Software installations don't equal sales

Consultants such as KPMG, Accenture, Deloitte Consulting and PricewaterhouseCoopers provide "systems integration"--basically planning and installing technology systems for large organizations. Because systems integrators wield a lot of influence over corporate software purchases, they generate a significant chunk of sales for enterprise software companies such as Oracle, SAP, PeopleSoft, Siebel Systems, i2 Technologies and BEA Systems.

So if the KPMGs and Accentures of the world are still doing implementations, then demand for new software must be holding up also, right? Not necessarily.

"It appears that much of the current implementation demand is coming from Fortune 1000 customers that have already purchased the software seats and are only now moving forward with the implementation, or from customers extending an existing implementation project to other divisions or geographies," Lehman Brothers analyst Karl Keirstead wrote last week.

Perhaps that's why this month has seen the stock prices of Oracle and SAP sag 1 percent and 5 percent respectively, while KPMG and Accenture registered gains.

KPMG Consulting's market capitalization--the total value of its outstanding shares--increased by more than a quarter from Nov. 7 to Nov. 19. Accenture's rose 16 percent over the same period.

Keirstead has recently pointed out that tech services stocks tend to rise and fall with shares of enterprise software vendors--but the sector's fortunes aren't always tied together. Like now, for instance.

Not that systems integrators are seeing much demand. Analysts polled by earnings-tracking firm First Call expect near-term revenues to drop quarter-over-quarter for some well-known tech consulting firms, such as KPMG Consulting and Perot Systems.

And most large vendors of enterprise software have already prepped Wall Street for a poor December quarter. SAP last month cut its fourth-quarter forecasts. Oracle two weeks ago lowered fiscal second-quarter estimates. Not even technological prowess and achievement can overcome a bad economy, analysts believe.

For instance, last week Morgan Stanley analyst Charles Phillips lavishly praised Oracle's latest software suite as a well-rounded product, with bugs and instability mostly fixed. "Oracle has corrected the problems and is now shipping high quality products," Phillips wrote. "And customers are beginning to notice."

Two sentences later, Phillips reduced his prediction for Oracle's earnings per share over the next two years, citing company's own forecasts and "continued weakness in the near-term environment."

Against that kind of backdrop, a report suggesting a lack of new software purchases through IT consultants is hardly shocking by itself. "We would not be surprised by any kind of trend suggesting that companies today are leveraging their existing investments in technology," said Bill Wohl, spokesman for SAP.

Emphasis on existing.

Corporations aren't installing much in the way of new software, but they have continued with earlier plans for enterprise resource planning (ERP) technology, Wohl said.

"In the background, many companies are still working on their ERP projects," he said. "They still have a lot of work to do in the enterprise space."

ERP applications are often called "back office" software because they automate behind-the-scenes processes such as accounting, human resources and inventory management. The whole point of an ERP system is efficiency and lower costs--something on a lot of executives' minds during the current economic recession.

Many of SAP's clients are looking at technology plans that offer a return on investment that is immediately evident, such as more rapid inventory turnover and reduced spending on raw materials, Wohl said. "Companies are focused on 'quick-hit' types of projects," he said.

Other enterprise software niches, such as applications for customer sales and support, are still gaining new customers, but growth has "clearly slowed," Keirstead said. Siebel, the biggest seller of customer relationship management (CRM) software, reported a third-quarter sales decline of 11 percent year-over-year; analysts, on average, expect a 25 percent drop in the fourth-quarter.

That could at least partly be the result of a shift away from perceived niche specialists like Siebel, i2 and Ariba to vendors such as Oracle and SAP, whose software suites try to encompass several enterprise functions, Keirstead suggested. Large ERP vendors like SAP market their suites as cheaper and more efficient in the long run than assembling a system that combines "best of breed" products from different companies.

"The pendulum is swinging away from the best-of-breed vendors and back toward more holistic solutions," Wohl said. "That bodes well for companies like SAP."

However, traders and investors still believe in best-of-breed products. Shares of i2 and Siebel moved up 14 percent and 16 percent even as Oracle and SAP lost a bit of market value.

Siebel has long argued that its products mesh easily with other companies' offerings, and preached against relying too heavily on any one company for enterprise software. However, some companies long perceived as specialists are trying to shed that image. So i2, commonly viewed as a company that rotates around supply chain management, in recent years has branched out into other areas to make it less of a niche player than other procurement software vendors, an i2 spokeswoman said last week.