J.D. Edwards’ Mixed Blessings

J.D. Edwards' Mixed Blessings
P.J. Jakovljevic - September 27, 2000

Event Summary

In August, J.D. Edwards & Company reported financial results for the third quarter ended July 31, 2000. License fee revenue grew 56% over the same period last year, to $116.7 million (See Figure 1). Transactions over $1 million represented half of the license fee revenue in the third quarter of fiscal 2000 and led to a substantial increase in the average sales price of license transactions. Services revenue was $144.4 million, compared to $157.1 million in the third quarter of fiscal 1999. Total revenue for the third quarter of fiscal 2000 was $261.1 million, compared to revenue of $232.1 million in the third quarter of fiscal 1999. Net loss for the Q3 2000 was $22.6 million, compared to a net loss of $33.2 million, in the same period last year.

Figure 1.

J.D. Edwards has also begun its strategic restructuring aimed at reducing costs and strengthening the company's position as a leading provider of software solutions for collaborative commerce. The company recorded a charge of $30.1 million in the third quarter of fiscal 2000 for restructuring and related items.

J.D. Edwards claims it has been targeting its software at integrating customers' supply chain operations with digital marketplaces. More than 45 such electronic exchanges now use J.D. Edwards' software, the company touts. In September, the company plans to introduce a new version of its OneWorld Xe software, which can also be used in electronic exchanges.

Market Impact

While the significant increase in license revenue seems very encouraging and represents a continued improvement in the company's traditionally inefficient sales & marketing effort, the rest of J.D. Edwards' situation remains lackluster. The restructuring moves have been aimed at adjusting its significantly higher number of general & administrative employees (15 % of the total number of employees) to the industry benchmark of 11%. The wariness to tackle this sensitive issue was regarded as one of the major management flaws in 1999.

While we condone J.D. Edwards' move to position itself as an ERP vendor to persuade enterprises to extend their activities into e-collaboration, we also believe that managing this large application portfolio, much of which involves partnering or extensive integration and customization, will be cumbersome despite its highly marketed flexible EAI product strategy. In addition to all apparent and/or hidden caveats of disparate products integration, the issue of increased costs of license sales (almost doubled over a year) due to an exorbitant number of 3rd-party software sales and subsequently less profit margins has been burdening the company's P&L statements. Therefore, further cost reduction by laying off staff can help only so much. Having known the company's quality difficulties with earlier releases of OneWorld as well as having witnessed the recent staff attrition, the market may, with a good reason, have serious reservation regarding the company's capabilities to successfully deliver and support its new, significantly more intricate product set.

However, this is not necessarily an insurmountable obstacle, given the fact that even SAP had to abandon its 'one-stop-shop' product strategy. E-commerce trends are by nature very dynamic, and no single vendor can provide all required components. Native integration is becoming less of an issue, particularly in the higher end of the market - acquiring the best products at the acceptable price to meet an e-business strategy is the major issue.

J.D. Edwards should also consider having notably different marketing approaches for the higher end of the market and for its smaller and mid-market fragments, given the different requirements and mindset of decision makers in these respective niches. The 'freedom to choose' message will most likely strike chords with some more aggressive CIOs of larger global companies, who would be unwilling to get locked into the inflexible, proprietary technology that, for example, Oracle's value proposition seems to inherently offer. The increase in new licenses within the higher-end of the market seems to speak in that regard. However, this should be backed up with much more vigorous marketing and market awareness creation than it has been done so far.

Also, to allay recent negative publicity, the company must emanate a convincing e-commerce message to assure the market and its customers that it will continue to be viable. The recent departure of Mike Schmidt, its outspoken e-commerce business unit leader and the proponent of the company's latest questionable but brave EAI strategy, may seriously undermine the company's marketing endeavors.

User Recommendations

Existing J.D. Edwards' customers should certainly consider the new offering, but avoid selecting it without looking at what the other vendors have to offer. We recommend identifying your clear e-business strategy and conducting a thorough comparison-shopping, at least for the negotiation leverage sake.

As for potential customers, we generally recommend including J.D. Edwards in an enterprise application selection long list for mid-market and low-end Tier 1 companies (with $100M-$2B in revenue). Organizations whose requirements fall within the scope of the standard ERP and SCM offering, where manufacturing, supply chain & collaboration and financial modules are main pillars of an enterprise application, would benefit from considering J.D. Edwards. One should bear in mind the company's expertise within some industries like automotive, consumer packaged goods, electronics, manufacturing & distribution.

Current and potential users may want to inquire about the company's plans regarding Internet marketplaces in their respective industries. Which specific market places does (or will) J.D. Edwards connect with, what methodology does (or will) the company prescribe to are some of the necessary inquiries in that regard.

Nonetheless, if a complementary product beyond core ERP and SCM (e.g., CRM, e-Commerce, BI, etc.) is of a critical importance, users should think carefully about the possible EAI implications and may benefit from considering competitors' value propositions too. As with all new releases, users should employ a critical approach in their evaluation of OneWorld and require all potential vendors to demonstrate specific business processes. Future clients are also advised to request the company's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for recently announced partnered offerings.

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