Today's supply chain software tools had better be easy to install, easy to manage, and render a quick return on investment.

Jennifer Baljko EBN (12/05/2002 3:24 PM EST)

When it comes to choosing IT projects, Michael Turay has a simple directive: If it doesn't contribute to the bottom line, it doesn't pass muster."There has to be a clear target and proof that there will be increased revenue," said Turay, senior manager of e-business development

at NEC Electronics America, the Santa Clara, Calif., subsidiary of NEC Corp. "Everything I do in the foreseeable future will be designed to meet that criterion."

Turay's mandate was, at best, loosely applied by the industry during the high-flying days of 1999 and 2000, when companies spent millions on supply chain, ERP, and procurement applications, many of which entailed lengthy installations and hefty consulting fees.

In today's more fiscally conservative environment, however, IT budgets are being placed under a microscope as companies in the technology sector strive for better profit margins and lower operational expenses.

The result is that e-business initiatives are required to accomplish more with less. In software terms, that means finding tools that can be quickly deployed to address specific problems, extend existing platforms, and deliver a measurable return in a matter of months.

For software vendors pitching their products to battle-hardened IT managers, the likelihood is that they will have a hard time getting a foot in the door, according to industry observers.

"This is Darwinism at its best," said Bryan Stolle, chairman and chief executive of Agile Software Corp., a product collaboration and sourcing vendor in San Jose. "There is enough business out there to sustain 30 to 50 enterprise software companies, but there are about 600 private and public companies trying to get to the trough. Many of them can't even see the trough."

The fact that the pace of the electronics industry has slowed is affording companies more time to rationalize their software selections. This may mean pondering whether to buy tools or develop them in-house, or checking financial histories before deciding to sign a name-brand software provider or a start-up.

"Customers are focused on cost management issues in these times. That resonates in the conversations we have with them," said Edwin Winder, chairman, president, and chief executive of sourcing solutions vendor Tradec Inc., San Jose.

Competitive landscape

According to AMR Research Inc., Boston, an average company in the high-tech industry will divert 3% of its revenue to IT spending this year. Of that, an average of 17% will be divided among ERP, supply chain management, customer management, and procurement and sourcing software.

With a limited pool of resources from which to draw, some software providers are tailoring their products to address specific issues such as inventory visibility, supplier management, or product development collaboration. This is particularly true of companies like Agile, i2 Technologies, and Manugistics. These and other so-called "best of breed" software providers are trying to supplement large-scale projects completed by ERP vendors in the past few years by offering slimmer, more modular tool suites, according to analysts.

"What we saw in the past 12 to 18 months was companies interested in and engaged with ERP vendors," said Karen Peterson, a Dallas-based analyst with Gartner Group Inc. "Now what we're seeing, especially from the larger enterprises, is that they want to augment their ERP platforms with best-of-breed capabilities."

Of course, even the largest software developers haven't escaped the backlash of the industry's downturn. i2 Technologies Inc., for instance, has seen a 51% drop in revenue for the first nine months of this year compared to the same period in 2001, and has weathered criticism from customers that claim the company's software has fallen short of expectations.

The Dallas company also underwent a major restructuring earlier this year that included the departure of chief executive Greg Brady and a major organizational shakeup in which i2 Technologies said it will consolidate its product portfolio from 150 products to 70 by the end of 2002.

Such an unsettled market has in part led i2 to realize the benefits of a more application-specific model.

"This approach presents a significant opportunity for us," said Andy De, the company's director of product marketing for supply chain management. "Customers are not buying many end-to-end solutions. They want to buy solutions that address very specific problems.

"For example, many OEMs, EMS companies, semiconductor makers, and distributors have already rolled out planning solutions. Now they want to focus on execution tools, but they want to pull data from the ERP system and the planning system too," De said.

Affordable tools

Customers are not only more focused when it comes to the problems they're addressing, they are insisting on tools that are affordable and allow them to check on progress at various stages of implementation, said Agile's Stolle. That combination has led Agile to set up a new payment model, the Guaranteed Business Results Program, which is a departure from typical upfront licensing fees, Stolle said.

"The way software has been bought these last couple of years has been somewhat ludicrous," he said. "When you buy a piece of land, you don't hand over a check to a contractor and tell him to call you when the house is finished being built. You want to see milestones and progress. This is how customers will now buy software from Agile.

"We want to help you figure out what your problem is, what the financial impact of that issue is to your company, and how much of a dent we can make in that problem.

"If you agree this is a good financial investment, then you give us something to get started. You give us another check when we go live, and you give us the rest when we reach the agreed-upon results. This is a risk-sharing model in that you shouldn't have to pay for something until you get value from it," Stolle said.

The push for modular, cost-effective solutions is also being addressed by ERP companies like J.D. Edwards, Oracle, and SAP, which in years past would have been more likely to sell large-scale, multimillion-dollar software tools. The difference here, however, is that such companies are more apt to generate revenue from repeat customers that want to maintain a common platform across various ERP systems.

"Product lifecycle management, supply chain management, and customer relationship management are key pillars for us," said Christian Knoll, vice president of global supply chain management for SAP A.G. in Miami. "We offer a complete solution for these areas that can be deployed as a stand-alone tool or integrated with other offerings."

Oracle Corp., Redwood Shores, Calif., is pursuing a similar track by developing advanced planning tools that can tie into back-end systems like ERP or production management, or stand on their own.

"We're trying to blur the gap between execution and planning functions," said Jonathan Oomrigar, Oracle's vice president of high-tech business solutions. "With these kinds of tools, companies can't afford to invest in a vendor that won't be around in a year. People may think that Oracle may have been slow to get to this stage, but I think they are pleasantly surprised by our capabilities."

For ERP vendors, developing applications that suit the masses is more important than having the most advanced features, and that is proving to be an advantage in a down market, according to Andy Carlson, director of product marketing for supply chain management at J.D. Edwards & Co., Denver.

"J.D. Edwards' strategy isn't about having bleeding-edge technology. We sell to the midsize market and want to provide solutions that solve their functional problems," Carlson said.

"From a demand planning, production planning, and supply chain management perspective, the functionality we have in our products solves 90% of the problems in the markets we cover.

"Companies that adopted best-of-breed solutions were early adopters. Supply chain is in the mainstream now and most of the people buying today are not just the early adopters," he said.

As the economy improves, that conservative but broad-based strategy will position ERP vendors to win even more of the market by appealing to midtier users, said AMR Research analyst Ann Grackin.

The second tier

So where does this leave small software houses, start-ups that still succeed in garnering venture capital and may offer a less expensive alternative?

In some cases, small software vendors that have landed large accounts have parlayed the publicity into business elsewhere. Quick-turn software supplier Tradec, for example, counts EMS giants Solectron and Sanmina-SCI among its customers, while Valdero Corp., Mountain View, Calif., is establishing its supply chain control tool in the networking space, inking deals with Juniper and Advanced Fibre Communications.

"Customers want three- to six-month implementation cycles, and we can show them some payback in 90 days," Tradec's Winder said.

Incremental changes

Another selling point is the ability of smaller companies to improve existing systems.

"Many of the companies we talk to have already put the plumbing in, and now they're looking to do incremental spending to get incremental improvements," said Singh Mecker, Valdero's president and chief executive.

"Smaller companies have an advantage because they have a targeted application that addresses a subset of problems. Companies can leverage their existing investment and other areas and add incremental value very quickly," Mecker said.

Other start-ups, like Bom.com, a Mountain View-based product lifecycle management provider, are trying to get in the door with technology and low prices.

"Our Web-native architecture provides us with an advantage from the price-point standpoint," said chief executive Michael Topolovac, adding that the cost of the license is about $1,000 per user. "We're able to bring up new releases and features automatically through the Internet."

Regardless of what vendors do to keep afloat, they will have to endure another year of weak sales and project postponements, according to analysts. Many executives said they expect the first half of 2003 to look much like 2002, with a possibility for improved IT spending in the back half of the year.

"Weaker companies that don't have customers or repeat business are dead, or will be soon," said William Brandel, an analyst at Aberdeen Group Inc., Boston. "If you have those things, it will tide you over. If you don't, then you're out."

Several analysts and software executives expect continued consolidation, either through mergers and acquisitions or from venture capitalists pulling the plug on their investments.

"We've already seen a large shakeout in the software industry. Depending on who's numbers you read, a third to half of software companies that were around a few years ago are already gone," said Mike Hennel, chief executive and president of Silvon Software, an analytics provider in Westmont, Ill.

"We'll see different scenarios play out. There will be forced marriages between weaker players. There will be selective acquisitions where a company says they want to invest in a certain area. And the venture capitalists will consolidate their portfolios," Hennel said.

As the shakeout proceeds, high-tech customers will have to consider carefully which of their contractors will survive.

eSilicon Corp., a relatively young custom-chip designer based in Sunnyvale, Calif., opted to use Oracle for its foundation planning system, said Gina Gloski, vice president and general manager of worldwide manufacturing operations.

"We had to get our systems up very quickly and needed an out-of-the-box solution," Gloski said. "And we wanted something that would grow with us."

NEC's Turay is weighing other considerations, namely a series of make-vs.-buy decisions that are tied closely to his ability to generate a quick return on the company's investment.

In some scenarios, such as NEC's effort to build out its RosettaNet e-business communication platform, the company opted to pay a fee to install a WebMethods package. But NEC has also allocated internal resources to create a system to allow reps to better manage their sales opportunities.

"The current marketplace conditions are forcing us to reconsider what projects we take on and how quickly we can solve a problem," Turay said.

"I'm of the belief that we should try to sell our way out of these bad market conditions. We need to develop or buy tools that will help us do that by addressing problems quickly and increasing our revenue."