Has the ERP bubble burst? The big five vendors of Enterprise Resourcethat about to change? Planning (ERP) applications have enjoyed a period of monumental growth for the last five years, but will end of year results signal that the tide is beginning to turn?
Once the darling of the financial markets, Dutch vendor Baan warned the world markets earlier this month that it expected to post a $250 million (#151 million) loss for the 1998 financial year. Last year was a tortuous year for Baan, with investigations being conducted into its financial affairs on both sides of the Atlantic, job losses for more than 20% of its total employees, the hasty departure of the former CEO and founding father and a share price on a sharp downward spiral. All this in a market that everyone else thought was booming. But is it?
ERP has taken big business by storm, becoming synonymous with the concept of technology advance for competitive gain through the automation of business processes like financial accounting, manufacturing and human resources.
The world's biggest and best queued up to have their businesses literally taken to pieces and reassembled by one of the "Big Five" management consultancies.
But the problem with ERP is that, by its very nature, companies only require one system - a situation which inevitably must lead to saturation amongst the blue chip clients and poses the question for ERP software vendors of where to go next.
Four of the main five players in this market rely almost entirely on ERP applications for their daily bread; these are SAP (the market leader), Baan, PeopleSoft, and JD Edwards. Oracle is the exception, having its roots in the database market. Ironically, it is a common criticism of its applications business is that it lacks focus of its competitors.
It is clear by their actions that the vendors have foreseen the possibility of market saturation and have started to seek out new markets. Some have attempted to widen their market by introducing generic products designed for faster and more economic implementations to appeal to the smaller corporation - this was the theory behind Accelerated SAP.
Some have tailored their products to the requirements of a particular vertical market, such as insurance. Other vendors have attempted to expand the reach of ERP into front office applications to include functions like sales force automation which govern the relationships with the customer and supplier. Some have attempted to do this by development (SAP); partnership (PeopleSoft); or acquisition (Baan).
When Baan announced its poor third quarter results, the finger of blame was pointed at the Year 2000 date change problem, which it claimed had high-jacked IT spending. This suggests that the problem is merely short-term and that a company of Baan's stature should be able to weather the storm. At the time it said it had lost several big deals in preceding weeks. But other vendors so far seem relatively unscathed by the diversion of funds to Millennium preparations.
"It's very easy to find blame in a topical problem," commented Paul Witting, partner in charge of the SAP practice at KPMG. He does not believe that spending on ERP in 1999 will be much reduced. "I'm not panicking at all," he assured PC Week.
At the time of writing, PeopleSoft and JD Edwards were in a quiet period awaiting publication of their financial results, but both firms seemed optimistic about results for the fourth quarter of 1998 and first quarter of 1999 respectively. Like Baan, market leader SAP also chose to give the market an early indication of its end of year results.
Revenue growth is expected to be in the region of 40%, with income only growing at 15%. However, the German software house predicted that revenue growth next year would decline to between 20% and 25%.
US human resources specialist PeopleSoft predicted revenue growth of between 25% and 30% for 1999 when it revealed its third quarter results last September. SAP's more conservative estimate "could be a recognition that the market is slowing down", pointed out Alastair McGill, marketing director at PeopleSoft.
So what is the prognosis for Baan? "Unless it can turn the company round in six months, the business will be looking distinctly dodgy," warned Phil Fersht, research manager at IDC. "IT decision makers considering ERP, more than anything else, are more likely to look at the financial performance of the vendor."
Fersht could not rule out the possibility of a takeover of Baan, maybe by a close competitor.
However, mergers are not high on the agenda of IT companies at the moment.
Generally speaking, no company would want to run the risk of inheriting the liability for Year 2000 non-compliance at this stage of the proceedings.
"You could be buying a can of worms," said Trevor Salomon, marketing director at JD Edwards.
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