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Insight Focus Coalition of the unwilling  The IT industry's best kept secret is out -- SAP is still up for grabs despite spurning its first suitor, Microsoft. |
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But what was in it for SAP, the leader in the business software market, with over US$8 billion in sales? The company hasn't fully said. But one answer to that question provides some telling facts about the entire enterprise software industry.
SAP, along with rivals Oracle and PeopleSoft, has long enjoyed fat profits and double-digit growth, as large corporate customers stocked up on financial, human resources and manufacturing software -- functions that fall under the category known as "enterprise resource planning," or ERP.
Last year's talks with Microsoft, coupled with Oracle's bid for PeopleSoft, indicate that new ERP sales are drying up, forcing the leading enterprise software companies to look for new markets or consider mergers and acquisitions in order to grow.
"The thing to realise is that the ERP market is a very small market," said Jim Shepherd, an analyst at AMR Research in Boston. "The reality is that the Fortune 1000 only has 1,000 companies."
Although much of the technology industry faces similar challenges, this change has been particularly harsh for enterprise software manufacturers. For three decades, the prime mover behind business software sales has been the promise of a "killer app" that can give customers new insight into their businesses, wring profits in the most efficient way and help them gain a competitive edge. That's what drove multimillion-dollar sales throughout the 1990s.
In recent years, however, many corporate customers have begun to rethink that notion, especially after the twin blows of the technology bust and the national recession forced them to live with less. Now, rather than buying more products to do more things, companies want the software they already own to more closely model how they do business.
"Every year, something new was going to come out. Now these companies are basically out of ideas," said Rick Beers, director of business process architecture at Corning, a US$3 billion manufacturing company based in New York that uses PeopleSoft's products. "We no longer need the next killer app. We've all become pretty damn smart as buyers."
It's a change that software makers acknowledge. The average deal size has shrunk, and will continue to diminish, Henning Kagermann, SAP's chief executive, told CNET News.com. "Customers are buying incrementally, related to business cases. (It's) not the big replacement of the IT infrastructure; therefore, deal size goes down," he said.
The state of the enterprise software market is reflected in sluggish sales of business applications.
SAP earlier this year managed to eke out its first quarterly rise in software licence sales in nearly three years, though overall sales remain slow. Last year, its overall sales declined 5 percent, to 7 billion euros, or US$8.5 billion. SAP is attempting to make up the difference through more, smaller sales. "We have less large deals, but we have more deals," Kagermann said. "We will see some increase in deal size. But we will not see a return to the old days."
Just this month, Oracle said its applications business declined by 6 percent during the past year, even though analysts had projected growth of 10 percent. Only PeopleSoft racked up a sizable software licence gain, mostly on the strength of its recently acquired JD Edwards unit and sales to mid-size companies.
Further indications of a slowing enterprise market have come from recent moves to consolidate. Last year, Oracle launched a hostile takeover bid for PeopleSoft, which had announced just days earlier that it would acquire JD Edwards. Testimony in the anti-trust trial involving the PeopleSoft takeover attempt revealed that Oracle had considered its own bid for JD Edwards, as well as Lawson Software and other companies. And in addition to discussions with SAP, Microsoft had considered an investment in PeopleSoft.
SAP, Oracle and PeopleSoft have all struggled to find new enterprise software buyers at the top end of the market: the bread-and-butter Fortune 1000 customers. Few entirely new sales of big-ticket enterprise products are made to these large companies anymore -- and there are even fewer of the multimillion-dollar blockbuster deals that typified the gold rush mentality of the late 1990s.
Unlike desktop applications or operating systems, sale cycles for enterprise resource technologies are notoriously long, with customers taking 15 months or more to make buying decisions. Companies only replace systems every 15 to 20 years, according to AMR, which means that major deals are few and far between.
As Shepherd put it, "It's not a decision you are going to make in a weekend."
Enterprise indigestion
The slowdown is, in part, a product of a prolonged budget crunch in the IT market, where few companies have had the money or desire to take on expensive new projects. Over the past three years, new enterprise resource software licence sales have remained flat overall, according to Forrester Research, as companies struggle to digest large purchases from the boom years.
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The Enterprise Vendors doing business in Australia have for some time been the only option for business to pursue with questionable value and risk relating to their products and services for both SME and Top Fortune companies. It has grown up with a heavy layer of cost,inflexibility and inefficiency which some day had to show it true worth and expiry dates. This is now happening. We are now seeing competing Australian offerings in services and compliant products coming on the radar and compete far better on price,value,performance and ease of use and implementation. Now being Big is not the case, it's being good which has been the cry of many a CIO for a long time.