The enterprise software spending shift

In my last column, I was pretty emphatic that the valuations (at that time) of the so-called JBOPS--JD Edwards, Baan, Oracle, PeopleSoft, and SAP--did not reflect the companies' underlying business fundamentals, and at best, these stocks would trade flat for the foreseeable future.

Except for Oracle, which has been on a tear following a strong performance in its database business, the JBOPS as a whole have performed poorly. Shares in both SAP and JD Edwards are down significantly, while stock in PeopleSoft and Baan has hardly budged. I believe we will see more of the same for the first half of 1999.

So you ask, are there any attractive stocks in the enterprise software market? The answer is yes--if you focus on the right companies offering the right solutions.

ERP vendors that cater to the middle-market customer (defined as companies with revenue between $100 million and $1 billion) should continue to do well in this environment. While the Fortune 1000 firm has had its fill of ERP solutions, middle-market companies are only just now beginning to implement ERP back-office systems.

The problem? There is just not enough business in the middle-market for all ERP vendors to continue to post annual growth rates of more than 50 percent--one of the reasons that growth has slowed for the JBOPS. While the group's growth rate slows, however, some vendors continue to beat financial expectations--ERP providers like McLean, Virginia-based Deltek Systems, which specializes in ERP systems for project-oriented businesses, or Columbus, Ohio-based Symix Systems, which has always targeted the middle-market customer.

We are also seeing the movement of corporate IT dollars away from implementation of back-office ERP systems, and into software products that help boost revenue (so-called front-office software) and that connect disparate systems within corporations (so-called middleware software).

The beneficiaries include vendors of customer relationship management and supply chain management software products, provided by vendors like Siebel Systems and i2 Technologies. As well, infrastructure software providers--such as SAGA Software, which enables systems integration and helps customers set up legacy mainframe software applications for the Net--will do very well in this environment.

The JBOPS do not yet provide the product functionality to effectively compete with independent vendors like Siebel and i2 Technologies. In the long term, however, the ERP vendors are uniquely positioned to consolidate the supply chain management and front office market. ERP vendors can offer complete solutions to corporations, have access to a significant customer base, and can provide solutions that are already integrated to the back-office.

Many ERP vendors have been announcing expanded product functionality in supply chain and front office, accomplished through internal development and through acquisitions. These trends, especially merger & acquisition activity, will accelerate over the next three years.

While the large ERP vendors will ultimately consolidate the supply chain management and customer relationship management markets, business will continue to be weak for the JBOPS until this consolidation occurs.