Overview

Introduction

For many Enterprise Applications vendors, 2001 was a tough year. Although total spending on Enterprise Applications increased, the biggest vendors accounted for a larger percentage of the expenditure.

"dot-com" bust leads to e-procurement boom

E-business applications did not go away with the dot-com bust in 2001. Instead, companies have been focussing on applications that help improve efficiency and save money. One particular focus has been on e-procurement applications. Until recently, most e-procurement applications used EDI systems to transmit orders and receive invoices. Even at this simple level, there were limitations, not least the cost to suppliers of deploying an EDI solution. The Internet is seen as the way to overcome these limitations, since suppliers do not need to sign up to an expensive EDI network, they just need to connect to the Internet. More importantly for suppliers, they no longer need to join multiple networks to connect with all their customers. During the dot-com boom, public marketplaces were seen as the way to go. In theory suppliers would all sign up to one marketplace and buyers could then find all suppliers in one place. Unfortunately, marketplaces could not get a critical volume of suppliers to join, in many cases because there were lots of marketplaces that they might join. They either had to join many marketplaces, or sit and wait to see which became the dominant one. Unsurprisingly, many chose the latter option and, as a consequence, marketplaces failed to attract buyers.

The answer has turned out to be much more familiar - the large corporations with plenty of buying power have either set up private marketplaces, or have joined forces to set up an industry-specific marketplace. As with EDI, these supply chain 'gorillas' have the clout to insist that suppliers connect to their marketplace or lose lucrative contracts. The boom in private marketplaces, or exchange-based e-procurement systems, has coincided with the existing Enterprise Applications vendors releasing exchange solutions. SAP partnered with CommerceOne to set up SAP Markets, while Oracle and i2 developed their own solutions. This increased level of competition is likely to spread to solutions for smaller companies over the next two years, potentially focusing on software to allow companies to connect to multiple exchanges or marketplaces.

Mid-market still in the doldrums

Vendors to mid-market companies had a particularly tough year in 2001. While there were affected by the post-Y2K adjustment to lower spending levels and the slowdown in the manufacturing industry, they did not enjoy the same boost from CRM and e-business applications that the larger vendors received.

In general, mid-market companies were either not spending IT budget on Enterprise Applications, or were updating their ERP infrastructure. Given favourable economic conditions, companies with updated ERP infrastructures are likely to begin to use the platform to deploy CRM, SCM or e-business applications. These applications should begin to realise significant returns on investment for the infrastructure. This light at the end of the tunnel is vulnerable to deterioration in economic growth.

Market Figures - 2001 Highlights

Expenditure

End User Spending increased again, but not at the rate seen up to 1998. Cambashi believes spending outpaced the expected growth rate in 1997 and 1998 as companies prepared for Y2K. The spending in 2000 appears to have returned to a level consistent with pre-1995 growth. Only in 2001 have we seen the correction below the trend growth level. European expenditure mirrors the worldwide growth.

Source: Cambashi estimates

Vendor software revenues in Europe saw remarkable growth in 2001. This follows stuttering growth from 1995 to 2000, possibly because of early preparation for Y2K, then spending on services, rather than software, in 1999. The growth in 2001 was fuelled by the take-up of e-business, CRM and SCM applications, rather than core ERP. However, smaller companies are still investing in core ERP as they modernise their systems.

Software revenues from European manufacturing companies saw a decline in 2001, mirroring the decline in the GDP of the manufacturing industry. Manufacturers appear to have been more cautious over the take-up of the solutions that add-on to ERP, particularly e-business and CRM. However, if the manufacturing economy picks up, then we would expect manufacturers to start investing in e-business and CRM projects.

European software revenues to Enterprise Applications vendors

Source: Cambashi estimates

Europe is SAP's playground

Although Siebel has consolidated its position in the leading Enterprise Applications vendors in Europe, SAP continues to dominate. Indeed, SAP accounts for more than half of the software revenues to Enterprise Applications vendors in Europe. Also noteworthy is Baan's re-emergence as a leading vendor in Europe.

European software revenues to Enterprise Applications vendors

Source: Cambashi estimates

European Manufacturing is also SAP's domain

SAP also dominates the market to manufacturers in Europe. Baan, i2 Technologies and IFS are much more prominent in the Manufacturing sector, reflecting their Manufacturing sector focuses. PeopleSoft and CommerceOne are notable by their absence in the top 10, replaced by Geac and CA's interBiz division. J.D. Edwards and SSA sit just outside the top 10 in 11th and 12th respectively. CA has just agreed to sell the interBiz division to SSA, and if the proposed merger happens smoothly, then combined revenues should rival IFS in the European Manufacturing sector.

European software revenues to Enterprise Applications vendors from Manufacturing sector

Source: Cambashi estimates

It's tough at the bottom

Last year we saw a polarisation in the market between companies that were growing and those that were contracting or stable. This year the big vendors appear to be getting richer, while the small vendors are getting poorer. With a few notable exceptions, such as IFS who posted a pre-tax profit for the first time since 1998, only the top four vendors - SAP, Oracle, PeopleSoft and Siebel made a profit. 2001 appears to have been a tough year for the smaller vendors, with many seeing declining revenues and continuing losses. There were none of the spectacular growth stories either. Ariba, who saw 515% growth in 2000, grew at a more restrained, though still impressive, 47%. CommerceOne, who was the most spectacular riser of 2000 with 1096% growth, saw only modest 1.7% growth in 2001. The other big riser of 2000, i2 Technologies, actually declined revenues by 12.5% in 2001. All three companies also made large losses, both Ariba and CommerceOne reporting losses in excess of $2.5 billion.

In terms of growth, the success stories came from some surprising places. Manugistics, which saw declining revenues in both 1999 and 2000, grew 76% and SSA recovered from its 'Annus Horibilis' with around 40% growth. Apart from the top four vendors, who all grew revenues at rates between 10% and 20%, while remaining profitable, the other success stories were Baan and IFS, both growing at a little over 20% and both seemingly profitable.

Conclusion

The consolidation that we expected in 2001 has only just begun in 2002, with announcements of purchases by PeopleSoft and the sale of interBiz to SSA. We expect this trend to continue through 2002 and into 2003. Initial financial reports suggest a tough year ahead for some of the key vendors with warnings from vendors such as Oracle and PeopleSoft.

For the industry as a whole, much is likely to depend on the state of the global economy. For, whilst IT spending as a percentage of GDP has been steadily growing, total IT spending requires a growing economy to grow at the rates we have seen over the last five to ten years. If the economy does not grow, or grows only slowly, then Enterprise Applications vendors would need to take a larger share of the IT spending for the Enterprise Applications market to continue to expand.

Dan Roberts
email: dan.roberts@cambashi.com

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