Eyeing ERP: Microsoft and IBM roles in flux
(IDG) -- As business gurus like to remind us, companies need to constantly keep an eye out for their next competitive opportunities or they will end up like horse-drawn carriage builders in the 1920s.
So these gurus probably think it odd that two of the largest companies in IT, Microsoft and IBM, have not yet established themselves in one of the largest, most lucrative fields: packaged enterprise applications. Microsoft and IBM do not appear among most lists of the top 10 or even the top 100 vendors of the software that does workaday -- but vital -- business tasks such as calculating a factory's optimum production, buying materials, cutting paychecks, and dispatching sales representatives.
But the market abhors a vacuum, and now both companies are starting to take roles -- albeit small and somewhat passive -- in business applications.
Whether this activity bodes well for established application vendors depends on if they see Microsoft and IBM as friendly giants that will help them out with platforms and services to accompany their products, or as 800-pound gorillas that want to kick them out of their chairs.
One of IBM's more obvious moves toward the business application market came in 1998 when it started a new subsidiary called Corepoint. This unit was charged with making applications for sales, call centers, and customer service (known collectively as front-office applications), and offering technology and services to link buyers and sellers in supply chains.
Microsoft has factored itself into this market more subtly with its Windows NT operating system and Component Object Model, pitched as shells upon which business applications are built. Many of these programs were showcased at two recent Microsoft events -- its DNA [Distributed interNetworking Architecture] for Manufacturing launch in late February and its Extensible Markup Language-based electronic-commerce platform announcement in early March.
Speculation periodically bubbles up that in addition to these behind-the-scenes moves, Microsoft will start selling its own applications, perhaps by buying a faltering vendor such as Baan.
A golden field
Despite the years of success that IBM and Microsoft have enjoyed without completely entering the business application market, the lure of this segment is obvious.
"Quite bluntly, it's where the money is," said Steve Cole, a senior analyst at Forrester Research, in Cambridge, Mass.
Although the market has cooled off in the past three quarters as prospective customers have become preoccupied with year-2000 fixes, most analysts expect demand to rebound after next January.
In 2000, the market for all enterprise applications -- front-office, supply-chain planning, manufacturing, financial, and human resources (the last four known collectively as enterprise resource planning, or ERP) -- should be at least $16 billion, according to Forrester's estimates. And it should keep growing at least at low double-digit rates for the next several years, if not necessarily at the 30 percent per year Forrester predicted in 1997 -- its most recent overall study, according to Cole.
Another reason for these two IT giants to enter the business application market, Cole pointed out, is to drive demand for their existing offerings -- notably operating systems, hardware, databases, tools, and services. IBM's AS/400 system is at least as popular in some industries as Unix, and its RS/6000 and OS/390 platforms have loyal fans.
But the impact of Windows NT, which is grabbing larger market shares every year, is impossible to ignore. AMR Research, in Boston, estimated that two-thirds of all enterprise applications will be running on NT platforms by 2002.
With that in mind, IBM's Windows NT strategy guarantees it a portion of the platform, middleware, and service revenues generated by ERP applications on that OS.
And IBM has its own ace in the hole: its massive mainframes, such as Deep Blue, and the researchers who build them. Imagine all of that processing power turned loose on, say, supply-chain planning, which is really just a huge number-crunching problem, Cole said.
"If [IBM] can forecast the weather, surely [it] could figure out how many boxes of Wheaties I ought to stock," Cole added.
Experts warn that one major reason not to jump into ERP and front-office applications is that they require a great deal of knowledge about business workings, such as the most efficient way to route a $50,000 purchase order or lay out a car factory.
But Cole said industry giants such as IBM and Microsoft can build messaging frameworks and components that can handle the underlying transactions while letting partners handle all of the business content.
"That's backing into applications, rather than approaching by the front door," Cole said.
By that analogy, IBM is entering the enterprise application field through both doors.
IBM: We're here; get used to it
IBM is involved in a complex web of competitive and cooperative relationships. Its hardware and software platform groups do brisk business working with established ERP players, as does the company's huge professional services group.
Although not offering a full suite of ERP wares, its Corepoint division competes with customer relationship management products from Baan and Oracle, as well as with front-office-only powers such as Siebel, Vantive, and Clarify. IBM also supplies the building blocks from which software makers can construct targeted, competitive ERP systems.
Those building blocks include the San Francisco Java frameworks of business application modules and infrastructure, as well as its WebSphere server platform.
Although IBM is sympathetic to the needs of its partners in the ERP camp, the market is changing and all bets are essentially off in getting to the next stage, according to Joe Damassa, vice president of application development marketing at IBM, in Somers, N.Y.
"In some cases [the San Francisco components] will allow our partners to compete with the established ERP vendors. We make no bones about it; we're an arms dealer in that race. We're trying to support the growth and emergence of a new market," Damassa said.
"Our portfolio will grow as components become more mature, and that will put us at odds with our traditional partners. We move a lot of ERP systems on IBM hardware and software. We may step on some toes, but they're evolving, too," Damassa continued. "As long as we keep customers' needs in mind, the market leaders will come and go."
Microsoft: Jump on our hay ride
In contrast to IBM's position, Microsoft comes across as downright mild-mannered toward established enterprise vendors.
At Microsoft's DNA for Manufacturing (DNA-M) showcase on Feb. 23, President Steve Ballmer reiterated the company's longstanding public position that it is happy to provide architecture that third parties can use for their solutions, but it has no intention of getting any deeper into vertical ERP markets.
Microsoft's goal is to let its customers create Windows-based, yet legacy-friendly, platforms to integrate previously separate applications without new infrastructure investments, Ballmer said.
"We are still not getting in the manufacturing industry," Ballmer said. "We will provide the infrastructure that lets those in the manufacturing industry do their jobs."
Microsoft's partners and customers appear to endorse this approach.
Mike Smith, national manufacturing systems manager for Ocean Spray Cranberries, based in Henderson, Nev., said his company is embracing DNA-M because it is flexible across all of Ocean Spray's divisions and is easily extended with small dabs of code to add new functionality.
"We don't have to redevelop new solutions from scratch," said Smith, whose company uses SAP's R/3 ERP suite and Intellution technologies on NT Workstations.
"For us, [Microsoft] provides a tremendous effect of leveling the field," said Mike Ehrenburg, CTO of manufacturing application maker Marcam Solutions, in Newton, Mass. Microsoft's support gives Marcam, which reported about $100 million in revenues in 1997, the capability to square off with SAP -- which is 30 times its size -- by taking care of integration and other issues while Marcam focuses on the needs of the food, pharmaceutical, and other process-production industries, he said.
Marcam is not a pure-Microsoft play -- its flagship Protean ERP suite also runs on Unix and works with Oracle and IBM databases -- but its architecture and application servers are straight out of the Windows DNA book, Ehrenburg said.
An even stronger backer is all-Microsoft shop Pivotal Software, in Kirkland, Wash. This front-office software maker "bet the farm on Microsoft" five years ago when it was starting out, according to Bob Runge, vice president for worldwide marketing. The company has offered its applications on only Windows NT platforms and embraces the BackOffice suite, he said.
"We sell very serious enterprise solutions. There are higher-order problems to solve, so the less we have to worry about lower-level problems -- every detail of the platform -- the better," Runge said.
Pivotal has no fear that its giant partner will become a competitor.
"There is no indication that Microsoft is going to enter the packaged enterprise applications market," Runge said. "They have been adamant about their neutrality as a platform vendor to ISVs .... We don't see them as a competitor."
Will they or won't they?
Industry observers and odds makers are divided on this issue.
Forrester's Cole takes the position that Microsoft does not want the trouble and expense of amassing all of the business knowledge necessary to write effective enterprise applications. The company knows that its strength lies in providing infrastructure and tools, he said.
"My impression is [it will] continue to do that. I don't see Microsoft Manufacturing or Microsoft Payroll in the near future," Cole said.
Sam Wee, an analyst at Benchmarking Partners, in Boston, agreed that Microsoft is unlikely to launch an ERP suite that competes with SAP or Baan. But he said he believes it might show an interest in the functions users generally add on top of ERP, such as sales, customer service, and supply-chain planning.
Of course, moving into this field creates the risk of antagonizing partners, Wee acknowledged.
"But we've seen this sort of thing with ERP vendors all the time: partners one day, competitors the next," Wee said.
The classic model of such "coopetition" is Oracle, which entered the application field a decade ago by building financial applications that work only with its databases.
Oracle is now one of the largest application vendors in both ERP and front-office packages. It often finds itself walking a tightrope with vendors that are its customers for databases, design tools, and so forth, but rivals for packaged applications.
And what if Microsoft chooses to take a similar approach?
"I think we'd be in the same situation [with Microsoft]. That might be a bit unpleasant," Marcam's Ehrenburg said.
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