A Breed Apart

CIOs don't talk much about best-of-breed (BOB) IT strategies these days. But this doesn't mean that CFOs should neglect the offerings of BOB software vendors -- far from it. "There was a period of time when the strategy of assembling an integrated business solution from a bunch of independent pieces was a fairly popular alternative to the notion of a broad, integrated suite," recalls Jim Shepherd, senior vice president of research with AMR Research. "This seems to have changed quite dramatically; the majority of CIOs these days, I think, genuinely favor the broad suite approach. At some level, this has certainly had a negative impact on best-of-breed vendors. On the other hand, what we keep seeing is the large suite vendors and the infrastructure vendors like Microsoft or IBM out aggressively courting these BOB vendors and working with them much more closely and wanting to partner with them to a degree that we've never seen before."

Best-of-breed providers bring an array of strategies to the ongoing battle for market share, and some of them are not what you might expect. The large vendors want to be seen as platform vendors, Shepherd notes: "Part of this battle means that you need an ecosystem of third-party independent vendors to commit to your platform and explicitly or implicitly endorse it." Niche players that position themselves as plug-ins or add-ons can leverage the perceived size and stability of the larger providers. "Also, in many cases the niche vendors are able to leverage more than that; they're able to leverage marketing dollars and customer access. Increasingly, we're seeing the larger vendors resell these niche applications, and, of course, they've been buying up these smaller vendors at a rapid clip."

Does this consolidation point to a loss of innovation in the market? A few years back Shepherd thought so, but he's more optimistic now. "While consolidation continues, we are seeing new startup third-party vendors, and this is a very healthy sign. There was a period there during and coming out of the recession when there didn't appear to be much in the way of new startup vendors, and I thought that this was a danger, but we are seeing them again."

The Software-as-a-Service (SaaS) delivery model is on an upswing, and this may have boosted the specialized software providers' outlooks. "The financial community is enamored of it, so they are favoring companies that have SaaS as the core of their delivery strategy or as an option," says Shepherd. "And there's at least a perception, not necessarily fully proven, that this is an easier way to enter the market, that there's less resistance on the part of potential buyers because they don't have to go out and make a major capital commitment."

But perhaps an even bigger factor in the BOB providers' future prosperity will be the rise of service-oriented architecture (SOA), a method of constructing software that allows it to be resolved into component units and easily linked with other systems. "This ultimately will have a very significant effect for BOB vendors in a positive way," says Shepherd. "To the extent that it works, it will make it easier for end users to take a piece of software from vendor A and integrate it with software from vendor B, and make it easier for the vendors as well, of course. But, more important, one of the major selling points of SOA is as an IT phenomenon, and there are lots of interested parties. The big infrastructure vendors, application vendors, and consulting vendors are all out spending a fortune in marketing this concept. To the extent that it ultimately convinces companies that this is something they can actually do, it removes a huge barrier for the best-of-breed vendors."

Companies' compliance work, too, will continue to present opportunities across the BOB spectrum. "Increasingly, software is seen as a key to the compliance activity itself, so this is opening lots of opportunities," says Shepherd. "It's forcing companies to replace older pieces of software that predated the compliance obligation, and it's causing people to spend a lot of money on software to help them comply."

BPM Bumps the Legacy Apps

Mark N. Clemente has seen these forces at play in the business performance management (BPM) space in the past 12 months. He's the director of strategy and programming at the BPM Forum, an organization that helps to advance the understanding of business performance management techniques, technologies, and processes in global enterprises. Corporate decision-makers are thinking, "'I need to have available systems that I can use for day-to-day, near-term decision-making as well as for slightly longer-term strategic planning to help me run my business better, but also to ready my organization for shifts in the marketplace, which come from all sources -- including government regulators,'" he reports.

A recent BPM Forum study assessed "processes and systems that a company may have had in place for quite some time -- applications that may no longer be doing the job," adds Clemente. "They may no longer be relevant to the organization, whether the application is outdated or the business itself has changed, either strategically, structurally, or organizationally. This is a study that was born out of feedback that we got from our members, who said, 'We need to look at our software from the standpoint of whether it is still doing the job. Is it helping us to advance process improvements? Is it helping us to keep pace with compliance-oriented applications?'"

The need to bypass a legacy application was much on Hernan Hernandez's mind when his organization implemented a BPM tool from KCI Computing in mid-2004. Hernandez is senior vice president of finance with Beverly Hills, Calif.-based City National Bank, an organization known as the Bank of the Stars for its work with the entertainment industry. "We came from using a pretty much read-only type of product that was not very flexible; it had its own front end and was very difficult to write to. Our budgeting was done in Excel. Each individual Excel model went out to each business line manager, and they had to fill it out and bring it back. You always have a lot of data integrity and formula issues when you do that."

"Our main goals were basically to preserve data integrity while performing quickly on monthly processing for our performance reporting for our business lines, and also to ease the task of doing the annual budget," says Hernandez. In addition to budgeting tasks, the bank uses the tool "to implement funds transfer pricing and cost allocations," he reports.

The efficiency gains were remarkable. "For the budgeting process, the time needed to make sure that everything tied out and rolled up properly just went away, so we focused our time on our business lines and how they were performing and what their goals were, rather than trying to add the thing up," Hernandez notes. "And then, for actuals, we created so much flexibility that we are able to more closely manage our cost allocations and funds transfer pricing. We're able to drill down and find out what's happening within our business line rather than spending our time just trying to pump out reports."

Process Management Breakthroughs

Business process management tools have come a long way in a short time. "If you look back at the capabilities that were available in software products 10 to 15 years ago when the (business gurus) were talking about business process reengineering, they did not have any tools that directly impacted what they were trying to do," recalls Ken Vollmer, principal analyst in the applications development and infrastructure group with Forrester. "Now, certainly they could model a process in Microsoft Visio, but that wasn't connected with anything; they could have spreadsheets in Excel that could do some things, but that wasn't connected either. Data had to be manually input, and then the results had to be interpreted and input into something else. Today, for the first time, we have integrated tool sets that cover each phase of the process life cycle."

The past 24 months have seen big advances in the technology underlying these systems, which support the definition, creation, execution, and optimization of business processes within organizations and among businesses and their partners. In the definition phase of a process management implementation, "you have standards-based graphical modeling tools that might not seem that radical to begin with, but the difference is that these modeling tools output graphical notations that can be implemented into the creation stage where code is actually generated," says Vollmer. "This is usually done through a business process execution language [BPEL] server. This is one of the new standards that is really enabling some significant improvements in the development area."

The software feeds the code into an execution engine and brings in workflow and process automation. "The same code is monitored by the business user through tools such as dashboards, and can be optimized through dynamic adjustment of business rules," Vollmer notes. "This capability did not exist until very recent times, and there are a lot of good stories about people doing things very quickly in a fraction of the time that they required in the past."

Forrester is forecasting rapid growth in this category. "The market overview we did in 2005 was looking at a market of $2.7 billion by 2009 for the software and services from the software vendors," says Vollmer. "Now we're projecting that this is going to be close to $7 billion by 2011. We've been finding from conversations with vendors selling BPM products that they're selling a lot more of them this year than we had thought they would. And we project that this will continue."

Cash Management Goes Global

The future also looks bright for applications that help companies manage their cash flow. "With the diminishing margins on some of these financial transactions that companies have to deal with on a daily basis, a lot of banks, financial institutions, and in-house treasury departments really want to lower their operating costs as much as possible," observes Albert Pang, research director of enterprise applications at IDC. "The standardization of these in-house systems is becoming a reality."

Treasury workstations are traditionally big-ticket items, and companies are finding innovative ways to defray their costs. "Rather than just doing it on their own, they might even invite their trading partners or affiliates to take advantage of the systems as well, to lower their overall operating costs by spreading the costs over a larger number of users," notes Pang.

Online delivery is a hot trend in the cash management sector. "Almost every best-of-breed vendor offers Web services capabilities. In some cases, they're completely changing their business models, moving away from in-house implementations to 100 percent Web services," Pang says.

Perhaps the most powerful engine of growth in this market segment is globalization. "In many cases, the whole globalization trend calls for the need to work with many, many business partners -- a lot more business partners than if you were building everything on your own," notes Pang. This means more transactions and "bigger and more demanding cash management requirements."

It also means more foreign exchange transactions -- lots more. "Forex over the past 10 years has just continued to explode in terms of not just the amount of transactions but also the number of companies that need to do foreign exchange trading every day, every minute," Pang points out. "These activities have really just skyrocketed. There's a greater demand for an integrated solution not only to do trading but also to match your trades very efficiently and to provide the amount of content that you need in order to make sound decisions."

Many Happier Returns

Ten years ago, you could count the number of vendors of tax management software for large organizations on the fingers of one hand. While the category has seen the arrival of new blood since then, it remains one of the smaller segments of the best-of-breed market. The sheer complexity of the tax information universe is a barrier to entry for new players. Even the established vendors have their hands full in responding to changes in tax laws and accounting regulations. For example, tools to help companies cope with the complexities of FIN 48 are just starting to appear at vendors' Web sites.

Financial services giant MetLife has relied on an income tax management product from Thomson Tax & Accounting for several years, but this year it implemented a Web-based solution from the same vendor. "We find online delivery to be a good model, so we're trending, I guess, with the masses to that solution," says Mark Goodman, vice president in MetLife's tax department in New York City.

In addition, MetLife is currently implementing a workflow automation system from Thomson. The software "is really enabling us to cut down on the amount of paper we need; it's a whole document management tool," says Goodman. "Instead of printing the returns and creating huge volumes of paper files, we're now able to store the returns electronically along with the supporting documentation. We're looking for this to be a big benefit in what I'll call 'file cabinet space.'"

Strategic Tools for Human Resources

The HR management best-of-breed category covers a wide area, notes IDC's Pang. "We're talking about everything from benefits administration to compensation to core HR, meaning a master database of your personnel including both full-time and contingent labor," he says. "And then, increasingly, we are seeing the demand for strategic HR applications" such as e-recruiting, applicant tracking, and workforce performance management.

This sector is booming because of three factors.

"The first one is demographic changes. In a lot of developed countries as well as a growing number of developing nations, there's the aging of the population. There's going to be an increased demand for hiring the right people and also retaining the right people because the cost of replacing your employees has skyrocketed over the past 10 to 20 years or so. So you've got to have a much better system to keep track of these candidates and your highly specialized employees."

The second driver is job mobility. "Increasingly, employees are able to jump not just from one company to another but also from one region to another. In Europe, you could be going out and hiring people in Poland and transferring them to London."

The third is corporate performance. Pang points to evidence that "the performance of an organization really is based on how well its employees are performing. So companies are looking to align the performance of their employees with the overall corporate objectives."

"Companies can no longer rely on their HR systems as just a standard personnel directory," Pang adds. "You're going to have to add a lot of employee self-service capabilities as well as manager self-service functions. Companies absolutely need to make sure that with regard to whatever changes they make in their benefits program or compensation program or even the scheduling of their employees, this type of information is made readily available to their employees, sometimes even on a real-time basis. Companies have been burned before because they don't keep track of this data and don't disseminate it efficiently to their employees."

Better Ways to Manage Credit

ERP providers are making serious inroads into the credit management space, says David Schmidt, senior analyst with Paystream Advisors. "They're in the game now," he notes, adding that their offerings are "pretty advanced." In response, "best-of-breed or point-solution providers are trying to add bells and whistles and expand the scope of their products."

Growth in the sector has been steady but not spectacular, says Schmidt. "It's following a fairly steady pattern; it's not explosive at this point. People still are looking very often to do what they can in-house." Paystream Advisors has seen growth in the sector running between 8 and 14 percent per year.

Toronto-based Xerox Canada implemented a credit management tool from eCredit in three phases starting in June of last year, according to Anna Yu, chief risk officer. "The reason we decided to go with a phased approach was that we recognized that in each phase we would be able to generate positive results rather than waiting for the entire project and development to be completed," she reports.

The company had three goals for the project: "One was to centralize our credit information through the interface with our internal and external sources. The second was to shorten the credit decisioning cycle, and the last one was to standardize all of our policies and reporting." Xerox Canada's Lean Six Sigma initiative was a central factor in the implementation. "The Lean Six Sigma initiative has been a key driver in many of our improvements within our processes in the company, so when we first started looking into what improvements we could put in place from a technology perspective, we utilized the Lean Six Sigma tools, which are based on data and validations, et cetera, to get us to the point of determining that this was the route we wanted to take."

The new system has met all of the company's goals, Yu reports. In addition, it "allows the team to focus on financial analysis and other areas of specialty that are more critical to our business versus the manual processes that we previously had." Customer satisfaction has increased, too. "There's no reason why we wouldn't move to a system that reduces manual labor and increases customer satisfaction and productivity," says Yu.

Nailing Down Expenses

The attractions of a top-notch best-of-breed expense management system are many; David K. Hillman, principal with Consulting Strategies in New York City, reels off the top three: "It makes expense reporting easier for the user -- a couple of clicks and you're finished. It provides valuable information to test compliance with travel policy and save money that way. And it provides valuable information for use when you're negotiating with your vendors because now you have a database that really gives you the ability to know what you've spent money on, with whom, when, and so on."

Hillman sees a robust future for the category. "Most of the Fortune 500, if not the Fortune 1,000, have selected and implemented some type of expense management system. I think that what's going to continue to happen is that they'll roll them out globally. Secondly, the use of these tools will trickle down into smaller companies; it'll certainly penetrate the midmarket and even smaller than the midmarket." Some tools are offered at a price that's within the means of smaller companies, he notes. "Additionally, over the past several years the price points of the best-of-breed have come down significantly, so that companies that may not have been able to justify them five or six years ago can now justify them." And these tools have greatly improved in those five or six years, he adds.

ABB Inc., a global engineering company, implemented a Web-based tool from Concur starting in January 2006 in a six-month process. "We have many ERP systems, so the interface took additional time for us," recalls Sue Gibbs, director of U.S. shared services. "We were looking to fully automate and go as paperless as we could. We have people in the U.S. who report to people in other countries. The approval process needed to span the globe, so to speak, and this allowed us to do that in a fully automated way."

While ABB hasn't formally measured ROI on the project yet, Gibbs expects to save money in negotiations with vendors. "Of course, it takes a little bit of time before you have that information; those contracts don't renew very often," she notes. "But we have increased our VAT [value added tax] reporting; there was a lot of money that we left on the table there, and we've brought in $50,000 or so that we probably wouldn't have been able to bring in otherwise." European countries that impose VAT "don't make it easy for you to reclaim it, so you really need to be able to get those receipts back from your employees and to have good control mechanisms on which to file," she says.

Sorting the GRC Tools

The governance, risk, and compliance (GRC) segment is one of the most fragmented and complex in the best-of-breed marketplace. Gartner Inc. divides the functionality provided by the tools into five types: finance management GRC, audit management, audit data extraction and analysis, segregation of duties, and business rule management. "The functions are pretty well defined," says Tom Eid, research vice president with Gartner, "and the feature set is fairly similar across the vendors."

In addition, though, "there's this area more broadly around IT GRC, looking at things like IT governance and IT controls automation and monitoring." Vendors in this area --including providers of IT operations, database management, database audit, and secure identity software -- "are all claiming to be a compliance offering," says Eid, "and they really aren't." While these products may be used in support of a Sarbanes-Oxley initiative or a HIPAA initiative, "those types of technologies are really just trying to rebrand themselves as a governance, risk, and compliance offering. They're supporting the initiative, but they're not really what could be considered to be a Sarbanes-Oxley or like-minded type of vendor."

The core vendors in the space are looking to expand their feature set. "They've been in the market a few years, and the technology is getting a little bit more robust, more reliable, more secure. At the same time, through the use of service-oriented architectures, they can modularize their technologies more. This facilitates the sharing of information into other modules, so that they can build out what might have started as one or two functions -- they are providing more of a platform or a suite approach, and offering more features and capabilities under the hood."

Project Portfolio Management

Neil Stolovitsky, research analyst with Technology Evaluation Centers (TEC) in Montreal, tells a classic tale of niche vendors' resilience in the face of the most daunting competitive pressure from bigger players as he looks back at the project portfolio management (PPM) sector's rapid evolution over the past three years. "Prior to that, project portfolio management was commonly referred to as professional services automation [PSA]," he notes. "Essentially, it was a set of tools that would help project-centric organizations track what they were doing from an execution point of view in their projects, linked to their back-office systems or their operations." For such organizations, "their product is actually their projects. These PSA vendors recognized that there was a gap between what accounting systems or back-office systems were typically providing and the execution or the delivery of projects. They developed a tool set that would bridge those two things."

The sector underwent a radical shift in the early years of this decade when ERP vendors started to focus more on the services industries. "A lot of these PSA vendors were left out in the cold because they didn't provide a complete offering," says Stolovitsky. In response, "they did a 180, and they said, 'Let's move away from being primarily vertical to the services industry and go a little bit more horizontal.' They switched their offerings to deliver project portfolio management solutions for IT departments."

"They recognized that any significant organization had an IT department -- very large budgets, very large projects -- but they didn't really have the tool sets to manage those projects, prioritize them, and manage their resources," continues Stolovitsky. "So about three years ago, a lot of these small best-of-breed PSA solutions relabeled themselves as project portfolio management tools."

The turnaround couldn't have come at a better juncture for these vendors; at the time, IT shops were starting to respond to demands that they align their IT processes with overall corporate goals. The PPM sector has been on an upward trajectory ever since. The pace of change has been unrelenting, though, with the market consolidating rapidly. Last year, for example, Hewlett Packard snapped up Mercury Interactive Corp. and Microsoft acquired the software assets of UMT, and in February of this year, PlanView acquired Business Engine.

"This is one of the things we stress when doing a software selection," adds Wayne Thompson, director of research with TEC. "In any market that's consolidating, such as this, those players who are smaller and may offer some type of functionality or some type of sales channel -- or may just have in-house talent for development -- are very prime candidates for mergers or acquisitions. So once those types of events happen, you have to ask yourself, 'What is their product plan? What is their future rollout schedule?' And typically in those acquisitions, all bets are off."