Challenges and Opportunities
Run for over two decades under the stewardship of the deLaski father-son team, Deltek Systems, Inc. has become North America's principal provider of enterprise software and solutions for project-focused organizations. In mid-2005, Deltek announced that New Mountain Partners II, L.P. would make a majority capital investment in the company. See Mountainous Investment Transforms Enterprise Management Software Vendor and Enterprise Management Software Vendor Welcomes Additions for more information about this investment and its implications. This move, while certainly enhancing Deltek's prospects in terms of strengthening its global position, should not deflect attention from their already impressive offering (see Sweet Spots and What-Nots: Enterprise Management Software Vendor Provides Notable Solutions). But the road ahead presents its own particular challenges and opportunities.
Part Four of the series Mountainous Investment Transforms Enterprise Management Software Vendor.
Thanks to its internal developments and acquisitions, Deltek currently boasts more than 11,000 customers worldwide, and 1,000 employees in 14 locations in the US, Canada, and the UK. The vendor has long since established its strategy with respect to its large installed customer base:
- to maintain and strengthen relationships with the existing customers by providing ongoing support services;
- to derive additional revenues by migrating clients to more advanced products within its product line, licensing add-on application software products, and offering its customers additional consulting and training services; and
- to target existing customers for front-office add-on solutions such as Deltek CRM & Proposals, Deltek Time Collection, Deltek Employee Expense, Deltek GovWin, Deltek BPM, and Deltek Employee Self-Service.
However, based on strong recent execution, tried-and-true alliances, and its "trusted specialist" and niche leadership auras in targeted project-oriented vertical markets, as well as its new management and infusion of capital, Deltek has recently been working to harness its indisputable differentiators, in order to move into new markets and position itself for continued growth. Since its inception, the company's product line has expanded from applications for managing core back-office processes, to front-office and e-business processes for professional services and other project-based companies, many of which provide products and services beyond the realm of federal government contracts. However, room for expansion remains, in certain areas. But these opportunities (although some of them may be low-hanging-apple easy pickings), will also present the upbeat vendor with challenges, if only because of the difficulties involved in sailing uncharted territories.
Geographic expansion into Canada, the UK, and Australia seems the most feasible option in the short term, given that they are English-speaking regions, and also given Deltek's ongoing effort to incrementally internationalize its product portfolio beyond the Costpoint, Vision, and T&E products. One should keep in mind, however, that in many Deltek markets, particularly in the federal government sector, its customers are inherently focused on the US, and will likely remain so. Therefore, multicompany and multilanguage features have only recently been introduced within the Costpoint 5 release (and Vision 3 release), which has likely meant many missed opportunities in the past—and possibly in the future while these immature features gain some traction. Despite some international clients (including pharmaceutical company Kendle International [Germany] and General Dynamics [Saudi Arabia]), Deltek has thus far achieved an only limited presence in international markets, which is a weakness compared to the global capabilities of competitors such as Oracle, SAP, Microsoft, Epicor Software, and Exact Software (see Global Software Aspirations).
Deltek's international business strategy is being energetically refocused, from opportunistically targeting potential user organizations, to marketing and selling its solutions through value-added reseller (VAR) channels. For one thing, it always helps to have an expert third party certify the best practices and value proposition of the enterprise solution, especially for those that require, even for occasional users, a thorough education with respect to concepts and lingo (as is the case with regulatory and reporting compliance in many project-based businesses). For another thing, VARs might be more savvy about meeting the integration or customization requirements of certain customers; as a rule, in certain industries and regions (such as the Asia Pacific), software vendors have to side with local resellers and integrators, or else face an insurmountable cultural and financial barrier to market entry. Furthermore, although Deltek's reputation for high quality service and support, and its ability to work directly with customers, along with its ability to provide reasonably rapid implementations, have all constituted competitive advantages to date, its primarily direct sales approach might not be the most appropriate for the lower end of the mid-market. VARs understand professional services prospective customers, simply because they are in the same type of business as their prospects, and in this context, the likes of Microsoft, Epicor, Exact, and Sage Software have an undeniable advantage. For more information, see The Cha(lle)nging World of Value-Added Resellers.
Despite having 600 international customers in 25 countries, Deltek has yet to show that its strategy and technology can consistently "travel abroad," especially to Europe, where it has to sow many more seeds than it has, if it is to fulfill its global ambitions. There is certainly no debate about the company's current lack of significant international presence, since a significantly smaller portion of its total revenues comes from sales outside North America. This is despite the fact that the company launched its international push nearly a decade ago, with the establishment of a direct UK presence; but there, it has had limited success. This kind of profile flies in the face of the accepted economics of the packaged software market, whereby a vendor of Deltek's size should have at least a third of revenues flowing from outside its domestic market. The vendor admits to not having put previous focus in international expansion, as instead its focus was on the US. Now, it believes itself ready to expand strategically, and for 2006 and beyond this expansion has become a key priority for Deltek and the executive team. The vendor now has leadership and executives with the proven international experience to map a much stronger international strategy. Also, Welcom's portfolio adds complex international capabilities to its earned value management (EVM) and project portfolio management (PPM) suites. Government mandates for EVM (that is, mandates for the Department of Defense [DoD], the Department of Energy [DoE], and National Aeronautics and Space Administration (NASA) in the US, and similar mandates for the UK's Ministry of Defense [MoD]) make this additional functionality a critical addition to Deltek's portfolio, given its client base as well as its goal of international expansion.
The company will also have to support and nurture its relationship with existing overseas clients in markets such as Europe, the Middle East, India, Australia and New Zealand, the Philippines, and South Africa, where it needs a local partner that can offer responsive customer support and knowledge about relevant laws and tax regulations. But the challenges of international expansion go far beyond product localization, which alone is an overwhelming challenge. Deltek will also have to invest sizeable financial, time, and human resources in order to prospect and identify an optimal internationalization roadmap, and then find, ally with, and manage appropriate channel partners (including during the typical fits and starts of the ramp-up phase). Additionally, the vendor will have to finance the necessary marketing and product and independent software vendor (ISV) technology alliance campaigns, which need to be well-attuned to the regions it decides to target, while ensuring that its own presence expands where applicable and without conflicts.
Bundled with the international channel push is the need to significantly expand its previously skimpy marketing budget (and mindset), which is of a strategic nature. This concept is opposed to Deltek's previous industry-specific targeted marketing (and word-of-mouth tactics within the Washington, DC [US] "beltway"). This is all necessary if the vendor is going to enhance its brand name and value proposition (the concept of selected project-based industries and their exacting needs) towards a greater, more global scale of presence and recognition. In addition to more purposeful and encompassing multichannel lead generation activities (see The Web-enabled Sales Process), alignment of the vendor message with alliances and a channel will require a sizable budget for more comprehensive marketing activities. Steps in the right direction include a whopping increase in the 2006 marketing budget over 2005 (so as to accommodate some 2006 events, including strategic hires in the marketing department, the re-branding effort, record user conference attendance, and so forth), and increased and planned growth in the direct sales force. However, the associated costs of hiring the right personnel, as well as a related increase in the marketing budget, will have to be handled carefully in order not to displease New Mountain, which might see its payback from Deltek coming at a slower pace than initially envisioned. This is certainly not the case now, since the company's business plan remains and has remained consistent and on track, and the progress has thus far been "above plan."
Tackling Earned Value Management and Project Portfolio Management
With new finances, Deltek certainly plans to continue its quest to build complete project solutions, from award to audit, via both internal development and acquisitions. As for future developments of Deltek Enterprise (Deltek Costpoint), in addition to ongoing Web enablement of key business processes, and delivery of control and reporting documentation related to the US Sarbanes-Oxley Act (SOX), major new "order winning" capabilities will include EVM and PPM. For more on achieving SOX compliance, see Using Business Intelligence Infrastructure to Ensure Compliancy with the Sarbanes-Oxley Act and Joining the Sarbanes-Oxley Bandwagon; Meeting the Needs of Small and Medium Businesses. While EVM is meant to be added to both Deltek Costpoint and GCS Premier (but not to Deltek Vision, which already has the capability), PPM modules such as portfolio management, risk management, project scheduling, project analytics, and so on, are currently planned for Costpoint, although the intent, strategy, and actual product set allows for integration to any back-office solution.
More Opportunities and Challenges
While the Deltek strategy to shore up its current install base and to target new related markets has been sound to date, one should never discount fierce competition as a factor, given that the market for enterprise application software has become highly competitive and dynamic. Deltek products are targeted toward a wide range of project-oriented organizations, and the competition varies depending on customer size, industry, and specific system requirements.
For larger implementations of enterprise-wide products, the principal competitors include Oracle (including former PeopleSoft and JD Edwards), Lawson Software, CODA, Unit 4 Agresso, and, inevitably, SAP. For smaller implementations of enterprise-wide products, competitors include Microsoft Business Solutions (especially when augmented by partner solutions for Microsoft Dynamics SL and Microsoft Dynamics GP [formerly Microsoft Great Plains]), Intuit, MYOB, Exact, Epicor, and Sage. Although many of the above vendors have not really competed regularly with Deltek so far, this will not necessarily be the case in the future, given Deltek's expansion aspirations.
There are also many other players which offer industry-specific products, such as (in the architectural, engineering, and construction [A/E/C] sector) Constructware, BST Consultants, and Axium, with some nifty features such as an electronic stopwatch for time collection, spread among several projects; and built-in warning systems when project is over budget (although Deltek Vision has this functionality, which will be released in version 4.1) or when the firm is going to overpay a subcontractor. Furthermore, Deltek Time Collection competes with electronic timekeeping systems offered by vendors such as Kronos, ADP, Ceridian, and Kaba Benzing. Its newly acquired Welcom applications face competition from such well-known companies as Microsoft Project, Primavera, Business Engines, Dekker, C/S Solutions, Artemis, Mantix, Integrated Management Concepts (IMC), and so on.
As the nonprofit sector requires automated allocation to support multiple funding sources under one project for billing and revenue recognition (which is traditionally done via manual calculations or custom programming within generic accounting solutions), Deltek has long supported multiple-source funding capabilities. The vendor has a nonprofit accounting product coming out later in 2006, which will target grant-based, or (as designated in the US) "A-133" nonprofit organizations. This product will be an affordable grant-based financial management system for small to medium nonprofit firms, which is a fairly sizable market in the US, contested by leaders like Blackbaud, Sage, Serenic Corporation, Intuit, Microsoft, Kintera, ASP eTapestry, and so on (see Nonprofits and Public Sector: The Latest Hot Market). While these leaders dominate the nonprofit market in a broader context—and no one is going after A-133s in any significant way at this time—this might change down the track. Point solutions like Deltek GovWin and CRM & Proposals might find their match in comparable solutions from providers like Adonix Inc., Map ROI Systems Inc., Input Inc., and others. Numerous project organizations have gotten used to manual "workarounds," and might still prefer the best-of-breed solutions they have in place—which might just be enough to represent a barrier for Deltek's all-encompassing offering.
Some of these competitors still have significantly greater financial, technical, marketing, and other resources than Deltek, not to mention a higher profile and recognition on a worldwide basis. Since they have begun to experience a deceleration in their core upper-market business, and have thus refocused their marketing and sales efforts towards the upper-middle market where Deltek actively markets its products, one should expect them to implement increasingly aggressive pricing programs. Furthermore, certain competitors, particularly Microsoft, SAP, Oracle, and Lawson, have well-established relationships with many Deltek customers (both current and prospective), and with major accounting and consulting firms which might have an incentive to recommend such competitors over Deltek. All these vendors, while possibly inferior regarding project-oriented, government-compliant, or service industries focus, will influence some purchase decisions by offering more comprehensive horizontal product portfolios and by touting a superior global presence and greater multinational product capabilities, which are still hurdles for Deltek. Still, comparisons to competitors need to be weighed with the understanding that no matter how large these competitors are, that they do not have the specific is industry focus and staff experience that Deltek does. Despite industry consolidation, Deltek remains a vendor that provides total solutions for project-oriented companies. There are really no competitors in the same space; either they are point solutions that compete in certain areas, or larger, non-project oriented vendors trying to tunnel down into this space.
But also, while Costpoint has long been very competitive with other major enterprise resource planning (ERP) systems with respect to features and capabilities for project-oriented businesses, the market has lately become more focused not only on the need for Web-based applications, but also on the need for intuitive role- and process-based user experiences (see Easy ERP: A Challenge to Conventional Thinking and Portals: Necessary But Not Self-sufficient). The lack of a fully Web-enabled system might for some time have hindered Deltek's potential growth objectives, and so the vendor has lately increased activity with respect to the Web-based development of Deltek Costpoint. Deltek believes that the realities of the market do not support the approach that the "best" solution is the one that is fully Web-based, based on the vast feedback from its customers. Deltek has chosen instead to build to the realities of the market and its customers, and the recent product developments reflect that pragmatic approach.
While the Web-enabled version is a great boost, the vendor needs to catch up with regard to developing portal-based solutions and user empowerment, especially in light of SAP's Mendocino and Microsoft's People-Ready recent initiatives (see Major Vendors Adapting to User Requirements). Each role in a service organization has a unique e-project perspective. For instance, while project managers often need full control (including the ability to change project projections), rank-and-file staff typically only need to be able to record billable project hours, and accounting needs only enough access to build the company cash flows from aggregate project data. However, all these constituencies increasingly want to accomplish these tasks from their familiar Microsoft Excel and Outlook workspaces, without the need to switch between office productivity solutions and the underlying enterprise applications. Deltek is developing a portal-based strategy, which was one of the reasons for the Welcom acquisition. Furthermore, Deltek Vision supports this type of Outlook integration, and the vendor will be releasing Excel-based interactive billing in the 5.0 product release.
Also, some prospects, especially from the commercial sector, may find Deltek's products too rigid and training-intensive, given that these products have had to abide by rigid regulatory requirements, and thus embed many features not required by commercial sector prospects. For example, while projects must be tracked and billed separately, and while services companies often need to run forecasts and what-if project scenarios (and to modify renegotiated total costs as a project evolves), they do not necessarily want to be encumbered with an additional set of stringent audit requirements for government contractors, which is Deltek's area of expertise. Some existing customers, especially of older Deltek products, might say that the system requires several rigid steps to create a purchase order, for example, or that it has only limited workflow and e-mail notification, meaning that it is still not possible to attach important documents in the database for other users to see and analyze via drill-downs. A notable exception would be Vision, which has extensive workflow capabilities and does not feature rigid regulatory requirements.
There might also be opportunity and need for Deltek to explore software as a service (SaaS) deployment opportunities for some applications. Pioneers in this regard are eProject and OpenAir in the project management arena, and a slew of competitors in the time and expense (T&E) sector. The ability to offer both on-demand and on-premise software in a near real-time synchronization mode is possibly the best overall solution to optimizing user access to applications. Deltek's readiness for this undertaking, however, remains to be seen. For more information on SaaS, see Software as a Service Is Gaining Ground.
Thus, Deltek faces the challenge of continued investment in redeveloping legacy systems or acquiring new vertically-astute technologies, while holding back on operating costs. This brings us to the burden of still outstanding research and development (R&D) work, which may prompt some observers to categorize Deltek's touted generous investment in R&D as making a virtue out of necessity. However, Deltek strongly believes that its specialization and focus equal "a price to be paid" in R&D, and that its R&D expenditure is not out of line with other top software vendors in the industry. This might even be considered impressive against a backdrop of supporting many products for up to twenty years and more since commercial release. It does not cost a lot of money to run these legacy systems and keep customers on them. That being the case, the vendor does not see the compelling need to move these customers off legacy solutions .
The picture becomes still more complex due to the fact that Deltek incorporates certain application software licensed from third parties into its software products (although most vendors, if not all, incorporate third party tools). In addition to attempting more market visibility and noise in its new target segments (as opposed to a largely word-of-mouth principle in the past), Deltek will have to further clarify its remaining hodgepodge of disparate technologies and solutions. Although it has grouped its offering within the three major branded groups of products, Deltek's offering still resembles an exotic and troublesome restaurant menu, where one has trouble guessing what goes well with what, and so on. Room for synergistic integration of staff members remains too, since some product specialists, while indisputably knowledgeable about their realm (timekeeping, say), do not necessarily have "big picture" knowledge of the entire Deltek portfolio. A mitigating fact is that certain products, such as FMS, Advantage, and Sema4 are no longer sold. Also, while one could argue that it would be "easier" for Deltek to have fewer offerings, after carefully reviewing and understanding the needs of the market, Deltek believes that its three flagship platforms offer the right mix.
For some prospective customers in the A&D sector, and similar complex engineer-to-order (ETO) manufacturing and field service industries, Deltek lacks integrated product data management (PDM) and field service or maintenance, repair, and overhaul (MRO) capabilities, making it an incomplete solution (although the vendor claims it is a strategic decision not to tackle some capabilities internally), at a disadvantage with respect to several ETO-oriented ERP systems such as SAP, Oracle, IFS, Cincom Systems, Relevant Business Systems (now part of Intuitive Manufacturing Systems), Encompix (now part of Made2Manage Systems), Infor Visual, ESS Finesse, and so on. All this is despite strong project management and accounting functionality, and partnership with RSS Solutions for advanced planning and scheduling (APS) capabilities. Only time will tell how well Deltek will partner with appropriate ISVs, or how well it will acquire solutions, in order to fill its ETO gaps (see ERP Systems and the ETO Manufacturing Market and MRO and Spare Parts Management Considerations).
As for the A/E/C segment, in many situations Deltek needs to integrate its products with existing computer-aided design (CAD) products, and to bridge the information divide between business systems, production systems, and support systems such as plotters, printers, scanners. The aforementioned VisionXtend platform is certainly impressive: it includes a Web Services application programming interface (API) and workflow engine, which allows firms to extend the application beyond its original boundaries to interface with other applications within their firewall as well as with information sources outside the firm (thus creating a virtual ecosystem of information). But in order to become a prominent service-oriented architecture (SOA) and composite applications player in the long term, Deltek will have to take best advantage of a number of longstanding and high-profile alliances on the infrastructure side. Such strategic ISV partnerships will require relationship management, mutual commitment, and technical resources, which Deltek previously invested on a limited and opportunistic basis. To be fair, the vendor already has strategic alliances with vendors such as Sepialine and Newforma, which integrate CAD, project collaboration, and cost control systems with Deltek Vision.
Ultimately, while no one will dispute the benefit of having a $1.5 billion (USD) backing rather than a shoestring budget, Deltek will have to expand judiciously, to avoid losing its roots and ties with the market and customers that have helped it thrive over two decades. The vendor will have to balance its "trusted advisor" image with increased activity on several fronts (product expansion, distribution and technology alliances, and so on), so that it does not become perceived as yet another mighty vendor in pursuit of building an empire at the expense of its relationship with its install base. Deltek will be expending the marketing effort required to ensure that all its customers, prospects, and partners fully understand the value proposition of its evolving products. It will also continue to invest further in technology to ensure that integration, migration paths, and Web-enablement are available across all product lines.
Indisputably, Deltek remains an enterprise applications vendor of choice for project-based businesses, and with its recent capital infusion and product deliveries, it has taken critical steps towards creating even more value for its customers. Existing Deltek customers should evaluate the latest EVM and PPM product additions and modernizations as valuable potential additions to their existing back-office applications, of course bearing in mind the resulting integration effort. Some project-based professional service companies that need tools for business development, for tracking billable hours, or for producing project what-if projections, might find this portfolio valuable in terms of both cost savings and increased efficiency. Also, certain Deltek products like Deltek CRM & Proposals, Deltek Employee Expense, or Deltek Time Collection, may be attractive standalone solutions with best-of-breed features.
Prospective customers of basically any size should look at Deltek if they are within the following project- and service-based industries: government contractors, A/E/C, management consulting, IT services and system integrators, aerospace and defense (A&D), and grant-based R&D; or nonprofit, project manufacturing, and accounting organizations considering business applications (both Web-based and client/server network dependent). Given that Deltek offers "different strokes" for different folks, many factors will determine the suitability of certain Deltek products.
However, these companies should bear in mind the Deltek product roadmap, and might benefit from considering competitive offerings. This is especially true for companies looking for holistic and broader extended ERP functionality. Those requiring a particular industry focus (outside Deltek's proven "sweet spot" of project-driven, professional and technical services, and construction markets) may benefit from evaluating other products at this stage. Large companies with complex physical supply chains and business process requirements such as complex product lifecycle management (PLM), strategic sourcing, plant maintenance, and call center or field service, should consider enterprise applications vendors with products and channels better suited to those needs. It should be noted, though, that Deltek has many satisfied clients outside their sweet spot, albeit with products that coexist with other applications.
As seen earlier, Deltek products are built on proprietary elements, as well as industry-standard components. As industry standards have evolved, the vendor has begun to redesign products to incorporate new industry standards. Thus, users of its older product versions should approach Deltek and inquire about the required effort to upgrade to a product that is browser-based, that provides connectivity to wireless devices, that is fully Java 2 Enterprise Edition (J2EE)-based or .NET based, and that uses extensible markup language (XML)-enabled interfaces (only some of the major enhancements). Despite a plausible product roadmap and the company's bolstered viability, any organization evaluating a Deltek product should keep itself informed, and consider existing functionality only, while making sure that what they buy today will keep abreast of technological developments tomorrow.
This concludes the series Mountainous Investment Transforms Enterprise Management Software Vendor.