Baan – What Will The Future In Invensys’ Stable Bring? Part 1: About Baan

Part 1: About Baan
P.J. Jakovljevic - November 29, 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 focuses 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.

The 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.

Baan History

Founded in the Netherlands in 1978 and with dual headquarters in Barneveld, the Netherlands, and Herndon, VA, USA, Baan Co. was once the fifth-ranked ERP vendor, with $736 million revenue in 1998. The Company posted stellar growth (over 80% year over year) from 1995 to 1997, with a significant slowdown in 1998 and sharp revenue decline to $619 million in 1999 (see Figures 1-3).

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Baan makes a wide portfolio of business applications that link a global enterprise's internal and external operations. The software automates distribution, finance, asset management, manufacturing, sales, customer service, transportation, and other resources. Approximately 69% of Baan revenues come from maintenance and other services, while 50% of its revenue comes outside of the European market. The Company has direct and indirect sales, service and support channels operating in 80 countries throughout Europe, North America, Latin America and certain Asian, African and Middle Eastern markets. By the end of 1999, the Company had licensed approx. 15,000 system installations to more than 7000 customers worldwide.

Jan Baan started Baan Co. in 1978, as a consulting firm specializing in financial accounting and engineering. In 1979 he began developing software for enterprises. His brother, former construction executive Paul Baan, joined the company in 1981. In 1982 Baan shipped its first notable enterprise accounting software. In 1987, Baan launched its first enterprise resource planning (ERP) software, based on the UNIX operating system, for automating the operations of manufacturing, building, and contracting companies. In 1993, Baan bought several companies to expand its product and market presence, including UK-based Agility Business Software and Canadian firm Probe Software Sciences. Also in 1993 Baan sold 34% of itself to General Atlantic Partners as part of an international expansion. Although initial US expansion efforts were unsuccessful, a $20 million contract with Boeing in 1994 paved the way for the establishment of a US headquarters.

In 1994 the Baan brothers gave the monetary value of their stock, while keeping the voting control, to Oikonomos, a foundation they created to fund charitable ventures. They also formed Baan Investment, a venture capital firm designed to promote ERP software development. Baan went public in 1995 and began its quest to challenge ERP market leader SAP by acquiring a slew of smaller companies with special bolt-on products. Among these were

• Berclain, a supply chain management (SCM) vendor (1996);
  
  
• Beologic, a product configurator vendor (1997);
  
  
• Aurum Software, a sales force automation (SFA) vendor(1997);
  and
  
  
• Caps Logistics, transportation and distribution planning and management vendor (1998).

In 1997 Putnam Investments sold its minority stake in Baan over concerns about the company's relationships with Baan Investment and other private companies owned by the brothers. There were widespread allegations that Baan had recorded to Baan Investment sales of software that had yet to reach users. As the attention intensified in 1998, Baan Investment changed its name to Vanenburg to distance itself (it had almost a 40% stake in Baan at that point), and the brothers stepped down from executive positions at the software company to concentrate on running Oikonomos and Vanenburg. COO Tom Tinsley was named chairman and CEO, replacing Jan Baan.

In 1998, some shareholders filed a lawsuit against the company alleging accounting irregularities. Subsequently, Baan cut about 20% of its workforce and closed or consolidated dozens of offices worldwide. The accounting turmoil, restructuring, a market slump, and difficulties in integrating the acquired products, particularly in merging the myriad of sales teams with different skill sets, all caused a substantial loss and tainted reputation in 1998. In 1999, Mr. Tinsley resigned and former Aurum president and CEO Mary Coleman took his place.

Developments Leading to Acquisition

Despite its troubles, Baan continued to introduce new products to its Supply Chain Solutions suite throughout 1999. In November 1999 Baan accelerated its attempts to penetrate the North American market also by announcing its "Open World" vision for business-to-business collaboration over the Internet.

However, early in 2000, Baan announced additional restructuring charges and Mary Coleman resigned. Baan was never able to overcome the impact of successive quarters of losses and the departure of Ms Coleman, who had been brought on in May 1999 specifically to lead the company into the e-commerce world (for more information, see Is Baan Clinically Dead?).

Baan's response to financial difficulties early in 2000 included heavily publicizing its entrance into the e-commerce market and selling off parts of its business; one such sale was its financial applications unit, Coda (for more information, see Baan Posts $236 Million Loss and Sells Off Coda for Nearly $40M Less Than It Paid).

The bad news continued throughout the millennial year as pressure to raise shareholder equity continued (for more information, see Q: Who Wants to Marry a Multi-Billionaire? A: Baan - Foster Care for Its Orphans Needed As Well). In second half of 2000, crippled by eight consecutive quarters in the red and yet another full-year loss, Baan was acquired by the British automating equipment provider, Invensys (London: ISYS) (for more information, see Baan Yet Another ERP Vendor to Find a Sanctuary Under Invensys' Wing). Baan Co. which had gone public in 1995, traded until the acquisition on both NASDAQ and the Amsterdam Stock Exchange. The immediate impact of the Invensys takeover was some instances of customer defection (for more information, see Baan Defectors - Is This Only Tip of an Iceberg?

As part of the Invensys Software Systems Division, Baan has begun to win new major contracts (for more information, see Is Baan Showing Signs of Life After Death?). The company claims to have signed nearly 100 new customers since the acquisition. Note that Baan was by no means the only major ERP vendor to succumb to market forces in 2000. Gores Technology Group (GTG) successfully acquired Systems Software Associates, Inc. (SSA), also once a high-flying ERP vendor (for more information, see ERP Belle poque Officially Ended With the Demise of Baan and SSA).

Vendor Trajectory and Strategy

Like most of its peers, Baan Company has made attempts, largely through its entry into the e-commerce arena, to counteract the effect of the ERP market slump that started at the end of 1998. While the challenges of creating "e" offerings have been significant for most companies, Baan's efforts have been exacerbated by loss of market share and user confidence, hindered product development, harsh restructuring, staff exodus, and extended financial losses over the past eight quarters.

Nevertheless, in the past 36 months, Baan has made several attempts to expand beyond its core ERP functionality and stimulate sales growth. Initiatives included the introduction of an enterprise application framework, vendor enhanced plug-ins, sales force automation (SFA) tools, customer relationship management (CRM), and - following the latest trend - business-to-business (B2B) e-commerce. During 1999, Baan pursued a dual product strategy: 1) becoming one of the first ERP vendors to offer a fully integrated ERP-CRM-SCM product suite, and 2) e-enabling and extending the suite to respond to the changes taking place in the marketplace as a result of the Internet and the growth of e-business.

To that end, in 1999 Baan continued to add new products to its Supply Chain Solutions suite (for more information, see Baan Releases New Supply Chain Products).

In November 1999, Baan announced its Open World framework for connecting business applications (for more information, see Baan Announces "Open World": Business-To-Business Collaboration Over The Internet). In January 2000 it announced a strategic reorganization to focus operations on e-enterprise solutions for the manufacturing industry. Stemming from the Open World initiative, Baan has announced "E-Enterprise" as a product suite to help deliver business-to-business functionality (for more information, see Baan E-Commerce: a Wing, a Prayer & and a Single Platform).

Baan further delivered on some of its original promise during 2000 with the release of BaanFrontOffice. The new BaanFrontOffice is the first release that truly integrates a collection of acquired front-office products with each other and with other Baan applications. The result is that sales and pricing information is linked to product information running in the back office. The release also included a new marketing component, a new product-pricing module, and an upgrade to its configuration tools (For more information see Vendors Begin to Round Out Their CRM Suites.).

Current Focus

Currently Baan is focusing its E-Enterprise and other extended ERP applications sales efforts on the manufacturers within its large client base. Its notion is to establish the product suite within that wide vertical and use the existing client base to help refine the e-business applications and restore depleted user confidence. Baan hopes this introduction and refinement will coincide with customers' Internet education and grow with their needs. If this plan is successful, Bann will then focus on winning new accounts.

Facing sharp declines in software license sales, Baan has narrowed its customer focus to the following four market sectors:

• Project Industries: includes Aerospace and Defense, Shipbuilding, Trains, Engineering Construction
  
  
• Industrial: includes Industrial Machinery, Machine Tools, Components, Fabricated Products, Furniture, Plastic and Rubber Products
  
  
• Electrical and Electronic: includes Computer Equipment, Telecom and Radio Equipment, Electrical Appliances, Instruments, Electrical and Electronic Components
  
  
• Secondary Processes: includes Construction Material, Glass Products, Steel Production, Paper and Pulp and Card products, Steel and Non-Ferrous Metal Production

The foundation of Baan's product strategy is the delivery of scalable and flexible enterprise application solutions that can be implemented quickly and re-configured rapidly as business requirements change. To do this, the Company is stressing both intuitive, graphical business modeling as a starting point for software implementation, and strong out-of-the-box functionality. During the last three years, Baan has been seeking to improve its penetration in the Small to Medium Size Enterprises (SME) market and to expand into enterprise applications beyond the traditional ERP solutions.

We expect Baan to also target individual product lines such as CRM to other industries, including healthcare, hospitality, insurance, professional services, telecommunications, transportation, wholesale, and utilities. Baan has partnered with resellers both to address additional market segments and to reach a larger number of enterprises, and claims to have achieved some success in gaining mid-market customers through these initiatives.

More to the point for Baan, 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 restructurings. With plans that focus on sales, marketing, services and administration, Invensys seems intent on both maintaining and expanding Baan's customer base. It plans to use the next twelve months to complete a significant restructuring program and to restore customer confidence while fully integrating e-business, ERP and automation business applications.

Planned product enhancements, such as the release of a new browser-based client, continue. In the next 24-36 months the company intends to further expand extended-ERP products, reestablish the growth of the Baan ERP customer base and attempt a significant cross selling within the entire Invensys' portfolio. Invensys has been arguing that Baan still has a competitive product in some industries; in this regard it particularly stresses manufacturing, where Invensys has made significant penetration with its other complementary, plant automation software products.

This concludes part one of a two-part evaluation of Baan. Part two focuses on specific information about Baan as it relates to its current customers and to companies considering its offerings.