Pro-sellout shareholder of i2 elects second board member

Amalgamated Gadget, a major shareholder of i2, has now elected its second board member, one David L. Pope. According to the SEC filing, Pope is employed by an affiliate of Amalgamated, which "acts as investment manager for R2 Top Hat, Ltd., which owns all of the issued and outstanding shares of the Series B Preferred Stock." Earlier this month, Amalgamated openly called for i2 to find a buyer.

An astute reader also informs me that i2 has taken down from its website all open job postings for customer-facing positions. He notes that previously, i2 had consistently been running 30-50 of these jobs at any one time. It's all speculations, but it could be an indication that the company is trying to reduce costs by not filling open positions, possibly to improve earnings prior to negotiation with potential buyers.

Update, Oct. 4: A second major shareholder, SAC Capital Advisors LLC, has just increased its holdings of i2 shares to 8.9% and promptly joined the call for sale of the company. At the same time, i2 is reporting that it has narrowed the list of finalists in its search for a new CEO and expects to name the winner in 30-45 days. If so, the winner may find him/herself with a very short resume entry.

Update, Oct. 15: The job postings now appear to be back online on i2's website. There are 51 jobs currently open, a level similar to that in the recent past. So, maybe the absence of postings was due to a website glitch.

Update, Oct. 17: Barrons is reporting that another major shareholder, SAC Capital, now holds 1.9 million shares (8.9%) of i2 and is also calling for sale of the company.

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Oracle reports another blow-out quarter

By my count, it's now three quarters that Oracle has reported financial results that exceeded expectations. The first time (Oracle's last year Q3), I questioned whether Oracle had achieved those results by draining its pipeline for Q4.

But then Oracle's blow-out results in Q4 ruined my theory. But I noted that Oracle co-President Safra Catz was predicting a whopping 20-30% increase in new license sales for Q1.

So what is Oracle reporting now for Q1? A 35% increase in new license sales, including a 65% increase in Oracle's application software revenue. Some other results: a 26% increase in revenue and a 25% improvement in net income. All of these results exceed just about anyone's expectations.

So what's going on? Certainly, a strong technology market doesn't hurt. Evidence of that is SAP's strong performance last quarter (it has yet to report the most recent quarter). Many other technology providers are showing strong results as well. Furthermore, I'm seeing and hearing of many new deals in process for enterprise software vendors generally, more so than in years.

But it's impossible to ignore the fact that Oracle's results also speak to the success of its acquisition strategy. Oracle keeps acquiring and integrating smaller vendors each quarter. This quarter's results include revenues from its pick up of Hyperion and Agile Software. Whether or not you like the trend toward vendor consolidation, of which Oracle is a major driver, it's hard to argue with success. We'll have to wait another three months to see if it can continue its hitting streak.

In the meantime, I am giving up on trying to predict Oracle's performance.

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IT budgeting policies and practices

Over at Computer Economics, we've launched a new survey on IT budgeting policies and practices. The survey covers the following areas:

• What categories of spending are typically included or excluded from IT budgets
• Where such spending appears: corporate IT budgets, divisional IT budgets, or user departmental budgets
• What types of IT expenses are charged back to users
• The trend for IT spending this year and next year
  

The survey will only take 10-15 minutes. If you or someone you know is interested in this subject, you can take the survey at the following link.

IT Budgeting Policies and Practices Survey

Anyone who completes the survey will receive a free copy of our analysis report that we produce from the survey results.

Major i2 shareholder calls for sale of i2

i2 has been having some tough times lately. CEO Mike McGrath resigned in July. Then the firm announced an earnings shortfall for its second quarter. It also said that it wouldn't be able to meet its previous forecast for the full year.

Now, one of i2's largest shareholders is calling for i2 to throw in the towel and search for a buyer. In an SEC filing yesterday, Amalgamated Gadget LP, said that i2 is too small to survive as an independent company and is better off to seek to be acquired.

Amalgamated isn't just blowing smoke. The size of its stake in i2 gives it the right to elect two board members. It says that it has already elected Michael Simmons, formerly from General Electric, as a board member and it is now seeking someone to fill its second open position.

i2 has been trying to recover for years from the tech downturn earlier this decade, but never fully seems to be able to get traction. Most recently, it has been trying to juice up its business model by adding more services to its traditional software product mix. This strategy, to me, has a lot of attraction in that supply chain management projects are often highly customized to the specific industry and supply chain than pure off-the-shelf solutions.

Nevertheless, an acquisition is probably the best path right now for i2, to put it in the hands of a larger firm that can better leverage its extensive product line, its impressive client list, and its patent portfolio.

The question is, who will step up to this opportunity? Names like Oracle and Infor are often mentioned, since they already have a history of making such acquisitions. But I think that some of the large IT services firms, both in the U.S. and in India, might be potential buyers. Think CSC, Accenture, IBM Global Services, or Infosys. I'm just speculating here, but since, as mentioned earlier, i2's business is increasingly services-oriented, such a combination might make a lot of sense.

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Total cost study for an open source ERP project

Baseline Magazine has an interesting case study on PerTronix Performance Products, of a small manufacturing firm that implemented the open source ERP system, Compiere. What's interesting is that the article reports the specific costs that the company incurred for the open source implementation. Thus, it provides a useful comparison with the typical costs for proprietary ERP systems.

Here are the metrics reported for PerTronix's open source ERP implementation:

1. Number of employees: 100
2. Number of named users: 20
3. Upfront costs (licenses, customization, training, and implementation): $20,000
   or, $1,000 per user
   
4. Hardware and operating system (Dell and Microsoft): $3,800
5. On-going support from Compiere partner: $12,000/year
   or, $600 per user
6. On-going support as percentage of upfront costs ($12,000 / $20,000): 60%
   

Now let's look at these metrics in light of a typical implementation of a proprietary ERP system:

• The up-front costs really stand out as exceptionally low: $1,000 per user is about one-fourth of the typical cost of a proprietary ERP implementation. For planning purposes, I generally assume about $2,000 per user for software, plus at least one times that for implementation, or $4,000 per user--usually more. Of course, the fact that there is little if any software license cost is a major driver of the low cost advantage of open source, here. (The article does mention "license costs," indicating there may have been some proprietary extensions of Compiere as part of the deal here--the article doesn't say. But whatever they are, they couldn't account for much of the upfront costs.)
  
  
• The $600 per user for on-going support is only somewhat higher than that for proprietary ERP, which generally runs about 20% of the initial license fee. Assuming an initial license fee of $2,000 per user, a proprietary ERP system would generally cost about $400 per year in maintenance fees, which cover software patches and help desk support. The $600 per user figure is certainly not out of line.
  
  
• Because Compiere is running on low-cost hardware and a Windows operating system, these costs are quite low, although many proprietary ERP systems, especially packages written for small and mid-size firms, run on this platform. So, we cannot point to an advantage for open source here.
  

So the major difference in cost between open source ERP and proprietary ERP lies primarily in the up-front cost. The on-going support costs are similar, which is not surprising, since those costs are largely driven by the cost of labor.

One might also point out the advantages of open source in terms of flexibility. If the lead development organization, Compiere Inc., goes out of business, PerTronix still has rights to the source code. If the Compiere implementation partner raises its support fees, PerTronix can go look for another, or it can hire its own support technicians. There is no vendor lock-in.

The article also discusses the benefits of the new system, which include centralizing of order processing and inventory management across multiple facilities, productivity improvements, ability to implement price revisions more frequently. But we can assume that those benefits would have been realized from a proprietary software implementation as well. Therefore, the real difference between an open source ERP system and proprietary software stand out more on the side of cost and flexibility.

Is open source ERP the right solution for all companies? Definitely not. These products, such as Compiere, Open For Business (OFBiz), ERP5, Tiny ERP, are still small in scale. Although they may have strong functionality in a few areas, they lack the overall breadth of features of established proprietary offerings. This is why there is almost always customization involved in the implementation.

But open source operating systems (e.g. Linux) and application platforms (e.g. Apache, JBoss), were once minor players as well, and today they have significant market share. In the case of Apache, it is the market leader. Open source is moving up the technology stack to business applications. Whether it can gain significant market share remains to be seen. ERP systems are much more specialized than operating systems and application platforms. It is not clear to me whether there are sufficient populations of developers to gain critical mass for these products, as there has been for products lower in the stack.

Who should consider open source ERP today? In my opinion, these solutions today are not so much an alternative to proprietary software as they are to custom development. An organization that knows it will need to do significant customization or enhancements to an ERP system should consider open source as a starting point instead of proprietary ERP. Organizations with unique requirements or unusual business models may be in this category. Modifying core code of a proprietary ERP system generally voids the warranty and makes on-going support less relevant, since the vendor will not support your custom modifications. Why not start, then, with open source ERP, where there is little if any charge for the source code? To me, that's a better choice than to start with 100% custom development.

I'm looking for more cost metrics on open source ERP implementations. If you're willing to share them with me, let me know.

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IT project management lessons learned, and re-learned

Liam Durbin, CIO at GE Fanuc Automation, writes in CIO Magazine about one of the most important lessons learned in IT project management--the need for strong leadership from the business side.

I took my current position on the heels of such a hard lesson. Our software business was the scene of the crime for our disastrous CRM implementation. Inside sales team was bleeding badly from several deep wounds and a thousand paper cuts. Channel partners were revolting. Activities that used to take minutes, like placing an order or checking availability, now could take half an hour. The system was bouncing frequently. The IT team was releasing a Siebel recompile every other day.

The root cause of the problems? A lack of strong functional leadership on the project. To emphasize this lesson, Durbin points out five scenarios where IT projects fail from lack of functional business leadership (in my words):

1. Trying to make the new system work just like the old system
2. Rushing the implementation to satisfy unrealistic schedule expectations
3. Expecting the IT project manager to represent business users as well as IT
   
4. Underestimating the complexity of data warehouse projects
   
5. Having multiple functional leaders instead of a single commander
   

It's not that IT executives don't realize the need for engagement by functional leaders--it's that they too often forgot or compromise "just this one time." They know what's right, but they don't stay strong in the face of false assumptions or unrealistic expectations.

Read the whole article.

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Update on Lawson's strategy

I interviewed Barry Wilderman, VP Business Strategy at Lawson Software, yesterday. I haven't written much about Lawson recently, so I thought it would be good to get the story from Barry, apart from the usual press releases and announcements.

Barry was named to his post this past January. Previously, he was a senior VP at META Group, where he was an ERP market analyst. I've met Barry in the past and have appreciated the analysis he did at META on the total cost of ownership (TCO) of ERP systems. He was a good catch for Lawson.

Some of the key points from our phone discussion.

1. We discussed Lawson's SOA framework, Landmark. Introduced over two years ago, Landmark incorporates pattern, or domain-specific language, to allow business analysts to build applications without knowledge of programming. So far, Lawson's human capital management (HCM) offering is built on Landmark as well as its new strategic sourcing application. Eventually, all of Lawson's products will transition to this new technology environment.
   
   
2. Landmark is built entirely on IBM technology, such as Websphere. I've long felt that application software vendors have no business building application development tools, so I agree with this strategy. At the same time, however, doesn't this reliance on IBM pose a problem to Lawson customers who do not use IBM technology? Barry agreed that this could be a problem to a customer that has standardized, say, on Microsoft's competing .NET technology. However, if Lawson is a key component of the customer's application portfolio, it should justify the transition.
   
   
3. I pointed out that many other software vendors have stumbled when they tried to make a major technology transition. Witness all the vendors from the host-based era who tried to make the transition to client-server. For example, the former System Software Associates (SSA) went into bankruptcy as the result of its attempt to move its AS/400 host-based product, BPCS, to a client-server architecture. J.D. Edwards had problems for several years in its transition from its host-based World product to its client-server and web-based offering, One World.
   
   
4. Barry didn't agree with my analogy, however, indicating that Lawson had already made the transition to Websphere for its entire product line, and that the move to Landmark was more of an evolution than a wholesale technology overhaul. So, the introduction of SOA and workflow should be less disruptive and can be accomplished in stages.
   
   
5. How does Lawson compete with SAP and Oracle? These days I'm hearing of many cases where prospects are not considering other vendors and when they do, SAP and Oracle are difficult to beat. Barry indicated that Lawson competes by focusing on key verticals, such as healthcare and retail. When they compete in their sweet spot, they do not lose many deals.
   
   
6. Lawson made a major acquisition two years ago when it merged with Intentia, a Swedish-based vendor that is strong in manufacturing and asset-based businesses, especially in Europe. Has this merger been successful, and how much cross-selling is taking place between customers of Lawson and Intentia. Barry indicated that there have been a handful of cross-sales of M3 (the former Intentia product) to Lawson customers, mostly of Intentia's enterprise asset management (EAM) offerings. There have also been a few sales of M3 in total into Lawson's installed base in the U.S. There have not yet been a lot of sales of Lawson's HCM into Intentia's customer base in Europe, however, largely because of the need to provide compliance with European regulations.
   
   
7. Finally, Barry said that he wants to communicate a more sophisticated message concerning Lawson's total cost of ownership, that Lawson delivers more value per dollar invested. In his view, Lawson installs faster, is easier to understand, and takes less time to implement. Of course, these are claims that are put forth by nearly all enterprise system vendors. Barry's previous work at Meta did show that Lawson (along with QAD) had the lowest TCO of seven or so major ERP vendors. Whether those results still hold true now, five or six years later, are unclear.
   
   
8. All of the major vendors are making significant efforts to simplify and speed implementation, and there is anecdotal evidence that those efforts are bearing fruit. At the same time, much of the cost of implementation is outside of the control of the vendor. A client that is well-organized for the effort, who has a well-trained project team and understands the need for business process improvement and change management will realize a much lower TCO than the client that expects the vendor to do all the work.

Still, Lawson continues to be one of the largest enterprise system vendors that has managed to show enough success to remain independent during this period of software vendor consolidation. Its share price is at its highest point since 2002, which vindicate Lawson's CEO Harry Debes and his email to me earlier this year.

Comparing Lawson's share performance over the past six months with SAP and Oracle (see below), it would appears that the market agrees.


Update, 9:36 a.m.: This morning, Computerworld has an interview with Lawson CEO Harry Debes, where he talks at length about competing with SAP and Oracle.

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SAP sales jump, defying Oracle's PR campaign

Following Oracle's outstanding quarterly results last month, SAP has posted its own preliminary results for its most recent quarter. SAP reports an 18% jump in software revenue over the same quarter last year, and a 10% rise in revenue overall.

Furthermore, SAP indicated that it is gaining market share against its rivals. According to unnamed industry analyst research, SAP's share of the worldwide market for "core enterprise applications" increased over the past year by three percentage points to 26%.

In nearly every public announcement of its financial results, Oracle has been comparing itself to SAP. SAP's most recent results show that Oracle's success doesn't mean it is triumphing over SAP. It just means that there's a robust market for enterprise software this year.

A rising tide lifts all boats.

SAP's quarterly results can be found on its web site.

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IT budgets are lagging behind corporate revenues

Over at Computer Economics, we've just published our 2007/2008 IT Spending, Staffing, and Technology Trends study.

One of the key findings is that the median IT budget growth rate in the U.S. and Canada is accelerating to 5.0% this year, from 4.1% reported in 2006. At the same time, the median IT budget as a percentage of revenue is falling to 1.8%, from 2.0% last year. The only way to interpret these two statistics is to understand that IT spending is lagging behind corporate revenues.

This is not bad news. What it means is that IT managers generally are able to support the growth of the business without corresponding increases in IT spending. Our study shows that the large majority of companies are increasing their IT spending--but they are doing it at a pace that is less than the growth of the business.

In the last part of the 1990s, IT budgets grew at much greater rates because of Y2K and the dot-com boom. Then, during the recession in the early part of this decade, IT spending actually fell in a significant number of companies. From 1997 through 2003, IT budgets were a story of boom-and-bust.

What I like about today is that these major disruptions in IT spending appear to be over--at least for now. We seem to have entered a period where most companies are expanding their IT budgets in a restrained but consistent way. This is a far easier environment in which to plan IT investments.

On the staffing side, increases in headcount are somewhat more restrained, but most companies are adding IT staff members this year. And, there's still no end to the increase in the level of outsourcing.

These findings and more are presented in the study. There's a complete description on the Computer Economics website. There's also a press release.

SAP admits wrongdoing in Oracle lawsuit

SAP filed its response to Oracle's complaint last night, admitting that its TomorrowNow subsidiary engaged in some inappropriate downloads of Oracle intellectual property.

SAP reasserts the rights of its TN unit to download materials on behalf of Oracle customers who have the rights to those materials. It points out that "Oracle’s complaint does not challenge the basic propriety of third party support, nor do its factual allegations support the inflammatory statements" of Oracle's complaint.

At the same time, SAP claimed that the Oracle materials did not leave TN's internal systems, which are separate from the rest of SAP's network. SAP's response says,

Upon acquiring TN, SAP AG and SAP America put in place extensive policies to assure that no allegedly confidential material of Oracle obtained by TN on behalf of its customers would reach SAP AG or SAP America. Defendants are unaware of any breach of these policies, and believe that none has occurred.

It continues,

Oracle’s allegation that TN’s downloading conduct was “corporate theft” or involved SAP AG or SAP America is simply untrue.

SAP also announced that it is installing a new head over its TN unit. Former SAP Americas COO Mark White will now oversee TN, with founder and CEO Andrew Nelson reporting to White.

I think SAP is smart to admit any wrongdoing at this point. Any such activities would eventually be exposed anyway during Oracle's discovery process, leading to a drip by drip release of negative information about SAP. At this point, the issue would is to what extent TN or SAP benefited from the downloaded materials and what damages should be awarded.

SAP takes its turn at throwing punches at Oracle:

Oracle professes surprise and confusion about how TN can provide services more cost-effectively than Oracle. The answer is simple – TN does not force its service customers to pay artificially inflated prices for service to fund Oracle’s future acquisition and integration of products that customers do not want or need.

Of course, SAP does not mention that its own maintenance fees for customers of SAP software are pretty much in line with Oracle's. So, SAP should be careful about continuing this line of reasoning.

More seriously, in my opinion, SAP indicated that the U.S. Department of Justice is investigating SAP and TN. I speculated earlier that this lawsuit could lead to criminal charges against SAP, TN, or individuals implicated in the illicit activities.

SAP's response to Oracle's complaint is available here. SAP has also issued a press release on this matter.

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