Best of Breed Fights for Survival

By Sidney Hill, Jr., February 2004

The past four years have been rough for best-of-breed software suppliers. A glance at the stock prices of three high-profile vendors-Manugistics, i2 Technologies, and Siebel Systems-tells that story. From January 2000 to January 2004, each of these vendors' stock lost at least 80 percent of its value.

Over the same period, Oracle, now the third-ranked ERP vendor in terms of sales, also saw its stock price fall 86 percent. But SAP, the ERP market leader, experienced only a 14-percent dip in its stock price. Meanwhile, PeopleSoft, which used its acquisition of J.D. Edwards to supplant Oracle as the No. 2 ERP supplier, saw its stock price rise by 14 percent.

While very few software companies experienced robust growth over the past four years, these numbers could serve as ammunition for the argument that best-of-breed vendors are an endangered species, destined to be devoured by ERP players that are quickly replicating best-of-breed functionality and adding it to their larger software suites. But many industry experts think that argument is faulty. At worst, these experts say, best-of-breed suppliers will have to temper their expectations about how large they can become, but they are not likely to become extinct anytime soon. The same experts advise manufacturers to keep best-of-breed solutions on their system selection lists-particularly when they have tricky business problems to solve.

"I won't sound the death knell for best-of-breed vendors; there is too much innovation coming from them," says John Fontanella, VP, supply chain with Boston-based AMR Research. "And many of the large enterprise suites still have a total lack of functionality in the areas that best-of-breed suppliers address."

Ravi Vancheeswaran, an executive with ON Semiconductor, Phoenix, says i2 is one of those innovative best-of-breed suppliers Fontanella speaks of. As evidence, he points to an i2 application that solved one of ON Semiconductor's stickiest supply chain problems.

"We were trying to find the optimal inventory levels across multiple stages of the supply chain," Vancheeswaran explains. "We have finished goods inventory, die inventory, and wafer inventory. We need to know how much of each to hold in order to satisfy customer demand while minimizing our operating costs, and i2 stepped up with a phenomenal solution for this."

Functional gaps

The most glaring gap in most enterprise suites, according to Fontanella, is at the supply chain execution level-which encompasses warehouse management and distribution management-although he says many of their supply chain management and CRM applications have major weaknesses as well. David Dobrin, president of B2B Analyst, a Cambridge, Mass.-based IT research and consulting firm, says best-of-breed solutions will remain viable because the enterprise vendors' business model prevents them from offering solutions that meet manufacturers' most critical needs. "Enterprise vendors are trying to sell systems to as many companies as possible so they have to offer fairly generic functionality," Dobrin says. "In that model, the incremental cost of building a solution that does everything that a single company needs is great, but the incremental benefit is not. So even if [an enterprise vendor] says it has a CRM or advanced planning solution, if you try to put any pressure on those systems at all, they are not likely to work for you."

The best-of-breed vendors welcome such words of support, but they also realize that they must continue proving the value of their systems to an increasingly skeptical community of users. For instance, Curt Lockton, general manager for high-tech and manufacturing industries with Siebel, the leading CRM vendor, says companies' desire to reduce the number of systems they use as a means of managing IT costs puts pressure on best-of-breed vendors.

"Some of the larger manufacturers we deal with literally have thousands of applications on their networks, and they are wondering why they need to carry that overhead," Lockton says. "They realize that having fewer systems would be better, but they also must realize that no one software vendor can provide all of the functionality that they require. There also is an inherent risk in depending on one supplier; it's like not diversifying an investment portfolio."

Industry-specific solutions

Lockton says Siebel's strategy for fending off the enterprise vendors is building applications that solve problems for companies in specific industries. "We have worked particularly hard to develop solutions for aerospace and defense companies, and other manufacturers of complex products," he says. "A lot of companies are looking to aftermarket service as a means of boosting revenue, and they don't have the technology infrastructure to support that."

In addition to its industry-specific solutions, Siebel has developed an integration platform it calls UAN-for universal application network-which Lockton says should counter the notion that purchasing a best-of-breed solution will lead to monumental integration problems. "A lot of organizations are finding it's harder to integrate a CRM solution from their enterprise vendor than it is to integrate to Siebel," Lockton contends. "When you buy a CRM extension from an enterprise vendor, unless that application is the same version as your original system, the cost of integrating actually can be higher than buying a generic integration platform from a company like webMethods and using that to connect to Siebel."

Andy De, a director with i2 Technologies, which specializes in supply chain management applications, says his company's primary strategy for ensuring its long-term survival involves "going back to our core competency, which is solving the most sophisticated supply chain problems." That's quite a shift from the late 1990s, when i2 marketed its solutions as everything from a replacement for ERP to an engine for powering Internet-based trading exchanges. Many industry observers believe these far-flung ventures, especially the flirtation with trading exchanges, had more to do with recent financial struggles than the general downturn in technology spending. Now analysts are applauding i2's back-to-basics movement. Dobrin, the president of B2B Analysts, says he also is pleased to see that i2 has beefed up its services organization and is "paying more attention to making sure that its stuff works."

Put me in, coach

De concedes that i2 had developed a reputation for being more interested in selling systems than implementing them, and it is now countering that perception with things like its "service-led solutions" initiative. Under this program, i2 will install an application and let a customer test it for eight weeks before deciding whether to buy it. "We don't want to just sell software, we want to coach people in how to get the most value from the software," says Adeel Najmi, i2's director of SCM solutions. "This service-led approach is resulting in extremely satisfied customers. That is how we are differentiating ourselves, and we think that will continue to make us successful, even when ERP vendors claim that supply chain management applications have become a commodity."

The i2 solution in use at ON Semiconductor, called Multi-echelon Inventory Planning, lets ON Semiconductor analyze demand patterns from individuals, and then assigns certain types of inventory to each customer based on the lead time they typically provide. "If a customer consistently gives us a good forecast, we may not have to hold any inventory for them because we know we will have enough time to start building when they place an order," Vancheeswaran says. "If another customer is always placing orders at the last minute, we have to keep a certain amount of finished goods inventory on hand for them."

The ideal situation, according to Vancheeswaran, would be to hold no inventory and build each order from scratch as it is placed, "but we can't risk being out of stock when a customer calls and have them go to someone else." Vancheeswaran says i2 was able to develop a solution for this problem because it has a history of working closely with inventory planners, something he believes enterprise suppliers lack. "Best-of-breed suppliers will continue to exist regardless of market conditions," Vancheeswaran adds, "because their solutions add a lot of value. They are leaps and bounds ahead of the ERP players in that regard."

Dobrin agrees there will always be a place for best-of-breed vendors, but he also advises users to check on a vendor's financial condition before buying its solution. The vendor doesn't necessarily have to be large, Dobrin says, but it should be profitable. It also should be committed to servicing its systems as well as selling them. "You actually want to check how much revenue the vendor is getting from services," Dobrin says. "If it's a fair amount, then chances are they have the resources to support your solution. What you don't want to hear is, 'We are a software company; we have partners to install our system.' "

Storage Equipment, a Minneapolis-based distributor of shelving and related equipment for warehouses and distribution centers, learned that lesson the hard way. The company was looking for a supply chain execution system, an area in which analysts says ERP vendors are especially lacking. Storage Equipment uses the FACTS ERP package from Software Solutions. "That package has a warehouse management component, but they didn't have anyone using it and it was fairly expensive," says Mike Dubbs, Storage Equipment's CEO. So Dubbs selected a stand-alone package, only to find out that the package didn't work as advertised and the vendor didn't have the resources to support it. "They only had a couple of support people, and if they ran into trouble at another site, it could be days before they got back to us," Dubbs recalls. After a year of trying to get the system to work-including a six-month period of waiting for the package to be rewritten-Dubbs pulled the plug on the project and his company bought a system from HighJump Software.

This time Dubbs did his homework, finding out that HighJump was financially sound, and talking to customers who had successfully used the system. He is even more comfortable with his choice following the announcement that HighJump is set to be acquired by 3M, the Minneapolis-based manufacturing conglomerate. That sort of financial backing should go a long way toward securing HighJump's future, and there is ample reason to believe other best-of-breed suppliers will survive long term as well.

"There is no way best-of-breed suppliers are going to go out of business as long as the large suite vendors are trying to target the widest group of companies possible," AMR's Fontanella says, "because the best-of-breed suppliers are still coming up with unique solutions that solve real business problems."

Note: The original article appears on the Web at http://www.msimag.com/current_issues/2004/feb/corp1.asp