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Business software's next big hit

As the once-booming market for enterprise resource planning systems slows, analysts identify the next big hit in business software: supply chain management.

As the once-booming market for enterprise resource planning (ERP) systems slows, analysts have already identified the next big thing in business software: supply chain management.

While ERP software handles a company's internal human resources and financial management systems, supply chain management (SCM) software links companies to the outside world of suppliers and manufacturers.

An auto maker for example, could use the same SCM system to order a windshield that its windshield supplier would use to order glass.

Big ERP makers, such as SAP, PeopleSoft, and Baan, accustomed to double-digit growth, have seen sales stagnate lately. Just this week, Baan posted a larger-than-expected loss, and said the market for ERP software in 1999 has "worsened". Even market leader SAP posted profits last quarter that disappointed.

The picture for SCM software is much brighter, according to market analysis firm AMR Research. The firm expects the supply chain management market to grow 50 percent, or to $4.5 billion in 1999, and expand to $13.6 billion by 2002. Business should pick up as potential customers wrap up their Year 2000 projects, vendors roll out a fuller suite of products, and customers seek to collaborate with their business partners over the Web, AMR states in a report due out next week.

Growth in the embryonic supply chain management market, dragged down last year by delays in corporate IT spending--which also affected the ERP market--should start to pick up this fall, according to the report.

Stamford, Connecticut-based research firm Gartner Group has more conservative expectations for supply chain software.

"We think it's closer to 30 or 40 percent [growth]," said Gartner Group analyst Beth Enslow. Those lower numbers will be due to the immaturity of vendors' product lines, continuing delays in new projects until Year 2000 fixes are done, and the ERP vendors' lack of vertical-specific software applications for the supply chain, she said.

During the past 18 months, the supply chain market has seen 40 to 50 percent market consolidation, with a flurry of new mergers and buyouts expected this year, according to Gartner.

To date, the lack of real gorilla-size competition has enabled some of the smaller, standalone supply chain firms--including i2 Technologies, Manugistics, Numetrix, and Ilog--to stake their claims.

However, by 2001, Gartner Group expects the ERP vendors to dominate the supply chain market, with only a few standalone competitors remaining. The market leader, i2, could likely be one of them. i2, which, like its competitors, has partnered with leading ERP vendors, topped analysts fourth-quarter expectations, posting $112.7 million in revenues and 70 percent growth.

The firm has been signing contracts with heavyweight technology firms such as Lucent and Compaq. Prudential Securities this week raised its rating on i2, which is expected to double the size of its sales force this year, to "accumulate" from "hold". SoundView Technology Group also raised its rating on Irving, Texas-based i2 to "buy" this month.

Not all standalone supply chain companies have thrived. Manugistics, for one, posted several poor quarters and was searching for a suitor before the company recently decided to restructure. Under a restructuring, Manugistics, which has paired up with Oracle in the consumer packaged goods industry, has recoiled from targeting vertical markets that are i2 strongholds.

Additionally, analysts expect the ERP vendors to come on strong this year with SCM products of their own. SAP, Baan, Oracle, and PeopleSoft are looking to supply chain sales to pad their pockets with new revenues as high-end demand for their ERP software continues to decline.

Indeed, the ERP market grew 35 percent last year to $15 billion, down from 47 percent growth in 1997, according to analysts. With a further decline expected this year, ERP firms have little choice but to expand their offerings into the supply chain and the lucrative front office.

SAP, the largest ERP titan with about 36 percent of the enterprise software market, saw license revenues flatten and profits miss the mark last quarter. Though late to the game, SAP is now moving quickly to install the first version of its new line of software that links a business to its clients, contractors, or suppliers.

Baan, which has built its supply chain line from its acquisitions, is moving to pull a tightly-integrated product line together. Of the ERP vendors, Baan has posted the most revenue from supply chain sales to date, with its Baan Supply Chain Solutions line.

SAP, with an installed base of about 20,000 customers, could potentially reap $300 million in supply chain revenues by the end of the year, if it rounds out its product, said AMR vice president John Bermudez. Wall Street analysts agree that SAP is at lease a year behind i2 and others with their supply chain products. Nonetheless, many SAP customers want to buy as much product as possible from a single source and have put their purchases on hold to see what the German software giant will deliver, Bermudez said.

Last December, SAP shipped its APO (Advanced Planning and Optimization) product, which analysts say is lacking in some forecasting and distribution planning features, and intended for companies with less complex supply chain problems. Unlike PeopleSoft and Baan, which are building their offerings based on other vendor's products, SAP is building its own supply chain strategy to make sure the applications are tightly integrated to a customers existing R/3 implementation, Enslow said.

As for PeopleSoft and Oracle, both companies have pulled together lines of supply chain offerings. Pleasanton, California-based PeopleSoft in 1997 acquired Red Pepper to beef up its supply chain management offering. Last year, the company bought Distinction Software. While much smaller than Rockville, Maryland-based Manugistics, Distinction competes in the same market by making products for process manufacturers who make products from raw materials.

Meanwhile, Oracle recently announced FastForward manufacturing, applications targeted at midsized companies that want a fixed-price, fixed-time manufacturing software installation.

There's no clear leader in the pack, said Byron Miller, analyst at Giga Information Group. Miller said it will take about 18 months for product lines to shake out and mature.

"All of them are working on [supply chain] and all of them have various strengths and weaknesses," Miller said. "We haven't seen a clear leader emerging. It's going to continually be a catch-up for awhile."