Zombie Software Companies

You have likely heard about zombie banks - those without the resources to make new loans. I have heard industry analysts begin to talk about zombie software companies. These are the former icons of the ERP market who no longer have the resources to invest in new technology and win new customers.

Is All Revenue Equal?

This is a chart of the license fees and EBITDA of one of our larger, publicly-traded competitors with a 3-letter name. As with others of its ilk, it keeps topline revenue somewhat flat (vs. a dramatic decline) through acquisitions, increasing maintenance fees and cannibalizing professional services revenues from its partners. License revenue is the true indicator of the health of a software company. EBITDA, of course, is an indicator of whether the company is creating value for its shareholders and whether its customers value what it delivers.

SaaS is Where the Growth Is

It seems all the revenue growth is coming from SaaS companies. Salesforce.com is a $1billion company. Netsuite is over $100million. RightNow, Ultimate and many others are doing well even during these dark times.

Plex Systems posted 33% growth in 2008 over 2007. The first quarter of 2009 is on pace to be roughly 25% above Q1 2008. We are facing the same macro conditions as QAD, SAP, Infor, Epicor, Lawson, Exact and the rest. SaaS just makes sense. It is the only sustainable model for the years ahead.

Beware the Zombies!

...melting away resistance to change

A recent article by AMR Research discusses the challenges facing the industrial supply chains. In part they say "There is nothing like the potential for additional layoffs to melt away an organization’s natural resistance to change."

Changing Course

Many smart manufacturers are preparing themselves to emerge stronger and more competitive and profitable when the recovery begins. Andy Grove is famous for saying: “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.” It is becoming easier to see who's who now that the receding tide is exposing rocks (too much debt, bad business models, etc.) and smashing some companies to pieces. It's not smooth sailing for anyone. However, some organizations are battening the hatches and trimming their sails for a new course that will get them to the recovery faster and in better condition than their competitors.

Eliminate Non-Value-Add Activities

One thing these companies are doing is investing in automation and improved processes. Productivity always rises as a result of recession. Trying times shock managers into seeking better, more efficient means of doing things. They take a hard look at every job in the company and think about whether it adds value to their customer. Success can breed complacency - and fat - in an organization. That fat gets trimmed during recessions - the reluctance to change is stripped away.

Automate, Integrate, Make Visible!

These three concepts are vital to ongoing improvement. You can't improve what you can't see. If obsolete inventory blocks a doorway, you know you have a problem. The key is to make waste 'visible' long before it becomes a huge problem.

Automating manual processes is a high-value opportunity to drive out costs. Capturing and validating data at the point of origination makes for timely, accurate and, therefore, actionable information for all other users in the enterprise. If the production scheduler (whether a human or computer) knows that material or tooling or labor is not available to run one job, it will schedule one that can be executed. If purchasing knew that we just scrapped or RMA'd 1,000 pieces or just got a surprise order today, they could rapidly adjust order quantities.

Automation is most powerful when coupled with integration. Many organizations have automated functions here and there with "best of breed" solutions only to find that the data hits a dead-end or must transit a cobbled-together interface to enterprise systems. Tying together traditional ERP with Shop Floor (MES), Quality, Supply Chain, CRM, etc. in one solution is the optimal way to drive out costs.

Rapid Improvement without a Capital Outlay

With SaaS, manufacturers can streamline their business very quickly without the costs and trouble associated with traditional implementations. These days it is hard for even good companies to get a lease on servers, backup equipment, storage and so on. Companies are turning to SaaS to conserve their credit for their core business needs.

...melting away resistance to change

There is nothing like traumatic stress to cause people to change long-held beliefs and habits. Like the heart patient who makes dramatic lifestyle changes after bypass surgery, manufacturers are focusing on the essentials and outsourcing the rest. This includes extensive use of SaaS to support core business processes to survive the downturn and even to thrive.

Hey...You...Get off of my cloud!

Harry Debes, Larry Ellison, Bill McDermott - get off of my cloud. You are all predicting the demise of cloud computing and software as a service. You think you have created an unpenetrable barrier to entry for competitors. Indeed, Mr. Debes believes your collective customer base is incurably addicted as if on cocaine because... "It’s too difficult and expensive to switch [traditional software] providers once you’ve invested in one."

Well, many of your former and prospective customers are in serious rehab. They don't see the vague and unnamed dangers in multi-tenancy purported by Larry Ellision and the thundering herd at Oracle. They know that products like Plex Online can offer depth and breadth for manufacturers unlike the "half-baked applications from SaaS upstarts" cited by Mr. McDermott.

Painful as it is for companies to walk away from the piles of money they have invested in stagnating, on-premise software and infrastructure, they are doing so in rapidly increasing numbers. As Phil Wainwright points out, it is better to be attacked than ignored. Traditional vendors who have not modernized their offerings are desperately increasing the amount of Fear Uncertainty and Doubt they are dumping into the marketplace about SaaS.

The fact remains that SaaS just makes sense.

SAP Predicts SaaS 'Disillusionment'

On January 7, 2009 John Foley wrote about an interview with Bill McDermott, SAP's president and CEO of Global Field Operations. Mr. Bill is echoing SAP's rapid retreat from SaaS.


In 2007, Herr Dr. Kagermann, SAP's CEO, touted Business by Design, SAP's SaaS offering, as "the most important announcement in the history of the company." I think it is SAP that is disillusioned, not the customer. An excerpt:

'McDermott contends that now more than ever companies need a full-featured, integrated applications platform for running global business operations -- mySAP, for example -- not half-baked applications from unproven SaaS upstarts. He points to SAP's 36 years of experience developing a "stable core" of enterprise software and a service-oriented architecture that makes it easy to add on third-party and custom applications. "It will take another 36 years for software-as-a-service vendors to do the same thing in the cloud," he says.'

Sounds to me like they just couldn't figure out how to do what Plex Systems and others have done. I am surprised and, frankly, disappointed that SAP is choosing to throw in the towel on SaaS after only five to eight years and countless millions.

Fortune forecasts lots of "clouds" in 2009

Fortune Magazine predicts a huge uptick in "Cloud Computing" and SaaS. It just makes sense. More and more IT departments are asked to do more with less, to support more users and applications with fewer people and other resources. The clear answer is cloud computing.

The rate of change is accelerating. More and more applications and resources are being provided in the cloud every day.

The Echo Boom is Upon Us

ERP Boom in 1990s
An enormous number of companies installed ERP solutions in the 1990s in the run-up to Y2K. It was a huge bulge, much like the baby boom in the 1950s. My children are part of what is called the echo boom - the upsurge of births from baby boomer parents like me.

Huge Number of Aged Implementations
The ERP installations from the boom time are now 10 to 20 years old. We are at the start of a huge replacement cycle. The world of technology has changed dramatically during the past 20 years. Cobol, RPG, and Progress have given way to HTML and Java. Big iron and expensive Unix machines have given way to commodity Wintel servers. Traditional disk storage has been eclipsed by SANs and NAS.

Enormous Business Drivers to Replace ERP Now
The ERP (or often MRPII) implementations in the 1990s were driven by the finance and accounting people who wanted standardization across the enterprise. That wave did consolidate many disparate packages and homegrown applications but the focus was relatively narrow - the front office, the "knowledge workers".

Many argue that the big ERP implementation projects undertaken over the last 15 years did not generate the ROI that was expected. In my opinion, that is because they didn't address the core of the enterprise. Most of the activity in a manufacturing company occurs on the shop floor and on the shipping and receiving docks. These areas are not under the purview of legacy ERP solutions. There is a tremendous amount of savings to be gained by automating and integrating all the operations within a company, not just the financial and procurement functions.

New Generation of Software
Today, there are software products that make everyone in a manufacturing enterprise a "knowledge worker", that tie together the shop floor and the "top floor" seamlessly. It just makes sense to capture and validation transactions as they happen rather than write down the details for a so-called knowledge worker to keypunch into the system later.

Echo Boom Will Resound for the Next Several Years
The move to replace aging legacy ERP solutions will accelerate over the coming years as more manufacturers realize they can run a comprehensive, next generation ERP2 solution for about the cost of just maintaining the long list of applications they are using now.

SAP Validates SaaS for Larger Companies

Today SAP announced plans to develop SaaS offerings for large enterprises. I couldn't be happier!

This move helps to further validate that SaaS just makes sense and that the software delivery/pricing model is receiving a warm welcome from customers. SAP has spent years and many millions of dollars developing Business By Design, their SaaS solution for small to medium enterprises. That product so far has been a failure.

I am certain SAP will get it right one day. In the meantime, they are helping build market awareness for SaaS ERP and saying to customers that "it's okay to buy SaaS solutions".