IFS Continues Its Reinvention Through Pruning Part Two: Background, Challenges, and Response

IFS Background

Recently, Industrial and Financial Systems (IFS) (XSSE: IFS), a Swedish extended enterprise applications supplier with sales in 45 countries, over $330 million USD) in revenues in 2003, and with more than 350,000 users worldwide, announced the following:

  • In early January that, following the agreement with Uniativa Ltda (which acquired the entire business and 100 percent of the stock in Industrial and Financial Systems do Brasil Ltda on December 31, 2004) partners will be solely responsible for the sale and distribution of IFS Applications in Brazil.

  • In mid-December, IFS Sverige AB, IFS' Swedish subsidiary, announced that it has sold its payroll software to Personec, and the two companies have entered into a collaboration agreement.

  • In November, IFS announced it would collaborate with Bentley Systems, Inc. (http://www.bentley.com). Bentley, which has its headquarters in the US, will thereby acquire IFS' esoteric computer-aided design (CAD) applications for process, electrical, piping, and instrumentation design. As part of the acquisition, Bentley pledges to assume responsibility for IFS' maintenance and support services for more than 100 accounts, primarily in Sweden and Norway, which employ IFS' CAD applications. The agreement with Bentley is expected to have a positive impact on IFS' earnings totaling approximately 6 million SAK (approximately $800,000 USD) in 2004 and 2005.

This would be yet another small step 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 (i.e., enterprise application components used in manufacturing, supply chain management [SCM], customer relationship management [CRM], service provision, financials, product development, maintenance, and human resource [HR] administration) and return to a consistent profitability track.

IFS has long realized the need to string together several quarters of profitability to quell market rumors, restore consumer confidence and long-term stability. However, this is yet to happen, albeit the vendor has lately swallowed many bitter pills in the 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 restructuring and so on have consequently been associated lately 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.

In fact, 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 the wholesale success in the finicky enterprise resource planning (ERP) market. Namely, 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. 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.

For over a decade, the cornerstone of IFS' strategy has thus revolved around its proverbial component-based architecture and moderate vertical market focus, becoming thereby part of its identity and a key ingredient in being able to deliver even deeper vertical industry functionality going forward. Recognizing also its scalability limitation, in addition to the rigidity of its erstwhile two-tier client/server architecture, IFS embarked also in the mid 1990s on creating an "n-tier" product architecture that would separate presentation, business logic, and data storage layers, and also render IFS independent from the Oracle development tools and the use of stored procedures in the Oracle database.

IFS Applications 2001 was consequently heralded as the fully Internet-enabled and componentized five-tier architecture suite, covering most of 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 needs of more specific businesses. The architecture, recently dubbed Foundation One, also allows new technologies and components to be relatively easily swapped in and out of the technology stack without causing major distraction to the install base, and it also fosters an easier way for interfacing or integrating with other system. One should note, though, that the above notable feats have been built out through the company's own hefty research and development (R&D) investment or some modest acquisitions.

Also, IFS' functionality has been split across over 60 independent modules, which are actually, coarser objects or components, which can supposedly be implemented and upgraded separately from one another. Companies can, at their own convenient pace, select modules to co-exist with other legacy applications and databases, or simply to avoid the "big bang," monolithic implementation approach that has 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 interface (API) imply 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 Java 2 Enterprise Edition (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 IT ecosystem.

IFS tries to differentiate from many other mighty or not vendors that try to confine user companies to a particular proprietary technology, such as Oracle or Microsoft-centric, given these two giants own the entire technology stack (layers) from database, via middleware and development tools, to applications (including even business intelligence [BI]). In this regard, IFS may somewhat be in tune with PeopleSoft (well, before the Oracle's acquisition), Intentia and SSA Global's approach of 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 contrary, 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, BEA Systems' WebLogic, Sun ONE and even Jboss, an open source application server (although the certifications for some of these are still in progress).

This is Part Two of a three-part note.

Part One presented the event summary.

Part Three will discuss the market impact and make user recommendations.

IFS Challenges and Response

Yet, the IFS' protracted mixed blessing performance—the delivery of new exciting product features on one side, with plaguing losses and eroding financial situation on the other hand—has unfortunately been the main theme for the last few years. Thus, the vendor had to shift the emphasis from an astronomic high growth of the ebullient late 1990s and an entrepreneurial spirit and "can do everything" attitude of previous years to its current focus on reaching forever evasive profits. Going forward, IFS conversely expects continued cost containment rationalization and to that end, the product development will be more sharply focused on refining functionality, particularly within specific industry segments that are of strategic interest for IFS and its premium partners. The vendor has plans to further develop its solutions to cater more deeply to specific vertical markets, and the future direction for the vendor should be 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.

The problem has been 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 it no longer required the same level of staffing for further development. Thus, IFS has lately seriously reduced its Sweden-based and well remunerated R&D team as part of an intensive cost-cutting exercise to save several dozens of millions per year. An increasing amount of its R&D activity has since been created in Sri Lanka, where it currently has approximately 300 employees, and where it can reportedly gain a five-to-one increase in manpower for the same amount that it costs in Sweden. This has reportedly reduced the R&D expenditures by over 20 percent for 2003 while not really affecting the capacity.

In addition to focusing on profitability and positive cash flow, IFS has been paying attention to balanced growth through more reliance on growth and product enhancements through strategic partnerships, and product development costs tied to new sales. IFS has particularly been more aggressively moving forward with a partnership strategy to further grow its business outside Europe. To date it has tackled vertical markets in various regions (and even countries like China through a joint venture with Beijing IFS UFSoft) where the barriers to entry are reasonably low. It has also been working with NEC in Japan for several years to establish its presence in Japan and to also indirectly penetrate the Chinese market, where many Japanese-owned companies have been setting up offshore operations. Early in 2004, IFS announced that NEC has even taken an equity position in IFS and it now owns 10 percent or so of IFS' stock, which should entice it to more directly invest in IFS functionality for the Asian market and expand IFS' implementation capabilities therein.

Likewise, the vendor plans to repeat the model of developing global and local partnerships with well-known companies in niche industries in different countries (e.g., ABB, IBM, Det Norske Veritas, etc.) for expansion, while product development focuses on deepening its functionality to retain its position in its chosen markets, and while broadening scope to capture some adjacent industries in the future. It has apparently achieved some success in that regard, by setting up high-profile partnerships, such as BAE Systems-IFS, for the global defense sector, and GE Engine Service for commercial aerospace.

IFS also expects to offer more specialized best-of-breed solutions, with the above partners, where appropriate. The perfect example would be the alliance with ABB (who is also another equity partner) to deliver IFS Enterprise Asset Management (EAM) solutions, which could possibly render IFS a leading EAM player in the future. Other partnerships and alliances have reportedly developed as well, resulting in greater market penetration and an increase in the number of prospects, with a result of nearly 10 percent of license revenue in 2003 being derived from partnerships and alliances.

This concludes Part Two of a three-part note.

Part One presented the event summary.

Part Three will discuss the market impact and make user recommendations.

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