Special Report: ERP Fuels AS/400 Growth

• 09/28/1998

Enterprise Resource Planning, or ERP, software was just coming into its own when the AS/400 debuted 10 years ago and is one of the engines driving growth of the platform today.

Greg Tavalsky, global industry solutions manager at IBM’s AS/400 division, puts the percentage of revenues the division derives from ERP at “mid-20s.”

“ERP is an investment area for us for 1998 and beyond,” Tavalsky says. “We’ll invest in ERP as a key vertical, putting marketing, development and coverage dollars into it. We have a sales team dedicated to ERP and we’ll extend it with our investments in supply chain.”

IBM is focused on ERP for good reason. AMR Research (Boston) predicts that global ERP software revenue will reach $52 billion by 2002, up from $14.8 billion today. Add in third-party services, hardware, databases and networking and those figures nearly triple.

Tavalsky says the Year 2000 is one driver of the market as companies scramble to update fragmented non-Y2K compliant legacy systems in time for the century change. But perhaps a more key driver is the benefits companies can derive by using modern ERP technology.

“Extensions to ERP, such as supply chain, give companies imminent paybacks,” Tavalsky says. “When a company implements an advanced planning and scheduling (APS) solution, the CFO can see the payback in less than a year. That’s the value in deploying advanced technologies, you get that quick payback. You’re at a complete disadvantage if you don’t have those technologies.

“If you don’t have a quality ERP system as a base, APS really can’t be done. Business intelligence is another example. You can’t mine out data very well if you don’t have a good transactional system to mine it from. Folks are at a competitive disadvantage if they can’t extend their ERP applications out like this.”

The AS/400 has not been left out of the ERP boom, according to David Caruso, director of enterprise applications research at AMR, which pegs the AS/400’s market share of ERP applications at about 18 percent.

“At a certain level, there’s been a bit of a rebirth for ERP on the AS/400,” he says. “Most AS/400 products are doing well, especially the AS/400-specific products. It’s probably not as dramatic as in the NT or Unix world, but it’s still a strong environment.”

Since the AS/400 is strictly a business server with an installed base about half a million, software that runs businesses is naturally a pretty significant market for it. But it’s the AS/400’s trademark reliability and ease of use that make it an outstanding ERP server.

Just ask SAP, the German company that is far and away the global leader in ERP software with about a third of the total market. SAP ported its R/3 solution to the AS/400 in July 1996 and has racked up 620 AS/400 installations in that time, 150 of which are in production. Though it was on Unix and Windows NT first and has more installations on those platforms, it has found that the AS/400 is one of the best platforms to run R/3. R/3 running on an AS/400 server in a three-tier environment can scale up to 6,651 concurrent users. Only IBM System/390 can do better.

“That shows the AS/400 is capable of running businesses of all different sizes,” says Gunnar Doerken, business development manager for IBM small- to medium-sized business customers at SAP.

It gets better. A recent Meta Group study marks the time of implementation of R/3 on an AS/400e series machine at as low as 4.7 months. Unix and NT average more than a year. AS/400 is also the only platform that can run R/3 on a single server.

“In general, the AS/400 is the fastest platform for R/3 implementations,” says Doerken.

Oddly enough R/3 was originally designed by SAP to run on the AS/400 in the early 1990s. However, it wasn’t until the introduction of the RISC processor to the AS/400 two years ago that it could support R/3.

Doerken says SAP considers the AS/400 to be a potentially lucrative market since so many AS/400 customers are still using outdated, fragmented systems in need of an upgrade to a modern, integrated solution. He says 5 percent of new R/3 installations were on the AS/400 last year. That figure is expected to be 7 percent this year and SAP has targeted 15 percent of new installations on the AS/400 by the Year 2000.

But that kind of market penetration won’t be easy.

“There’s very strong competition in this market -- J.D. Edwards, SSA, Baan soon. It’s not that easy to grab all the market potential that’s out there. It’s still a hard fight to get a contract signed,” Doerken says.

But he says SAP plans to eventually be No. 1 in the AS/400 space, as it is in the ERP market as a whole.

“That’s our clear goal, to catch up on market share. Most of our competitors have been in this space longer.”

Caruso says one of the overall strengths of ERP applications on the AS/400 is the vertical industry specialization that many vendors offer.

“Within this space, there’s a lot of very good vertical industry providers, like Intentia for mill goods, apparel and fashion and JBA in automotive products and apparel. The focus on vertical industry providers is a good story for the AS/400. It’s a much simpler platform for them to run on rather than Unix,” Caruso says.

J.D. Edwards (Denver) isn’t known so much for its vertical industry solutions – though it certainly has them – but is known as the market leader in AS/400 ERP. The company traces its roots to System/38 in the early 1980s and now boasts more than 4,500 customers on its flagship World product with another 580 using its multiplatform OneWorld solution natively on the AS/400.

Mark Peterson, director of strategic alliances at J.D. Edwards, proudly points out that the company has helped IBM sell 8,000 AS/400s in the last 10 years. Peterson says J.D. Edwards is focused on customers in the $100 million to $2 billion [in annual revenues] range. It sells to a wide range of industrial companies, such as manufacturers of automotive products, fabricated metals, consumer goods, chemicals and pharmaceuticals and has also penetrated non-industrial markets through the popularity of its financial applications.

“Our financials are so well recognized that we have customers who are banks and insurance companies and other industries outside of what most ERP vendors sell to,” says Peterson.

The financials were J.D. Edwards’ first applications and often help it to sell its entire suite to non-industrial companies, Peterson says.

“Because of the strength of our financials, we clearly can apply our solution outside of the normal ERP marketplace. Because of the flexibility of our applications, customers can adapt to it quickly and easily as they’re implementing the solution, but also as their companies evolve. We appeal to organizations that have a company philosophy of acquisitions because we can adapt well to taking on new organizations.”

Its competitors and analysts have accused J.D. Edwards of abandoning the AS/400 with the August 1996 release of its multiplatform OneWorld solution. While World is developed with a CASE tool that generates RPG, OneWorld is developed with a CASE tool that generates C, C++ and Java and can run on Unix and Windows NT as well as the AS/400. “It’s taken us from a host-centric RPG model to a network-centric model,” says Peterson.

Through the end of the third quarter, there were 900 OneWorld installations, 580 of them on the AS/400, Peterson says.

“People thought we were getting away from the AS/400 with OneWorld, but it has actually brought a lot of new customers to the AS/400,” he says.

“We’ve always been very committed to the AS/400. We made OneWorld to run across multiple architectures, not because we felt the AS/400 was not a viable platform. We still do believe it’s viable. Running across multiple platforms has benefited us by taking us into market situations we couldn’t have gone into before. Then once we’ve gotten there, we’ve been able to show people that the AS/400 is the best platform for them. We’re selling more solutions on the AS/400 today because of OneWorld.”

You’d have to go back to 1978 to find the earliest implementation of ERP technology on the AS/400 or its System/3X predecessors. And that honor falls to MAPICS, now an independent company, but then a rudimentary IBM ERP package for the System/34.

MAPICS – an acronym for Manufacturing, Accounting and Production Information Control Systems – was sold by IBM to Marcam Solutions in 1993, then leveraged into an independent Atlanta-based company July last year.

Its current MAPICS XA suite, the fourth generation of the product, has 2,300 of MAPICS’ 5,700 total customers. However, its 1,400 legacy AS/400 customers and 2,000 System/3X customers represent a fat target for AS/400 and non-AS/400 competitors alike. And that competition is heating up.

“It’s certainly true that we have more competition with people like SAP, Oracle and PeopleSoft trying to come down to the mid-market and smaller players attempting to move up,” says Dan Brown, MAPICS’ director of product marketing. “But we continue to compete very successfully and win a very high percentage of deals. [Our competition] can’t meet us in terms of flexibility, focus on midsize manufacturers, speed of implementation and local affiliates.”

Atlanta-based MAPICS is focused on mid-size discrete and batch manufacturers with annual revenues from $20 million to $500 million, as well as divisions of Fortune 1000 companies. It has customers in several different verticals with electronics and automotive products being among its strongest. It is also known as the ERP system of IBM’s AS/400 manufacturing site in Rochester, Minn.

While it still runs exclusively on the AS/400, MAPICS is planning to move to other platforms via Java. A push towards Windows NT is planned after 2000.

“We’re looking ahead to various platforms and Java is our means to do that,” Brown says. “We’ve begun development efforts in redesigning our core capabilities under Java. But that’s still a ways away. For the foreseeable future, we’re still on the AS/400.”

Brown says the AS/400 is still the platform of choice for the manufacturing community and MAPICS remains committed to it, however it sees opportunities beyond the AS/400 customer base.

“Being on NT will allow us to make our solution available to a customer set in a different marketplace,” he says.

Another company with a storied ERP history on the AS/400 and System/3X is Chicago-based System Software Associates (SSA). Its BPCS (pronounced BEE-pics) product even sounds like MAPICS and is an acronym for Business and Planning Control Software.

And like MAPICS, SSA is finding that change is vital to maintaining and growing its customer base. The company plans to expand its offerings beyond the AS/400 with a Unix release generally available this Thursday and an NT version planned for next spring. New AS/400 versions of BPCS will be released at both times, adding enhanced support for the Euro and e-commerce and other features. In fact, the hallowed name of BPCS may also change, a possibility still to be determined. “It’ll be a significantly different product,” says Bob Hoyt, VP of operations and communications at SSA.

BPCS dates to 1981 and System/38. In fact, it still has some customers there. All told it has 6,300 customers at 18,000 sites worldwide, all in the industrial sector, especially pharmaceuticals, food and beverage, consumer packaged goods, automotive parts, specialty chemicals and consumer electronics.

Its customers tend to be both big and small, with 80 percent either over $1 billion or less than $400 million and the other 20 percent somewhere in between. The company has faced difficult times in the past year with sales growth shrinking and losses mounting. It laid off 12 percent of its workforce over the summer. SSA once had as many as 8,500 customers, Hoyt says.

He agrees that the company has become a victim of its own past success with customers now looking to update their legacy BPCS applications and finding many more options to choose from than when they first licensed BPCS.

“The ERP market in general is a replacement market. About every five years companies replace their ERP systems, either with an updated version of the product they had or another company’s product. That’s why we’ve undergone a major product transition for the last three years,” Hoyt says.

That transition to a modern client/server system will culminate with the 6.1 release of BPCS next spring. Despite its moves to other platforms, SSA remains committed to the AS/400, Hoyt assures. At least for now.

“The AS/400 will be a big part of our business for at least the next two or three years,” he says. “Beyond that it’ll be based on how the AS/400 group does.”

Acacia Technologies (Lisle, Ill.), a division of Computer Associates (Islandia, N.Y.)., also has a long-established AS/400 pedigree.

Acacia offers two ERP products, PRMS, it’s flagship product, and KBM, specifically designed for the engineer and make-to-order business. PRMS dates back to 1980, when it was known as RMS (Resource Management System), developed by a company called PCR. Pansophic Systems acquired PCR in 1987 and added the P to RMS two years later. Computer Associates acquired Pansophic in 1991 and PRMS became Acacia’s flagship product when it was launched as an independent business unit of CA in 1996.

KBM dates to 1984 when it was a System/38 product called MRPS 38-S, made by a company called Data3. When the AS/400 debuted in 1988, Data3 updated the product as SIM/400. The ASK Group acquired Data3 in 1989, then CA bought ASK in 1994, releasing SIM/400 as KBM (Knowledge Based Manufacturing) 1.0 later that year. KBM became part of Acacia when it was created two years later.

Today, PRMS has more than 2,400 customers worldwide and KBM has more than 500. Both products are used for discrete, repetitive, process and co-existent manufacturing with food and beverage, consumer packaged goods, electronics, healthcare products, machinery and automotive products the leading industries.

Unlike many other ERP vendors, Acacia has no plans to take its products beyond the AS/400. Its customers aren’t asking for anything else, according to John McCarron, senior VP and general manager of Acacia.

“Our marketplace is midrange manufacturers. Midrange manufacturers don’t have or want large MIS overhead. They want reliable systems that require little or no overhead,” McCarron says.

Norm Baran, Acacia’s chief technologies officer, puts it even more succinctly.

“We’re not spending our R&D dollars porting to other platforms. We’re focused instead on giving our clients new technology without replacing the backbone of their systems,” he says.

Acacia also makes Warehouse Boss, a warehouse management system, and Quick Response Engine, an NT-based advanced planning and scheduling system.

“We own all three components – ERP, advanced planning and scheduling and warehouse management,” says McCarron. “We’ve tightly bolted them together to offer one-stop shopping for our clients and a strategic advantage from dealing with one vendor.

“We provide those three pieces on a stable platform and we understand the problems of midrange companies.”

The globalization of the economy has brought more players to the AS/400 ERP world. Germany’s SAP joined the fray two years ago, but other overseas companies, like England’s JBA International, became established in the North American AS/400 ERP market long before then.

JBA entered the North American market in 1989 with its acquisition of GMB, then the largest MAPICS reseller in North America. The company’s System 21 package had been available for System/36 and /38 in Europe since 1981.

“There’s a lot more players in the mid-market ERP space today,” says Thad Zylka, installed account marketing manager at JBA, which has its North American headquarters in Chicago. “In the late ‘70s and early ‘80s, it was pretty much just MAPICS, SSA and CA [now Acacia]. Now you have the JBAs, JDEs, Baans, PeopleSofts, SAPs. Everybody’s competing in the mid-market ERP space, offering a one-stop solution for supply chain and ERP that a lot of customers are looking for.”

Zylka says System 21 has about 4,500 customers worldwide, about 90 percent of which are on the AS/400.

JBA focuses on customers in apparel and footwear, automotive products and the beverage industry. Zylka says its strength is working with manufacturing and distribution customers who need a strong worldwide financial package. “Anywhere where you need a bonded warehouse and have to do a lot of international taxes and reporting,” he says.

Zylka says opportunity exists for ERP vendors, both in leveraging the AS/400’s installed base and in new customers.

“IBM’s gotten really aggressive with their new announcements with mid- and low-range AS/400s. A lot of people in the mid- and low-range markets need reliable solutions. AS/400s just run. They bring competitive advantage to a lot of people. If these people see the AS/400 as a very cost-effective solution, you’ll see more sales into new business.”

Sweden is another European exporter of AS/400 ERP systems to America, sending Intentia and International Business Systems (IBS).

Intentia’s Movex solution dates back to System/36 and /38 in 1984. The company now boasts about 3,100 customers worldwide at more than 4,000 sites. Customers tend to fall between $25 million and $1 billion in annual revenues or divisions of multi-billion dollar companies.

Ed Koepfler, president and CEO of Rosemont, Ill.-based Intentia Americas, says the AS/400 ERP market is now in its “second wave.”

“It’s customers who haven’t bought a package, but they have automated ERP function. They have generic ERP systems for process, discrete, repetitive or job shop.”

As AMR’s David Caruso noted earlier, the company has become known for its strong vertical industry products.

“We take the philosophy that what’s good for a box manufacturer may not be good for a jewelry manufacturer,” Koepfler says. “So our products are in line with the verticals. We’ve taken that one step further with different versions of our software for different verticals. We have versions for fashion apparel, paper goods, mill goods like plastic, carpet and steel, food and beverage, and furniture.”

Overseas, Movex also has versions for aviation maintenance and repairs and steel manufacturing.

“This strategy is playing extremely well all over the world,” says Koepfler. “Our prospective customers want products that fit their industries. And it allows us to offer a quicker implementation.”

Koepfler says the Tier 2 [midsize] market that Intentia plays in is “showing no signs of slowing down.”

“The SAPs, Baans, PeopleSofts and Oracles in Tier 1, their market may go soft when the Y2K issue is solved. But that doesn’t seem to be the case with Tier 2.”

He backs up his claims by pointing out that Intentia has experienced 60 percent growth in license revenues in the first two quarters of this year over the same period last year, after experiencing 53 percent growth from 1996 to 1997.

“From what we’re seeing, resistance to the AS/400 is minimal in the marketplace. The Wave 2 buyer understands that the function of the product is more important than the technology. They want a strong technology, but the application has to be there,” Koepfler says.

International Business Systems, which has its North American headquarters in Folsom, Calif., entered the North American market in 1987, two years after it launched its ASW product for System/36 and /38. Today, IBS has 2,500 customers worldwide, with pharmaceuticals, industrial distribution, automotive products, retail and the food industry its niches.

Customers range from as small as $7 million to multi-billion dollar companies, but most fall within the $40 million to $400 million range.

The ASW suite began with distribution and finance applications, then added applications for forecasting and planning and warehouse management. It recently added an EIS called Analyzer.

“We see a lot of growth on the AS/400 platform,” says Lowell Feil, product manager at IBS. “It’s allowing many companies to consolidate their disparate systems. Whether you’re on mainframes or NT or Novell, you can bring all those pieces into one system and run them together. You don’t need 13 servers and nine guys to figure out what’s going on with them.”

Don Baldwin, AS/400 technology manager at IBS, points out that 50 percent of the company’s new installations are new to the AS/400.

“It comes down to whether you want to manage your business or manage your server,” he says. “The tide is in the process of changing over to the AS/400 perspective. There have been too many NT failures.”

PeopleSoft certainly thinks the AS/400 market presents some intriguing possibilities. One of the leading vendors in the overall ERP market, PeopleSoft started marketing its human resources and payroll applications to the AS/400 August last year. Earlier this year, with the release of PeopleSoft 7.5, its entire ERP suite became available to AS/400 customers.

PeopleSoft claims 10 customers using its complete suite on the AS/400 out of 57 altogether, according to Tony Goolsby, global business development manager at the company. But that may be just the tip of the iceberg. Goolsby says PeopleSoft forecasts 2,000 AS/400 customers by the end of next year.

“This is a growth opportunity for us, an opportunity to tap into a customer base of 500,000,” says Goolsby. “We’re trying to be conservative when we say 2,000. We think it’ll actually be a lot more than that.”

Those are bold claims considering PeopleSoft’s current installed base across all platforms is only 2,300-2,400, according to Goolsby. He forecasts growth on the AS/400 to come from within and outside the platform.

PeopleSoft generally is used in large organizations and has already racked up sales to some of the larger AS/400 shops. The Pleasanton, Calif.-based company dates to 1987 and covers most industries from manufacturing to retail.

“We made our name with human resources applications, now we’re offering the full complement of applications,” Goolsby says.

PeopleSoft isn’t the only traditionally non-AS/400 ERP heavyweight that finds the AS/400 market enticing. Baan, a Netherlands-based company with U.S. headquarters in Reston, Va., is expected to announce next month that it is porting its ERP applications to the AS/400, meaning virtually all of the leading ERP vendors will be on the AS/400 with the exception of Oracle. Baan boasts more than 3,000 customers at more than 5,000 sites worldwide.

Unlike PeopleSoft and Baan, Infinium Software (Hyannis, Mass.) came up through the ranks of System/3X. Nonetheless, the company took an interesting, indirect route to AS/400 ERP.

Infinium – known as Software 2000 until last year – began on System/3X in 1981 with an environmental regulatory reporting system for process manufacturers. Ten years later, the company saw an opportunity and evolved its original regulatory reporting product into a process manufacturing ERP system for the AS/400 known simply as Process Manufacturing ERP.

“We took our environmental components and merged them into a full process manufacturing ERP system,” says Steve Boyd, product marketing manager at Infinium. “It gives us a strategic advantage, having integrated regulatory components built into our process ERP system.”

Infinium now has 1,500 customers using Process Manufacturing ERP on the AS/400. About half are process manufacturers such as specialty chemicals and food processing, with wholesalers and retailers, healthcare services, hospitals and financial services making up the rest. Boyd says Infinium also sells its human resources and payroll applications to discrete manufacturers, but doesn’t have a full suite of applications for that market.

Customers range in size from $100 million to more than $1 billion, with $750-$850 million the sweet spot, according to Boyd.

While Infinium has added an NT product line in the past year, it still considers the AS/400 to be a growth market. Boyd says expansion in the process manufacturing industry in general along with Year 2000 and Euro issues is driving this growth. But he gives IBM a lot of credit as well.

“The AS/400 has gained new respect over the last year,” Boyd says. “We’re seeing that in terms of a lot more activity related to the AS/400. IBM’s done a great job turning around those market perceptions and we’re enjoying the benefits of that.”

The IBM gospel of e-business is also having positive effects on customers, Boyd reports.

“We’re seeing a great deal of interest in the process manufacturing arena in what I call extended ERP, what IBM calls e-business. It’s the capability of getting outside the ERP system, collaborating with customers and suppliers and extending the workflow out of the enterprise.

“These Domino-based capabilities the AS/400 now has, whenever we show them to customers, they have an immediate understanding of the benefits of connecting up with their suppliers through e-mail or browsers. This is the next great wave in ERP of connecting to suppliers and other plants. That’s where a lot of interest lies these days.”

There are other AS/400 ERP vendors who play in even tighter niche markets than any of the companies mentioned in this article.

Friedman Corp. (Deerfield, Ill.) is one such company. Friedman develops a configuration-based ERP system known as Frontier (formerly HFA), which is used in customer-focused manufacturing such as for home products, industrial machinery, forklifts, recreation vehicles and even promotional items, such as pens with a company’s name on them.

“We play anywhere there’s heavy customer specification up front,” says Bill Leete, VP of product direction at Friedman.

The company began developing a custom-written package for System/3X in 1982. That package grew into HFA by 1987, migrated to the AS/400 in 1988, then became Frontier in April of this year. Frontier was, in effect, Release 17 of HFA.

Playing in a small niche market, Friedman boasts just 350 customers altogether, 80 of them on Frontier. Customers tend to be in the $20 million to $250 million range.

“What’s kept Friedman competitive is the strength of our configuration capabilities,” says Leete. But what will keep them competitive in the future is a migration to Windows NT. Friedman has already embraced NT on the client side of its applications, but still requires an AS/400 server backbone. Though professing commitment to the AS/400, the company is developing an NT-server based version of Frontier to compete better in the lower end ($20-50 million) of its market.

“There’s a lot more potential for us in that market,” says Leete. “And there’s a big push from NT in that market space. Function-wise, NT solutions come to market with stronger product configurations and tighter integration.

“Our customer base is IBM-friendly and pro-AS/400, but this will open up the market for us to companies that aren’t IBM friendly.”

American Software (Atlanta) is another company playing in a small niche of the AS/400 ERP market. The company has nearly 300 customers on the AS/400 -- about 90 percent of its installed base -- and works primarily with discrete manufacturers and distributors in the $100 million to $750 million range.

American dates back to the System/3X world in the mid- 1980s, but entered a new phase in its existence with the release of its Intelliprise suite this past April. The company bills Intelliprise as a complete ERP solution, including supply-chain management and integrated data marts. It can employ either MRP or Flow Manufacturing philosophy, according to Karin Bursa, American’s VP of marketing.

“In the past, we focused on and sold financial applications only or distribution applications. But we pulled everything together into an integrated ERP suite and added supply chain management,” Bursa says.

While Bursa says there’s still a “tremendous” amount of opportunity on the AS/400, American, which also supports HP-UX, is hedging its bets with an NT version of Intelliprise, due out by the end of the year.

“The AS/400’s selling points are that it’s a very practical and manageable OS environment,” Bursa says. “A lot of companies will stay on the AS/400 another five years. It will continue to be a viable platform for ERP solutions. But if it is supplanted, it’ll be by NT. We see a lot of people planning to move to NT post-Year 2000.”