Baan – What Will The Future In Invensys’ Stable Bring? Part 2: Evaluating Baan

Part 2: Evaluating Baan
P.J. Jakovljevic - November 30, 2000

Executive Summary

Baan Co. once a leading global provider of enterprise business software has gone from an independent force in the ERP market to being part of the Invensys Software Systems Division. It is not dead, as some feared would be the case by now, because it has begun to win new major contracts.

Since the acquisition, Invensys seems to be determined to capitalize on what Baan has to offer. The Baan core development organization in the Netherlands remained virtually intact during numerous restructuring moves. With plans that focus on sales, marketing, services and administration, Invensys seems intent on both maintaining and expanding Baan's customer base.

Baan has a wide portfolio of enterprise software applications, including customer relationship management (sales force automation, product configuration and call center products), corporate, and operations management (ERP and supply chain) solutions. Baan also supports these core products with such add-on modules as business reporting tools, business-modeling tools, and e-commerce versions of applications. By the end of 1999, the Company had licensed approx. 15,000 system installations to more than 7000 customers worldwide.

About This Note

This is a two-part note; the first part focused on Baan's history, how it fits in its market, recent developments of interest, and the direction the company is headed under Invensys. It also contains a Financial Summary.

This second part contains specific analyses of Baan's strengths and challenges along with bottom line predictions and recommendations for the company and users.

Corporate and Product Profiles appear in both parts.

ANALYSIS

Vendor Strengths

Discrete Manufacturing and Project Industries: Despite the destructive affects of its difficulties during the last two years, Baan remains a strong competitor in software for discrete manufacturing. Baan has traditionally been able to accommodate different styles of manufacturing (make-to-stock, make-to-order, assembly-to-order, engineer-to-order, hybrid, etc.) owing to its Customer Order Decoupling Point (CODP) concept, which allows users to decide where in the manufacturing process the forecast/make-to-stock (MTS) vs. make-to-order (MTO) point is created for every product and/or component. Further, Baan is still one of the leaders in complex engineer-to-order (ETO) project industries owing to its very strong project definition, estimation and management functionality.

Rapid Implementation and Easy Reconfiguration: Baan was one of the first large ERP vendors that attempted to reduce ERP implementation complexity, a problem that has plagued the market with languishing implementations and rigid systems. To that end, the Baan Dynamic Enterprise Modeler - Strategy Execution (DEM SE) concept attempts to remove some of the configuration complexity by enabling users to graphically model (using flowcharts) and navigate enterprise business processes, organizations and events, and then automatically configures the product. Moreover, it provides for system agility since software components can be changed and/or reconfigured at any time without disrupting operations. Furthermore, Baan's core ERP product still exhibits strong support for almost all industry relevant platforms and middleware standards. These factors have made Baan products attractive to both medium and larger enterprises in the past.

Large ERP User Base: With over 7000 clients spanning industries such as aerospace, automotive, and complex manufacturing (to name but a few), Baan has a number of industry verticals to develop, pilot and deliver solutions to. Furthermore, Baan claims to have finally bundled together a wide range of functional components to extend the core ERP functionality: SCM, CRM, e-business, and middleware. Few if any other vendors can provide integrated applications of this magnitude under one umbrella, particularly in the mid-market. Also, Baan products have traditionally been less expensive compared to its peers' products, giving it a competitive price/performance ratio. On top of that, Baan has recently announced a promotion allowing customers of its Baan IVc and higher releases to take advantage of a range of special deals on Baan Sales, Procurement, Business Intelligence, Supply Chain and Baan OpenWorld solutions. This initiative might be attractive to some of its loyal customers.

Invensys' Sensor-to-Boardroom' Capability: Invensys, with its ambitious 'Sensor to Boardroom' product strategy, seems determined to provide manufacturers a solution that satisfies all their needs, from shop floor measuring devices to cyberspace collaboration. Baan offers ERP and e-business software, as well as customer relationship management (CRM) software from its acquisition of Aurum, and supply chain planning and execution software from its acquisitions of Caps Logistics and Berclain, whereas Invensys offers manufacturing execution system (MES) components. The possibility of integrating and providing all elements of a complete manufacturing solution must be tempting, and is quite possibly lucrative, but every effort should be made in order to avoid the kind of poor product execution which partly led to Baan's demise.

Vendor Challenges

Deteriorated Competitive Position: Over the past two years Baan has suffered a considerable loss of market share, money and customer confidence. The company has, therefore, been affected much more by the Y2K-induced market slump than other Tier 1 vendors (See Figures 4 & 5). The company's channels, both direct and indirect, have also been all but wiped out during the same period of time. The situation has particularly been aggravated in the US market. As a result, the market has witnessed a hungry flock of Baan's competitors preying on its large, perturbed customer base. SAP, for one, has been creating interfaces to ease migration for current Baan customers to its own software offerings. There are indications that many of Baan customers are at least considering migration to another provider, while some have already opted for it.

Figure 4.

Figure 5.

Furthermore, while the acquisition by Invensys (see Part 1), may have allayed the recent concerns about Baan's imminent demise, doubts remain over Baan's future given recent Invensys' profit warning and speculation that it may in turn be an acquisition target.

Product Immaturity and Inconsistent Functional Strength: The Baan product portfolio, achieved through a number of acquisitions (see Part 1), has seen hefty delays and costs that resulted from resolving integration issues and reworking disparate pieces into a single schema/data model. There are still instances of the products having different look-and-feel across the range of the portfolio. The number of acquisitions over the last few years has created a clutter of many different technologies and applications that required integration. How well integration was implemented remains to be seen. Moreover, if one can judge by the past, we can expect product quality problems with immature product releases as well as uneven functionality.

With Baan Series (formerly Baan V), Baan has embarked on a mission to deliver a component-based architecture, a major departure from its monolithic 4GL-based Baan IV product. Unfortunately for Baan, this undertaking coincided with its financial troubles, which had an impact on its execution. It is also ironic that the Baan business was hit with troubles exactly when it finally seemed to have delivered its most stable and mature product (Baan IV) and when it finally seemed to have straightened out its service and support part of the business. Conversely, during its golden days of over 80% annual growth, the company struggled to recruit enough experienced resources to keep up with its mushrooming global market while selling an unstable and bug-ridden product.

Further, while Baan has addressed enhancement of its general financial functionality by providing features such as multinational support, consolidations, and central invoicing, its functionality is still inferior to that of larger competitors. Also, its lack of native HR/Payroll functionality means that Baan will not attract customers that prefer a truly enterprise-wide 'one-stop-shop' solution.

Customer Base Retention and Leverage: The legacy of questions about its viability is not the only reason Baan may have difficulties leveraging its existing client base. Companies interested in "e-business" may need to move faster than Baan is currently able to do. Boeing, a crucial Baan ERP client, recently chose a competitor's product to implement its e-procurement initiatives. While this is only one customer, the case indicates that Baan will need to provide feature-rich and tightly integrated solutions if it wishes to maintain the existing client base.

We estimate that Baan is at least a year behind the market leaders regarding e-business capabilities. Competitor J.D. Edwards has inked a deal with marketplace mover Ariba, whereas SAP and PeopleSoft have established partnerships with Commerce One, as well as a number of ASP partnerships, while also pursuing a dozen vertical markets. Oracle's e-business initiatives have also been well publicized. If Baan wishes to compete in the ERP/e-commerce environment, it will need to consider similar initiatives within the year. Furthermore, while the choice of Microsoft's Back Office Suite as a sole platform for its E-Enterprise solution certainly has its merits, it may represent a double edge sword. We estimate over 50% of Baan's existing ERP customers are Unix based. Many of those companies may not be ready or willing to support a Microsoft operating platform at this time.

Invensys' Dubious Strategy and Execution: While we approve of Invensys' move to provide manufacturers a solution that may satisfy all their needs, creating functional connections between front office, ERP and plant automation applications will be a colossal task. Baan's service and support viability remains uncertain in the interim owing to the exodus of Baan staff and questionable Invensys' core competency in extended ERP applications. The need for cross training of the sales force in functionally disparate applications should not be neglected either. These factors may aggravate Baan customers' anxiety.

There are have been speculations that in order to recover the cost of the acquisition Invensys will keep only Baan's core ERP product, to gain strength in manufacturing sectors, but will sell off product lines such as the Aurum CRM business and Caps Logistics SCM business. Although Invensys has indicated it will not dismantle Baan, its statement that it "is committed to a strong research and development program at Baan and the full suite of Baan products" may not be good enough for a disaffected customer base.

BOTTOM LINE

Vendor Predictions

Fiscal 2000 and 2001 will be very challenging, with revenues dropping more than 80% compared to revenues in 1998 (70% probability). We do predict a return to profitability during 2002 (60% probability). While remaining among the Top 5 enterprise applications vendors is not a likely scenario within the next three years (30% probability), Baan will retain its position among the Top 10 applications vendors during the same period of time (70% probability).

Major acquisitions are very unlikely (20% probability), while selling off parts of the Baan business (e.g., Aurum CRM or Caps Logistics SCM) are also unlikely (35% probability). Instead, the focus will be on strategic alliances with local VAR and ASP companies in order to penetrate the Small-to-Medium Enterprises (SME) market via outsourcing offerings. The focus will also be on partnerships with IBM and Microsoft (70% probability) in a marketing effort for brand recognition and restoring customer confidence.

Within the next four years, more than 55% of Baan revenues will come from the European market (60% probability), with license revenue contributing less than 30% of the total revenue within the same period of time (60% probability). CRM and supply chain solutions will be significant contributors to Baan's sales revenue (up to 40% within next 3 years, with 60% probability) despite not being the cutting-edge products in the market.

We believe that, within the next twelve months, the company will officially announce an alliance with a vendor whose products provide it deeper B2B direct material e-procurement and vertical marketplace capabilities (70% probability). Potential candidates are the likes of RightWorks, SupplierMarket.com and NetVendor.

Vendor Recommendations

Baan must continue its effort shore up its customer base and to penetrate the SME market segment with its entire product portfolio of component applications, mainly through indirect channels and outsourcing arrangements. Baan must expand global distribution, sales, services and support capabilities, primarily by leveraging qualified indirect channels. Failure to rebuild these channels may annul all its endeavors in the right direction. Baan should consider utilizing Invensys' infrastructure to fill existing gaps in current geographical coverage.

Baan must use its direct sales force to expand the business in its existing large customer base, both by increasing the number of seats and by offering enterprise applications such as Front-Office, Business Intelligence, Supply Chain, and e-Commerce beyond its core ERP solutions. To clear the deck, Baan should promptly attend to the resolution of any remaining integration and/or inconsistent functionality issues that early users of Baan Series (Baan V) software have experienced.

Baan should maintain and improve its core ERP product while enhancing e-business offerings (e.g., direct material procurement and link to digital marketplaces functionality). These endeavors are very ambitious and the current R&D budget should be maintained at least at the 1999 level.

Invensys/Baan should promptly address customers' concerns by unequivocally revealing its detailed product strategy and the timeframe for its delivery. Also, it is very important that the company defines and publishes a long-term e-business plan. While the recent executive appointments and marketing campaign are commendable, Invensys should maintain its program to reenergize the Baan business. Financial and other merit-based incentives should be extended to a wider range of employees.

Baan should also carefully reevaluate its product migration strategy from current Baan IV and older instances, in order not to alienate and disillusion its customer base. The company should consider extending the previously mentioned promotional offer to all customers, not only to users of Baan IVc and later versions.

User Recommendations

The Invensys involvement in Baan business reinforces our belief that the operations of existing users and of organizations in an advanced stage of implementation will not be put at risk. While we cannot advise Baan's customers to completely relax, neither do we recommend abandoning ship in a hasty manner. Due diligence and development of case scenarios either for a system change or for remaining with an expanding Baan offering is, however, recommended.

Discrete manufacturing and less technologically aggressive companies may be better off by hanging on to Baan for a while. Nevertheless, be on high alert and develop medium- to long-term alternative plans for moving to a new technology. Ensure that you have the prerogative to change the source code, and that there is a team of skilled resources available should that become necessary. 'Self-sufficiency' should be the name of the game, given that we expect Baan service and support to continue to suffer in the short term owing to recent restructuring throughout the organization. We do expect support services to improve in 6-12 months time at the earliest. However, identifying and approaching your local Invensys/Baan sales representative and asking for assurances and firm commitment to future service and support would be the best course of action at this stage.

Until the new product strategy, particularly regarding e-business and Internet trade exchanges, is crystal clear and publicly committed to, we advise potential users to warily evaluate the product even within its engineer-to-order discrete manufacturing sweet spot. (Of course, learning about new features and attractive pricing would be beneficial, at least for information and for leverage with other vendors.) We suggest evaluating the bells-and-whistles, price, reference sites within your industry, and corporate viability of other vendors as well, before making a selection.

For existing Baan clients, we suggest keeping your eye on the extended-ERP solutions. Understand what functionality you're interested in and investigate what the company can offer. Identify the requirements and related costs to upgrade your systems to support the added functionality. If you are interested, perhaps your existing relationship could be leveraged to dramatically reduce the cost of the suite. Consider negotiating a pilot or trial period at no cost to you. Also, use the opportunity of Baan's promotion to negotiate a lower price with competitors. An upfront implementation guarantee by Invensys/Baan and a list of recent customers can alleviate some potential anxieties.