz in the trade press these days, but in fact it's becoming a way of life for many companies.

CNet has an update on the trend.

Word on the street: IT spending is up, but not across the board

In discussions with technology sales people here in Southern California, I'm hearing mixed reports regarding corporate IT spending. The bottom line is that IT spending is picking up, but not in all areas. Here's the buzz.

• In the mid-market, spending on new ERP and CRM systems continues to be slow. Most mid-market companies are still attempting to extend the life of existing systems with add-on's or complementary products and are only buying new ERP systems when existing systems are clearly inadequate. There is a pick up of mid-market activity is some verticals, such as life sciences, health care, and defense contractors, but among many verticals, such as high tech electronics, there is not much appetite for large investments.
  


• With large companies, on the other hand, spending is stronger. But it revolves around streamlining IT processes and cost savings. Specifically, there is a lot of interest in anything that reduces space requirements, such as blade servers.
  


• Data center facilities are now hot properties. Nationwide there is strong demand for new data center space. The need is driven by several regulatory mandates: HIPAA, which drives increase in electronic records in healthcare, Federal Reserve regulations that require banks to have backup sites outside the region of existing data centers, and Sarbanes-Oxley requirements for stronger internal controls such as audit trails, which increase demand for data storage. One source mentioned a case where several banks got into a bidding war for an empty data center facility that came on the market.
  


• Phoenix and Nevada appear to be strong markets. This is being driven by the high cost of doing business in California and the proximity of Arizona and Nevada, which makes them attractive as backup/recovery sites.
  


• When companies go shopping for new application systems, they are showing strong interest in Linux-based systems, mostly because of perceived cost savings. Consistent with this, enterprise system vendors such as Oracle and PeopleSoft are promoting Linux because it allows them to lower the cost of hardware and operating systems in the deal, leaving a larger share of the budget available for software licenses.

Certainly, we're not in the technology boom times of the 1990s. But that doesn't mean IT spending is moribund. It's just happening in different directions today.