Article from Managing Automation

Software leaders

By Willie Schatz

So how do software companies thrive when their markets even on their best days are among the most volatile and more unpredictable of all technology segments? By following the wisdom of former Intel Corp. (Santa Clara, Calif.) president Andy Grove: adapt or die.

The winners recognize the trends affecting profitability--massive outsourcing, e-commerce, strategic partnerships, globalization, killer software packages and web-based everything--and become like chameleons, executing seamless strategic changes to seize the time in their respective software segment. The losers wait to see what happens. By the time something does, they’re toast.

A look at the profitability picture among selected Software Leaders categories and companies shows that many suppliers burned to a crisp last year. Net income for the ERP sector, for example, dropped almost in half, to $69.2 million in 1999 from $1.53 billion in 1998. The e-commerce sector and the customer relationship management (CRM) sector were less singed, but only because they didn’t bleed as much red ink. E-commerce lost $73.8 million last year after losing $1.2 billion the year before. CRM was comparatively a huge success, losing $23.1 million in 1999 after finishing 1998 $26 million in the red. And the supply chain management (SCM) market’s losses filled to a $112 million pool of red ink, compared to $81 million loss in 1998.

Some of the biggest names took the biggest hits. ERP heavyweight PeopleSoft (Pleasanton, Calif.) last year lost $168 million after earning $144 million in 1998. E-commerce giant CommerceOne’s net loss of $51 million last year more than doubled its 1998 $20 million loss. But there were bright spots, too. CRM market leader Siebel Systems Inc. (San Mateo, Calif.) chalked up a $122 million profit, and PowerServ Corp. (Tampa, Fla.) bounced back with a $568,000 profit, compared with a $1.8 million loss in 1998. And CRM’s EPIC lost $48.8 million in 1999 after earning $8.1 million in 1998.

The brightest sector, though, appears to be, perhaps ironically, the industrial automation sector. ABB Industrial Automation; Siemens; Emerson Electric Co., the parent of Intellution Inc. and Fisher-Rosemount Systems; Rockwell International Corp.; Eaton Corp., the parent of Cutler-Hammer; Honeywell International Inc. and General Electric Co., a parent of GE Fanuc Automation Corp., all improved their performance in1999. Net earnings at Emerson, for example, rose 7% to $1.3 billion. Net income at Eaton (Cleveland) grew 11.7% to $439 million. And at Rockwell (Milwaukee), income from continuing operations recovered to a positive $582 million from a negative $109 million in 1998.

The profitability picture, of course, means different things in different markets. In maturing markets, such as ERP, a decline in sector profitability can be due to pricing pressure or higher costs of sales. In 1999, the ERP sector’s profitability dropped, but some companies still made money.

In newer, less mature markets in which the software technology is not as widely adopted or even understood, profitability takes a different course. E-commerce, for example, is a market in the investment phase of its life-cycle, a phase in which profits are a future promise. The CRM market, too, is still developing, with profitability expected to emerge later.

Regardless of the point where a market is in its lifecycle, profitability becomes the bottom line on a business. At some point, companies must make money. Manufacturers considering a major software purchase—call it an investment in their future by way of their software supplier—must have the confidence in the security of that partner company that only financial health can bring. Revenue growth creates momentum, but profitability ensures survival.

Just how did Software Leaders companies grapple with these twin issues in 1999? GE Fanuc Automation pursued a strategy of providing customers with better products at lower cost with broader services, says senior vice president Vince Tullo. And Invensys plc’s Foxboro Co. (Marlboro, Mass.) has transformed itself into an economic performance company from a traditional product technology company. "If we don’t generate economic value for our customers, we’re history," Martin says. "We actually have been moving slowly in that direction for 11 years. We just didn’t know it."

Rather than be held hostage by the global industry consolidation that slows capital expenditures, a proactive industrial automation company such as Rockwell Automation restructures itself to institutionalize a "lean enterprise" performance improvement metric across the company. It also adjusted its strategy to maximize its gain from the surging software and services market and minimize its pain from the catatonic systems business. "Our growth initiatives really are in the service areas, such as e-biz and software support," says president Keith Nosbusch. "We’re moving into the batch control and the batch process arenas as growth opportunities."

In the supply chain planning market, leaders such as Logility and WebPlan have seized the time to vigorously position themselves as must-have suppliers in the burgeoning business-to-business (b2b) space. Mike Ker, WebPlan’s president, the ERP vendors came, but they didn’t see and they certainly didn’t conquer. "ERP is only a backend transaction system," he claims. "The ERP vendors aren’t ready for the Web. They’ve got to totally rewrite their product because their Web architecture is totally different. We new guys embraced the Web and started building for it. So we’re going forward with the maturity of our web applications and our tool sets to build products. That’s driving profitability this year."

So is e-business. That practice provides customers with 24x7 access to WebPlan’s home page. Substituting electronics for humans has enabled WebPlan to serve its customers twice as well for half the price. That efficiency has allowed Ker to move the displaced persons into a consulting group, where he can leverage their expertise for a fraction of what it would have cost him to outsource the tasks.

"We were talking the talk, but we weren’t walking the walk," Ker says. "We were talking up e-biz to our customers but we weren’t using the product. Once we started using it, our customer contacts went to 200 hits a month from 30 phone calls. E-biz is going to be a huge competitive advantage for us. It’s a proactive luxury right now. But within a year it will be a survival necessity."

Mike Edenfield, the president of Logility, isn’t as sanguine. He attributes his company’s $7 million loss in fiscal year ’98 to the rumors about the ERP vendors and the now-thoroughly discredited waiting-for-Y2K movement. Yet he also cites those vendors’ failure to put their money where their mouths were as a major contributor to Logility’s $3.4 million income in fiscal year ’99. "The ERP vendors are way behind," he adds. "Most of them didn’t know about CPFR (collaborative planning, forecasting and replenishment) last year and they probably still don’t this year. ERP is not a factor in the b2b/ecommerce markets for direct materials."

Then what is? Just-in-time delivery, just-in-time quality and just-in-time communication. No, make that collaboration.

"The primary reason we improved last year from the year before is that we got our message out about collaborating in the B2B space," Edenfield says. "The market responded by buying our products, particularly our forecasting packages. In 1998 customers would buy those tools, implement them internally, then guess what the other companies along the supply chain would do. They wouldn’t ask customers or suppliers about their plans. So no one was planning from the same numbers."

That was then. This is now. Customers all along the chain share information about what products they’re going to need, when they’re going to need them and their preferred delivery schedule. That’s collaboration, says Edenfield, because people are asking, not just telling. Although many companies still are not practicing what they preach, Edenfield believes collaboration will reach critical mass sooner rather than later. It then will become even more of a competitive factor in the SCP segment, driving Logility to aggressively seek strategic partnerships with larger companies that will enable Logility to raise its visibility and expand its sales channels.

Globalization also drives GE Fanuc’s drive to stay even with GE’s rigorous profit requirements. GE Fanuc last year met GE’s 15%-to-17% margin requirement margin after earning $700 million in revenue. GE does not reveal its subsidiaries’ income.

"Our top line this year is driven by acquisitions, globalization and solutions," Tullo explains. "We made three acquisitions last year. They have to be accretive in the first year. Globalization means investing in many areas of the world to get more revenue on our top line through reducing costs in operations and support structures. And we look at solutions as selling five times as many dollars per order. So we won’t just sell you a PLC. We’ll sell you an industrial computer plus the software plus the network plus the services and the support to make it all work."

At Rockwell, the focus has been on value-added business opportunities. "With customers looking for their suppliers to focus on what they do best, we decided ours are automation and technology," Nosbusch says. "We also think the space between the plant floor and the front office is a great opportunity for expediting our manufacturing execution system. Those used to be monolithic solutions where you did one-offs. Now there are incremental pieces in play, so you get an immediate ROI [return on investment]."

But you do need pieces with which to play the incremental game. Nosbusch says the company will aggressively seek partners to incorporate software applications it doesn’t have. That will offer the customer a complete automation concept.

The same philosophy apparently permeates Foxboro, another brick-and-mortar stalwart. Martin says the company’s commitment to Web-based technology has enabled it to deliver more value for less than a fraction of its terrestrial cost. Instead of having an engineer on every project site, for example, the same engineer can be virtually teleported among all the customers’ factories. So there’s obviously something happening here, because Foxboro’s profitability mix has shifted to a 50% Web based-ancillary services to 50% hardware-software ratio from a 90% hardware-software to 10% ancillary services ratio.

"In our marketplace customers will use the latest and greatest as long as it’s been tested for five years," Martin says. "So, of course, no one would talk to you about the Web five or six years ago. Now we’re investing in the Web. Our economic value is greater than ever because our technology enables us to correct a problem before our customers knew they had one. We’ll give you guaranteed measurable economic value with no capital required."

For customers, that’s a real change in the bottom line.

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