Each year, more than 150,000 patients pass through the doors of Oregon Health & Sciences University in Portland, a leading teaching hospital and dental clinic. Keeping track of all of them is the job of John Kenagy, the hospital's chief information officer -- and his is no easy task: OHSU uses 200 different software packages to admit, track, and bill patients. If that isn't complex enough, many of those programs are unable to communicate with each other. "Data integration is a huge problem in the health-care industry," says Kenagy. "If I'm seeing a cancer doctor, and three weeks later I show up at the emergency room, my records have to show up in that department too."
Making that happen is easier said than done. It has taken Kenagy 30 months to convert 15 applications and 40 databases to run on Oracle (ORCL) software. That project alone cost $25 million -- or $10 million more than originally planned -- in part because of delays that occurred as Kenagy labored to roll out new software while simultaneously keeping patient records up to date and processing payroll -- the equivalent of changing tires on a moving car.
It'll be at least two years before OHSU earns a return on that investment, but Kenagy says he has learned lessons that will sustain him through his next major overhaul. One is to resist being persuaded by an innovative but financially vulnerable upstart to buy the latest whiz-bang piece of software that turns out to be hard to merge into existing systems. Instead, Kenagy is opting for large, established suppliers with a broad range of products that can be pieced together more easily -- and thus deliver a more integrated network that's cheaper to install and run.
GREATEST CHALLENGE. By chance not choice, Kenagy has become a front-line participant in the battle to streamline corporate software -- also known as business application software, or enterprise resource planning (ERP) software. Kenagy isn't alone: Software simplification is the corporate tech boss's greatest challenge, according to an October Morgan Stanley survey of 225 CIOs.
In fact, simplification is rapidly becoming a proxy for the one issue that unites all CIOs -- cutting costs in a sluggish economy. Using fewer software suppliers -- and fewer software packages -- is one way to achieve that, albeit in an environment where any sweeping alteration in the back-end systems of a major company is going to cost millions of dollars.
CIOs want to streamline their supplier list, in part, to save money on systems integration -- the job of making new software work with existing systems at a cost equal to 40% to 60% the price of the software itself, according to research firm Gartner. Even though, long-term, CIOs risk losing the leverage to bargain over price with their big suppliers, they're increasingly shunning small, specialty software companies in favor of the names they feel sure will be around for the long haul -- SAP (SAP), Oracle, PeopleSoft (PSFT), Siebel (SEBL), Microsoft (MSFT), and the like.
IN-HOUSE GLUE. Giga Information Group, a market researcher in Cambridge, Mass., forecasts that sales of core ERP software, now a $13 billion market, will grow 4.8% annually through 2006 and that purchases will be driven less by new technology than by the efforts of large customers to consolidate to fewer, larger suppliers.
Business application software is designed to integrate every function of a company, from planning and manufacturing to sales and marketing, plus internal functions such as accounting and human resources. Ten years ago, large corporations had to contract with different suppliers for each task -- buying one software package for accounting, another for health-benefits management, and so on. In many cases, companies also had to tie everything together with custom programs they wrote in-house.
That has left even sophisticated tech companies such as Xerox (XRX) tethered to dozens if not hundreds of aging, proprietary programs -- some that still run only on mainframes -- that can now be replaced by more integrated products from the likes of SAP and Oracle. The trick is to make the switch in a financially prudent way. A Xerox rule of thumb, says Janice Malszenko, the company's vice-president for enterprise software integration projects, is that they should show a return on investment in under a year.
EMPTY PROMISES. Paradoxically, the economic boom of the late 1990s has made many of today's simplification efforts harder, by spawning innumerable varieties of business application software. These complex systems embodied the promise of the New Economy: They were supposed to revolutionize business by instantaneously linking companies electronically to suppliers and customers.
However, as frequently happens when a hot new concept takes hold, the initial product's incarnations were imperfect or incomplete -- and companies faced endless permutations and numerous no-name suppliers. One promised instant sales-force access to customer data sorted by country, region, or account. Another provided software that would let customers get the best prices by placing bids based on real-time inventory tracking.
Technology managers were wowed by the possibilities. From 1997 to 2000, they persuaded CIOs of major companies to plunk down as much as $250 million for an "intergalactic" ERP system, according to Boston-based AMR Research -- without really thinking through how existing software and the new applications would talk to each other, or even whether they would be easy for both employees and customers to comprehend. Merger binges heightened the problem, as newly acquired companies often came with dozens, if not hundreds, of their own unintegrated back-end systems. "A lot of CIOs drank the Kool-Aid," says Sanjay Poonen, vice-president for worldwide marketing at analytics software maker Informatica (INFA) in Redwood City, Calif.
STICKING WITH SAP. Day & Zimmerman CIO Anthony Bosco says he wasn't fooled. Five years ago, his Philadelphia construction and engineering company, one of the largest private outfits in the U.S., made a strategic decision to buy only from SAP. Not all of SAP's software was ultrasophisticated. In fact, at the time PeopleSoft's applications for human-resources departments, for example, were "head and shoulders" above SAP's, Bosco recalls. But SAP offered the widest range of corporate products. Today, Bosco believes that SAP and PeopleSoft are on par in HR software -- and that his decision was wise.
He has also learned not to be captivated by solutions that try to be too perfect. "The goal is to provide software that allows a high degree of agility," he says. "If you try to get this specific functionality or that specific functionality, you ultimately have to face major integration problems." Worse, you could end up spending millions on one type of functionality, only to see it become irrelevant as your business changes over time. Adds Bosco: "That's what drives the costs up. That's what drives the success rate down."
Bosco's experience is good news, not just for SAP, but for other "software suite" suppliers such as Oracle, PeopleSoft, Siebel Systems, and Microsoft, which appears to be developing a lock on the small and midsize business market. Each of these giants offers a broad range of software. Equally important, each is financially stable and nearly guaranteed to be around for future consulting, service, and maintenance.
NOT SO BAD. The desirability of such staying power is reflected in the revenue trends of the biggest suppliers, all of whom have nonetheless been hurt by the recent dearth of corporate tech spending: SAP's revenues for the first nine months of 2002 rose slightly to $5.1 billion, vs. $5 billion for the same period a year ago. PeopleSoft's revenues fell 9%, to about $1.4 billion, while Siebel's fell 22%, to just more than $1.2 billion.
Such numbers sound dismal until you compare them with those of software companies that lack the scale and corporate confidence of their larger competitors. For instance, I2 (ITWO), once a leading provider of supply-chain-management software, suffered a revenue decline of more than 50%, to $402 million, in the first nine months of 2002. Revenues at competitor E.piphany (EPNY) plummeted 40%, to $61.3 million.
Is this the beginning of the end for pure-play suppliers to the corporate market? Yes and no. Consolidation is coming, analysts say, and software companies with a single technology that can become a component of a larger company's suite will likely go away or be snapped up. Yet, those that got a foothold before the downturn could hang on -- if they're smart and aggressive.
HEARING CUSTOMERS. I2, for example, had 1,400 customers by the time the doldrums arrived, though now it faces corporate clients that realize they're in a buyer's market. "It's a battle for the CIO's wallet," says Janet Eden Harris, I2's chief marketing officer. "We have to prove ourselves a lot more. We have to help [customers] understand how they can start small" -- get a taste of what a product can do without spending a mint. To that end, I2 offers "fast track" deals that let a customer try out its software in one area of the business before writing multimillion-dollar checks. The price for such toe-in-the-door projects: $500,000 or less.
Indeed, with times so tough, software companies are learning humility. And they're starting to practice what they preach -- listening to their customers. "During buying frenzies, vendors try to outdo each other with features. They look more at each other than at what their customers want," says John Wookey, Oracle's senior vice-president for application development.
By contrast, paying attention to customers means creating solutions for "pain points," such as costly systems integration. Oracle and PeopleSoft, among others, now offer fixed-price implementation deals so that customers such as OSHU's Kenagy won't suffer such crushing cost overruns. This version of systems integration still isn't cheap, but if a project runs overbudget, the supplier picks up the tab.
LESS IN COMMON. Tailoring products for niche markets is another popular strategy. SAP, which traditionally targeted manufacturing and consumer-goods companies, now makes products for 21 different markets. It has advisory groups -- customers it consults during product development -- plus a separate sales force for each industry. Siebel, which specializes in customer-relationship-management (CRM) systems, is going one step further. It sells to eight different industries but has teams working on 20 "subsegments."
Financial services, it turns out, isn't a specific enough market for CRM, says Kevin Nix, Siebel's vice-president for industrial applications, who notes that retail banks and brokerage firms have less in common than might appear. Banks want systems that process customer loans quickly, while brokerages want software that can present a simple snapshot of an investor's portfolio to help customers make better decisions.
Big players are also starting to target the mid-market, which remains surprisingly untapped. PeopleSoft already has 1,400 customers with fewer than 500 employees. SAP America CEO Bill McDermott adds that his company's primary marketing challenge is making smaller businesses understand that SAP isn't only for corporate behemoths. "Big companies need scale. But all companies, no matter what size, want to be more efficient and save money," he says.
MICROSOFT'S WEDGE. The key, of course, is how much the added efficiency will cost. Many midsize customers still find the largest software companies too intimidating -- and pricey. Take utility Portland General Electric (PGB), which serves 51 cities in Oregon and has nearly 3,000 employees. It uses SAP for supply-chain management but finds its products' cost "hard to justify" for basic accounting and human-resources tasks, according to Mel Greenberg, manager of the utility's application systems. For now, it's sticking with what it has. In fact, Portland recently spent $41 million on a two-year effort to link its existing legacy databases.
Situations like these are where Microsoft sees an opening. The software king hasn't traditionally been a force in ERP software. But in 2000, it purchased Great Plains Software, which makes basic financial planning and accounting software. In 2002, it picked up the Europe's Navision, which offers, among other things, scaled-back versions of supply-chain and CRM software. Thus, Microsoft now sells not only core financial applications such as software for managing accounts payable and receivables but also customer-management and service-tracking software for small retail and manufacturing companies.
To date, these products have brought little discernible benefit to Microsoft's ample business. In its fiscal first quarter, ended Sept. 30, the business-solutions division contributed just $106 million of the giant's $7.7 billion in revenues. But that's up 25% over the same period last year, and analysts expect revenues from this division to grow. Microsoft's business software revenues will likely never surpass the likes of SAP, "Today you think of SAP as the largest ERP vendor with 18,000 customers," says Yvonne Genovese, an enterprise software analyst at Gartner. "In five years, thanks to the emerging mid-market, it will be Microsoft."
SAFETY IN SECURITY? Of course, every generalization has exceptions, and some niches will survive. Security software companies seem safe from the advance of the ERP titans. Since September 11, CIOs have become so anxious over computer-system security that they're in no mood to wait for suppliers of software suites to weigh in. Merrill Lynch estimates that the computer-security market will grow 11% annually over the next five years, from $9.8 billion in 2002 to $15 billion in 2006 (see BW Online, 11/19/02, "Enhancing Computer Security").
Another possible exception is business intelligence software that helps large corporations harness the data in their legacy systems without having to rebuild or replace everything (see BW, 6/24/02, "Information Is Power"). Tech research firm IDC expects sales of business intelligence programs to rise by 2%, to $3.9 billion, in 2002, while the overall application development-tools market, of which business intelligence software is a part, will decline 2%, to $40 billion.
For most sellers of software, though, clinching a deal is increasingly coming down to offering the best value for the money. For now, the big software companies have the best shot at delivering, with their so-called enterprise products. Having just "one vendor means [a software project is] quicker to implement. There's less maintenance, [and only] one support desk," says David Hilal, who covers software for investment firm Friedman, Billings & Ramsey in Arlington, Va. "The value proposition the suite makers provide appeals to the CIO."
It's a vein of gold -- and if software companies want to tap it, all they have to do is to stay attuned to what their customers want. By Jane Black in New York, with Olga Kharif in Portland, Ore.