IBM & ILOG Matrimony: Good for BPM, Uncertain for SCM? -- Part 1

While my two separate blog post series about workflow automation and Business Process Management (BPM) and about the long tails of supply chains were coming to their respective ends, one event that is curiously pertinent to both topics has meanwhile taken place in the market.

Namely, at the end of July 2008, IBM acquired ILOG, a specialized software provider with headquarters in France and the US. Over 3,000 direct corporate customers in over 30 countries currently "make better decisions faster" with ILOG's technology.

Also, more than 500 independent software vendors (ISV’s) rely on embedding ILOG's business rule management systems (BRMS), optimization, and visualization software components into their products. These ISV customers, some of which are leaders in their respective markets, embed ILOG’s software engines to create their own differentiating products and services and improve their competitive edge. 

To be more precise, ILOG provides various tools within the realm of BRMS (for managing business change), optimization (for making complex decisions), and visualization (to create diagrams, charts, maps, etc.) for other ISVs to embed in an original equipment manufacturer (OEM) fashion, whereas its more nascent supply chain management (SCM) applications are aimed at end-users (companies).

One day before the acquisition, ILOG, which is listed on NASDAQ & Euronext, reported its fiscal 2008 results, in which 2008 fiscal year revenues of US$181.0 million were up 12 percent compared to US$161.5 million in fiscal 2007. Still, the ILOG executives acknowledged a challenging environment and slowing down of its many businesses, especially in the embattled financial sector.

What’s ILOG’s Dowry?

The deal, valued at approximately US$340 million, is expected to close by year-end 2008. By acquiring ILOG for Euro 10 per share, at a premium of 37 percent over the ILOG's market capitalization at the time, I believe that IBM has gotten a good deal for a member of the Cape Horn Strategies Sustained Success Honor Roll.

This esteemed membership is comprised of all software companies that are listed on the NYSE, AMEX and NASDAQ stock exchanges that have six (or more) consecutive years of measured profitable growth. ILOG is recognized as belonging to the group of only 23 out of 482 public software companies with seven consecutive years of profitable growth.

In fact, ILOG, with over 850 employees in the following nine countries: US, France, Germany, Spain, United Kingdom (UK), China, Japan, Singapore, and Australia, has a stable recurring revenue stream from several hundreds of ISV’s royalty arrangements to embed its products. Indeed, it is quite difficult to think of how many vendors involved in some optimization or intelligence area are not leveraging ILOG's optimization, visualization and rules engines (and thereby not reinventing the wheel themselves).

Most importantly, IBM has had partner and OEM agreements with ILOG for over a decade (since 1996). The giant incorporates ILOG's network visualization technology into its Tivoli Netcool and WebSphere Business Events products, and it also uses ILOG's manufacturing optimization products at its semiconductor wafer plant in Fishkill, New York, US.

Moreover, ILOG’s business rules capability is embedded within IBM WebSphere Process Server and WebSphere Application Server. It is interesting to note here that IBM also partners with ILOG's foes Fair Isaac Corporation and Corticon Techologies for their BPM and rules management capabilities. Last but not least, ILOG BRMS engine also runs IBM’s InfoSphere Master Data Management (MDM) Server and IBM FileNet enterprise content management (ECM) offering [evaluate this product].

As another marquee partnership, SAP uses ILOG's optimization engine embedded within SAP Advanced Planning & Optimization (SAP APO) and possibly within other SAP SCM suite’s applications [evaluate this product].

Former Manugistics (now part of JDA Software) has also embedded ILOG algorithms in several products, most notably in the strategic network design product.  i2 Technologies (ironically, also soon to be part of JDA Software) did as well dating back to the Intertrans Logistics Solutions Limited (ITLS) acquisition 10 years ago.  However, for some of the most complex SCM products (i.e., inventory optimization and manufacturing scheduling/sequencing), both Manugistics and i2 have developed proprietary algorithms (oftentimes heuristic-based ones).

BPM Is in Play Here, Duh!

Software tools, rather than enterprise applications, are primary targets of IBM purchases. It is thus not a big revelation here that IBM has acquired ILOG primarily for its market-leading business rules generation capabilities. Business rules engines are at the core of any service oriented architecture (SOA), complex event processing (CEP), Business Activity Monitoring (BAM) and/or BPM  infrastructure, because they enable change of the underlying logic of business applications to nimbly adapt to new business conditions (environment), risk management policies, or local regulations.

IBM plans to much more tightly combine (than it has been done so far via ILOG extensions) its BPM, business optimization, and SOA technologies with ILOG's BRMS software. When completed, the acquisition should strengthen IBM's BPM and SOA positions by providing customers with a full set of rule management tools for complete and near-real-time business information and application lifecycle management (ALM). The unified business process modeling & design, process execution, BAM & analysis, and human interaction & collaboration capabilities will be able to work across a variety of platforms, including IBM's WebSphere application development and management platform.

With more than 6,550 client engagements worldwide, IBM is a worldwide leader in the SOA  and BPM markets. This leadership is further illustrated by a community of greater than 120,000 architects and developers, more than 150 universities incorporating IBM's SOA and BPM curricula, and more than 6,000 IBM Business Partners building SOA skills, solutions, and practices.

While IBM has a basic rules management capability in its WebSphere Process Server, the planned acquisition of ILOG should close a notable gap in the native WebSphere business rule processing functionality. IBM's lack of a native cutting-edge BRMS technology limits its opportunity and credibility when compared to BPMS vendors such as Pegasystems, Lombardi Software [evaluate this product] or IDS Scheer, to name but a few.

Part 2 of this blog series will analyze the ongoing BPM/BRMS market dynamics. In the meantime, please send me your comments, opinions, etc. I would certainly be interested in your experiences with the BPM software category (if you are an existing user) or in your general interest to evaluate these solutions as prospective customers.
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