James McGowan would have preferred that his first day of work got off to a better start. Early — very early — at 5:00 am on the morning of February 9, he showed up at the Hyannis, Mass., main office of Infinium Inc., a developer of enterprise resource planning applications. He had his keys to the office, but he didn’t yet have his employee access code.
McGowan wound up tripping the alarm, and by the time he was at his desk, a patrol car from the Hyannis police department had arrived.
Obviously, there are more auspicious ways to starting a new job as president and CEO of a software company. McGowan’s mishap with the burglar alarm forced his boss, Bob Pemberton, the company’s chairman, to get out of bed and tell the police that the stranger in the corner office was indeed legitimate.
By his second day, McGowan had the right access code.
But now, he, like some other recently hired CEOs and COOs of suppliers of financial software and enterprise resource planning systems, is faced with a problem that, while less physically threatening than a suspicious police officer in the wee hours of the morning, may be far more difficult to solve. As the broader economy weakens, demand for their products is getting sucked into the downdraft. Meanwhile, their products are in the midst of a difficult technology transition, leaving customers reluctant to commit to new orders.
The market for ERP systems peaked in 1997 and 1998 as corporations rushed to upgrade their systems before the deadline of the Y2K witching hour. By 1999, it cooled off considerably as many companies locked down their existing systems and delayed adding new applications until they’d survived the date rollover. In the 15 months since, the economy has steadily worsened, and corporate IT budgets have been reined in. That’s put a squeeze on many suppliers of ERP software, and in the last year to 18 months, problems have mounted for several of them.
Now that the Y2K acronym has come and gone, it’s been replaced by the single upper case “R” of recession, and it is clearly taking its toll on some key suppliers of ERP systems.
Jennifer Chew, an E-business analyst for Forrester Research in Cambridge, Mass., says the rush to install ERP systems in advance of the Y2K deadline led to many poorly designed and troubled implementations. Many users are now reluctant to commit to new technology projects until they get the kinks worked out of existing systems.
Last August, the company laid off 18 percent of its staff of 550 people, or roughly 100 workers.
Infinium hired McGowan after Pemberton gave up the CEO title. The company’s CFO, Veronica Zsolcsak, resigned last August, and the company is still searching for a permanent replacement.
In January, the company hired Hank Bonde as its new chief operating officer, replacing Dave Girard.
While Invensys announced this past March that it was laying off 5,000 employees, the parent company now views the Baan unit as one of its few pockets of strength. Despite the lingering weakness in the ERP sector, the axe apparently didn’t fall at Baan, and the software company reported its first profit in more than two years for the January quarter.
Clearly, it is not the best of times for suppliers of ERP systems. For CFOs of the corporate clients of these ERP providers, the financial stress cuts close to the bone: ERP systems are in a very real sense the heart and soul of a CFO’s everyday work.
When the software developers are going through a difficult stretch, then CFOs at client sites need to be on guard that product development and maintenance don’t suffer.
The picture is not entirely bleak for the ERP sector. According to data compiled by market researcher Gartner Inc., the sector went through a dramatic contraction two years ago, falling from $7 billion in total sales in 1998 to $6.3 billion in 1999. But the market has rebounded. In 2000, the total revenue was back up to $7.7 billion, and Gartner projects it will climb another 5 percent this year.
Brian Zrimsek, the research director for Gartner’s enterprise systems group, says that by 2003, growth in the ERP market will return to an annual rate in excess of 20 percent.
“We’re seeing ERP now in some non-traditional sectors like government, and we have a widening of the market into international sectors,” Zrimsek says.
But the beneficiaries of much of this growth are the vendors at the top end — companies like Oracle, SAP, and PeopleSoft, Zrimsek says. Many of the second-tier players may have to merge to survive, and he cites last year’s merger of two European suppliers, Navision and Damgaard, as typical of a trend toward consolidation that is only gathering steam.
For their part, some of the executives recently hired at financial software firms say they are feeling the effects of the economic slowdown. While none report any crippling impact, there’s enough softness in demand to be a cause for concern.
Infinium’s McGowan hasn’t seen new sales screech to a halt, but he says management at client firms has drawn out the sales process, and pushed their orders back by a quarter or more.
J.D. Edwards’ Bonde says the impact of the weakening economy on his firm is still uncertain. He says he took note of Oracle’s announcement in February that its sales for the quarter that ended Jan. 31 were being dragged down by the economy. Oracle was squeezed by the failure of the normal quarter-end rush of deal closings to materialize.
J.D. Edwards’ second fiscal quarter ends later this month, and so far, the company says customers’ buying patterns have matched those of previous quarters. But at this stage, it’s too early to tell if there will be a surge of orders before the end of the quarter.
Bonde says, “It may be that customers haven’t reached that true decision time, but we’re watching it very closely.”
McGowan says, “Things are tight. The go-go days came to an abrupt halt, and that carried over into 2000.”
Susan Heystee, who took over as president of Baan’s American unit in February, is seeing much of the same phenomenon at work.
Heystee says there’s been some caution on the part of customers, but she also says, “I’m not seeing it on a large scale.” Part of the reason behind the sustained demand is that customers “still have business plans they need to execute,” she says.
The recent improvements made in areas such as ERP and supply chain management are spurring companies to adopt these tools so they can gain a better grip on their relationships with suppliers and customers.
J.D. Edwards’ Bonde says, “The supply-chain piece resonates very strongly in the mid-market.”
For example, Bonde says Coca-Cola’s Mexican subsidiary installed J.D. Edwards’ supply chain software last year and reduced its “stock outs,” or products they had temporarily run out of, by 70 percent, forecasting errors by 75 percent and inventory costs by 25 percent.
Forrester’s Chew says the majority of ERP vendors have identified supply chain management as the next big market. Its potential may not match the rush of orders that preceded the Y2K deadline, but it offers a new area of growth that they sorely need.
Corporate clients of the ERP vendors “are focused on cutting costs and maximizing the benefits of the applications they’ve installed,” she says. “In the original ERP heyday in the 90s, people were implementing systems because other people were doing it. But now they’re more cautious with their investments. They want a return, and supply chain falls into that category.”
But are supply chain applications enough to keep growth healthy during a market that’s clearly suffering a downturn? Chew says supply chain management systems are so new that they lack a large, demonstrable track record of successful installations. The absence of such a record only fuels the reluctance of many customers to commit to new systems during an economic downturn.
Despite the reluctance of customers to purchase new systems, Chew says there’s no inherent flaw in supply chain management to prevent it from reaching a mass market, but it’s going to take a while.
In the meantime, the new software firm executives are trying to navigate their way through the rocky shoals of the economic slowdown.
Infinium’s McGowan says, “The salespeople are telling me that they are not losing the business, but that customers are pushing things back from quarter to quarter. They’re not going to hand over big chunks of money until they’re absolutely sure.”
So what might end the current slowdown?
Baan’s Heystee says there’s a growing trend toward “collaborative commerce,” a term Gartner coined, and it is going to compel more companies to install supply chain management systems and other forecasting tools so they can get a better grip on their businesses and customer relationships.
McGowan says much of Infinium’s hopes are riding on the customer relationship management market. A year ago, it acquired Dexton Information Systems, a maker of CRM software in the Netherlands.
“We’ll be using that as our building block,” McGowan says. “In the world today, enterprise software is not just what you do with the back office, it’s how you tie it into the front office.”
The problem is, the more innovative the technology, the more risk it holds for the user, says Forrester’s Chew. The customers who are most attuned to that risk are the same ones who had bad experiences implementing ERP systems in advance of the Y2K deadline.
“They need to integrate their technology with their business strategy,” she says. “If they don’t, it’s a recipe for disaster.”