A.G. surged ahead with new features and performance capabilities, while Oracle Corp. faced a challenging transition and Hyperion Software Corp. pulled back. Many companies still bought software to fix their Year 2000 problems, but that sales bubble may be ready to burst. Vendors, seeing the market become saturated, began changing their products to become more object-oriented and "componentized."
This is just some of what happened in the accounting software marketplace during the past year. When all was said and done, SAP was still alone at the top. "We're the leading financial system in the entire world," boasts Jeremy Coote, president of SAP America Inc. "That's important to understand in a global economy. The flexibility and scalability of R/3 is the widest of any product in the United States. Last week [in November 1997] I closed a 10-user license with a pre-IPO company in Silicon Valley, and General Motors announced that they're standardizing their worldwide financials on SAP."
Coote's ebullience is justified. SAP's R/3 commands more than a third of the $7 billion ERP (enterprise resource planning) application software market, as much as the next five competitors combined. ERP software is so named because it controls functions across the entire enterprise--financials, marketing, logistics, distribution, manufacturing, and human resources. No other ERP software has achieved R/3's level of functionality or ability to integrate almost every department of a large organization.
"The gap between SAP and its competitors is getting wider," says Dennis Keeling, a London-based consultant. "SAP has addressed most of the criticisms that have been leveled against it." One was lack of scalability; a year ago, R/3 was supporting a maximum of 300 to 400 concurrent users, says Keeling. "Today, I know of sites with 3,000 users," he says.
By contrast, 1997 was a mixed year for second-place Oracle. "Oracle is doing very well in the small-to-midsized corporations, but they're having problems on the larger side," says Keeling.
Those problems stem from the new version of Oracle Financials. Oracle used leading-edge technology when it developed Oracle Financials 10 years ago. Today, the original architecture, which used character-based terminals accessing the Oracle database as if it were a host mainframe, is out of date. Oracle had been number one in worldwide ERP sales in the early 1990s, but started losing out to SAP when the latter replaced its mainframe R/2 system with the client/server R/3 system. Oracle reacted by promising it would release a mixed character-and-graphical-mode version of Oracle Financials, starting in May 1995. After numerous delays, Oracle finally began releasing version 10.7 in 1997.
But Oracle's problems are continuing because of performance issues, according to Keeling. "They have sites with 500 to 1,000 users of their character-based version [10.6], but they can't move them over to version 10.7," he says. The reason? "Their big reference sites [for 10.7] are for at most 250 concurrent users with the SmartClient version." The result is that a lot of Oracle's users on version 10.6 or earlier are reluctant to move to 10.7, says Keeling.
The Year 2000 problem (Y2K) is complicating Oracle's task, according to Vinnie Mirchandani, research director at Gartner Group. "Most of Oracle's customers are on 10.6 or earlier, and those versions are not Y2K compliant," he points out. "This is distracting the company somewhat, because they have to move 4,000 users to the [Y2K-compliant] version in the next 18 months."
However, even if Oracle has a presumably temporary problem scaling its software to thousands of concurrent users, the company has nonetheless put together an extremely powerful set of enterprise applications. It has done so through a hybrid strategy that combines internal development with best-of-breed partnering. (A best-of-breed vendor presumably has a superior application in one area, whether it's financials, human resources, logistics, or manufacturing.)
R/3 is the epitome of an integrated system, having been developed entirely within SAP. But Oracle has developed an integrated ERP system by combining products from other companies. It started with its own accounting and human resources systems. Then, in 1996, Oracle bought Datalogix International Inc., a vendor of software for process manufacturing. The same year, it partnered with Industri-Matematik International, which makes order processing software; TSW International, which makes plant management software; and Manugistics, which makes software that tracks materials and finished goods through warehouses and other distribution points.
In almost breathtaking fashion, Oracle has combined these and other complex, high-level functions from dozens of third parties into a single integrated product. Because of this strategy, Oracle has come out ahead of SAP in many areas of functionality, according to Bobby Cameron, principal analyst with Forrester Research Inc. It can sell the different components as individual products, or it can sell the entire suite as an integrated system. "This is where Oracle really beats out SAP," says Cameron.
Oracle's ERP software, in short, is "componentized." Other vendors--even SAP, which has a reputation for being inflexible and monolithic--are following suit, breaking up their software into components. In the end, the main benefactors will be users, as it becomes more possible for components from different vendors to easily interoperate.
Each vendor seems to cite a different reason for componentizing. SQL Financials International, for instance, says componentization makes its software extremely flexible. "We're not talking about two-tier or three-tier software here," says Steve Jeffery, president of SQL Financials. "It's n-tier. This means a user can spread the functions around by putting different components on many different servers or clients."
J.D. Edwards has adopted an aggressive componentization strategy for an additional reason: to ease the transition for its customer base from the AS/400 platform to a client/server system. J.D. Edwards has been the market leader for several years in multinational ERP systems for the AS/400, and the AS/400 still makes up most of its installed base of 4,000 customers. Many of these users are demanding migration to client/server systems on either Unix or Windows NT-based servers, and last year Edwards introduced its OneWorld system, which is available on Unix, NT, and AS/400 platforms.
"A customer can convert from an AS/400 system to client/server OneWorld by replacing one component or business process at a time," says senior technologist Paul Barker. "We're in the process of creating all sorts of snap-ons or interoperability plug-ins, in order to make our system as flexible as possible."
Baan Makes a Deal
Netherlands- and U.S.-based The Baan Co. is componentizing its software as it challenges SAP as a vendor of worldwide manufacturing software, especially in the automotive and aeronautical industries. Baan has always had a perceived weakness in its general ledger and other purely financial software, but it's moving to correct this weakness through componentization and a deal with Hyperion Software.
Hyperion has long been the market leader in multinational consolidation software (Hyperion Enterprise). In the early 1990s, Hyperion expanded its financial software offerings through acquisition--a budgeting system (Hyperion Pillar), a multidimensional database for decision support (Hyperion OLAP), and client/server accounting software (Hyperion Financials).
The budgeting and decision-support ventures have been successful, but the accounting software has not. The full suite wasn't delivered until 1996, too late to gain substantial market share. Hyperion has promised to continue supporting sites that have purchased Hyperion Financials, but it is no longer actively marketing it, and thus Hyperion is no longer listed in CFO's buyer's guide.
But Hyperion's troubles provided an opportunity to Baan. By signing a two-year joint development proj-ect with Hyperion, Baan hopes to assemble a robust collection of financial software components.
"By providing small components and standard open interfaces between components, we will add a lot of value to our customers' supply chains," says Curtis Prout, product marketing manager for finance. "Standard interfaces will allow our customers to extend the software to their customers and suppliers, allowing them to place orders and check inventories, which shortens lead times and time to market."
As Prout points out, the key to enabling different vendors' software packages to interoperate is industrywide standards, both business and technical. These standards are beginning to emerge.
On the business side, the ubiquity of the leading ERP packages is forcing companies to do business in essentially the same way. "SAP, Oracle, and PeopleSoft together have 40 to 45 percent of the market share in the Fortune 1,000, and all of them do general ledger, accounts payable, and accounts receivable the same way, except for a little differentiation," says Craig Macdonald, vice president and service director at World Research Advisory, in Reston, Virginia. "Business transaction processes are being standardized because the ERP packages are forcing business process reengineering--which forces the standardization." Such standardization makes it possible for one vendor's software component to replace another vendor's without forcing a new round of reengineering.
If ERP vendors have been instrumental in bringing about process standardization, the best-of-breed vendors have been forcing technical standardization. Technical standards are necessary because there has to be a way for different vendors' packages to communicate with one another.
"We can implement an entire solution from soup to nuts, not just a financial system," says Robert Brown, CEO of Coda Group Plc, a best-of-breed financials vendor. Coda has partnered with several manufacturing software vendors, including QAD Inc., Marcam Corp., and Cincom Systems Inc., and so naturally Coda is among the strongest industry proponents of industrywide technical standards.
In order for one vendor's general ledger component to interoperate with another vendor's manufacturing component, the vendors need to agree on two things: how to exchange information, and what information needs to be exchanged.
As for how information is to be exchanged, two competing standards have evolved: CORBA (common object request broker architecture), from Object Management Group, in Framingham, Massachusetts; and COM (component object model), from Microsoft Corp. Most accounting software vendors are supporting both standards.
Much more important to users is the question of what information is to be transmitted in each "package." For example, each time distribution software records that a product shipment has been completed, what information--precisely--must the distribution system send to the financial system so that the product shipment can be recorded accurately and completely in the general ledger? This is the major problem that the industry must solve before true interoperability can be achieved.
For this, there's only one game in town: the Open Applications Group (OAG), a consortium of vendors and users formed to develop interoperability standards in ERP software. The group, which includes SAP, Oracle, J.D. Edwards, PeopleSoft, and other vendors, has developed specific standards for information to be transferred in dozens of transactions. These standards are published on the group's Web site(www.openapplications.org).
The problem is that, in practice, these vendors are adopting only an approximation of the OAG standards. SAP, for example, is to be commended for opening up its BAPIs (business application program interfaces) so that third-party software can initiate R/3 transactions. But users who want third-party software to interoperate with SAP's software have to follow SAP's standards, not OAG's.
Similarly, Oracle has a set of APIs (application program interfaces) that vendors can use to initiate Oracle Financials transactions, but once again, the information to be supplied for each transaction is a little different than the OAG specification (and, of course, different from SAP's). Other high-end vendors are developing their own APIs, but haven't indicated how closely the results will match the OAG specifications.
David Connelly, chief technology officer of the OAG, indicates that half a loaf is better than none. "If I were SAP, I'd rather have my proprietary BAPIs be the standard," he admits. "However, if SAP and the other application vendors are componentizing their products and adding an API layer that's close to the OAG model, then users can interoperate using the OAG standards."
Still, many analysts believe that we're a long way from a single set of standards. Forrester Research says the industry is heading to two de facto standards--SAP's BAPIs and Oracle's APIs--and that vendors will be forced to comply with either or both.
But that won't be good enough for users, maintains Sai Venkat, director of application architecture for the enterprise at Lucent Technologies. Venkat is on the customer council of the OAG, and she believes users should force vendors to adopt strict OAG standards. "The amount of money that IT organizations have to spend to integrate software packages is too high, and they shouldn't have to spend that money," she says.
Lucent Technologies is taking the lead by demanding that its vendors adopt strict OAG standards. Lucent uses R/3 as enterprise software, but it also uses manufacturing and supply-chain software from QAD to fill some of the holes in SAP's functionality. "No one product, even R/3, can cover all the needs of a corporation," says Venkat. "We're requiring vendors to follow OAG standards so we can spend our dollars on software, not on integration."
The Y2K Bubble
In the past few years, many companies accelerated purchase and implementation of client/server software because their legacy software was affected by the Y2K problem. This created a sales bubble that has benefited many financial software vendors. But that bubble is about to burst. According to research conducted by Forrester, as of the year 2000, 75 percent of U.S. companies and company divisions (65 percent worldwide) will have purchased new financial software in the preceding five years. The result is that the market will be saturated by the year 2000, forcing mergers and consolidations among the vendors.
Different vendors are using different techniques to cope with this saturation--usually a combination of componentization and addressing specific vertical markets or other niches.
Karl Steinle, president and CEO of Concepts Dynamic Inc., agrees that some companies will be in trouble when the Y2K bubble pops. "We'd be in trouble if it weren't for our project management capability," he says. CDI's project management software, which has always been the vendor's strength, permits it to target services businesses, engineering and software development companies, and "any industry that's people intensive, not material intensive," says Steinle.
The strength of all best-of-breed accounting systems is that they can be implemented much more quickly than the ERP systems. FlexiInternational Software Inc. emphasizes that implementation times of its software are typically 40 percent less than an ERP vendor's, thanks to the company's use of Microsoft's tools and object-oriented design methodologies. "For example, we can take a Flexi ActiveX control for journal transactions and embed it into an Excel spreadsheet," says George Dearing, vice president, technology marketing. "This means that a company can use Excel as the graphical interface to their accounting software." Dearing reports that although the source code is available to customers, almost no direct customers even take delivery of it. Most customers do modify the user interface and the database fields in some way, but this can be done without the source code.
Lawson Software has been successful in migrating its Insight system from an AS/400 platform to Unix and NT, and is differentiating itself in part by providing advanced reporting capabilities for activity-based costing (ABC). The key to this functionality is that Insight contains its own data repository, according to Adam Thier, vice president of product marketing. "Ninety percent of the users of the system are going to use it for query and reporting," he says. "It's very easy for the user to build the data model for the repository, and when you upgrade the software or change your data model, all your old reports still work and don't have to be reprogrammed."
After expanding too quickly in 1996 and overreaching, Computron Software Inc. replaced its top management in early 1997. With 1,700 customer sites worldwide, Computron was able to refocus on its strengths; as a result, sales increased 40 percent in 1997, according to John Rade, the new president and CEO. "What it boils down to is to focus on industry segments where knowledge or information is the stock in trade of the company, rather than manufacturing widgets," says Rade. "We focus where best of breed is really needed--insurance, financial services, transportation, communications, and professional services, as well as local government and education." However, unlike other best-of-breed vendors, Computron is considering becoming a full ERP vendor, after having acquired a human resources and logistics software firm headquartered in Germany.
Early in the 1990s, many analysts were predicting that the new client/server architecture would eliminate mainframes by now, but one surprise this year is the resurgence of the mainframe as part of an accounting and enterprise software solution. Typically, these are still client/server systems using Windows-based desktop clients, but in many cases customers use the mainframe as the server. Many vendors are offering mainframe versions of their software; two vendors, Walker International and Quality Software Products (QSP), are carving out mainframe sales as a special niche.
"Very large corporations understand the merits of mainframes over Unix, because of [mainframes'] high reliability, manageability, and scalability, as witnessed in the high transaction rates," says Carl Greiner of Meta Group Inc. In fact, Walker claims it could theoretically support 150,000 concurrent users on a large IBM multiprocessor parallel Sysplex configuration, although the company has reference sites for only 10,000 concurrent users. QSP doesn't support large Sysplex configurations, but still has reference sites of more than 1,000 concurrent users. "Furthermore, Unix and NT don't have all the tools and controls, while mainframes have all the tools that let you truly optimize your applications, and then run them 24 [hours] by 365 [days]," adds Greiner.
Along with the renewed vitality of the mainframe comes the stabilization of two legacy mainframe ERP systems, the Millennium and Expert systems, formerly owned by Dun & Bradstreet Software (DBS) and now owned by Geac Computer Corp. Geac still has more than 3,000 legacy mainframe customers, and the tide of customers leaving for client/server systems has been stemmed, according to Craig Richards, senior vice president. Richards says Geac has spent a lot of money in the last three years to improve the software and make it Year 2000 compliant.
Support and upgrades of the mainframe software make up most of Geac's revenue, while sales of its client/server software, SmartStream (also purchased from DBS), are building more slowly. "The best way to describe our view about Geac SmartStream is that we're a lot more optimistic than we were at this time last year," says Gartner's Mirchandani. "Management is a lot more aware of what their products are and what markets they want to focus on. They recognize their problems, and that's the most important thing on the path to recovery."
John J. Xenakis is technology editor of CFO.
(Chart Omitted) Competing for the Middle Market
------------------------------------------------------------------------ --------------- The move toward componentization coincides with an anticipated market consolidation in accounting software for the upper midrange. SAP, Oracle, and PeopleSoft are all preparing "light" versions of their software, preconfigured for specific marketplaces, and are partnering with smaller consulting firms.
"Going to small and medium-sized companies, especially in the manufacturing area, allows our customers to extend their business practices out to their divisions and their supply chains," says Jeremy Coote, president of SAP America.
All of the high-end ERP vendors have gone down-market, but they use different strategies, according to Richard Dance, president of SoftResources LLC, in Seattle. While Oracle and Baan are affiliating with consultants to sell preconfigured systems, "PeopleSoft is using its own sales reps," says Dance. "To get the reduced price, a user will have to settle for only a few modules, without the major international features."
In the past, many best-of-breed packages differentiated themselves by their relatively low cost and quick implementation times in companies with a moderate number of transactions--typically companies with $50 million to $250 million in annual sales. Companies that size were too large to use accounting software from the midrange packages covered in CFO's midrange buyer's guide, but were also too small to spend the millions of dollars necessary to implement SAP and Oracle and the other high-end ERP systems. The gap was filled by best-of-breed financial software vendors like Coda, SQL Financials, and FlexiInternational Software, or by AS/400 manufacturing software vendors like J.D. Edwards.
Today, these companies no longer fill the gap by themselves. Almost every vendor of every size now has a version of its software running on Windows NT as a server running Microsoft's SQL Server as a database. (Oracle Financials runs on NT with Oracle's database.) High-end vendors like SAP have been moving down-market, and midrange vendors like Great Plains and Platinum have been moving upmarket, all targeting the same type of client.
Indeed, there are several companies in next month's midrange buyer's guide that now compete with companies listed here. The former include Great Plains, Infinium (formerly Software 2000), Platinum, Solomon, and State of the Art. In addition, Accpac 2000 and Navision have international presence, which makes them useful for foreign offices of multinational corporations.
------------------------------------------------------------------------ --------------- Three analyst groups offer fixed-price packages to help in the selection of high-end accounting software. All three packages include documentation and access to an analyst for advice. Prices shown are for a one-year subscription.
- * Decision Drivers Inc., subsidiary of Gartner Group; (203) 316-6046; www.gartner.com. Price: $9,500. Also includes software.
- * Meta Group SPEX service; (800) 945-META or (203) 973-6700; www.metagroup.com. Price: $3,000 and up.
- * Dennis Keeling and Ovum Ltd.; (800) 642-OVUM. Price: $3,330.