IFS Aspires To Capture North American Market Against The Low Tide

Event Summary

On March 15, IFS Industrial & Financial Systems AB, a Swedish business applications vendor announced that it won a number of major contracts in the US during the first two months of 2001 despite the negative market sentiment after recent announcements of its major competitors. Also, the company touts that the utilization of its consulting organization, which was possibly bloated during the past 12 months, has continued to improve and the effects of the action plan targeting increased profitability are beginning to be seen in the shape of lower costs. Sales in the US during the first two months in 2001 are up 79%, amounting to USD 12 Million, compared with USD 7 Million for the corresponding period in 2000. License sales have increased by 63%, while consulting revenue has risen by 83%.

Bengt Nilsson, president and CEO of IFS, commented, "The situation in the US has recently been the subject of attention after negative signals from Oracle and JD Edwards. Although January and February are traditionally weak months, so far, IFS has not noticed any downturn. Although earnings are slightly negative, they are better than we budgeted. It is primarily our consulting utilization that has been strengthened a natural consequence of our strong license sales during last year."

Earlier in March, IFS, however, reported much less scintillating results for the fourth quarter and the fiscal 2000 (See Figures 1 & 2). Total revenue in 2000 increased by 21%, compared with 1999. Annual license revenue rose by 74% to $102 million, which was still possibly the best license revenue growth amongst leading ERP vendors. However, consulting revenue was down 2% during the year, while the most disappointing fact was the net loss of $26.9 million in 2000, compared with a loss of $ 19.2 million in 1999. The Q4 loss amounted to $6.9 million, compared with a loss of $5.2 million for the corresponding quarter of 1999.

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Bengt Nilsson commented, "Concern about the financing of IFS' rapid expansion affected sales negatively during the fourth quarter, as a result of which earnings were lower than expected. However, we initiated a program of measures during the fourth quarter to ensure short-term and long-term financing for IFS and to improve IFS' cash flow and profit margins. This is part of the foundation we are laying to ensure continued growth in the future along with increased financial strength."

"During the year we invested more than ever before in product development. The result is a world-leading product that will guarantee IFS a competitive platform for a long time to come," continued Bengt Nilsson. "In IFS Applications 2001, we have enhanced the architecture, completed the integration of e-business functionality, and developed personal portals. Customer interest in IFS Applications 2001, which contains over 500 improvements, has been particularly strong."

"IFS' investment in the US market has generated an increase in license sales of 217% for the whole year. Today, US sales represent 24% of IFS' total sales, up significantly from 13% in 1999. Companies acquired in the US have now been integrated, and a new organization with 7 branch offices has been introduced. During the coming year, a growing proportion of IFS' sales will be carried out in collaboration with strong partners within selected industry segments, which means that the consulting organization will be of less significance for future earning trends", Bengt Nilsson concluded.

During the year IFS entered into a number of global partnerships with the partners who are the market leaders within certain industry segments like BAE SYSTEMS in Defense & Civil Aviation Markets, ABB Automation in the asset-intensive industries, Cap Gemini Ernst & Young within the utility sector, and Atos Origin in certain European markets, to name but a few.

Market Impact

The time for IFS to get its bearings has finally come as illustrated in management's rhetoric. The rampant growth both organically and through acquisitions and exorbitant R&D costs (almost 60% of license revenue), with little or no internal auditing and control has resulted in major operational losses during the last two years. As a consequence, the company's focus shift for the future on profitability/cash flow, balanced growth and reduction of accounts receivable/DSO, reliance on growth through strategic partnerships, and product development costs tied to new sales (less than 40% of license revenue) is more than justifiable. TEC's previous reports on IFS raised the need for this focus shift (see IFS Marches On, Although With a String of Losses and IFS Has A Magic Growth Formula; But What About Profitability?). One should expect better financial performance in the future given the winding down of R&D expense and increased internal control and discipline and assuming the continuation of healthy growth.

IFS' latest product release, IFS Applications 2001, which was released in August 2000 in Europe and only recently in other markets including the US, should keep the company abreast with the latest market trends. In addition to its proverbial component-based architecture that supports interoperability and collaboration, this release also features over 500 major product enhancements and the addition of 10 new modules. IFS Applications 2001 includes web-based components, Internet storefronts, customer relationship management (CRM) applications, connectivity to other business applications, and collaboration via a variety of e-commerce engines.

IFS Applications 2001 offers over 50 functional business components for improving business processes in medium-to-large size companies. Some major enhancements were:

• Completely integrated CRM Solution with Sales & Marketing, Call Management, Sales Configurator and Web Store.
  
  
• Portals implemented throughout the entire IFS Application product suite.
  
  
• Flow manufacturing with support for Kanban.
  
  
• New quality assurance statistical process control (SPC) methods and/or charts.

While IFS focuses its marketing efforts in a number of segments within the four main groups: manufacturing, utilities & telecommunications, logistics, and services, look for an increased IFS' visibility in the US within selected medium-size manufacturing markets. TEC has recently seen IFS making the final list in almost any software selection gig within the sector, causing thereby headaches to its more prominent, sometimes complacent competitors (for more information, see Demonstration Post-Mortem: Why Vendors Lose Deals).

Although not necessarily taking the highest spot after responding to the initial request for proposal (RFP) document, the company often impresses prospective users during scripted software demonstrations. Its teams' confidence without arrogance and glitzy marketing collaterals as well as astute preparation and following the scripts to the letter, with a minimal number of pre-sales consultants often overturn users' sentiment about the product from skepticism into enamor.

Despite ease of use (a user has only to learn five different screen forms, e.g., query, graph, etc. that are pervasive throughout the entire suite) and agility, the product features very deep, vertically-focused functionality that is also workflow enabled. IFS Applications encompasses Front Office, finite scheduling, E-Commerce, product data management (PDM), and plant maintenance management functionality, in addition to conventional ERP modules. Therefore, IFS is very competitive in manufacturing industries that require strong engineering, asset management and complex project manufacturing functionality.

Furthermore, at the lower end of the market segment IFS represents a generally low-cost, viable option. While the North American business unit continues to make inroads into non-penetrated ERP land, IFS' track record of successful regional implementations is still growing. Currently it is at the level of a couple of hundred customers that include sites inherited through IFS' acquisition of EMS in 1999. But the positive development for IFS is the recent inclination of global corporations to more open, decentralized IT strategy, which allows a plethora of vendors to provide solutions to different corporate divisions. The company will also likely pursue the opportunity of preying on the customer base of currently struggling or all but vanished vendors (e.g., SSA or JBA).

However, even with IFS' presence in 42 countries, the challenge of further international expansion and "up-and-coming only" brand awareness remains. The perception of poor scalability, confinement to Oracle database and less-than-global presence within the higher-end of the market are the other hurdles yet to be overcome.

There is also room for improvement in its currently undeveloped indirect channel, which has been a major success factor for other companies in the mid-market, and which will only have to be executed through the above-mentioned partnerships. Also, the lack of strong HR/Benefits module for the US market may limit some opportunities. The product's suitability for process manufacturers is almost completely unknown and poorly marketed in the US.

The major challenge will lie in retaliatory moves of vendors that have traditionally been strong players in the US manufacturing mid-market. They have been increasingly realizing the danger coming from IFS and will very likely orchestrate their efforts to find any caveats with this still relatively unknown vendor. A potential soul candy for these vendors will be the IFS' financial performance, which should be watched closely in the future. The mitigating factor in this regard remains IFS' solid current stockholders equity and the announced initiatives to bolster it also in the future.

User Recommendations

The challenges aside, look for a vigorous IFS participation in many future software selection deals within the above-mentioned segment. The company has both broadened its product lines and responded to recent market trends, consequently, slighting its opponents in a number of deals. Time only will tell how well it will continue to target the right e-business issues for the manufacturing and service mid-market within its industries of focus (aerospace & defense, telecommunications, repetitive/automotive, engineering and project delivery, internet entrepreneurs, service management, energy and utilities, and forest segments).

More comprehensive recommendations for both current and potential IFS users can be found in IFS Has A Magic Growth Formula; But What About Profitability?