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Software Wars and Hard Realities

August 29, 2003
Related Topics: Human Resources Management Systems (HRMS/HRIS), Featured Article

Nancy Wyman’s blood is boiling. Installing an enterprise resource planning system is tough enough even under ideal conditions, she will tell you. Connecting a vast array of systems, databases and computers can turn business processes upside down and stretch an organization to its breaking point. Yet the comptroller for the state of Connecticut can deal with all that, especially if the disruption eventually leads to a sizable return on investment.

    The question is whether Connecticut will ever have an opportunity to achieve a return on its ERP investment. Wyman is doing her best to stay calm, but she’s the first to admit that members of the state government are feeling extremely anxious. They’ve spent the last three years researching, installing and integrating a complex PeopleSoft ERP system. So the news that Larry Ellison planned to scuttle PeopleSoft and discontinue its product if his firm, Oracle Corp., succeeds in taking over the rival has left the government agency reeling.

    "It’s an ugly situation," Wyman laments. "We would wind up tossing out 100 million dollars that we have spent getting the PeopleSoft application up and running. Within a few years, we’d have to spend an equal or greater sum to get a new system up to speed." Instead of calmly accepting the situation, the state of Connecticut is fighting back with a vengeance. On June 18, it filed suit against Oracle, claiming that the deal violates antitrust laws in that state. The case is now wending its way through the court system.

    The wild and woolly world of business software is not a happy place. Last June, PeopleSoft announced that it would purchase fellow ERP vendor J.D. Edwards (a deal it has since consummated), and then Oracle announced a hostile bid for PeopleSoft. This set in motion a series of actions and reactions that have reverberated to the core of the industry, and has shaken the confidence of many organizations that have purchased expensive ERP suites over the last few years.

    The emerging reality may be a bitter pill. Jim Holincheck, a research director for consulting firm Gartner, Inc., says that the real issue today is who controls the technology. "It’s about vendors getting to critical mass in terms of customers so that they can control the direction that applications and technology take." And that could come at a steep cost to organizations suddenly forced to change course. "It’s not inconceivable that some companies could find themselves paying out hundreds of millions of dollars to make changes--if they wind up with a product that’s a dead end, " adds David A. Link, a vice president for consulting firm Cedar.

    Some industry consolidation, of course, always has been a part of the picture. To some extent, it’s essential to a free-market system. However, the size and scope of recent takeovers--and the possibility of more to come--has some corporate executives wringing their hands. "The potential for disruption is great," says Edward Jensen, a partner in the consumer performance practice section at consulting firm Accenture. "Companies must prepare for the possibility that they could see a change in ownership" of their products.

A slight disadvantage
    Installing an enterprise resource planning suite or large human resources application isn’t a task for the fainthearted. It’s not unusual for the process to take 12 to 18 months and devour tens of millions of dollars. In most cases, the goal is to automate the work flow and generate cost-savings by using people and resources far more efficiently. Yet in today’s high-stakes business environment, with the Internet forcing constant change, most organizations have no choice but to forge ahead with these massive information technology projects.

    Once an organization installs an ERP package, it hopes to stick with it for several years. Not only does the time and expense of installing, integrating and tweaking exist, but it’s also necessary to train employees to use the system and educate supply-chain partners and others about its capabilities. Not surprisingly, when Larry Ellison stated that he had plans to discontinue development of PeopleSoft if he succeeded in taking over the company, customers squawked. Most companies that have chosen PeopleSoft have already looked at competitors such as Oracle and SAP and decided not to use those products, Link says.

    Although there’s a very real chance that Ellison just wants PeopleSoft for its market share and customer list--and would discontinue the product if he succeeds in buying the company (which has become a big "if" since PeopleSoft completed the purchase of J.D. Edwards)--there’s another possibility, Holincheck says. "It’s a disruptive tactic designed to scare away potential [customers]."

"After a few years, you wind up with a product that’s lagging behind the market. You lack the features and functionality that’s necessary, and you’re forced to switch."

    Edward Hansen, a technology practice attorney in the New York City office of the law firm Shaw Pittman, says that it’s impossible for Oracle to ignore realities of the marketplace. "There’s always the risk that PeopleSoft customers would migrate to SAP or another platform," he says. And, ultimately, that could force Ellison to back off from his hard-line rhetoric. In fact, Ellison has already softened his stance, saying that he would continue to support PeopleSoft customers. Still, he stops well short of vowing to continue product development. As Wyman puts it: "After a few years, you wind up with a product that’s lagging behind the market. You lack the features and functionality that’s necessary, and you’re forced to switch."

    The same ugly scenario strikes fear in the heart of Jon Walker, global leader of human resource information technology at Dow Chemical. "In today’s competitive environment, lagging behind the technology curve can prove disastrous. If a vendor pulls the plug on a product, you’re stuck. You either lag behind and face the prospect that you’re going to be at a competitive disadvantage or shell out a lot of money for a new system." Dow uses PeopleSoft for its human resources management. It also relies on SAP R/2 for financials and an Oracle database.

Designs on the future
    There’s no simple way to sidestep the land mines of today’s business-software market. Yet consultants and analysts aren’t shy about offering opinions. Organizations that have already installed an ERP or HRMS application should probably stay the course, Holincheck says. The same basic logic holds true for companies wading through an implementation during a vendor acquisition or merger. At that point, the expense of switching to another software package would almost certainly be prohibitive and delay the benefits that any application can provide. Meanwhile, organizations selecting a vendor should conduct thorough due diligence, Hansen says. Although there’s no way to eliminate all risk--as the Oracle-PeopleSoft situation illustrates--knowing something about a software provider up-front allows an enterprise to make a better decision.

    One way to get the inside word on a firm selling business software is to check with consultants in the trenches, Hansen says. In many instances, they are aware of internal problems that might lurk just below the radar. It’s also wise to examine a company’s financials, he says. "A vendor that’s on the rocks is far more likely to go out of business or wind up acquired." Finally, it’s essential to spend a great deal of time structuring a contract before work begins. "Legal and business issues are deeply intertwined. Buyers need to look at both aspects at the same time," he adds.

    Maintenance agreements are another weapon in the buyer’s arsenal. By specifying a period of time that the supplier will provide maintenance in exchange for a fee, a company can buy some insurance. The agreement should also provide for upgrades necessary to keep the technology current with generally accepted industry practices, and it should establish an easy and predictable expansion and contraction path, Hansen notes.

    Finally, some organizations are turning to business-process outsourcing to reduce risk. Because these service providers handle every aspect of a particular task, such as payroll or benefits administration (and use their own technology to do so), it’s possible to steer clear of potential problems. On the other hand, application service providers might appear attractive at first glance, and a business could have valid reasons for using one of these firms--but a customer is still bound to a particular technology. "Whether the application resides within a company or outside, the customer must choose an application," Holincheck says.

    Link believes that an enterprise is best served by developing a comprehensive technology plan. Instead of organizations thinking about initiatives by a vendor’s name--SAP, Oracle, PeopleSoft, J.D. Edwards, Geac or Lawson, for example--the focus should center on business processes and results. "It’s important to develop a technology plan that accommodates change and construct an organization that’s able to adapt to today’s rapidly changing environment," he says.

    Although Oracle, PeopleSoft and J.D. Edwards have grabbed headlines over the last few months, the reality of the digital age is that any application or vendor can vanish overnight. And any organization can suddenly find itself staring down the barrel of an acquired vendor and a discontinued product, Hansen says. "Every company should prepare for the possibility that a change in ownership could occur among the vendors they’re doing business with. There are no guarantees."

Workforce Management, September 2003, pp. 66-70 -- Subscribe Now!

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