| BUSINESSWEEK ONLINE : OCTOBER 25, 1999 ISSUE | ||||||||
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| INFORMATION TECHNOLOGY
Enterprise Software: A Belated Rush to the Net Makers of software that run corporations have to play catch-up in becoming Web-worthy January is a dark and misty month on Sylt, a German resort island in the North Sea. But gloomy Sylt seemed just the place last winter for the annual planning meeting of software giant SAP (SAP). The company grew smug in the mid-1990s on a steady diet of success, but now its revenue growth was leveling out at 20%, down from three times that during its heyday. SAP's proud leaders weren't about to give up on their core business: software to run a company's biggest jobs. But during intensive meetings in Co-chairman Hasso Plattner's thatched-roof house, they searched for ways to get their revenues revving again. The answer came from Kevin McKay, CEO of SAP America Inc. ''He told us there was no way he would make his sales numbers unless the company shifted and embraced the Internet,'' says Plattner. And shift SAP did. After months of frenzied planning, the $5 billion company rolled out a new strategy last month that it claims is its most important overhaul in seven years. By early next year, the company plans to redo its huge array of corporate software in easy-to-use pieces that can be accessed from a simple Web browser. On Sept. 30, it launched a Web site, called mySAP.com, where corporations can hook up with other companies to do business. And Plattner plans to spend $50 million on ads to convince people that SAP is up to speed on the Net. FERVOR. The Web wake-up call came dangerously late--not just for SAP but also for most of its competitors. Now, Oracle (ORCL), PeopleSoft (PSFT), J.D. Edwards (JDEC), and Baan (BAANF) are hurrying to the Web with the fervor of shipwreck survivors reaching for a lifeline. These companies are in the business of supplying the large and complex software applications that companies use to manage their finances, manufacturing, inventory, and workforces. During the mid-'90s heyday, most large corporations revamped their internal operations using this so-called enterprise software, creating a market that reached $16.3 billion last year. Now, the business is in a stall. Corporate customers have postponed buying enterprise software while wrestling with Year 2000 computer bugs, which SAP on Oct. 13 blamed for what it says will be anemic revenue growth of 7% in the third quarter. And the prospect of e-commerce is bewitching customers and diverting spending elsewhere. Enterprise-software license sales tumbled 21% in the second quarter from a year ago. ''The tide that floated all boats has gone out,'' laments Craig A. Conway, new CEO of PeopleSoft Inc. The damage? SAP shares are down about 40% from their high of $60 last year. PeopleSoft has been pushed to its first-ever layoffs--430 people--and its founder and chairman, David A. Duffield, just resigned the CEO post. J.D. Edwards & Co. has tilted into the red, and Baan Co. has lost $363 million in the past four quarters. Oracle Corp. alone has been saved from the bloodshed--largely because of its thriving business for database software. Michael J. Donahue, managing partner at KPMG Consulting, predicts that the enterprise market, which raced at 40% growth through the '90s, will recover from this year's debacle to much slower 13% annual growth over the next three years--and with far skimpier net margins than the customary 15%. To return to better days, the top players have all cooked up strategies similar to SAP's. Namely: to redo programs so they work well on the Web. At the same time, they're branching out into new hot-growth software markets--aimed at tasks such as automating a company's dealings with customers or managing its chain of suppliers and contractors. And like SAP, they hope to set up Web sites where their customers can make contact and do business with suppliers. In short, one-stop shopping for all kinds of software. GLOATING RIVALS. For these stars of the '90s, the alternatives could hardly be more stark. If they manage to turn themselves into the software link to the Net, they could become veritable giants of the Internet Age. Trouble is, SAP and its ilk specialize in operations inside companies. And the growth markets are those that extend far beyond internal operations. These software makers are just not expert at programs that manages interactions with a company's suppliers or customers. Already, upstart competitors are gloating. ''It's dark, and it's getting worse,'' says Thomas M. Siebel, CEO of Siebel Systems Inc. (SEBL), the leader in sales-tracking software. The likely result is a shakeout that could put intense pressure on smaller players such as Baan, which is clinging to a 4% share of the enterprise-software market. Oracle, by contrast, boasts an early lead in Web-ready programs, which should allow it to up its share from the current 13%. And SAP could soldier through the rough times on the strength of its 5,000 programmers and its gold-plated installed base of 12,000 customers. Even after all its troubles, it still has a dominating 30% market share in the core enterprise applications. What makes SAP's lead seem so durable? It has persuaded hundreds of customers to place their fate in its hands. Just listen to Edmund D. Toben, chief information officer at Colgate-Palmolive Co. (CL) The company has spent tens of millions of dollars in the past two years installing SAP's applications. Now, Toben is planning to adopt SAP's Internet technology--rather than choosing a company it doesn't know. ''SAP is our partner, and we count on them to lead us to the right technology,'' he says. HIEROGLYPHICS. It's no small job for these companies to recast their software for the Net. After a decade of producing complex systems for managers who understood arcane computer codes, they must now reach an entirely different audience. In effect, they're aiming to get inside every desktop in a corporation and beyond--through the Web--to a company's suppliers and customers. For this, they must shift from digital hieroglyphics to software as simple to use as clicking on Amazon.com (AMZN). At the same time, the enterprise-software makers have little understanding of some of the markets they're entering. One new software market, known as supply-chain management, links together networks of companies that sell to one another. This creates global ties that help coordinate shipments and invoicing between scores of companies as smoothly as if they were one entity. Supply-chain software is already a $1.4 billion market, led by i2 Technologies Inc. (ITWO) and Manugistics Group Inc. (MANU), and it's expected to quadruple in the next three years. Other hot-growth software automates and manages communication with customers through Web sites, call centers, and sales forces. This is Siebel's specialty--so-called customer-relationship-management (CRM) programs. It has turned Siebel into a $500 million company--and one that's growing at a blistering 80% per year. To win in these markets, SAP, Oracle, and other enterprise companies must not only come up with these products but also unseat the upstarts. Brash new players such as i2 are rich--and they're cozy with the customers that SAP counts as its own. Take Texas Instruments Inc. (TXN) It uses SAP's finance software, but when it came time to buy a factory planning system, it went with i2. ''When we started our project, SAP didn't have an offering to suit us,'' says TI Vice-President Phil Coup, and TI didn't want to wait around until SAP caught up. Now, the major enterprise-software makers are aggressively rolling out suites of supply-chain and customer-relationship software. The stock market still respects their clout. When SAP released its supply-chain products a year ago, i2's stock plunged from 42 to 12. Despite the initial enthusiasm, SAP has failed to land the expected mega-contracts. Meanwhile, its smaller competitors keep growing. Sales at i2 have soared 75% since the SAP launch, and the stock is at $53. Crows Gregg McKee, i2's senior consultant for worldwide alliances: ''SAP is basically giving its software away, and sometimes they can't even give it away.'' SAP argues that it has landed about 150 contracts, including Colgate-Palmolive. It confirms that it's deeply discounting some products, but denies it's giving software away. SAP and most of the former highfliers have been chastened--with the exception of Oracle. The Redwood Shores (Calif.) company seems to have the early lead. Far closer to the Internet epicenter than its German rival, Oracle moved more quickly to enterprise programs that work on the Web. It's holding up better, with sales growing 32% in fiscal 1999, which ended in May. One customer, living.com Inc., a new online furniture retailer, is using Oracle's software because of its Web focus. ''Oracle gets the Internet more than a lot of companies,'' says Andrew Kass, the director of technology at living.com. KNITTING UP. Oracle now has its eyes on the booming customer-relationship market. The goal is to wrest leadership away from Tom Siebel, a former Oracle executive. A first version of Oracle's CRM software released in June produced an impressive $45 million in sales in its first three months. Now, 600 Oracle programmers are developing a second version that will be knitted together with the company's other enterprise applications: financial, manufacturing, and human-resources software. In the next three years, Oracle CEO Lawrence J. Ellison is hoping to revamp his $2.4 billion enterprise applications business. Instead of selling just software and leaving customers to make it work properly, Ellison will run the complex programs himself and charge customers a service fee. SAP, late to jump to the Internet, is trying to make up for lost time with mySAP.com. The idea is that customers will use the Web site as a place to hook up with their own customers and suppliers and that they will use SAP's software to cement those connections. And, with its own interface software, called Workplace, SAP even hopes to supplant Microsoft Corp.'s Windows. Says Plattner: ''We want to own the desktop. We have the right. We have the experience. We have the history.'' But can they move quickly enough? For a decade, SAP and the other enterprise-software giants rode the corporate restructuring wave. To survive and grow in the next decades, they must speed up their offerings and operate on Internet time. But the Web won't give them long to learn how to surf. By Stephen Baker in Paris and Steve Hamm in New York Click here for an online profile of SAP's Kevin McKay at ebiz.businessweek.com _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS Enterprise Software: A Belated Rush to the Net CHART: Sales of Enterprise Software Are Slowing...So New Targets Are the Customer Service Market. CHART: ...Programs Connecting Companies to Suppliers...And E-Commerce Software for Powering Web S TABLE: How the Corporate Software Giants Stack Up CHART: SAP Stock Price CHART: Oracle Stock Price CHART: PeopleSoft Stock Price CHART: J.D. Edwards Stock Price i2: The Early Bird Gets the Market INTERACT E-Mail to Business Week Online | |||
