IFS Continues Its Reinvention through Pruning Part Three: Market Impact and User Recommendations

Market Impact

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, 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, that 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 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://c.technologyevaluation.com/?u=/cp/TEC_article_20050208_1_al.asp&cl=1&i=766&c=205&l=1). 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) in 2004 and 2005.

Further, the deals with Bentley and Personec, which are also in tune with the above inclination to leverage partners discussed in Part Two, would not be the first of a sort for IFS. Namely, the vendor initially expanded into the customer relationship management (CRM) arena by acquiring former Israel-based CRM vendor Exactium for its product configuration module in the late 1990s. The subsequent sell-off move to Pivotal in 2000 (see What is IFS Up To in the CRM Arena?!) represented IFS tacitly conceding that it had gone beyond its means with its too ambitious product scope and geographic expansion at the time.

Also in the late 1990s, IFS purchased a US-based enterprise resource management (ERP) vendor Effective Management Systems (EMS), hoping to convert its customer base from the maturing Time-Critical Manufacturing (TCM) product to its own enterprise applications, and consequently gain a quick US beachhead. However, customer satisfaction with TCM was very high and, therefore, customer loyalty made it difficult to move customers off TCM. With the majority of the TCM customers reluctant to transition, IFS then heavy-heartedly agreed to sell the TCM product line in November 2001. Thus, the current WorkWise organization was formed comprised of former EMS staff and has since been focused solely on the TCM product line and its customer base (for more information, see A User Centric WorkWise Customer Conference).

With the CAD and payroll applications too, after careful soul searching, IFS' management decided to stay focused on its core competencies, instead of extending painstaking efforts to develop peripheral applications for a small fraction of customers in Scandinavia, where the payback would be highly unlikely. By selling these applications, IFS may not only control potential damage but also "kill two birds with one stone" by 1) leveraging Bentley's and Personec's commitment to a true partnership and product integration to boost both parties' license sales, while streamlining its own operations; and 2) obtaining some equity, however little, as to improve its balance sheet.

For instance, although a differentiating trait might have been tempting (i.e., no other ERP vendor would ever have native CAD applications for piping design or so), the IFS' CAD customer base was too small for the vendor to justify developing own CAD applications in the long term, and it did not have enough specialists outside the Nordic region to effectively sell and support CAD applications globally. This would be possibly the best proof that IFS is getting rid of its erstwhile "not invented here" attitude.

Although through the IFS Plant Design set of CAD modules, once data is entered into the common database, it immediately becomes available to the other IFS Applications modules (whereby, e.g., as a result, information can be recycled, remain consistent and updated, and never has to be entered twice; also, the CAD modules provide designers with a drawing tool for process and instrumentation design, while predefined forms and convenient look-up functionality are further examples of features that benefit all design disciplines), the product has nonetheless had more of a distracting effect to IFS. Not to mention the confusion to prospective customers who could be intrigued by the CAD modules, but who could not exactly understand its functions and relations to other extended-ERP modules, only to hear from the IFS' staffers not to even consider it unless they are from the pulp and paper vertical in Scandinavia or so.

This is Part Three of a three-part note.

Part One presented the event summary.

Part Two covered IFS background information and discussed challenges and response.

Adjusting to a Mature Market

The above analysis of IFS' change of mindset brings us to the fact that the enterprise software is now a mature market where the grow-at-all-costs strategies of the ebullient 1990s simply do not work any longer. Namely, the stock market of the 1990s saw brand new accounts as a key metric when valuing application software companies, which drove these to a business model designed to win new accounts that were seen as the primary source of revenue by most. For both the investor and vendor, this "new accounts at all cost" was the right business model.

But times have drastically changed, as the market penetration is so high that only a few new account opportunities exist. Moreover, economic uncertainty has tightened the purse strings of most prospective user companies so that selling new systems is much more difficult. Therefore, more successful application vendors of late are focusing on their install base as their primary source of revenue while cutting cost to provide profitability. Many, like Bentley and Personec, are even vying for existing dissatisfied customers of competitors. The result is a drastic change in their business model. Namely, the old business model of "new accounts at all cost" must now morph in to a "love the customer" model, whereby the strategic goal remains focusing more resources on servicing existing customers than on attracting new ones. These have typically been made with three objectives in mind:

1) align the organizational structure with current characteristics of the market (i.e., produce a more tightly focused target market and results-based new account sales and marketing operations; and maintain emphasis solely in sensible product and services development while protecting existing technology investment);

2) improve stability of operations and the staying power of company (i.e., achieve profitable growth, financial strength, access to capital, and operational excellence; and maintain consistent profitability, and positive cash flow as a result), and

3) increase the focus on adding value primarily to existing customers (i.e. institute redefined product management and development priorities; focus on enriching software ownership experience rather than software buying experience; and continue with vertical and niche product enhancements, albeit with focus on quality rather than speed, product performance and stability, depth of functionality, and customer needs).

Nevertheless, many vendors are still focused and spending most of their resources on acquiring new customers instead of delivering real value to the customers they already have. As a result, the overall software industry has very low levels of customer satisfaction and financial performance. Nonetheless, most vendors will tout that they are both new account and customer oriented, and some might have struck this balance. But, the vast majority have still been worshipping at the former Wall Street ideal of new accounts for so long that the reality is, they still have a mostly "new accounts" business model. In this culture, sales, marketing, support and implementation teams are oriented towards selling and installing new accounts, whereas in a "love thy customer" culture, the same departments are required but the skill sets and attitudes can be very different.

Therefore, any willing vendor's change of the skill sets and attitudes is by no means easy; these two different strategies each require a different mentality. Further, if unsuccessful, the existing customer will likely suffer the consequences of less experienced, less knowledgeable people. For instance, in a "new accounts" culture, the majority of service personnel are trained and equipped to install new accounts, whereby they are very good at taking a customer from nothing (green-field) to being implemented. In an "existing customer" culture, however, the service personnel work to enhance the value of the software already installed. While some of the skills and knowledge are the same, the enhancing objective requires greater experience, and knowledge and people skills.

The identical (or similar at least) people issue exists within the vendor's sales team, and particularly within the support department. Namely, when a new account initially implements, the support staffers get lots of relatively easy calls for help. Once installed, the quantity of calls drops but the difficulty of the question increases. Thus, of all departments, software support may be the one that most needs in-depth product knowledge.

Business practices must change too, since installed customers are more interested in services than products. Installed customers have excellent knowledge of the pluses and minuses of being a customer and expect to interact with the vendor in a way that enhances the pluses and fixes the minuses. Therefore, they often want more flexibility, such as even an indefinite support of older releases (see Support for Old Releases-Good for the User but Is It Good for the Vendor?) and a plethora of options or "a la carte" support services.

In this down economy, one must also realize that in the enterprise applications business, people are an enormous cost. If the vendor wants to reduce expenses, one apparent way is to cut headcount, but it really muddles the management of two conflicting objectives—to change the mix of skill sets and the need to reduce headcount.

If one is to judge IFS by a number of its recent new account wins, increasingly through recently recruited resellers (some of which are former J.D. Edwards' defectors), it appears that IFS is still driven by new accounts. That remains an expensive business model, with an uncertain payback in the near term, whereby exploiting the existing install base of over 3,500 customers worldwide could have a more profound effect on both IFS' top and bottom line. That is to say, satisfied customers tend to be more amenable to many additional ways for the vendor to add value (which translates into new license and service and support revenues) to the customer in an effort to maintain the long-term relationship, such as enhancements, extensions, refresh or upgrade services, etc.

One could be reminded of SSA Global, Infor Global Solutions, MAPICS, Epicor, Sage/Best Software, Geac, etc., where the strategy of taking a deep breath and reflecting upon how to proactively better serve existing customers, and gradually building upon that with a combined organic growth and growth via acquisitions, seems to be a recipe for success these days. The enterprise applications market is indisputably a mature and fairly saturated field, and all players must accordingly adjust their investment strategies from those of the emerging and growing market in the 1990s. That means painstakingly finding a perfect balance between cultivating the install base versus the zeal for hitching brand new customers.

Vendor Recommendations

Therefore, IFS might even be better off to slow development down to ensure building increased quality into the product and refine its product (and services) management and development processes to allow customer input at every phase. Its management should institute and foster a "love your customer" culture and redefined product management and development priorities, with a focus on enriching software ownership experience (e.g., an improved ease of use or truly needed functional enhancements) rather than a flashy buying experience. This strategy would be in tune with the general feeling of low customer loyalty and staying power of enterprise applications providers, which has forced even much bigger and mightier players to espouse their equivalent customer-retaining strategies with catchy names, such as PeopleSoft's "Total Ownership Experience (TOE)" (which future is now uncertain under Oracle's ownership) or Lawson Software's "1,000 Days Manifesto".

Moreover, if IFS truly wants to be a global player, it will have to bolster the image of itself as a company with strength in the target verticals, regardless of the location. Greater shift of focus on its still developing indirect channel, which has been a major success factor for many peer mid-market vendors, and which will be executed through a number of announced market/industry-based partnerships, could remedy IFS' predicament of global image and high cost of direct selling in the long run. However, the vendor has to do that in a judicious manner, as to not make its direct sales force overly nervous and ready to make an untimely departure, particularly if it has to strike a perfect balance between "hunters" (i.e., those that pursue new accounts) and "farmers" (i.e., those that nurture existing customers). For a more pertinent discussion, see The Reinvention of Software Vendors and End User Value.

User Recommendations

The market should appreciate IFS' attempts to become more focused, better financed, and better structured for profitable growth, while investing in existing customers, products and technology and while targeting leadership positions in well-defined markets. Latin American customers should, at least in the transitional period, watch carefully whether they will benefit from better front line support from IFS' partners in remote locations combined with a backup support from IFS' internal experts.

Pulp and paper and power generation businesses using IFS' back-office applications that have needs to connect their plant maintenance, engineering, and manufacturing departments should react positively to this announcement with Bentley. Both current and prospective customers should evaluate the potential combined functional enhancements by both Bentley, Personec, and IFS as a way to add value to their existing applications while bearing in mind that other ERP, HR/payroll or CAD/product lifecycle management (PLM) vendors might currently also offer mature and functional products at this stage.

Approach Bentley and Personec to clarify their current skills to support your respective short- and long-term HR/payroll, CAD and PLM initiatives, as well as a clarified product roadmap. Also, watch for market developments carefully, as the competitive landscape will heat up, and manufacturers will see more choices, particularly those looking for a full suite of functions to manage product life cycles. The parallel technologies used by both vendors might offer customers lower total cost of ownership (TCO), as well as training and knowledge transfer costs. Nevertheless, past experiences have shown that true integration takes time and is very seldom painless. Also, make sure that IFS, Personec, or Bentley offers a single contract and is held accountable for all disparate components in its product offerings.