Coming back for more

With an imposing portrait of co-founders Hasso Planner and Dietmar Hopp on its cover, the 3 November 1997 issue of BusinessWeek paid lavish tribute to the German enterprise software giant SAP. Planner and Hopp, it gushed, had driven SAP to global dominance by developing powerful enterprise-wide software systems that could run every aspect of a business, from order-taking to running the factory, and from human resources to financial accounting. Global business ran on enterprise resource planning (ERP) software - and that market belonged forever to SAP, the company that had created it.

Just months later, the company's share price began a plunge from L42 to L18 in the wake of profit warnings and slowing sales growth. At competitor PeopleSoft, the story was the same, with the share price falling from a high of L39 in April 1998 to L9 a year later. Baan, hit by a simultaneous accounting scandal, was so weakened that it was acquired by British conglomerate Invensys - precipitating its own share price collapse.

Publicly, the millennium was blamed. Businesses had put a sharp brake on their IT spending plans in the run-up to 2000, determined to face 1 January with tried and tested systems. But another - more troubling - reason was that the business of business had moved on.

E-commerce, electronic marketplaces and new ways of forging relationships with suppliers and customers were highlighting gaps in ERP vendors' offerings. As SAP found to its cost, telling customers to wait until the German monolith had decided what to do about the Internet (or supply chain management itself, for that matter) just didn't work.

Customers deserted in droves, buying business-to-consumer, business-to-business and supply chain planning applications from new niche entrants that had decided what to do about it and had a product to sell. In the wake of SAP's indecision, upstarts such as i2 and Agile Software prospered. If ERP vendors hadn't blown it, such firms may not exist today. No IT executive in their right mind would complicate their infrastructure by adding additional vendors or systems, if their own ERP delivered the same functions.

But two years on, corporate buyers are returning to the ERP marketplace. For one thing, they have to: programs bought two or three years ago are now long in the tooth For another, there are now credible offerings in terms of e-commerce and supply chain capabilities that weren't there in 1998: SAP, for example (which back then was anguishing over a proposed acquisition of ii) has brought out its own supply chain planning software.

"The ERP market is being fought in supply chain management, and that will be the case for some time," says Simon Pollard, European vice-president of research at analysts AMR Research. This reflects the growing importance of the supply chain to firms. Unless the company is in an area where recruitment is a hot issue, for example, the calibre of its human resources applications are unlikely to make that much impact on its performance.

Changing business

The supply chain is different, and not only because customers notice when it goes wrong. The nature of business is changing, emphasising the inter-company relationships that the supply chain embraces. Sexy, yes; and increasingly essential, too, if a company wants to stay in business.

"There's a lot of potential locked up in extended value chains that today's disjointed systems can't get at," says Ian Walker, an associate director of supply chain strategy consulting at the Computer Sciences Corp, a large consulting and IT services firms. "People have been talking about the extended enterprise for a decade now, but only now can we begin to see it actually taking shape."

Perversely, the dearest loser is i2, which specialises in this very thing. Although it has continued to grow strongly - especially with the purchase of Aspect Development in 1999, giving it strong purchasing with online electronic catalogues and component rationalisation capability - it has had to recognise that broadening its range and becoming a fullscale ERP vendor is, for now, a bridge too far.

These days, says Nick Ford, i2's European vice-president of business development: "We don't see ourselves replacing ERP vendors' products, so much as augmenting them." This was despite last March's alliance between i2, IBM and Ariba in a move designed to extend the scope of its product and customer base.

So ERP vendors with a solution to sell continue to do brisk business. Belatedly, PeopleSoft is at last beginning to make something of the Red Pepper supply chain optimisation technology that it acquired and then proceeded to ignore. "Supply chain management is our fastest-growing application," says Craig Conway, PeopleSoft's chief executive. The company even launched a "Supply chain in a box" version of its latest release, PeopleSoft 8, which contains a bundled suite of applications to handle customer-supplier relationship management and designed for rapid implementation.

SAP, too, has begun shipping copies of its supply chain planning suite, Advanced Planning and Optimizer, started in the aftermath of the abortive i2 acquisition. Initially panned by critics, it is now seen as well-designed and sales are expected to grow strongly in the wake of a core of successful implementations.

On the supply chain transaction side, too, offerings such as mySAP.com and PeopleSoft's e-business applications are making headway against the specialist business-to-- business systems from the likes of Commerce One and Ariba. "Our European customers never really bought the hype of the dotcoms, but they can see e-business as a technology that really delivers," says Richard Carrington, e-business director for PeopleSoft UK. Credit Suisse First Boston, for example, now has more than 500 employees buying what they need online, with orders routed through to Commerce One's MarketSite in the US and BT's MarketSite in the UK.

But even if many of the ERP vendors' products overlap with the offerings of niche vendors and direct ERP competitors, huge gaps now yawn in terms of how vendors see these capabilities as part of a greater whole.

Take architecture. In contrast to its competitors, all PeopleSoft's products have been rewritten for the Internet. Despite the sexy "i" attached to the latest release of Oracle's ERP suite, lli, and the equally wired-sounding nomenclature of SAP's mySAP.com, only PeopleSoft can legitimately claim to have "no code on the client, as the jargon has it.

The importance of this is that all one needs is a suitable web browser on a desktop, WAP phone or any Internet-enabled device. "PeopleSoft has a rightful claim as the 'purest' Internet ERP design," says Mark Huey of analysts the META Group. Simon Bragg of analysts ARC Advisory Group adds that for large corporations, the result is a far simpler maintenance and upgrade procedure: just update the software on the server, leaving users' computers alone.

Continuing debate

Another dear distinction is the ongoing "best-- of-breed or whole solution" debate. Given the breadth of functionality in an ERP suite, is it reasonable to expect niche-but-critical applications to come from a one-size-fits-all ERP vendor, or a specialist software company?

For SAP, the answer has always been onesize-fits-all, thanks to its complicated configuration process which also tended to make implementation a highly expensive business, involving an army of consultants. Now the company is more pragmatic. "Our philosophy now," says Andrew Monday, head of solutions marketing at SAP (UK), "is that if a customer has a particular need to run i2 or any other application, then we want to win business in any other areas."

But it's not the Damascene conversion it might appear. "Clearly," he concedes, "SAP isn't going to devote the same resources to integrating best-of-breed applications than it is with its own." The only exception, he adds, is where strategic alliances have been formed such as with Commerce One, but not i2, Manugistics or any major supply chain player where SAP has an offering of its own.

On the other hand, it sn't an outright refusal - unlike Oracle which, publicly at least, firmly eschews best-of-breed linkages altogether. "We think people are starting to see how bogus the best-of-breed approach is," argues Phil Wood, head of the company's European business-to-business e-commerce programme. "Can you carry out a business process re-engineering exercise, break out the core functions, and pick the best software product for each? It isn't that simple."

Oracle has certainly profited from a campaign trumpeting the near L700 million it has saved by using its own products to simplify processes and embrace e-business. Few vendors have previously been as explicit about ERP's benefits: indeed, the META Group famously calculated that ERP typically took 31 months to deliver any benefits, cost at least Rio million to install, and delivered total benefits worth an average net present value of L1 million - underwhelming to say the least.

Naturally, all ERP vendors distance themselves from both such a pessimistic view-- point and high-profile disasters such as those that befell Hershey and Whirlpool, two giant US companies that suffered massive financial damage following failed ERP implementations. At building supplies company SGB, for example, IT director Michael Bunney is delighted with his decision to opt for Oracle. "We have cut costs and have a solid platform for future growth," he avers.

But with the battleground moving to critical areas such as supply chain management, customers and potential customers will be looking more closely than ever for tangible benefits. Despite the Nasdaq share index standing at less than half its March 2000 peak, SAP and PeopleSoft are enjoying their best valuations since the heady days of 1998.

After a ghastly couple of years, and with a fresh new Internet-ready product line, it's once again up to the ERP software vendors to deliver the goods. At the moment, the battle seems theirs to lose, but i2 and the rest of the crowd are waiting for a slip.

* NEXT ISSUE: Customer relationship management