Despite increased competition on several fronts, best-of-breed (BOB) software vendors are thriving. Most of these companies have achieved ongoing growth in revenue over the past year. They've done so by providing applications that solve specific business problems and by offering superior product quality and deeper functionality than their less-specialized competitors do.
"The ability of BOBs to maintain a quality edge over competitors is often due to their lead time," says John Hagerty, vice president of AMR Research in Boston. "When it comes to something like business performance management [BPM], it takes time for competitors to catch up to the quality level those best-of-breed BPM vendors have achieved, partly because those BOBs have been entrenched for so long and have extended their quality lead for a relatively long time period.
"However, when it comes to something like compliance management, in which lead time is not a particular advantage for BOBs because the compliance management space is relatively new, BOBs' quality gap hasn't had time to widen," Hagerty notes. In addition, the long lead times that historically have cushioned best-of-breed providers are shrinking, he says. And these vendors must now fend off challenges from IT platform providers -- IBM and Microsoft, for example -- as well as from ERP players such as Oracle and SAP.
Recognizing the need to adjust to the changing face of competition, best-of-breed vendors are stepping up their M&A and partnering activities. Their goal is to shore up product deficiencies and establish end-to-end functional capabilities.
BPM Heats Up
Total spending on business perfor-mance management software will reach $23 billion in 2006, according to a recent survey by AMR Research. "With all this buying, competition is becoming tighter, and three categories of performance-management vendors are beginning to emerge: best-of-breed, enterprise providers and technology platform providers," says Hagerty.
Specialized BPM software companies are scrambling to minimize shortcomings in their product lineup by acquiring or partnering with vendors that occupy even deeper niches. For instance, in April, Hyperion Solutions announced that it will acquire UpStream Software in order to deliver a packaged solution for financial data quality management. In the same month, Applix announced a partnership with Varicent Software Inc. to provide a sales perfor-mance management product that will help companies improve their sales metrics analysis.
Perhaps the most salient trend in this space is the convergence of BPM tools and business intelligence (BI) software. Says John Colbert, vice president of BPM Partners in Stamford, Conn.: "It's going both ways, with BPM players acquiring BI capabilities, as in the example of Longview Solutions partnering with enterprise business intelligence player Information Builders, and [BI players acquiring BPM companies] -- for example, Business Objects acquiring SRC Software, a budgeting and planning BPM software firm focused on the financial services and health-care industries."
For Carl D. Lowman, director of global financial planning and analysis at MWH Global Inc., a civil engineering services and design/build firm, the search for the right BPM solution began in April 2005, when his organization investigated budgeting and planning tools. "We developed an initial list of vendors, and my IT colleague took the lead on contacting the ones we wanted to evaluate more closely," says Lowman, at the company's Broomfield, Colo., offices. "We did phone interviews with a shortlist of vendors, conducted further due diligence and proof of concept, and then we brought in our three finalists. They showed us their demos, and from there we matched their capabilities with our needs."
MWH Global's final choice was a hosted application. The company's IT resources were already committed to a worldwide rollout of an ERP system, and Lowman felt the department would be stretched too thin to handle an extensive BPM implementation simultaneously.
Before making the final decision, Lowman and his colleagues solicited input from finance teams within the company's various operating units. "I didn't show them a budget prototype ahead of time because I didn't want them to start nitpicking it," he reports. "I just asked them questions about their business requirements to do their budget, and some of them gave me validation of what I wanted to go with. In the end, everyone was surprised how close the solution was to meeting their requirements. We went live in October 2005 with the BPM solution from Host Analytics."
Bright as the BPM sector's outlook appears, its future hinges on providers' ability to extend their products' functionality beyond the core areas of budgeting and planning. BPM software must become more relevant to more users in order to meet companies' need for a tool that can infuse a performance mind-set enterprisewide. Yet, to date, few organizations have been able to discover uses for BPM in nonfinancial functions such as operations.
Process Management Hits Prime Time
Business process management software is all about enabling companies to continuously improve procedures across departmental boundaries. And, increasingly, businesses are awakening to the power of these solutions. Providers of business process management systems (BPMS) will see their revenues from licenses, services and maintenance grow from $1.2 billion in 2005 to more than $2.7 billion by 2009, according to Ken Vollmer, principal analyst with Forrester Research in Cambridge, Mass.
"Today's BPMS efforts have a much higher success rate than the tools implemented during the business process reengineering heyday," Vollmer observes. "Today's BPMS software directly connects the digital and physical worlds in every phase of the process life cycle, from modeling and simulation to business process analytics and optimization. In contrast, earlier workflow products were inflexible and couldn't support this direct linkage."
Vollmer divides BPMS vendors into two broad categories: those that focus on integrating the technologies that underlie business processes and those that streamline the processes themselves. "Integration-centric BPMS focuses primarily on integration between the applications and systems that support cross-functional business processes -- automating system-intensive processes -- while human BPMS focuses on automating human activities like claims processing, loan approval and call center interactions," he says.
It's been almost four years since Charles Bihler spearheaded the implementation of a business process management solution, from Proforma, at his company. Bihler is manager of business operations and process at Loral Skynet, a Bedminster, N.J.-based company that provides satellite, network and professional services. "Initially, we looked at optimizing common processes such as billing, contracts and legacy systems, and as those processes became more streamlined, SOX came along and we began to use the solution for our compliance needs," he says. "It's become one of our SOX tools, helping us to improve our internal controls and process charts showing responsibility of duties, hand-off processes and approval processes. The software has been well-received by our auditors."
Dynamic Cash Management
Best-of-breed cash management tools can automate cash forecasting, cash flow analysis, collections and receivables. "These BOB solutions allow information to be brought in from an ERP system so you can see where you stand with your cash management efforts," notes John Van Decker, senior vice president and principal research fellow with the Robert Frances Group in Manasquan, N.J.
For Ikon, a $4.5 billion sales and service provider of document management solutions and office equipment in Malvern, Pa., the primary goal of a far-reaching cash management initiative was centralization. Ted Strand, vice president and controller, wanted a system that would enable users to see all of the company's collections and receivables data in one location.
"We have a high volume of maintenance contracts, and in the past we spent most of our time organizing the data from our different business units rather than acting on it," Strand reports. "That drove us to move from our in-house system, which was specific to our needs but didn't have the flexibility to change, to an automated solution. After about five months of going through a vendor selection process and determining how each vendor would meet our needs and integrate with our IT department, we chose the solution from Aceva Technologies." The decision was also based on input from the company's collectors, who heard the vendors' sales pitches and learned how the various solutions would help them do their job.
"We're currently in day five of implementing the Aceva cash management solution," reports Strand. "It will handle all of our U.S. business, which is 75 percent of our business overall."
HR Tools Evolve
Traditionally, human resources management software has been an infor-mation-tracking system, a means of collecting details about employees to ensure that they're receiving the benefits they are entitled to. In the past few years, however, companies have begun to use these tools to leverage their HR data to better understand employee behavior and skills and to match human capital assets to corporate performance goals.
Vendors in this $6 billion space are striving to gain a competitive edge and round out their suite of offerings by acquiring smaller players, says Christa Degnan Manning, research director at AMR Research. "For example, in January 2006, Saba, a traditional e-learning provider, acquired Centra, a collaboration platform for interchanges of information designed to train employees remotely and to help companies deliver educational materials," she reports. "In 2005, Authoria acquired Hire.com, which [became] a recruitment component, so that companies could use Authoria not only to identify skills, but also to hire what skills they found they were lacking."
Yet for most companies, streamlining the administration of health benefits remains the most prevalent use for this type of software. That's been the case at Pitney Bowes Inc., a provider of integrated mail and document management systems and services. "We use the solution from HighRoads, which we implemented about four years ago, for requests for information and requests for proposals from health plans," reports Dr. Jack Mahoney, corporate medical director, in Stamford, Conn. "It has eliminated virtually all of the paperwork. Everything's electronic, and we can see historical changes in health plans without using paper."
Making Taxes Less Taxing
In the last couple of years, best-of-breed software vendors in the tax management space have begun to offer comprehensive packages covering the gamut of corporate tax needs, from sales tax to payroll tax to consumer use tax.
At Nestlé Holdings Inc., a Norwalk, Conn.-based subsidiary of Nestlé S.A., corporate leaders wanted to create a standardized process for accruing use tax that could be applied uniformly to all of the organization's major operating companies. Nestlé Holdings' tax management function "is always looking for software that will aid us in our mission, and the tax management software upgrade we're in the process of implementing, from Vertex Inc., is helping us achieve our goal," says Dave Roscia, sales and use tax manager.
"In the past, our process involved too many people throughout the organization and took too much time," Roscia adds. "With this [software], we're automating more of the processes and putting more of our companies on the same platform. We're also applying it to state sales taxes."
Before the implementation, Nestlé Holdings' hundreds of in-house purchasers were responsible, with the support of the tax department, for knowing the taxability of the items they bought. The new system eased that burden. "This automated process won't involve [manual] analysis of tax, and it will also eliminate redundancies through a more streamlined process," Roscia says.
Tools To Control Credit
Best-of-breed software vendors in the credit management space -- aka the receivables and collections management space -- offer systems that enable users to understand their accounts' status at a glance while eliminating manually intensive A/R chores. Although integration with other types of applications remains problematic, companies that invest in credit management tools are achieving significant savings in time and money.
Jerry A. Drake is financial services manager at Viracon Inc., a fabricator of glass for the architectural industry based in Owatonna, Minn. Drake helped his company implement a credit management application a few years back. "We've found the credit management solution from GetPaid, which we went live with in July 2003, cuts down on the number of people we need working in credit and collections, and we can take on more marginal accounts because we can monitor those accounts more closely," says Drake. The GetPaid Corp. was acquired by SunGard in 2005.
For Kolcraft Enterprises Inc., a manufacturer of crib mattresses and other children's products, the need to address chargebacks and deductions triggered the search for a best-of-breed credit management tool. "It was difficult for us to manually verify the accuracy of the chargebacks, and our main problem was getting cash applied on a timely basis," recalls Sharon Danko, vice president of finance in Chicago. "We found ourselves anywhere from two weeks to a month behind in cash applications, which made tracking the deductions difficult because we didn't know the deductions were there until almost a month later. With the solution from 9ci, we can quickly see how many chargebacks were paid out or if a chargeback was taken in error."
Beating Back Expenses
Buyers of best-of-breed expense management tools are looking for packages that enable them to input receipts electronically, achieve deeper visibility into their spending, and eliminate paper-based approval processes. As vendors strive to satisfy those needs, they're feeling pressure from new competitors -- credit card providers like American Express, MasterCard and Visa, for example -- according to Jeff Pikulik, who was a research director at Aberdeen Group when interviewed and is now senior vice president at payment management software provider Harbor Payments in Atlanta.
Still, best-of-breed providers in this segment are finding a ready market. "From a buyer's perspective, if you only have a few people handling expense management, you could go with a desktop, self-administering type of application," Pikulik notes. "But if there are 25 to hundreds of users, then you'll need a more comprehensive solution that the company might buy as a hosted solution."
An increasingly important focus area for expense management software providers is telecommunications. "We have over 1,400 branches, our telecom bills range in the millions per month, and we deal with dozens of local providers," says Steven Wagoner, vice president and IT financial planning manager at BB&T Corp., a bank holding company headquartered in Winston-Salem, N.C. "We needed bill consolidation and information on who's calling our network.
"With the solution we purchased from AnchorPoint in 1999, our most recent improvement has been using an electronic data interchange," says Wagoner. "Now we can correct our telecom bills faster. Our savings to date on bill corrections has been several million dollars as a result of having this information in front of us."
Solving the Compliance Conundrum
Offerings in the compliance management software market have been a source of frustration for many companies over the past few years. "Frequently, companies get bogged down in one area of compliance, such as Sarbanes-Oxley, but fail to realize that compliance is a challenge that hits nearly every part of the organization," says Michael Rasmussen, vice president of governance, risk and compliance management at Forrester Research.
A comprehensive compliance management application must include four core features, according to Rasmussen: policy, risk and control documentation; risk and control assessment; risk analytics, which helps users quantify and model exposures the business faces; and functionality that helps users manage compliance-related events, losses and investigations. Yet few, if any, compliance management systems offer all of those capabilities.
ERP software providers are partnering with best-of-breed vendors to offer compliance capabilities, Rasmussen adds. "Within the next 18 months, look for ERPs to start acquiring the compliance management BOBs and changing the landscape of this space," he says.
Last year, Mike Stolorena needed to replace the compliance software his organization had been using. He's vice president and chief compliance officer at Scientific Atlanta, A Cisco Company, which provides products and services that help broadband operators connect consumers with inter-active video, data and voice services. The compliance tool had been provided by one of the Big Four accounting firms. "We looked at a number of compliance vendors and ranked each one versus our needs," reports Stolorena, in the company's Lawrenceville, Ga., headquarters. "That took about 60 days. Then we selected three finalists. One of the finalists gave us a canned demo, and the other two used our data to show their system would work for our company. Finally, we selected OpenPages' compliance solution and implemented it in the fourth quarter of 2005." That was shortly before the company, then called Scientific-Atlanta Inc., was acquired by Cisco.
"We're able to slice and dice the information better, something which would have been much harder using a spreadsheet," says Stolorena. "The solution has also helped with the transition to being a Cisco company and working with Cisco's auditors, enabling them to get at the information faster, which will potentially lower our audit cost fees. We're able to give the auditors more information about which controls are high-risk and which ones are low-risk."
Rationalizing The Project Portfolio
Project portfolio management (PPM) software helps companies evaluate and prioritize initiatives to achieve the optimum mix of risk and return. "PPM has become increasingly popular among companies over the past year, particularly in the IT area," says Dennis Gaughan, research director at AMR Research. "Revenues from BOB vendors in this space are growing at about 20 percent to 30 percent annually. ... PPM solutions can be applied to a variety of needs, including research and development, or to evaluate all of a company's capital spending -- not just projects."
Eighteen months ago, Advanced Medical Optics, an ophthalmic medical devices company in Santa Ana, Calif., was using a PPM tool to measure the time employees were spending on various projects. "Then, in November 2005, we started to implement this solution, which we purchased from Business Engine, more fully," says Chris Carr, controller for strategy and technology. "Now our people can see the project plan and its status at a glance, in real time."
In the past, the company's R&D departments used several project management systems to monitor the performance of their initiatives, according to Carr. "Now everyone follows the same process for developing new products, and with this software system online, it's helped us to get to a standardized plan for product development," he reports.