Five Predictions: From Obvious, to Out There, to Outrageous | AMR Research
First Thing Monday
Monday, January 08, 2007
First Thing Monday
Five Predictions: From Obvious, to Out There, to Outrageous
by Bruce Richardson
The dawn of a new year brings promise and uncertainty. As we complete the first week of 2007, we have more questions than answers: How will the economy fare? What will we be talking about next year at this time? Which company will Larry Ellison buy next?
With that as a backdrop, here are five predictions for 2007.
1. Strong global economy, though still not evenly distributed
Like you, Im always in search for clues about the economy. Last week, Werner Brandt, SAPs CFO, said his company is expecting double-digit revenue growth in 2007, with the United States and Asia being the top two sources of growth. SAPs optimism is a good omen for the enterprise software market.
This week, we met with the CEO of a well-known industrial automation company. He cited Asia and Latin America as two engines for continued growth. Many of the new Asian opportunities involve infrastructure projects in China and India. As for Latin America, two strong verticals include life sciences and biofuels.
As a too-frequent traveler, I also look to hotel and airfare pricing as a harbinger. Business hotel rates in India are moving up from expensive to obscene. The same is true in the United States and many parts of Europe and Asia, too. The sense is that this will be a good year for business. Even the airlines are set to report their best years since 2000.
2. SOA moves from SOA what? to small pilots in manufacturing and retail
I initially put this list together for an IT executive. When I asked colleagues to add their predictions, one of them warned me of a very strong anti-SOA (service-oriented architecture) sentiment at a recent meeting of IT executives. Here is his summary of the conversation:
People bought ERP packages because they wanted a packaged application. SOA seems to be a step back from that. Companies dont necessarily want more customization, and this [SOA] seems to be driven by the vendors not the end users. I only mention this because it might be worth considering moving SOA down the list a bit.
My colleague is right, but it doesnt matter. My interviews with the largest SAP and Oracle application customers also reveal that they are in little or no hurry to explore the wonders of web services. Nonetheless, Ill bet that SAP creates a sales incentive program to get to the first 100 or so ESOA accounts. Knowing SAPs tendencies, Shai Agassi will want to close 2007 with a large base of name accounts in hand in order to demonstrate his companys SOA leadership over archrival Oracle, which is not expected to ship its Fusion SOA applications until 2008.
3. SAP and Workday fuel model-based craze
I may be the only analyst interested in the model-based approach to creating applications. Nonetheless, I predict that First Thing Monday readers will come to appreciate what the model-based development or definitional services methodology will mean to application development, modifications, upgrades, and maintenance.
When First Thing Monday readers see this or hear me talk about it, the first reaction might be: Sounds like youre talking about a 4GL or fourth-generation language for application development. While space limitations (and reader attention spans) prevent me from rehashing my November column Dave Duffields Workday Ushers in New Era of Apps http://recp.rm05.net/ctt?kn=11&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 here is how two Workday executives explained the difference between model-based and 4GLs:
Programming has evolved from coding in binary (1GL if you will), through use of Assemblers (2GL), to higher level languages like C, Java, or other 3GLs, and then to higher level 4GLs like ABAP, PLSQL, or PeopleCode. The next logical step in reducing code was to use a definitional or model-driven approachusing templates to prompt for application definitions, which could be turned into actual processing through either interpretation or code generation.
There is no 3GL or 4GL code in Workdays apps. Per the developers, all parts of the application are defined as metadata, which is interpreted by our Object Management Server (OMS) at runtime. This led into the discourse on the 19,000 method definitions or 19,000 pieces of metadata without code versus tens or hundreds of millions of lines of code in the leading ERP systems. Plus, with the new approach, youve severed the need to map all of the application data to a relational database and you can embrace new user interface technologies (such as AJAX) in the browser.
Workday is not alone. As we wrote last month in SAP: A Tale of Two SOAs http://recp.rm05.net/ctt?kn=15&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 SAP is poised to launch a new set of model-based applications. Jim Shepherd bet me this morning that we could see the launch of SAPs A1S as early as next month.
Now some of you are thinking, Poor Bruce has fallen down the object-oriented wormhole. Not true. This time things are different. I think were on the edge of having do-it-yourself (DIY) Web 2.0 applications that will be based on a common development framework and metadata.
Now if SOA makes CIOs nervous, DIY may induce apoplexy.
4. Oracle or IBM buy part or all of Ingres
In July 2004, I wrote The Panic in Software Park http://recp.rm05.net/ctt?kn=9&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 in which I mentioned that I had bet a reporter that one of the major software vendors would offer at least one of their products in an open source version. Here were my two scenarios:
Scenario 1: PeopleSoftPeopleSoft has two major CRM products, its own product developed after the Vantive acquisition, and the YOUcentric software that came with the J.D. Edwards merger. What if PeopleSoft offered the YOUcentric applications for free? Any loss in revenue could be offset by the offer of an annual support contract. The only vendors that could try to respond would be the other ERP vendors. Siebel and salesforce.com couldnt match this with their own products.
Scenario 2: IBMWhat if IBM bought an ERP vendor specializing in the small and midsize business (SMB) market? Rather than cede that market to Microsoft, IBM buys Syspro and offers it as an open source product.
Two and a half years later, Im back to thinking about open source.
If you attended Larry Ellisons keynote at the recent Oracle OpenWorld, you wondered why Oracle chose to launch an attack on the much-smaller Red Hat. After the event, I speculated that it might have been a pre-emptive strike on Microsoft against the new Vista operating environment or an attempt to launch a stack war on SAP.
One industry luminary said he believed everything Oracle does is an attempt to hurt IBM Software Group. He argued that the acquisitions of PeopleSoft (and JD Edwards by proxy) and Seibel was an attempt to reduce the oxygen to WebSphere and DB2 by eliminating its largest software partners. All that was missing was film of the man with the umbrella on the grassy knoll.
Assuming that my friend is right, what might Oracle do? How about this: Oracle has two very large targets for database, its existing base (especially very large organizations) and OEM customers. Now, Im not a database expert, but Id bet that customers with a large investment in Oracle database technology have little incentive to move to DB2 or an open source database. Im guessing that switching costs and/or retraining might make this a non-starter.
If you look at the OEM segment, archrival SAP would do nearly anything to help its customers get off of the Oracle database. Again, its hard to envision that they would move. First-time customers, on the other hand, might be very amenable to mySQL or other offerings.
What if Oracle were to invest in or acquire Ingres, the self-described business open source database? Ingres has 10,000 customers and partners. One of the newest partners is Infor, the third-largest ERP vendor. Last month, Ingres said it would be providing database technology to Infor for one of its Adage ERP product line. Infor has 70,000 customers using software the company acquired via Baan, MAPICS, Marcam, and SSA. While the relationship with Infor is with the much smaller Adage customer base, Oracle would love to lure all of Infors ERP infrastructure business away from IBM.
Or, IBM gets to Ingres first.
5. U.S. government outlaws use of flash memory sticks
A few months ago I met with the founder of Verdasys, a small Boston area company specializing in security software. Heres the premise: most companies have limited appeal to prevent the unwanted dissemination or theft of confidential data or intellectual property. A disgruntled employee (or entrepreneurial supplier) may cut-and-paste sensitive data to an Excel spreadsheet, e-mail it to a Gmail account, print it, fax it, or copy it to a memory stick or disk.
Verdasys Digital Guardian prevents this. The software deploys a number of safeguards including employee warnings, alerts, denial of access, and unexpected encryption of the targeted data.
Am I overreacting to the potential threat? During my recent swing through India, the cover story of Outlook, a weekly news magazine with 1.5 million readers, was entitled Indias Top Secrets Sold. According to the article, an Indian commander allegedly copied thousands of pages of military procurement plans from the ministry of defense on eight memory sticks, and gave them to an arms dealer who provided them to foreign weapons firms.
As it turns out, some of the Indian firms we visited have sealed the USB drives on employee laptops to prevent this type of activity from occurring.
Data theft or loss is not an India phenomenon. In the last year, I have received letters from my local newspaper and my college alma mater alerting me that my personal data has been compromised. Im not saying Verdasys or similar tools could have stopped this, but looking for software solutions seems like a smarter approach than a government ban.
Your top predictions here
I initially started the list with 10 predictions, but it was already too long. Maybe Ill add the other five next week. A better idea may be to solicit your 2007 predictions or reactions to my firstname.lastname@example.org.
In Memoriam: Sam Starr
by Bruce Richardson
At 8:02 a.m.on January 2 I received a phone call from a friend at Sterling Commerce calling to tell us that Sam Starr, Sterlings president and CEO, had passed away. He was 47.
I first met Sam 18 months ago at the Enterprise 2005 conference. He was a panelist on an M&A session that I was asked to moderate. My first impression of the Brooklyn-born Starr was that he was smart, funny, and focused. We became instant friends.
I last saw Sam a few months ago when he was in our office. I interrupted a briefing he was providing to our research team to make sure that he had a chance to meet Tony Friscia, our Brooklyn-born founder and CEO. They also became immediate friends.
Sam leaves his wife, Mary Ellen, and six children. Our thoughts go out to them on their loss. He will be sorely missed.
This weeks must-read news
Oracle posts 2Q
Oracles results for its second quarter ending November 30 show total GAAP revenue of $4.2B, up 26% over the same period last year. For the applications business, the closely-watched new license revenue is $340M, up 28% (25% in constant currencies). At first glance, applications license performance was very strong. However, we were caught by surprise when president and CFO Safra Catz said that if you subtract the revenue from Siebel (acquisition was completed last January), i-flex solutions (closed last December), and Portal Software (closed in July), the rest of the application suite grew only 1% over the year earlier period. Siebel software generated $59M in new license sales, while i-flex added $10M. Oracle executives attributed the slower organic growth to sales execution issues, particularly in the United States, where several deals failed to close as expected. Investors got at least two pieces of good news: a strong pipeline and growing success in retail and telco. For more on Oracles quarter, see Oracles App Licenses Up 28% Though Organic Sales Nearly Flat http://recp.rm05.net/ctt?kn=1&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1. Well also be talking to Oracle President Charles Phillips this month and hope to have more detail on a pending deal with Wal-Mart reportedly worth more than $10M and the outlook for 2007.
RightNow Plans for Later
RightNow Technologies pre-announced preliminary results for the quarter and year end. The company expects Q4 revenue of $28M (missing consensus expectations of $31M) and earnings below previous guidance of 2 cents per share to break even. However, Q4 bookings are expected to come in at $41M, which would result in about 50% growth between the full year 2005 and 2006.
CEO Greg Gianforte blamed the revenue and earnings miss on a continued shift to subscription-based recurring revenue agreements from perpetual licenses, noting one particularly large deal forecast as perpetual that came in as a subscription deal. Most other SaaS CRM vendors, such as salesforce.com, offer only the subscription model, charging customers a per-user, per-month fee.
The subscription-based model is better for RightNow in the long term, since hosting and support are continually funded by customers. The company has not stated it will completely do away with the perpetual model, but doing so would likely be good for investors as well as customers into the future. However, this demonstrates how difficult it may be for public software companies that have historically sold perpetual licenses to make the shift to the recurring revenue model of SaaS. For more on RightNows pre-announcement and how this shift in models may affect others, see RightNow Bites Bullet Now for Longer Term Security http://recp.rm05.net/ctt?kn=6&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
salesforce.com opens AppStore
salesforce.com recently unveiled its AppStore vision and monetization strategy. For the zero-touch sales model for AppExchange partners, salesforce.com will manage the marketing, selling, invoicing, delivery, and payment of partner products through the AppExchange, so integration is already assured. Today more than 430 applications from 230 partners are available. These range from a gamut of customer-facing applicationssales, marketing, service and support, partner management, and analyticsto financial services, finance and accounting, human resources, tools and utilities, and vertical solutions.
Whether these programs generate much revenue for salesforce.com is hard to say. One executive said that AppExchange has fueled a $100M economy... and growing, referring to the vendor sales generated by that marketplace. For a more detailed look at AppStore and what it means to the larger applications market, see Inside salesforce.coms New AppStore http://recp.rm05.net/ctt?kn=10&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
Cognos shows momentum
As Cognos heads into the final lap for FY07 (ending February 2007), it put up some pretty solid numbers for 3Q07 that provide some much-needed momentum. The company posted total quarterly turnover of $248M, with license revenue of $94M, up 17% and 24% respectively from 3Q06.
The firm had been buffeted by an SEC investigation earlier this yearnow cleared with no financial impactas well as restructuring activities earlier this quarter. These were expected to affect company performance 3Q07, but didnt seem to in the final analysis.
As we reported earlier, the company has a clear vision of what it needs to accomplish and has its collective down, executing through to the finish line. See A Conversation With Cognos http://recp.rm05.net/ctt?kn=13&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 for more on our opinion of the firms prospects.
IDS Scheer offers SAP BI answers
SAP Business Intelligence (BI) is a hot topic in the SAP customer base. Customer inquiry is high as companies plan 2007 projects, and its an ongoing topic of discussion in SAP Forum groups. Process modeling vendor IDS Scheer now offers a product to assist companies in documenting the transformation steps from transaction data to Business Warehouse (BW) InfoCubes.
ARIS BI Modeler extracts the data flows and structures from the SAP BI system and remodels them in a visual display that integrates with the ARIS repository for business process. Today, it is only one directionfrom SAP to ARISbut the company expects this to be bidirectional later in 2007.
Buyers consistently report that its extremely difficult to find trained resources to assist in deployments of SAP BI. Earlier this year, we wrote about the demand-supply gap for SAP BI-literate resources (see Addressing the SAP Skills Crunch: Handicapping BW Consultants http://recp.rm05.net/ctt?kn=2&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1. We discovered that IDS Scheer also has a small but highly experienced consulting staff to assist in BI/BW implementation, regardless of release level. With an average of eight years SAP experience and more than five years BW experience, this becomes another source for these valuable resources.
Business Objects gains Nsite
Business intelligence/performance management (BI/PM) vendor Business Objects has acquired software-as-a-service (SaaS) development platform vendor Nsite to boost its capacity to develop and market on-demand products in 2007. Nsite fields an on-demand platform to create transaction processing applications and related dashboards as well as some prebuilt applications designed with workflow and approval processes in mind.
Business Objects is looking to flesh out its SaaS strategy with a three-pronged approach (with some parts already in place) that capitalizes on the burgeoning demand for SaaS-based products among small and midmarket customers. Although we see little difference in demand for large-scale buyers, the company will not immediately pursue that segment. These lines include the following areas: on-demand business applications, on-demand BI, on-demand business information.
Business Objects has an opportunity to capitalize on a rapidly emerging demand for business analytics in the burgeoning SaaS applications space. Most of the SaaS application vendors are currently preoccupied with battling the notion that the multitenancy delivery model has limitations with regard to integration and customization, and therefore are leaving analytics as a future endeavor. As SaaS usage broadens, however, the need for better analytics will increase almost exponentially. More detail on this deal and what it entails can be found in A Small Acquisition Fuels Business Objects' SaaS Strategy http://recp.rm05.net/ctt?kn=3&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
IBM builds a framework
IBM PLM is expanding the breadth of its application and services in PLM, recently launching the IBM Product Development Integration Framework (PDIF). PDIF builds off the IBM SOA WebSphere framework to target the complexities of large product development companies. IBM PLM has found 20 years of success as a strategic partner delivering the Dassault Systemes applications, and the PDIF is intended to broaden support for PLM processes that span further across multiple applications and business silos. The moves come as IBM PLM gets moved into the $18B IBM Software Group. IBM PLM is now assembling all its software applications, hardware, business partners, and services to address an organizations PLM needs.
The challenge for manufacturers has been knowing with which part of IBM to engage. Many large global manufacturing companies will welcome this one-stop shop to solve their NPI challenges. However, many manufacturers seek to delineate the software decision from the services partnership. IBM PLM will need to clarify further the packaged software portions of the PDIF to help this audience understand the packaged applications versus the implementation and business transformation services. For more on IBMs PLM plans and PDIF, see IBM Introduces the Product Development Integration Framework http://recp.rm05.net/ctt?kn=8&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
VCs love retail
Retailers and retail software vendors were heavily wooed by venture capital investors last year, and 2007 is shaping up to be no different. The new technologies will be aimed at helping retailers sense and respond to consumer demand and deliver a seamless cross-channel shopping experience.
In our early coverage on this topic, Private Equity Funds Targeting Retailers and Retail Software http://recp.rm05.net/ctt?kn=17&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 we said that if the pace of private equity activity continued, this years total would break the record $177.9B raised in 2000. According to Private Equity Analyst, between January and September 2006, private equity firms raised a staggering $172.2B in 253 funds (the six largest funds have raised 30% of the total). This is 72% more than the year-ago level and 6% above the $162.5B in total capital raised in 2005. Of the $172.2B, buyout funds have raised $118.5B, and venture capital firms have raised $21.8B. While the venture level year to date is considerably below the 2000 record of more than $81B, it exceeds the 2005 total. If these firms raise the $57B in 4Q06 that they have averaged in the first three quarters, then 2006 capital raising could reach close to $230B.
While going public has advantages, it also forces the company to operate in the public eye. Communicating with Wall Street and investors often diverts management time and attention. So, many retailers are going private, which allows them to concentrate on fixing problems without public scrutiny. For a detailed look at private equities activities in retail see, Private Equity Investments in Retailers Will Continue To Be Blistering http://recp.rm05.net/ctt?kn=18&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1 and VC Investment in Retail Software Vendors Should Remain Strong http://recp.rm05.net/ctt?kn=14&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
Taking stock of the Software 60
Technology stock seems to be a pretty good bet, provided you put your money on the right company. AMR Researchs annual list of stock performance for the 60 major software companies we cover shows an arithmetic average return of 16.7% at calendar years end. Not a bad return when compared to the Dow Jones Industrial Average of 16.3%, S&P 500 Index return of 13.6%, and NASDAQ growth of 9.5%. Heres the full list ranked in order of performance.
Research and Advice That Matter
AMR Research is the No. 1 advisory firm focused on the intersection of business processes with supply chain and enterprise technologies. Founded in 1986, AMR Research provides subscription advisory services and facilitated executive peer forums to operations and IT executives in the consumer products, life sciences, manufacturing, and retail industries. More information is available at http://recp.rm05.net/ctt?kn=4&m=471271&r=MzI0MzIyNTQwOAS2&b=2&j=NzU3NjE3ODkS1&mt=1.
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