Enterprise Applications Vendor Reverses Fortunes - But Will Perseverance and Agility Be Enough?

Event Summary

Amid the ongoing protracted and ever-intensifying "feeding frenzy" in the enterprise applications market (see The Enterprise Applications "Arms Race" To Be Number Three), the ongoing turnaround success of IFS (XSSE: IFS) has gone somewhat unnoticed. IFS is a global enterprise applications supplier with sales in 54 countries, 2,600 employees, revenues of about SEK (Swedish krona) 2.15 billion ($290 million [USD]) in 2005, and more than 750,000 users at over 2,000 corporate customers worldwide. Perhaps the vendor's deliberate choice to stay away from any serious merger and acquisition talks has also contributed to it remaining outside the spotlight (although sporadic market speculation cannot be avoided).

Part One of the series Enterprise Applications Vendor Reverses Fortunes—But Will Perseverance and Agility Be Enough?

In a nutshell, IFS was the fastest growing enterprise resource planning (ERP) supplier in the mid-to-late 1990s. But the early 2000s marked a painful adjustment to slower growth and sometimes declining revenues. The vendor also had to deal with losses—some of which were whopping—for several years running, peaking at about $85 million (USD) on revenues of about $313 million (USD) for 2002. The IFS turnaround is thus impressive, since 2005 was the first profitable year in a long while (with profits of $13 million [USD] on total revenues of $288 million [USD]). The vendor also gained 10 percent in customers (including over 200 new customers), and over 15 percent of existing customers reportedly invested in new functionality during the year. IFS management attributes the success to its more focused sales strategy (including finding a tricky balance between not being seen as a niche provider and not being "all things to all people" either), increased organizational efficiencies (with costs and expenditures aligned with revenues), and continued emphasis on a selected, manageable number of vertical industries.

The Halcyon Days of the 1990s

Before delving deeper into these current foundations of success, it might be useful to review the vendor's genesis. In general, IFS has typically found success when growing organically (for the most part) and by staying focused on midsized manufacturing enterprises. Technology Evaluation Centers (TEC) has frequently covered IFS since the late 1990s, when the vendor was undergoing a phase of rapid growth (especially in terms of new licenses) and global expansion. Add a good product, and one would have thought that nothing could ever go wrong with the vendor. The company's roots go back to 1983, when it was founded in Sweden, with software used to maintain assets for large utilities, and 1986 marked the launch of IFS Maintenance. After extending into manufacturing, distribution, and order entry and management, as parts of a more complete ERP suite in 1990, 1991 marked the company's geographic expansion into Norway, Finland, and Poland, whereas 1993 was marked by the first graphical user interface (GUI), and the opening of offices in Malaysia and Denmark.

In 1994, IFS pioneered component-based ERP software with IFS Applications, now in its seventh generation. Its component-based architecture has helped the vendor provide solutions that are typically easier to implement, run, and upgrade. It would be worthwhile to state at this point that IFS could be an object case of how a great product (in terms of functionality scope and technological foundation) and knowledgeable employees are only part of any wholesale success in the finicky enterprise applications market of today. For instance, back in 1994, IFS began a development project to transfer its flagship IFS Applications suite to object-oriented technology, which was completed in 1997 with the launch of the IFS Applications 1998 product suite. This was (and still is) in sharp contrast to the vast majority of competing enterprise applications, which remain largely on a monolithic client/server architecture and are in a midst of colossal efforts by vendors to move their spaghetti-like code-based applications to service-oriented architecture (SOA). The IFS business concept has since been to increase the "freedom of action" and competitiveness of user companies by enabling customers to either apply IFS solutions as a complete enterprise system, or as a complement to other vendors' applications within a specific part of the business process, which again is in tune with the SOA concepts of flexibility, agility, reuse, and so on. The main premise of SOA is to possess a number of individually developed, reusable software components (services) that can perform the functions of those applications (instead of having separate applications). Since many functions are common to many applications, services can supposedly be used in more than one setting, which in turn should reduce total development time and costs, and increase the agility of businesses. For more information, see Understanding SOA, Web Services, BPM, BPEL, and More and SOA as a Foundation for Applications and Infrastructure.

A Futuristic Product

For over a decade, the cornerstone of the IFS strategy has thus been founded on its now proverbial component-based architecture with a well-rounded product footprint (to fit many manufacturing environments, including the mixed-mode or hybrid ones) and moderate vertical market focus. This has thereby become part of its identity, and a key ingredient in being able to deliver even deeper vertical industry functionality going forward. Also recognizing its scalability limitations (in addition to the rigidity of its erstwhile two-tier client/server architecture), in the mid-90s IFS embarked on creating an n-tier product architecture that would separate presentation, business logic, and data storage layers, and also render IFS independent from Oracle development tools and the use of stored procedures in the Oracle database.

IFS Applications 2001 was consequently heralded as a fully internet-enabled and componentized five-tier architecture suite, covering most traditional horizontal ERP functionality via a mandatory IFS Foundation layer, on top of which one can build (in a "pick and mix" manner) functional modules needed to satisfy the needs of more specific businesses. The architecture, which has been called Foundation1 since 2002, also allows new technologies and components to be swapped in and out of the technology stack relatively easily, without causing major distraction to the install base, and it also fosters an easier way for interfacing or integrating with other systems. Since 2002, IFS has also provided Web service access and Java 2 Enterprise Edition (J2EE) within its architecture. Namely, the original n-tier approach was based on older CORBA (Common Object Request Broker Architecture) technologies. As newer, better and standardized technologies became available (such as J2EE), IFS moved Foundation1 from CORBA to J2EE without significantly changing its application components. This fundamental technology shift demonstrated the value of this approach without impacting the core applications, and IFS customers received this technology uplift as part of a normal version upgrade.

Also, the IFS functionality has been split across over several dozen independent modules, which are actually coarser objects or components, and which can be implemented and upgraded separately from one another (this has been true for some time now). At their own convenient pace, companies can select modules to coexist with other legacy applications and databases, or simply avoid the "big bang" monolithic implementation approach that is increasingly being avoided as an unwieldy practice (for more information, see The Joy' Of Enterprise Systems Implementations). Built-in extensible markup language (XML) messaging support and the external availability of all internal application programming interfaces (APIs) mean that integration between IFS components and other companies' software should be a reasonable endeavor. This layer of messaging via XML and Web services could in fact allow so-called "composite applications" to be assembled and deployed from multiple vendors. For more details, see IFS To Be At Customers' (Web) Service.

Further, owing to the component architecture, customers can, for example, install the latest version of a certain IFS component even while still using an older version of IFS Applications. And since the component architecture has been further enhanced within IFS Applications 2004 with the J2EE interface (dubbed IFS Service Oriented Component Architecture [SOCA]), thereby further basing IFS modules on open, commonly accepted standards, they should more readily be integrated into a company's existing information technology (IT) ecosystem. To that end, the IFS/Connect module allows any service or software component to be published as a Web service, transmitted via numerous protocols, integrated with messaging middleware products, or simply exported to a flat file. Designed for XML and the Web services concept, IFS/Connect also integrates with legacy systems, electronic data interchange (EDI) handlers, file import/export, and event notification. Moreover, while Foundation One is based on the commonly accepted open Internet standards, its design thinking is somewhat different, since IFS anticipated the need a while back to keep abreast of inevitable technology changes by incorporating the capability to add, change, or remove individual technology components on an ongoing basis and as required. To that end, Foundation One has already revised its web tier once and its mobile infrastructure layer twice.

IFS tries to differentiate from many other vendors (mighty or not) that try to confine user companies to a particular proprietary technology, such as Oracle- or Microsoft-centric solutions. These two giants are a particularly appropriate example, as they own the entire technology stack (layers), from database, via middleware and development tools, to applications (including even business intelligence [BI]—see SOA-based Applications and Infrastructure—The Next Frontier?). In this regard, IFS may somewhat be in tune with the approach of PeopleSoft (well, before the Oracle acquisition), Intentia (now part of Lawson Software), and SSA Global, with regards to leveraging IBM's more open technology, but it also resembles SAP's NetWeaver technology approach, although certain elements of SAP's platform (such as SAP Web Application Server [SAP Web AS] and ABAP/4 language) are proprietary to SAP. On the other hand, IFS uses completely openly available tools and technologies, as illustrated by its intentions to offer a choice of several J2EE-based application servers such as IBM WebSphere, Oracle Application Server 10g, and even Jboss Application Server, an open source application server. Currently, about two thirds of IFS customers run on Microsoft Windows operating systems, with the rest on UNIX, whereas Foundation1 within IFS Applications 7 is implemented in J2EE 1.4.

But There Were Also Harbingers of "Days of Reckoning"

One should note, though, that the aforementioned notable feats were built through the company's hefty research and development (R&D) investments and some modest acquisitions, especially throughout the ebullient dot-com era of the late 1990s, when not much attention was given to profitability. Around that time, in 1995, IFS opened offices in North America and Indonesia. Soon after, in 1996, it acquired Avalon Software, the US-based ERP provider, and in 1998 went public on the Swedish Stock Exchange, which, at the time, gave a false impression of almost unlimited capital investment. In 1997, IFS launched its web-based client (the predecessor of today's IFS/Collaborative Solutions which provides role-based portal views, which can be configured based on customers' unique requirements, so as to match the type of collaboration they desire), and expanded in the UK, Germany, France, Brazil, and Turkey. Hungary and Argentina followed in 1998.

In 1999, the vendor expanded into Greece and acquired US-based Effective Management Systems (EMS), as a way to move more aggressively into the North American market by getting a sales force team, a development team, and a local footprint. This has had only mixed success, since the acquired Time Critical Manufacturing (TCM) product line was discontinued, and only some of its customers migrated to the IFS product. IFS had hoped to convert its customer base from the maturing TCM product to its own modern enterprise applications, and consequently gain a quick US beachhead. However, customer satisfaction with TCM was very high, and customer loyalty therefore made it difficult to move customers away from it. With the majority of the TCM customers reluctant to make the transition, IFS then heavy-heartedly agreed to sell the TCM product line in November 2001, when IFS sold the business unit back to the original founder of EMS (Mike Dunham), who subsequently renamed the company WorkWise. Over 500 companies continue to use TCM to manage their businesses (see A User Centric WorkWise Customer Conference).

IFS initially also expanded into the customer relationship management (CRM) arena by acquiring former Israel-based CRM vendor Exactium for its product configuration module in the late 1990s. The subsequent sell-off move to Pivotal in 2000 (see What is IFS up to in the CRM Arena?!) represented IFS tacitly conceding that it had gone beyond its means with its over-ambitious product scope and geographic expansion at the time.

The Consolidation and Restructuring Phase

Since 1999, IFS has made no substantial acquisitions, although some expansion and growth continued till 2001, when it expanded to China (including Hong Kong) and Russia, while in the same year, IFS and IBM collaborated on next-generation mobile business applications. This, however, was at a time when IFS faced the rude awakening of market downturn concurrently with the stock market bubble burst and investors' negative sentiments. This heralded the so-called consolidation (after expansion) phase for the vendor, which entailed many steps in the right direction for IFS on its long and winding road to straighten up its ship, focus ever more solely on its core competencies (delivering a truly global and even more nimble product, and a sharper industry focus), and return to a consistent profitability track.

IFS then painfully realized the need to string together several quarters of profitability to quell market rumors, and restore consumer confidence and long-term stability. To that end, the vendor had to swallow many bitter pills in an attempt to stem the tide and concurrently increase revenues and return to profitability, while also developing the internal infrastructure to measure and increase efficiency and reduce costs. Cost-cutting, layoffs, certain organizational restructurings, increased off-shore product development, and so on, have consequently been associated with the prominent upper mid-market vendor that not that long ago seemed to have been getting everything right—technically, functionally and, to a degree, geographically.

The turnaround was achieved with new management, particularly the (now already former) chief executive officer (CEO) Michael Halln (previously the head of the R&D division), who led the company from late 2002 to early 2006. During that period, a non-core computer-aided design (CAD) solution, the @IFS hosting infrastructure and resources, a Brazilian subsidiary, and a Swedish payroll solution were divested to bolster the balance sheet and focus on core competencies (see IFS Continues Its Reinvention Through Pruning). The protracted mixed blessing performance of IFS in the early 2000s—the delivery of new exciting product features on one hand, with plaguing losses and an eroding financial situation on the other hand—had unfortunately been the main theme for these few years. Thus, the vendor had to shift the emphasis from astronomic high growth in the bullish late 1990s (and an entrepreneurial spirit and "can do everything" attitude of previous years) to a focus on reaching long-elusive profits. IFS conversely had to continue cost containment rationalization and to that end, product development has since been more sharply focused on refining functionality, particularly within specific industry segments of strategic interest for IFS and its premium partners. The vendor had to further develop its solutions to cater more deeply to specific vertical markets, and to focus on functionality in terms of finding out within which verticals it has thus far had success (and why), and to target them even more deeply.

For a long time, the underlying problem was that the company had invested heavily in product development to deliver more than sixty modules, including localization for many countries. Having done so, the company suddenly ended up with too much of a burden, given that it no longer required the same level of staffing for further development. Thus, IFS had to seriously reduce its Sweden-based and well-remunerated R&D team as part of an intensive cost-cutting exercise to save several dozens of millions of dollars per year. An increasing amount of its R&D activity has since been created in low-cost Sri Lanka, where it currently has about 600 technically proficient employees, and where it can reportedly gain a five-to-one increase in manpower for the same amount that it costs in Sweden. For instance, almost two thirds of the latest product version, which required a total of 600,000 R&D hours, was developed there for nearly one seventh of the total cost, which reportedly reduced the R&D expenditures to an extent where it is now covered by the recurring maintenance revenue stream, while not really affecting capacity.

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