editorial: The Great ERP Scare
By now, I'm sure you've read all you care to on the subject of enterprise resource planning, but trust me, there's more. I'm not here to extol the virtues of ERP, but rather to talk a little about why so many ERP vendors have hit the skids financially during the first half of this year and what you can expect to see beginning early next year.
The rush to achieve Year 2000 compliance -- and the subsequent freeze on IT spending until Y2K is resolved -- is a primary reason why such heavy hitters as J.D. Edwards, Marcam Solutions, Baan Company, SSA, PeopleSoft Inc. and SAP have taken it on the chin this year. For many IT decision-makers, now is not the time to simultaneously take on two complex projects, such as Y2K compliance and an ERP rollout (or major upgrade).
It seems as though every major ERP vendor has taken its turn on the mat in 1999. In late May, J.D. Edwards reported a $10.4 million loss for its second fiscal quarter, while new software sales dropped 12 percent to $67.2 million, down from $76.4 million during Q2 of 1998. Though restructuring expenses skew Marcam's fiscal results, for the first half of this year the company recorded an operating loss of $9.2 million, despite an increase in license revenue by 28 percent from the previous quarter. Baan's revenues for the first quarter of 1999 were $176 million, compared with revenues of $179 million during the first quarter of 1998. For SSA, second quarter revenue in 1999 was $86.7 million, down 15 percent from the second quarter of 1998. This was attributed largely to lower than expected software license revenues.In April of 1998, PeopleSoft shares were riding high at $57.44 per share. This April, the stock was trading below $15. SAP has also reported slower growth in profits and earnings. In July 1998, SAP shares were valued at $60. In early April of this year, that value fell to $25.
The numbers look pretty bad, but they don't tell the whole story -- that success can't be measured simply in terms of licensing revenues anymore. Services continue to become a bigger part of the picture. In fact J.D. Edwards's services business was a major factor the company's total revenue increase of 11 percent for Q2. Similarly, maintenance and service revenues comprised 63 percent of Baan's overall revenue for the first quarter of this year, as compared to 48 percent in Q1 of 1998. To put this in perspective, product license revenue dropped 30 percent for Baan during the same period. Marcam's services revenues were reportedly healthy as well in Q2, increasing by six percent over Q1 this year and by 24 percent over the same quarter one year ago.
The companies least affected by the downswing of ERP revenues in the AS/400 market appear to be Intentia International and MAPICS Inc., two organizations that have learned the value not only of services but of ERP application integration. Intentia reported its net revenue in the first quarter of 1999 expanded 42 percent, compared to the same period in 1998. The company is not immune to all the market's woes, as license revenue declined seven percent from the corresponding period in 1998, but consultancy revenue has been robust, climbing 99 percent from the first quarter of 1998. MAPICS reported total revenues for the second quarter of 1999 were up four percent from the year-earlier period, and that total revenues for the first half of the 1999 fiscal year were $68.7 million, up 17 percent from the first half of 1998.
In the ERP market, vendors achieve separation from their competitors by modifying their approach to the technology to conform with the market's current and future demands. In the AS/400 market, users are clamoring for application integration and connectivity to the Internet. As a result, MAPICS introduced its Integrator product, designed to enable customers to link all their enterprise application information into a single client architecture. Earlier this year, Intentia released Version 11 of Movex, which introduced to the AS/400 market a server-side solution composed using the Java development language.
Analysts believe the ERP market as a whole will begin to recover during the second quarter of next year, and that this recovery will continue through the rest of the year, as companies put Y2K issues behind them and readjust IT budgets.
The degree of success ERP vendors enjoy, however, hinges as always upon the IT decision-maker, who will be looking for products that enable simpler implementation, provide an integrated picture of the enterprise, and improve the accuracy and timeliness of business functions.