Business app firms lean on services

Enterprise resource planning firms find that service is one of the few revenue streams for the software vendors that isn't plummeting.

4 min read
Enterprise resource planning firms are handing out service with a smile, a smile because it's one of the few revenue streams for the software vendors that isn't plummeting.

Vendors like SAP, Oracle, Baan, and PeopleSoft are reporting sharp increases in the service side of their business while software sales decline.

"SAP used to pass a lot more of the services on to consulting firms and customers but the fact is it is hugely profitable for the vendors. There is too much money on the table to walk away from," said Joshua Greenbaum, analyst at Enterprise Application Consulting, in Berkeley, California. "It is also a very good feedback mechanism in terms of development. It works nicely as way of getting brain power back into development."

But it is also coming because users are demanding help implementing the beastly software systems that automate nearly every internal business process in a corporation. And, as the vendors position their products to be the backbones of corporate computing environments, the users are also increasingly demanding that vendors take responsibility for integrating those systems with other software products.

In fact, market research firm International Data Corporation in Framingham, Massachusetts, predicts that the "consulting and integration services market will grow at a compound annual growth rate of 17 percent, while the client-server segment will exceed 25 percent over the next five years," according to a recent report.

It's already making a pretty big dent in the vendor's bottom line. PeopleSoft, in its latest financial report for the third quarter ended September 30, claimed services were now 58 percent of its total revenues, with services income jumping 96 percent from the same period the year prior.

Similar reports are coming in from other vendors. SAP, for the same period, reported a 76 percent leap in consulting revenues and 65 percent leap in training revenues from the prior year's third quarter. Consulting and training account for 32 percent of SAP's total $3.5 billion in revenue.

Services have always been a major part of Oracle's business be it implementing its databases, applications, or integrating other companies' products with its own. Oracle's combined database and application business revenue for its first quarter ended August 31 was $1.7 billion. Of that, a whopping 68 percent or $1.16 billion was from services, while licenses were only 34 percent, or $582 million, of the total revenue. Services are also growing, up 38 percent from last year's first quarter.

Dutch vendor Baan, like Oracle, has suffered a sales slump of late much greater than its competitors. The firm, with U.S. headquarters in Reston, Virginia, announced earlier this month that it is going to post a loss for its third quarter when final results are released October 28. For its second quarter ended June 30, service revenue jumped 72 percent from the previous year's like period to $98.8 million, 43 percent of the firms total revenue for the period of $230 million.

Morgan Stanley Dean Witter analyst Charles Phillips estimates that Baan's service revenue for the recent quarter will top $105 million, 54 percent of its total revenue of $193.3 million for the quarter.

Forrester Research in Cambridge, Massachusetts predicts the vendors are going take on even more services business, becoming what Forrester calls "portfolio assemblers," sort of a tailor shop for software where a single vendor will sew together all of a users' software products and make sure the stitching is tight and lasts.

"Broad, one-size-fits-all suites are rapidly becoming ineffective," said Tom Gormley, analyst at Forrester. "Today, companies prefer suites to mixing lots of best-of-breed applications because they offer tight business process integration and single-supplier simplicity. Portfolio assembly, integrated, multivendor suites sold, implemented, and supported by a single provider will deliver these benefits with industry-specific, best-of-breed products."

Signs of this are already evident in Oracle's consumer packaged goods offering which ties together a multitude of software products from various vendors to serve the industry. SAP, with its TeamSAP program, is doing a similar thing and taking more responsibility for integrating software for its clients.

The result of these programs is that even if sales of software continue to slide and the ERP market becomes overly saturated, the vendors themselves may have a bright revenue future from simply offering their services. This includes the ever-rising demand for outsourcing services as well. All of the major vendors have launched some sort of outsourcing service where users simply turn over the job of maintaining and running the software to the vendor.

However, Greenbaum and others said that it could also be a costly venture if not executed correctly and vendors should plan their services strategy carefully.

"The downside of the service model is you have to hire a lot of very expensive people," Greenbaum warned. "These are top level implementers getting paid $200,000 a year. It's a risk if they are sitting around doing nothing, you are just hemorrhaging money. It is healthy for companies to hesitate and think twice about getting into services, but at this point there is too much money in the market to sit at home and let Andersen [Consulting] take the cash."