Magazine

Software Highfliers


When potato-chip pioneer Herman W. Lay started his company in 1938, he spent so much time visiting customers and suppliers scattered around Nashville that his Model A Ford might as well have been his office. By 1980, Lay's little potato-chip outfit had been melded into Frito-Lay Co., a multibillion-dollar division of PepsiCo (PEP). But that growth came at a cost. The business lost touch with its customers and its suppliers. So over the next five years, Frito-Lay custom-built a $40 million computer system to keep it plugged in.

It worked. Sales growth, which had dropped below 5% in 1981, returned to historic 20% to 30% levels by 1988. And thanks to wireless computing devices that gave warehouse managers a clearer sense of how chips were being delivered, Frito-Lay was able to cut inventories by about 20%. "I had a chance to meet Mr. Lay before he died," says Charles Feld, a technology consultant who was Frito-Lay's chief information officer in the 1980s, "and he always talked about finding a way to get back in touch with people."

Since then, with Frito-Lay as their inspiration, corporations have spent tens of billions of dollars on computers and software to make them seem as responsive to consumers as a country store, yet as efficient as Wal-Mart (WMT). These investments are starting to pay off quicker, thanks to the Net--and Net software that lets companies connect with their customers and business partners cheaply and instantly. A manufacturer can rush to market with a new product if its software spots a change in consumer tastes. And if demand drops overnight, it can coordinate with suppliers and avoid getting caught with unwanted inventory.

It's little wonder, then, that the shining stars in the software gloom are some of the top makers of customer-management and supply-chain software. Siebel Systems (SEBL), No. 14 on this year's IT 100 list, is the leader, with 17% of the market for software that manages customer relations, according to AMR Research Inc. German software maker SAP (SAP), No. 30 on the IT 100 list, has about 7% of the supply-chain software market, ranking it second in that category. And PeopleSoft (PSFT) is No. 33 on our list, thanks in part to Internet software that lets an executive see all the moving parts of the company.

The newest versions of these companies' software promise to be even more effective. Rather than storing information about customers in one spot and suppliers in another, the new software links together information about what customers want to systems for coordinating with suppliers. Companies are even able to collaborate with suppliers to jointly design products that are easier to manufacture.

It's a booming business. This year, companies are expected to spend $22 billion on customer and supply-chain software, according to AMR. And these markets are still young. By 2004, analysts peg spending on these programs--which cost upwards of $1 million--to hit $54 billion. In comparison, the market for corporate-finance and human-resources software is expected to rise from $20 billion to just $25 billion.

Perhaps most surprising is that the slowing economy has not put the brakes on sales. A March Morgan Stanley Dean Witter & Co. survey of technology spending plans for this year shows that customer-management and supply-chain software ranked No. 1 and No. 3, respectively, with No. 2 being e-business infrastructure software. A February AMR study also found that 87% of executives plan to green-light customer and supplier-management projects.

Why? Analysts say that using this stuff can shave 15% to 20% off a company's expenses. Panasonic Company National, for example, has reduced the time it takes to order parts from suppliers and then deliver finished consumer-electronics products to retailers by 75% since it installed supply-chain software from i2 Technologies Inc. (ITWO) Panasonic gathers sales information directly from dealers and runs it through a forecasting system, so it rarely has more than a week's worth of inventory on hand. "We can estimate what the demand will be, and it protects us from risks on big pricing changes," says Panasonic President Michael Aguilar.

Companies installing customer-management software expect big savings, too. "The payback on this is going to be quick," says Don Boerema, senior vice-president for business development and strategy at AT&T Wireless (AWE). AT&T is using Siebel's software to cut its customer-service costs. The project, which cost an estimated $5 million, will improve automation of AT&T call centers, reducing the number of service reps needed to field customer questions by 15%. AT&T Wireless won't say how much it expects to save overall, but analysts estimate that it could be 15% to 20% of customer-service costs. The software also gives sales-and-marketing staffs handy access to customer information over the Internet so they can pitch customers new services.

To be sure, this kind of software has had its share of problems. Four or five years ago, only 20% of customer-relations software installations were deemed successful by corporate customers, says Rod Johnson, an AMR analyst. Now, according to AMR surveys, that has jumped to over 70%.

Credit the Internet. With more companies doing business using simple browsers and Web pages, a lot of the complexity has been taken out of these systems. Conducting business transactions over the Net can be done 90% cheaper than over the old, privately owned computer networks, according to Goldman, Sachs & Co. At the same time, industries are quickly adopting new technology standards, such as Extensible Markup Language, that makes it easier for software packages to communicate with one another without human intervention.

It's that kind of integration of one software program with another that makes it possible for companies to keep close track of what's going on in their businesses. Carreker Corp., a Dallas-based tech consultant to financial-services companies, is outfitting its 300-person sales force with PeopleSoft customer software. The program keeps track of what services customers buy, and that makes it easier for Carreker to put together special offers for individual customers. And once Carreker has provided services for that customer for a number of months, it can run business-analysis software that taps into its financial programs to see if the relationship is boosting Carreker's bottom line.

The next big thing is expected to be collaborative software, which allows ideas, not just data, to be passed back and forth between companies. Enporion, an online marketplace for energy-producing equipment, plans to use SAP software that lets engineers at its large utility clients share plans with engineers at equipment suppliers. That could cut development time for something like a steam turbine from 18 months down to 12, says Enporion CEO Joseph R. Zelechoski. "Engineers talking to engineers is almost like a small company talking to a small company," he says. "It's very intimate." That's just the way Herman Lay did business when he was driving his Ford around Tennessee. By Jim Kerstetter in San Mateo, Calif.


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