Collaboration vs Leadership in Decision Making

In last month’s post about vendor margins and cannibalization of older high margin products by newer low margin products, Cisco was highlighted as a firm with a high level of innovation whose profit margins disappointed investors. Carl at Chicago Boyz offers a critique of the management structures used by Cisco that gets at the root cause of their problems. It appears that Cisco CEO Chambers reorganized management to operate as committees and utilize collaborative decision making processes – ultimately 70% of Cisco’s decisions were collaborative.

The core idea of the business enterprise and entrepreneur-ship is all about leadership, accountability and personal responsibility. Businesses aren’t non profit organizations, they aren’t schools, and they aren’t after-school specials. They are serious efforts, with salaries and families and cities on the line, and people need to be given roles and held to the results that they committed to. These aren’t concepts that can be maintained through revolving committees where no one is responsible. Trying isn’t good enough.

While committees can be help bring many perspectives to a decision maker, business success relies on accountability and personal responsibility of decision makers.

This is equally true for ERP selection and implementation projects. Where ERP project committees can canvas the entire enterprise for business requirements, only an accountable leader who is responsible for business results can make the tradeoff decisions between functionality of competing vendors or the desirability of a range of system modification requests during implementation. A committee without such a leader will end up with an ERP project that is over budget and delivered late if ever, often missing out on the key business benefits that justified the ERP investment.

HarrisData’s Quick Start Guide helps our customers understand how to balance collaboration and decision making to ensure the ERP project is on time and under budget while delivering the benefits their businesses need.

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Its Good to be Public

The ERP vendor acquisition season heated up today with Apax Partners acquisition of ERP vendors Epicor and Activant, to merged into a new privately held Epicore. For the Epicore shareholder the offer yeilds an 18.9% premium over the past 30 day average price, and a 34% premium over the average for the year. Compare these numbers to the 19% premium over 90 day average price offered Lawson shareholders by Infor, then consider that SAP and Oracle may need to counter these moves. Where does this put the remaining publicly held ERP vendors? Would their shareholders want this kind of premium?

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The Slippery Slope of Software Services (Part 1)

Don’t let your project budget get blasted by services

Whether you are selecting new software, or implementing an application upgrade, your success depends heavily on whether you implement the software on time and on budget. You may be tempted to rely on your vendor’s experience to perform certain implementation tasks for you – hoping to save time and money. However, when you start using vendor services to accomplish tasks you either should do yourself or shouldn’t do at all, you start down a slippery slope of service expenses that will ruin your project budget and timeframe. Two examples illustrate this point:

  • Data conversion should NOT be left to the vendor

    It’s easy to fall into the trap that your vendor should convert all of the data from your existing system into your new system. After all, who knows the new system better than the vendor? However, consider that you need to know how the new system works for your organization as well as the vendor does (or it won’t work!). Further, you already know how your current system works – or, more importantly, how your organization uses it.

    If you pay your vendor to perform the data conversion, you will spend a lot of time teaching your vendor’s consultants how you use your current system (and what the data means), and more time teaching them how you intend to use their system (and what you expect the data to mean). Then they’ll do the easy part and map the data from one file to another – a process you can frequently get accomplished with a smart user and a spreadsheet – and charge premium rates for programming talent. The next time you see a proposal including data conversion services, ask yourself what you’re really getting, and whether it’s worth the money.

  • The software should NOT be customized to meet every user demand

    Customizing your applications to meet every user demand is the surest way to ensure your project misses deadlines and goes over budget. All user demands are not equal, and demands for new or modified functionality must be carefully vetted by your management before any consulting work begins. Vendors are usually happy to offer additional consulting services to address each and every user demand, destroying your project budgets and timelines. Cost overruns from this problem can run into millions of dollars.

    Instead, each demand should be assessed for what value it delivers the organization and what consulting costs will be incurred (both initially and in the future). Well-run projects will review all user change requests through the project team to quantify value, costs, and any alternatives (your vendor should be able to help you determine what alternatives there are). The project team will then submit the requests with the highest return-on-investment to a senior executive or steering committee for review and approval. Only with careful management of user requests can you stay away from the slippery service slope and make certain your implementation project stays on target.

Vendors eager to make money on services will propose ‘comprehensive’ data conversion projects and ‘effective’ change control procedures that do nothing but take the control of project – and your project budget – out of your hands, and offer little quantifiable value in return. The savvy software buyer will pay attention to these issues both before and after they buy a software application.

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ERP Software Vendor Metrics – What Matters?

With acquisitions in the air again, how do you tell if an ERP vendor is performing well? For example Lawson is performing well by many accounts, but received an unsolicited takeover bid anyway. Some suggest the cost of shifting to the cloud puts Lawson’s business model in peril – they only have the resources to either serve their on premises customers or develop a cloud alternative. Without a cloud alternative Lawson has no future, in spite of Lawson’s profit and revenue performance. Is this the best way to analyze an ERP vendor?

Several fundamental measures exist for any software company, including ERP vendors: initial license fee growth rate, maintenance renewal rate, services growth rate, and the percentage mix of license fees, maintenance and services.

Initial license fees are easy to track and predict the future of the other revenue streams, without a license there is no maintenance or services. The emphasis on cloud delivery of ERP reflects analyst belief that future growth will favor cloud over on premises delivery of ERP software. Thus a typical analyst would devalue an ERP vendor for a lack of emphasis on cloud, and factor in declining initial license fees in their projection of vendor performance.

The maintenance renewal rate is the most important indicator of ERP vendor performance because maintenance is the biggest revenue category for a software vendor. The maintenance renewal rate reflects how well the vendor is performing at the key task of continuing to deliver new value to its existing customers. Too little value, renewal rates decrease. Major shifts in technology can have big impacts on renewal rates. For example the shift to Windows based client server architectures led to much lower renewal rates of ERP vendors which could not deliver on the new technology. This led to two consequences: a relative unknown got to the new technology first and dominated market share in ERP (SAP); many strong ERP vendors could not make the transition and ended up acquired by industry consolidators. A rule of thumb in software is that a renewal rate of 85% is healthy – initial license fees and maintenance price increases can easily replace 15% of maintenance revenue and still provide for overall growth. An ERP vendor whose maintenance renewal drops to 60% is in very big trouble very quickly (this is what happened to most of the ERP firms acquired in the 90s as the client server trend took its toll). After two years the customer base is only one third the size of the original (60% * 60% leaves 36%), total revenues are falling through the floor and required layoffs eliminate the ability to invest in future products. Thus a typical analyst would devalue an ERP firm’s maintenance revenues as at risk from the lack of direction to the new cloud technology.

Services revenues have a different impact, and here I differ from the analysts. While the typical analysts sees post sale services as a vibrant and desirable revenue stream in the face of changing technology, I see a big services revenue stream as a drag against initial license fees and maintenance renewals. A high services percentage of total revenues tells the ERP customer two things: implementation will be very expensive, and upgrades will be prohibitively expensive. This holds true for both on premises and cloud delivery of ERP systems. Thus a focus on services revenues will make an ERP vendor less competitive in initial sales (implementation estimates often dwarf on premises license fees, let alone cloud rental rates) compared to ERP vendors who successfully reduce the need for services. The focus on system upgrades as a services revenue opportunity will cause fewer customers to upgrade, meaning fewer customers will receive continuing value from the vendor – thus reducing maintenance renewal rates. Thus unlike a typical analyst, I would devalue an ERP firm’s services revenues as destructive to the core revenue streams of license fees and maintenance renewals.

How the to measure services? As an overall benchmark services revenue should be less than 10% of an ERP firm’s revenue base. The effectiveness of the services delivered (and thus key predictor of maintenance renewals) is measured by the percentage of active customers on the current release / refresh of the software. Less than 60% of customers on the current refresh within one year of release suggests upgrade barriers are too high – and too few customers are benefiting from the ERP vendor’s R and D output. (One ERP vendor benefit of the cloud is the vendor controls upgrades, and can drive the associated services revenues whether or not the customer benefits).

How do ERP vendors rate on these metrics? While posting renewal rates is more common, few vendors release any of these key metrics. HarrisData looks pretty good by this view, naturally.

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Infor Gets Aggressive

In a move that doesn’t surprise anyone, Infor launched a takeover bid for Lawson Software. Infor CEO Charles Phillips found his first target, and with the offer at a 19% premium to the trailing 90 day Lawson stock price (and below Lawson’s current stock price) more negotiating is likely.

The average premium for completed software acquisitions in the past three years is 30.3 percent, Bloomberg data on deals over $1 billion show.

Lawson CEO Debes has been through this dance before (with JD Edwards acquisition by PeopleSoft then Oracle). Other potential Infor targets like Epicor or Microsoft Dynamics may be forced to counter this move.

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Vendor Margins and the Cloud

It’s all cloud all day in the buzz about the software business, and that definitely includes ERP software. With conventional wisdom pointing to a need for purpose written cloud software (multi-tenant architectures etc.), it is no surprise that on the acquisition front

81% of respondents in SEG’s 2011 survey said it is important or very important that the investment target be all or substantially SaaS/subscription-based, up from 51% in the 2010 survey.

The cloud gets the money and the attention. What does this mean for the rest of the ERP software customers? Does research and development for current products continue? What happens to the wonderful margins vendors command with on-premises ERP products?

Bob Evans provides a cautionary example in Cisco.

So because it was not—and perhaps still is not—keeping pace with the requirements and demands of its customers, Cisco’s high-margin legacy products are being cannibalized by its new gear, which offers the performance levels customers need but can’t yet deliver the profit margins investors demand. And this deep-seated problem of Cisco’s

Will ERP vendors keep pace with the requirements of their legacy customers, or do they face self cannibalization and margin erosion? For now the common approach is to price cloud offerings so that a customer on three years of the cloud product pays the same total dollars for software licensing (plus more for hardware and operations) as they would pay for comparable on-premises software. Of course any customers retained after three years would yield a far greater margin to the vendor (no break for paying the “original license fee” over three years). ERP vendors believe they can avoid Cisco’s fate by forcing higher margins on the innovative new products than they received with their traditional products.

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Make ERP Interesting

Blimps, like ERP, used to be interesting. Back when only a few were flown a blimp sighting was unusual enough to attract attention, less so today with several different branded blimps and at least one of them flying over just about every major sporting event. Today the most memorable blimp event was the Hindenberg disaster. [ed. a zeppelin is a blimp with hydrogen gas for lift]. It seems that disasters are interesting for quite a while, but trouble free service becomes boring.

ERP has its share of disasters including many well known companies and governments. A quick Google search for ERP success yields few lists, but a ton of critical success factors. Disaster is more interesting than hard work so an ERP disaster is more interesting than an ERP success. A disaster is also much more likely to be reported in the business press where your senior executives will see it.

The challenge is to make your ERP project interesting to management in a positive way. An ERP system is basically a tool for automating accounting entries and tying them to business documents (orders and payments) – the drab work that used to be performed by white collar automatons with desktop calculators. That orders are shipped complete, on-time every time with month end sales and cost of sales accounts properly updated is a sign of ERP success is beside the point , the executives tasked your organization to accomplish those objectives whether or not the ERP worked – they attribute the success to the organization and not to the ERP. However should excitement occur, say your biggest customer did not receive what they ordered, that is a sign the ERP failed and the failure will interest executives. The challenge becomes:

how to take a tool that performs boring functions, where success is defined as performing these functions in as unexciting a way as possible, and make it interesting.

The answer is to tie your ERP project to new possibilities for the executives to take credit for, self interest is always interesting to oneself. Wouldn’t it be great if the executive could announce shorter lead times for user customized product delivery? The executive would bask in customer accolades while the ERP made delivering on this promise a boring non-event (provided it supported user customization of products and lean manufacturing processes you need to be able to deliver). Tying the ERP to the executives business innovations is the way to make it interesting.

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Multi-Tenant ERP Solutions: A Fundamentally Bad Idea

Sometimes, a really good idea gets pushed too far with really bad results. For example, someone once invented a bathroom computer workstation so you can skip the newspaper and roll a computer workstation in front of you and use the Internet, check emails or write a memo to staff or family. There’s nothing wrong with inventing a computer workstation, but designing it for bathroom use is taking it too far. It’s the same thing with a multi-tenant ERP solution – multi-tenant applications make sense, ERP solutions make sense, but a multi-tenant ERP solution is a fundamentally bad idea.

The ERP Cloud News article “Multi-tenant versus Single-tenant ERP – a comparison” defines multi-tenant application, in simple terms, as a single piece of software shared by multiple users. Internet applications you use every day – like Gmail from Google – use a multi-tenant approach to make it easier and faster to deliver new features (and fixes) to all users of the system at the same time. Based on some clearly successful multi-tenant applications, some analysts and ERP solution providers have erroneously concluded that ERP solutions must be multi-tenant applications to be successful.

There has been a lot published on every side of the argument. Phil Wainwright, at ZDNet, argues passionately that a multi-tenant architecture is as critical to a SaaS application as the WinTel standard is to a PC. Josh Greenbaum, from Enterprise Matters, disagrees completely, and says it’s really just a vendor issue. Meanwhile, Oracle’s Larry Ellison is trying to change the definition of cloud computing to suit Oracle’s marketing objectives. The question here, however, is whether a multi-tenant architecture is a good idea for an ERP solution delivered through the cloud.

The primary benefit of a ‘complete’ multi-tenant architecture is efficiency, with the presumption that greater efficiency translates into cost savings for the vendor that are passed on to the customer. (Even this simple conclusion is likely wrong. The application software market is not very efficient – just look at the profit margins of Oracle and SAP and try to justify the view that cost has anything to do with price.) The gains in efficiency come from the ability of the vendor to perform software upgrades and system maintenance one time for the entire community of users, rather than going through the effort to perform upgrades and maintenance for each customer’s system separately. Clearly, this is a more efficient way to approach the problem, but does it work for ERP solutions?

Technically, yes, but one of the primary responsibilities of an ERP solution is to account for the flow of money, materials, and time through a modern organization. With this comes the responsibility to manage and present the financial statements of the organization. I emphasize ERP solution – not software – because ERP software doesn’t make the financial statements accurate and complete. ERP software enables the policies, procedures, and processes of the organization to be consistently applied with reliable results (like accurate and complete financial statements). The financial statements are accurate and complete when the organization’s policies, procedures, and processes are effectively adhered to by the organization’s people. The people held accountable for the policies, procedures, and processes (and for their organization’s ability to adhere to them) are the senior managers of the organization – not the software vendors.

This distinction between software and solution is critical. The SOX regulations that govern every public company in America (and many of the private ones) don’t care much about whether the software is on-premise or hosted, whether you pay a lot up front or less each month, or whether the solution is single or multi-tenant. In the words of Renee Boucher Ferguson at e-Week Magazine, get your “…house in order for compliance, lest your company executives wind up in jail.” In plain English, management must be able to assure shareholders that the policies, procedures, and processes used to generate the financial statements (on which investment decisions are made) are being adhered to, or face legal penalties.

As a result, ERP customers facing SOX regulations are reluctant to upgrade their systems without careful planning. They must carefully consider each change to a procedure or process caused by the upgrade, review and document the internal changes that will result, and have the changes reviewed and approved by outside auditors. Consequently, an upgrade to financial systems (and any systems that affect the financial systems) is frequently held off until a fiscal year end, when newly documented and approved processes and procedures can be effectively deployed to the staff. The truth is, many organizations today would prefer not to upgrade their financial solutions until the benefits of the upgrade to their organization dramatically outweigh the cost and grief of upgrading and deploying new the policies, procedures, and processes that go with it.

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Cloud not Cheaper than On Premesis

As the cloud reality replaces the hype machine, sober
analysis of costs and benefits is becoming available. Chris
Chiappinelli
sums it up nicely:

A few
years ago, there was a rampant assumption that software delivered
via cloud computing was automatically cheaper than traditional
software deployed on-premises and bundled with costly hardware.
Over the long term, however, the assumption doesn’t hold—and it’s
important to remember that business software is meant to be enjoyed
over the long term.

More detail on the cost
breakdown of cloud vs on premesis computing is here.
No way to improve on Chis’s close :

Cloud
computing and SaaS have matured enough to compete on more important
grounds. It’s time to take the mythical “50% off” sign out of the
window.

Read Chris’s entire post.

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Optimizing Dynamics for the Stack

Microsoft’s latest investment in Dynamics is aimed at developers, not business users. The focus is independent software vendors (ISVs) which build vertical ERPs using Dynamics as a base.

The new version, now code-named Microsoft Dynamics AX 6, should reduce the need for customized code, and will be more tightly integrated with a range of other Microsoft software, such as SQL Server and Microsoft Office, according to the company.

Microsoft strategy is to rewrite Dynamics to get outside developers to use more of Microsoft stack. No mention of actual business customers of Dynamics, just the ISV / Microsoft distributors.

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