What future for Baan's CRM applications?

Uncertainty over future product strategy continued to dog long-suffering customers of Dutch applications group Baan this week, following its acquisition by UK electronic engineering company Invensys.

While Invensys' £474m takeover of Baan may draw a line under the Dutch company's financial woes, it remains to be seen how far the vendor will go to support Baan's product range. Baan's downfall was largely due to its diversification away from its niche manufacturing competency into more general areas such as customer relationship management (CRM).

Accounting issues and the general millennium bug-induced slowdown also hit the supplier's profit and share price, and Baan gave up the fight after reporting dismal quarterly figures in April this year.

The group made a net loss of $26m for its first fiscal quarter of 2000 compared with losses of $19m in the same period last year. Losses deepened despite Baan's $20m gain from the sale of its stake in payroll and human resources applications vendor Meta4 and a $31m profit from the disposal of its Coda financial package business.

The Coda sell-off was yet another example of Baan's failure to make a go of its diversification strategy.

But Invensys has been successful for precisely the opposite reason, according to Duncan Chapple, a business applications analyst at Ovum. The firm was created out of the merger of BTR and Siebe on 4 February 1999.

"Invensys has the same vertical market focus that Baan had before it started to overstretch itself - but unlike Baan, it has loads of cash, strong leadership and a very strong market focus," he says.

Supporting role?
Invensys has become successful as a result of concentrating on its discrete manufacturing niche, but this means that its promised support for Baan's complete application suite may be difficult to pull off into the long term.

And industry analysts remain unconvinced that Invensys' long-term strategy will include support for products such as Baan's CRM packages. Indeed, concern over the challenge that Invensys faces in integrating the Baan business as a whole was reflected in the sharp drop in its share price early last week, although it appeared to rally slightly by Friday.

Industry watchers agree that some of Baan's half-a-million customers may have to play a waiting game as far as its non-manufacturing products are concerned.

Nigel Rayner, an analyst at Gartner, says: "Invensys is very focused on manufacturing. That's good news for manufacturing and supply chain products, but it's difficult to see how it's going to succeed with the CRM products."

Ovum's Chapple agrees that Invensys needed to stick to its knitting and maintain its focus on the mid-market manufacturing space to enable the enlarged business to perform. But this means that even if it continues to develop most of Baan's offerings, its manufacturing focus may end up moulding functionality in a different way to original expectations.

For example, the supply chain software requirements of an e-tailer with a small Clerkenwell office and complex outsourced warehousing and stocking operations, differ greatly from that of a factory producing discrete goods.

According to Chapple, Baan's supply chain software can currently support the complex needs of dotcom retailers very well, but as Invensys' core manufacturing customers display different supply chain needs, this may change.

Supply chain doubts
Although Invensys has said it is committed to improving Baan's supply chain products to meet the requirements of its manufacturing customers, it is unclear how far support will go beyond this.

But Invensys is better placed that most to make a go of the Baan business. The firm hopes to turn Baan around by reducing costs by $60m to $120m each quarter by the final quarter of this fiscal year. Its aim is to return Baan to profitability within 12 months, which will involve incurring restructuring charges of $400m over an 18-month period.

Invensys has been successful in nursing other companies back to health in the past, however, a notable case being software company, Foxboro, which it acquired when in a similar situation to Baan.

"Foxboro was a real basket case just like Baan, but it has been able to turn that company around," says Chapple.

If Invensys finds it difficult to make Baan's CRM offerings competitive, however, it may be forced to sell them off at a later date, according to analysts. But customers may be reassured by the fact that Invensys is itself a Baan customer and so has knowledge of the firm's product set. It also has a reputation for declining to asset strip its purchases.

For the moment, however, Gartner's advice for customers, particularly those in non-manufacturing or process manufacturing arenas, is to look elsewhere for their CRM applications. Forrester Research has likewise expressed concern over Invensys' commitment to Baan's CRM products - and has even suggested that Baan reject the offer.

Shaping up for ERP
But should the deal go ahead, enterprise resource planning (ERP) application suppliers could find Invensys a force to be reckoned with - if it maintains its current strategy. According to Chapple, if it retains its niche focus in the mid-range manufacturing space, it could become an ERP "godzilla". But it must be careful not to overstretch itself or try to become another SAP, he warns.

It is unlikely that Invensys will become a big threat to other CRM players, however. The ferociously competitive industry is already stocked with some strong players. Oracle, for example, is banging the CRM drum and is putting significant development resource behind it.

There is also a multitude of other smaller CRM specialists competing in this space, which means that should Invensys' development efforts fail, there could be a bidding contest for Baan's non-core offerings. A number of companies, including Oracle, are said to have already looked at Baan's CRM business when it was in a less stable financial position, following the company's announcement earlier this year that it was priming it for a future spin-off.

What Invensys will do with the operation still needs clarification and the company declined to comment. But one thing is certain - the UK group faces a difficult balancing act between investing enough in Baan's products to keep customers happy, and cutting costs around non-core applications to improve profitability and satisfy shareholders. Quoted companies are often forced to lean towards the latter approach.

Regardless of customer and shareholder views, however, Invensys' success will rest on its ability to focus once the dust from the Baan purchase has settled. According to Chapple, success is likely to come from concentrating on a particular sector. This is demonstrated by companies such as QAD, which floated on the Nasdaq in 1997 and is in the same market space as Baan.QAD, says Chapple, has been able to survive "because it has been able to take hold of a niche and run with it".