Software makers see gold in consulting

That's a logical strategy for enterprise resource planning (ERP) software makers to take, as they watch new license sales dip in their once-soaring market, analysts said in recent interviews.

Though less profitable up front than the software sale, ongoing services represent the lion's share of an ERP project, which can take several years and include a raft of support and maintenance fees. As big enterprise software companies such as German titan SAP bulked up their services practices, it's meant less ERP consulting work for their Big 5 consulting partners--including Andersen, PricewaterhouseCoopers, and KPMG.

At software-maker PeopleSoft, revenues from services last quarter jumped 45 percent to $248.7 million, while software sales dropped 61 percent to $57.9 million. Meanwhile, Dutch software-maker Baan's maintenance and service revenue rose to a record $118.45 million last quarter, while license revenue more than halved to $54.35 million. SAP's consulting revenues in the first half of the year increased 57 percent, while revenues from new licenses dipped 3 percent.

"At some point, [SAP] felt they needed to get involved in the implementation side, rather than leaving it to the KPMGs of the world because they saw how much money they can make," said industry analyst Tom Rodenhauser, head of Consulting Information Services.

Services firms have long worried that ERP giants--which make software that automates business needs, from accounting to human resources--would decide to take back their lucrative business, Rodenhauser said.

"It's going to make some of these Big 5 firms think about how they partner with software firms," said Rodenhauser. However, he doesn't believe that concern has "soured the relationship" among these companies, which fiercely depend on one another in this $16.6 billion market.

However, services are one easy way for enterprise software firms to add cash to their coffers, analysts said.

"They've got to do something to prop up [earnings]," said Dave Caruso, analyst at AMR Research. "That's a quick way to add revenue."

SAP decided several quarters back that it wanted to provide 10 percent to 15 percent of the services its customers require, not only to recoup some money, but to also reconnect with its customer base, said AMR Research's Jim Shepherd.

"They organized to do this long before there was a shortfall," he said. Now, SAP may involve some of its own consultants to become the prime integrator on certain deals, or become more involved in supporting a new product line or software within an industry. But in taking back the services business, SAP "runs a fine line" in maintaining crucial relationships with consultants, Shepherd said.

"By and large, we haven't heard services [companies] complain," Shepherd said. "There's so much business to do out there and SAP is so important to their businesses that they aren't likely to complain and its clear that SAP isn't trying to steal their business."

Nonetheless, consulting firm Ernst & Young recently laid off about 500 consultants in the United States, which included a mix of ERP-related consulting positions and other jobs, the company said. Ten more ERP consultants from Ernst & Young lost jobs in the United Kingdom.

Ernst & Young's ERP practice leader Bill Ruckle said the layoffs were based on work performance and unrelated to any ERP market downturn. Ruckle said about 4,000 to 5,000 of Ernst & Young's 8,200 consultants work on ERP projects, many of them for SAP.

He said the company had planned for the ERP slowdown and has been shifting its focus to e-commerce, supply chain management, front-office software implementations, and other projects over the past several years.

While consulting firms transition their businesses to new areas with more growth potential, it's clear that the software makers--which are also shifting their development focus to new e-commerce focused areas--have little intention of going solo on full-scale integration projects.

Indeed, the expertise of ERP firms lies within software development, not consulting, said an SAP spokesperson. About a tenth of the roughly 50,000 consultants now working on SAP projects are SAP employees. The company could not be reached for further comment.

Ruckle said there is no friction between SAP and Ernst & Young regarding which one provides what services on a deal.

"For the most part, we don't feel we're competing with SAP," he said. "If anything, we want to strengthen our relationship. ... We're all changing. We're a lot more powerful going together than [individually]."