Baan has admitted it cannot finance planned growth out of its existing resources and has been forced to raise $200 million. This is in addition to the $225 million it arranged this time last year.
This year has been tough for traditional enterprise application vendors like SAP, PeopleSoft and JD Edwards. But only Baan has raised money to finance its operations.
Mark Hamilton, Baan's senior vice president, marketing, acknowledged that financing what it sees as growth in front office and supply chain would not be possible without additional funding. "We believe the growth markets next year will be CRM and supply chain. We're funding for marketing and development initiatives in those areas," he said.
This is a delicate time for enterprise application vendors. 1999 has been written off as a tough year and the vendors are all looking to 2000 as a turning point. JD Edwards recently reported a healthier than expected quarter and hinted that its sales pipeline is much better than it thought.
Sources at PeopleSoft suggest a similar picture, while SAP and Oracle are both quietly confident about 2000. Baan however remains tightlipped about its position.
On 30 September, the company stated it has cash or near cash reserves of $149 million. But taking into account the money it has raised, Baan's own cash reserves are a mere $49 million. On 31 December 1998, Baan showed cash reserves of $206.8 million but that was after raising $114.5 million.
A precise comparison from one year to another is difficult because the latter part of 1998 and the early part of 1999 saw Baan taking substantial hits as it restructured itself in the wake of a dramatic slowdown in demand for its core ERP products. But the deterioration in its cash position is not something the company can take lightly, despite recent favourable analyst comment.
Conflict of opinion
Baan's latest funding round has raised conflicting views among leading analysts. Bruce Richardson of AMR Research described it as "a smart defensive move." In his view, "Baan wants to amass a war chest now when it doesn't need it rather than being desperate when it does." Brian Skiba, enterprise applications research director at financial analysts Lehman Brothers, took a different tack. Skiba believes "Baan is bracing itself for a tough first half [of 2000]."
The financial facts of life are that none of the applications vendors can tap the New York stock exchange today because the market remains nervous about the outlook for enterprise vendors. The success of Baan's funding strategy is heavily dependent on the company's ability to execute its sales plan at a time when it is far from clear whether the market will turn sufficiently in 2000 for confidence to return.
At best, it will be the second half of the year when the real winners and losers shake out.
"The reasons given for the funding operation are Baan's way of starting to deliver on its 1997 and 1998 acquisition spending spree. At the time, Paul Baan, one of its disgraced founders claimed Baan would offer packaged best in class applications, reasoning that its acquisitions were from vendors that had great technology.
Baan thought the integration work would be relatively easy because it had identified products where the fit with Baan's core applications was generally good. In addition, Baan had the DEM framework against which it believed applications could be slotted in.
This turned out to be a false assumption, exemplified by Baan's efforts to integrate CODA financials, a job that proved much more difficult than it anticipated and yet, at the time acquired, was passed off as something thatcould be achieved 'in a matter of weeks.'
This latest financing round plays to the framework idea but with a differentspin. According to Hamilton, the message to customers is "View Baan ashaving all the pieces but implement to suit yourself - putting it all in atonce is unrealistic."
This is a refreshing change, and a clear recognition of the dangers associated with large scale, multi-application implementations of the type that have come back to haunt SAP.
The downside is that this message, while perfectly cogent, makes Baan look hesitant at a time when its CEO, Mary Coleman, has been talking up Baan functionality in the key areas of front office, supply chain and ecommerce. It also plays against what analysts have been lead to believe.
AMR's note on the funding, for instance, makes the specific point that: "The integration technology has yet to be proven with users, which is necessary if Baan is going to sell the extended suite rather than the bits and pieces."
Let's look at the figures
One part of the announcement that remains a real worry is chief financial officer Jim Mooney's reference to the initiative allowing "Greater flexibility to allow customers to take advantage of our new subscription pricing model."
This is patently wrong. Baan has had a subscription model in place since October 1998 when it announced a $99 to $149 per seat per month deal based on the Microsoft Back Office backbone (BESA).
At the time, the deal was judged to be flawed. At 5000 users, the overall cost before implementation and consultancy worked out at $3,564 per seat over the three years, or a whopping $17.8 million. But a small 50-user site would pay around $268,200 before implementation costs.
Although the figure per user in a 50-user site is $5364, this is probably uneconomic for Baan unless it provides industry templates for rapid implementation and slick support.
To date, Baan has not reported any notable success with the model. The question, then, is whether the funding allows Baan to deliver on what was innovative thinking in 1997 and 1998 and which even now is slightly ahead of the game.
All commentators agree the past has been laid to rest and Coleman represents a safe pair of hands. Some analysts believe Baan's supply chain and front office solutions are at least enough to allow it into bids, and like everyone else it has an ecommerce story tied to a neat thin client.
But in its current, weakened state, Baan cannot realistically expect to do the mega deals that once marked the past. It has to play in the upper mid-market, a notoriously competitive space with many wannabes and sexy dot com vendors in the sales and marketing applications space.
Smoothing out the lumps
Baan has no ASP credentials. This is odd, because BESA would be compelling if it could be adapted to a model similar to Oracle's Business Online hosted by BT. Users pay a mixed licence fee and monthly subscription that can be anything between 15 and 40 per cent cheaper than an outright purchase.
But if Baan gains volume sales with the subscription model, then its earnings quality will rise. This is because the continuing income stream smoothes out the revenue lumpiness associated with a straight license sale.
In the meantime, it has a rounded product set and an appreciative analyst community behind it. Now all Coleman has to do is strengthen the sales pipeline and deliver on her vision. Tough, but not impossible.
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