In a Fix

Confused by the spate of takeovers in the enterprise software industry? A new crop of third-party advisers is here to help.
Jason KaraianDecember 18, 2006

You wouldn’t know it by the
company that he works for, but Gijs
Houtzagers doesn’t like to take risks, at least
not when it comes to IT. When he joined
Holland Casino, a €681m company that runs
13 casinos in the Netherlands, in 2002, he
says its PeopleSoft ERP system was “in a bit
of a mess” and some bold work was needed.
A big reimplementation followed, and a year
later the entire company was working with
the same version of the software. But then,
Houtzagers recalls, came “the Oracle thing.”

Oracle’s hostile bid for PeopleSoft was
launched shortly after PeopleSoft’s takeover
of JD Edwards in mid-2003 and it dragged on
and on. PeopleSoft grudgingly accepted Oracle’s
$10.3 billion (€7.9 billion) offer at the end
of 2004. When the dust settled, three of the
ERP market’s largest vendors became one.

Like many PeopleSoft and JD Edwards
customers, Houtzagers wasn’t comfortable
with the thought of his company’s IT
systems coming under new ownership.
Given the rancorous takeover battle, in
which each party rubbished the other’s
products, management and much else,
Houtzagers was more than a little nervous
about Oracle’s commitment to its
new customers, despite conciliatory
statements issued after the deal closed.
Sooner or later, he reckoned, Holland
Casino would be forced to upgrade to
Oracle’s next-generation applications
suite, called Fusion. Rather than take a
gamble and leave his company at Oracle’s
mercy, Houtzagers explored his options
and took action.

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It’s a scenario that plenty of other companies
are familiar with. The group of five
leading IT vendors formerly known as
JBOPS—for JD Edwards, Baan, Oracle,
PeopleSoft and SAP—is now three. Market
leader SAP is notable for its focus on
organic growth and relatively balanced revenue
split between maintenance, licence
and services fees. Still, it is not immune to
merger fever, having been outbid for retail
software specialist Retek by second-ranked
Oracle, which spent some $20 billion gobbling
up rivals over the past two years. The
third-largest ERP vendor, private equity-backed
Infor, is a collection of 30-odd
formerly independent ERP vendors,
including Baan, following its May takeover
of SSA Global, itself a prolific dealmaker.

And ERP users should brace themselves
for more upheaval. “Further consolidation
among ERP vendors is inevitable,”
says Paul Hamerman, an analyst at IT
consultancy Forrester Research.

With their market rapidly maturing,
ERP vendors are finding new licence
growth scarce. So their best hope for revenue
growth is in the annual support contracts
they set up with their customers.
These typically range between 17% and
22% of the original purchase price of software.
Forrester predicts that maintenance
revenue will grow by an annual average of
9% through to 2010, outpacing both
licensing and services growth. By the end
of the decade, maintenance will account
for 45% of ERP vendors’ revenue, up from
40% in 2005.

But it’s not all bad news for corporate
IT users. Hoping to poach disillusioned
PeopleSoft and JD Edwards customers,
SAP launched a programme in January
2005 called “Safe Passage.” The vendor
offers a significant licence credit for
PeopleSoft and JD Edwards customers if
they agree to switch to SAP—in Holland
Casino’s case, 65% of its original investment
in PeopleSoft. SAP also offers cut-price
maintenance for a range of systems
now owned by Oracle via TomorrowNow,
a third-party support specialist it bought
in conjunction with the Safe Passage

At Holland Casino, Houtzagers calculated
that the implementation and running
costs for an upgrade to Oracle’s
Fusion or NetWeaver, SAP’s latest offering,
would be nearly identical. However,
given the licence credit and support offer
from SAP, Houtzagers decided to make
the switch. He jokes that no ERP implementation
can be called “smooth,” but
offers few complaints about the transition
to SAP, which will be complete in early
2007. The “couple of hundred thousand
euros” the company saved by signing up
to the Safe Passage programme meant the
full-featured new system from the global
ERP leader was cheaper than cobbling
together a system of limited functionality
from small, local software vendors.

Running in Place

Not every company is as eager to rip and
replace its current systems as Holland
Casino. “There is little appetite to go
through the upheaval of implementing a
new system,” notes Neil Jones, a principal
at Deloitte Consulting. “In general,
it’s now about gentle optimisation and
minimising upheaval.”

This is where companies like TomorrowNow
have spotted a promising niche.
Third-party support specialists like
TomorrowNow offer much cheaper
support for “legacy” ERP systems no
longer owned by their original creators.
They’re targeting
companies that are happy with the stability
and functionality of their current
systems, and are unhappy about paying
maintenance fees that are the equivalent
of repurchasing the software every four
or five years. “If I am using JD Edwards,
why do I pay 22% maintenance to Oracle?”
asks Andrew Nelson, a former PeopleSoft
executive who co-founded TomorrowNow in 1998.

An industry rule of thumb dictates
that vendors put around half of the revenue
they earn from maintenance fees
towards new product development. By
taking those fees out of the equation,
third-party providers claim that they are
able to offer a minimum discount of
50% on vendor-provided maintenance.
What’s more, most of the service
providers are staffed with former
employees of PeopleSoft, JD Edwards,
Siebel and other Oracle targets.

For four years, netCustomer provided
outsourced support for PeopleSoft
from its base in Noida, India. Following
Oracle’s takeover, the now-independent
service provider says that it can save customers
up to 75% on support for People-
Soft, JD Edwards and Siebel systems.
“The enterprise applications market is
maturing, and the gap between what
customers need and what vendors want
is increasing,” says Punita Pandey, net-
Customer’s CEO. “Our customers are
okay with what they have for the next
five years, and want to save on maintenance
in the meantime.”

As a starting point, netCustomer
charges 50% of a customer’s most recent
vendor-supported maintenance bill. It
then cuts the cost of support for modules
a customer doesn’t use—a surprising
number of companies negotiate good
deals for bundles of applications without
realising that recurring support costs for
unused “shelfware” can really add up,
Pandey says.

NetCustomer’s India-based support
staff also tailors its service to heavily customised
systems, something vendors
tend to shun and for which western consultants
charge a fortune. “We offer huge
savings on what you would call utility
spend,” Pandey says. “This frees up a lot
of the budget for CFOs and CIOs to
spend on innovation, rather than paying
large amounts to vendors making a 90%
margin on support services.”

However, third-party support services
are not for everyone. By definition,
these support providers do not have
access to source code. Thus, they can
offer publicly available patches and regulatory
updates, but cannot add new
functionality. For this reason, says Forrester’s
Hamerman, the third-party
route is best for companies that: have little
interest in functional upgrades to
mature applications like accounting and
HR; have limited geographic coverage;
or want personalised service for a limited
product set. But regardless of those
factors, says Hamerman, companies
should leverage the offering from the
likes of netCustomer and TomorrowNow
as a “negotiating tactic” when
signing maintenance deals with their
current vendors.

For the time being, the majority of
third-party support providers are targeting
applications bought by Oracle.
But SAP is up next. In May, Oracle
announced a partnership with a service
provider called Systime, offering SAP R/3
users a 55% discount on maintenance
costs. Oracle also gives up to a 100%
licence credit to SAP customers if they
agree to switch to Oracle under a programme
dubbed Oracle Fusion for SAP,
or “OFF SAP” for short.

Back at Holland Casino, Houtzagers
is now writing a white paper for the
company’s board. It will detail his plans
for the new ERP system over the next
three years, including “spreading SAP in
a broader sense to departments beyond
just finance and HR,” he says.

In recent years, though, SAP itself has
been the subject of takeover rumours
involving both Microsoft and IBM. After
being caught out with his short-lived
implementation of PeopleSoft, Houtzagers
admits that, at the moment, any forward
planning when it comes to IT is, in
a sense, a roll of the dice. Think of
Arthur Andersen, he says. “Companies
disappear. Anything can happen.”