Best-of-Breed Software

While ERP vendors move toward one-stop shopping, adding a wide variety of applications to their suites, best-of-breed providers gain strength through consolidation and by focusing on meeting specialized client needs.

As Kermit the Frog has said, it's not easy being green. It's a sentiment that best-of-breed (BOB) software providers can relate to. Life can be tough for small, highly distinctive creatures inhabiting narrow ecological niches. Over the past year, these specialized application vendors have needed all their agility and willingness to explore new territory in order to survive in this frog-eat-frog world. Stronger members of the species have added new functionality to their growing product suites by gobbling up other stand-alone software vendors. John Van Decker, vice president, technology research services, with the Meta Group Inc. in Stewartsville, N.J., reels off a handful of examples: Cognos' purchase of Adaytum, Hyperion Solutions' acquisition of Brio Software and Business Objects' purchase of Crystal Decisions.

At the same time, most best-of-breed software providers have struggled to defend their market share against the incursions of enterprise resource planning (ERP) software vendors. ERP suites continue to expand into the functionality categories in which BOB vendors are most successful. Some are doing so through acquisitions. Van Decker points to Lawson Software's purchase of Closedloop Solutions and Geac's swallowing of Extensity as examples.

Still, the traditional best-of-breed application is in no danger of extinction, experts agree. Stand-alone software providers that are willing to explore new avenues to serve their clients' needs will always find a market. "They can develop new products and bring those products to market faster than ERPs," says Van Decker. "They don't have to deal with their own global infrastructure like ERPs do or spend as much time training their sales force. BOBs are more nimble in terms of product development because they don't have all the baggage of an ERP."

That agility is a crucial edge for best-of-breed software providers. "Suppose your ERP vendor has 10 applications planned for rollout, but they won't be available for two years. Do you wait for them, or do you get what you need now from a BOB vendor?" asks Mark Smith, senior vice president of research at Ventana Research in Belmont, Calif. "What will the impact be on your business if you decide to wait?"

Van Decker echoes that point. "Why wait? If it helps you right now, why not go outside now and get it, and get to your goal sooner? Then perhaps later, when your ERP vendor does have that product, you can go back to them and start using their version of it. You need to look at these purchases on a case-by-case basis. What's the likely ROI going to be?"

Competing on Cost

When forced out of a niche by competitors, best-of-breed software providers have a record of landing on their feet. "When a BOB starts being squeezed out of one market, they'll often pop up in another," says Jim Holincheck, research director with Gartner Inc. in Chicago. "For example, while ERP vendors may be dominant in the traditional human resources space, a BOB can find a niche in a more specialized aspect of HR. For instance, it might put together a product that focuses only on call center workers, as in the case of Performix. It's a niche that's too small to interest ERPs.

"Those kinds of niche opportunities exist across the spectrum of best-of-breed applications," Holincheck adds. "So there's still plenty of room where BOB providers can compete, as long as they're able to differentiate themselves and provide specific solutions."

For companies eyeing a strategic software purchase, bigger is not necessarily better. In the past couple of years, ERP providers have sought to develop functionality initially offered only by stand-alone software vendors. Increasingly, they are assembling these capabilities into suites of BOB-like applications and selling the complete package to customers all at one time, according to Holincheck. "The thinking is that by selling the suite all at once, the customer can implement whatever they want, whenever they want," he says. "The actual adoption rates, however, are not always clear. There's a difference between the amount of actual sales by ERPs, and whether the product suite offerings are actually being used on this sort of as-needed basis or not."

What's more, stand-alone application providers are finding new ways to compete with enterprise software vendors on price. Irving, Texas-based BizNet Software Inc., a provider of business performance management (BPM) systems to midmarket companies, exemplifies that trend, according to George McMann, BizNet's president and CEO.

"Much of our business performance management prod-uct line is built around Microsoft tools like Office, SQL Server and Windows Server 2003," says McMann. "So customers who already have those products can save over 50 percent of their business performance management software costs versus starting from scratch. Granted, not many companies have the 2003 Microsoft version yet, but our thinking is this is something they would eventually buy anyway."

What Buyers Want Now

ERP providers' pitch to current and potential customers goes like this: "You already know us, and we know your core business processes. If you go to another vendor, won't that create integration problems? Stick with us, and you won't have to juggle a number of different vendor relationships."

It's an approach that's paying off for enterprise software providers, according to Chris Leone, vice president of product strategy for enterprise performance management at Pleasanton, Calif.-based PeopleSoft Inc. "Customers are looking to reduce the number of vendors they work with," he says. "So they are consolidating around their ERP vendors, and we've picked up customers as a result of that trend."

Fred Studer, vice president of marketing, ERP applications, with Ora-cle Corp. in Redwood Shores, Calif., agrees. He believes his company has eroded best-of-breed vendors' market share over the past two years. "I like the suite strategy of getting lots of applications around one vendor," he says. "If you don't have the right integration, you can't maintain your information. That's a particularly important consideration in light of new demands by Sarbanes-Oxley to mitigate risk."

Connectivity is often a weak point in BOB vendors' offerings, says Smith. "How open will these applications be to integrating into your technical architecture?" he asks. "If they don't all work together, or if they only work together with some ERP vendors, you can end up having manual intervention, which opens up a can of worms." However, many stand-alone software vendors are quick to point out that they have greatly improved their products' ability to communicate with other specialized applications in the last 12 months.

BPM vendors counter ERP providers' emphasis on consolidating vendor relationships by insisting that BPM applications have a decisive edge in delivering perhaps the most critical benefit of any business software purchase: improved decision-making.

"Relational databases, data warehouses and ERPs have all been first steps toward better decision-making, but none has completely delivered," says Rob Ashe, president and CEO of Cognos Inc. in Ottawa. "Now there's more focus on enabling decision-making systems via business performance management. In addition, there's a move toward back-to-basics now, including the basics of making a plan, supporting it, setting targets and looking at variances."

Visibility Into Intangibles

New best-of-breed software offerings are being driven by a handful of key forces. "One clear trend is to work toward making technology more open and business processes easier to manage," says Ian Kimbell, vice president, mySAP ERP strategy and business development, with SAP in Walldorf, Germany. "While features and functions are still important, the main emphasis is on more effective process management. The primary goal with today's BOB offerings is to improve the amount of flexibility you have in managing your business processes." Another key objective for best-of-breed software vendors, he adds, is to help customers reduce the time they spend managing their software assets and increase the time they have available to implement new systems.

Ashe sees a growing need among companies for more visibility into their future performance. BPM tools -- also known as corporate performance management (CPM) software -- can help, he says. "Ten years ago, a company's market cap was closely associated with its tangible assets," he points out. "Now, there's a much higher correlation with future earnings and intangibles and where those intangible assets will come from. The question, then, for the CFO becomes: Do you have a system that allows you to gain the kind of visibility you need to make decisions quickly? CPM is taking the lead in terms of revenue growth and overall customer interest because of those trends."

Where does all this leave finance's software buyers? "You need to take more of a business process view," says Van Decker. "Today, finance managers are asking: 'How do I help with the financial needs surrounding human resources, or supply chain management, or financials and e-procurement, or the financial implications of contract management?' "

The BPM Boom

One of the most effective ways for companies to achieve the process enhancements they are seeking is by investing in a BPM system. This best-of-breed application -- or, more precisely, composite BOB application, since it includes functionality for budgeting, forecasting, planning and reporting -- can help companies improve corporate performance by orchestrating combinations of people, processes and technology; breaking down silos; and delivering a single database that provides performance data for almost any part of the organization at any given time.

According to a recent study by IDC, the market for BPM systems and related financial analytics applications passed the $1 billion mark in 2003 and should grow to $1.6 billion by 2007, a compound annual growth rate of better than 10 percent. In a Meta Group study completed in 2003, 85 percent of surveyed companies reported that they will launch a BPM project by December 2004.

"Shoppers of BPM suites in 2004 will rank vendors on their ability to provide tight integration of key modules; robust enterprise reporting tools; ongoing strength and innovation in online analytical processing (OLAP); and the quality of their planning functionality, dashboards and compatibil-ity with multiple technology platforms," says Shruti Yadav, analyst at Nucleus Research Inc. in Wellesley, Mass. "Each of these features has strong relevance for ROI, and successful vendors will be those that satisfy the checklist and offer customers flexibility in licensing components of their suites."

Sarbanes-Oxley Compliance Tools

BPM software providers have been quick to seize opportunities arising from companies' need to meet the requirements of the Sarbanes-Oxley Act. These vendors have enhanced their products with features designed to help businesses define compliance-related metrics and increase visibility into their operations, key steps in meeting the legislation's Section 404 mandates.

Outside the BPM space, compliance management software helps companies improve an array of Sarbanes-Oxley-related functions, including process management and audit, documentation of internal controls, project management, and cost analysis. These products help organizations manage the extensive documentation generated by compliance activities. Their content management functionality helps organizations track key decisions, quickly locate critical data and mitigate fraud risks.

Most major ERP vendors offer add-on compliance assistance modules, but these tools lack the deep functionality that best-of-breed products bring to the task, according to Andrew Efstathiou, program manager at The Yankee Group, a research and consulting firm based in Boston. "Companies that are serious about compliance still need to look beyond what their ERP vendor may be offering in terms of compliance management," he says. "The large ERPs are offering tools that help enhance the ability to meet some of the compliance challenges, but not all of those challenges. So gaining full-blown compliance management requires purchasing some products from BOB vendors as well."

Efstathiou adds that the documentation and content management tools that many companies relied on before the passage of Sarbanes-Oxley provide only rudimentary capabilities. More and more organizations are realizing that they need to tighten their document-related risk controls. As online contracts become more common, a new generation of risk management software is helping companies cope with electronic security issues, including verification of electronic signatures and contract signers' identity and authority.

The HR Connection

Increasingly, best-of-breed software vendors are designing their applications to connect more closely to the organization's overall performance management effort. Take human resources software, for instance. "We're seeing a tighter link between performance management and compensation, so that exemplary employees are being rewarded more often than on the old annual basis," says Ron Hanscome, senior program director in the Meta Group's Plymouth, Minn., offices. "You'd still have the annual review, but there would be an opportunity for quarterly compensation for superior performance. Workscape, for instance, which has been strong on the compensation side, is now adding a performance management component to it.

"Another driver of customer response in the HR space is better linkage of employee performance to business strategies," Hanscome adds. The ultimate goal for many organizations is to link their compensation data directly to their performance management system in order to leverage metrics such as revenue per employee. But that's a long-term objective, he notes.

Specialized software vendors in the human resources space are hitting their stride with applications that target functions -- sales force incentive management, for example -- much narrower than those which ERP providers are willing to explore.

UGS Inc., a provider of product life-cycle management software based in Plano, Texas, reaped big rewards when it implemented a variable compensation management system in 2000. "We needed a new sales compensation system that could provide online reporting to salespeople in the field, as well as integration into our SAP transaction system, and we found what we needed in Callidus Software," says John Seiler, sales compensation director. "The Callidus product allows each sales rep to view their own performance data, including their compensation statements, and it allows that rep's sales manager to see the performance information of all the reps they manage."

Corralling Expenses

Expense management software vendors' success in the last 12 months largely has been driven by the popularity of their products' Web-based functionality. Companies that enable their employees to complete reimbursement processes online can save money by reducing paperwork. Not surprisingly, it's been a pretty easy sell. "Over the past 12 months, the expense management market has grown by around 12 percent, compared to about a 3 percent or 4 percent growth rate for business software in general," says Christa Degnan, research director with the Aberdeen Group Inc. in Boston.

"More and more midsize companies that are using this software are going with a hosted model as opposed to buying it outright," Degnan adds. The advantages of that strategy include far fewer installation hassles, lower maintenance costs, and immediate access to the latest and greatest version of the product whenever it becomes available. "Customers can start using the upgraded version within 24 hours," Degnan notes.

Vendors offering travel and entertainment (T&E) expense management software are finding a ready market for their products, too. According to the Institute of Management and Administration's 2003 study "Managing T&E Operations, Costs and Automation," processing a T&E report manually can take companies up to five days and cost them as much as $27. T&E software generates sizable savings by automating this task and eliminating paper-based processes. It also reduces employees' wait time for reimbursement.

Most products in this space offer Web-based expense report submission capabilities as well as integration with corporate credit card billing. In addition, these systems provide reporting capabilities that enable finance managers to boost their negotiating power by identifying the best travel deals and compiling a list of preferred vendors.

Best-of-breed software vendors are also finding success by exploring nontraditional areas of the expense management space. Santa Clara, Calif.-based seeUthere Technologies focuses exclusively on professional meeting automation, or consolidated meeting management, as CEO John Chang prefers to call it. "Our product helps companies gain visibility and cost savings around meeting spending, which is a large expense category for many companies," he reports. "It's not a modular application; every meeting is different.

"We haven't had to battle with ERP vendors at all for this market," Chang notes. "In fact, we have a couple of major ERP vendors as clients, working with us to help with their meeting management needs."

Portfolio Management Tools

IT expenditures often constitute the biggest single slice of an organization's budget. Yet much of the money businesses pour into software implementations is wasted. Too often, companies think an investment in the latest technology is a silver bullet for performance problems, and they fork over huge sums of money for new systems without first reviewing their key processes and determining how the initiative will improve them.

That's changing, though, as more and more companies turn to project portfolio management software to achieve a holistic view of the risks, costs and returns that their enterprise initiatives generate. "These days, companies are looking to improve their ROI from IT purchases, as well as searching for the best fits for their needs," says Dennis Gaughan, research director at AMR Research in Boston.

"When it comes to the IT portfolio management BOB category, there's a trend toward vendors trying to build more of an end-to-end suite," Gaughan notes. "Consolidations such as Kintana being bought by Mercury Interactive signal this push to deliver end-to-end capabilities. Even so, while the tools in this space are improving, they're still only as good as the processes you put around them." He adds that requests for information about IT portfolio management systems are among the most common inquiries he receives from clients.

At Textron Financial, a Providence, R.I.-based commercial finance company, investing in an IT portfolio management system helped managers align IT investments with overarching corporate goals. "Every IT decision we make impacts the quality of the product we deliver to our customers, so ROI analysis is important to us," says David Raspallo, executive vice president and CIO. "Since we implemented the IT portfolio management product from Niku three years ago, IT ROI has been more quantifiable and more accessible. We can compare our overall IT ROI against each of our IT projects' ROI to determine whether we should continue to support that project or not."

Over the past 18 months, IT portfolio management software providers have absorbed quite a few specialized vendors of professional services automation (PSA) software, according to Hanscome. "Many of the pure-PSA players have struggled because of a need to develop broader analyses of project costs beyond their relatively narrow billing-and-time-expense focus," he reports. "And as a result, many of them have been absorbed by larger, more IT-portfolio-management types of companies. Evolve, for instance, was purchased by Primavera.

"In addition, large ERP vendors like SAP, Oracle and PeopleSoft have all increased their efforts to offer PSA software capabilities," Hanscome notes. "So, with the exception of some remaining pure-PSA players like Open-Air and Business Engine, most of the PSA vendors have been engulfed by these broader IT portfolio management players."

A/R Advances

Companies looking to anticipate accounts receivable problems and nip them in the bud are increasingly turning to cash management software. A case in point: Syngenta Crop Protection Inc., the 800-employee U.S. subsidiary of Basel, Switzerland-based agricultural chemical company Syngenta AG.

A few years ago, the company faced an array of collection woes and credit control challenges resulting from its rapid growth. "In 2001, as a result of our mergers, we realized we had over 6,000 customers, and we were facing issues of control and consistency," recalls Bert McCuiston, head of credit, receivables and cash management. "Plus, we knew we had to gear up for Sarbanes-Oxley. The question became: How do we show we're consistent? So in May 2003, we purchased a cash flow management software product from Emagia which was tailored to our industry."

That investment paid off handsomely, McCuiston reports. "In addition to a significant reduction to past due accounts receivable, along with additional improvements across the board, in January we received a grade of 'well-controlled' following an internal audit by our headquarters in Switzerland -- a grade they're very reluctant to give out," he says. "They couldn't find anything; we had no exceptions. In addition, now we're able to see in advance where account problems may be developing before they become delinquencies, which helps us with our inflow forecasting."

Best-of-breed software products will continue to evolve at a rapid clip over the next few years. The current wave of BOB vendor consolidation shows no signs of dissipating. Don't be surprised to see new partnerships, alliances and acquisitions in the months ahead, as stand-alone application vendors and enterprise software providers jockey for position. It may become hard to tell the players apart without a scorecard. But the forces shaping the contest -- companies' need to enhance connections among their business processes and software assets; their drive to achieve one version of the truth through a single, standardized database; and their ongoing focus on performance management, which makes those goals achievable -- will remain the same.

Competing on Cost

What Buyers Want Now

Visibility Into Intangibles

The BPM Boom

Sarbanes-Oxley Compliance Tools

The HR Connection

Corralling Expenses

Portfolio Management Tools

A/R Advances

PERFORMANCE MANAGEMENT
(Budgeting, Reporting, Consolidation)

COMPLIANCE MANAGEMENT

CREDIT MANAGEMENT

HUMAN RESOURCES

EXPENSE MANAGEMENT
(T&E, Tax, Fixed Assets)

CASH MANAGEMENT

PROJECT PORTFOLIO MANAGEMENT
(Professional Services Automation, IT Project Management)

Competing on Cost

What Buyers Want Now

Visibility Into Intangibles

The BPM Boom

Sarbanes-Oxley Compliance Tools

The HR Connection

Corralling Expenses

Portfolio Management Tools

A/R Advances

PERFORMANCE MANAGEMENT(Budgeting, Reporting, Consolidation)

COMPLIANCE MANAGEMENT

CREDIT MANAGEMENT

HUMAN RESOURCES

EXPENSE MANAGEMENT(T&E, Tax, Fixed Assets)

CASH MANAGEMENT

PROJECT PORTFOLIO MANAGEMENT(Professional Services Automation, IT Project Management)

PERFORMANCE MANAGEMENT
(Budgeting, Reporting, Consolidation)

EXPENSE MANAGEMENT
(T&E, Tax, Fixed Assets)

PROJECT PORTFOLIO MANAGEMENT
(Professional Services Automation, IT Project Management)