Business Finance Magazine  July 2005

Best of Breed Strengthens its Hold

Stand-alone applications are richer in functionality than ever before, and the trend toward vertical solutions keeps gaining ground.

If you had to describe in just one word the type of user most likely to favor products offered by best-of-breed (BOB) software vendors, that word would have to be "sophisticated." They're the kinds of users who are looking for higher quality and deeper functionality, and they know that a stand-alone solution is where they're going to find it. That's been the case historically, and now the quality of offerings appears stronger than ever. More and more vendors are enhancing their product features, offering a richer set of user benefits and greater end-to-end functionality. An expanding number of new best-of-breed vendors are appearing as well. In addition, the trend toward mergers and acquisitions continues as larger vendors gobble up smaller ones to fill gaps in their product lineup.

"For example, SAS bought a company several months ago that focused on retail merchandising, giving SAS a merchandising analysis capability they wanted," says Dan Vesset, research director at market intelligence and advisory firm IDC in Framingham, Mass. "Siebel made a deal with Fast Search, which does analysis of text with applicability in call centers. There's also been consolidation within the budgeting applications and the recruitment applications areas, where BOB [providers] have good offerings. But perhaps there were too many of them to all survive. In the human capital management space, there's been consolidation of complementary vendors. For instance, Workscape bought Performaworks, and Authoria bought AIM."

As best-of-breed players are gearing up to focus more earnestly on industry-specific expertise, the move toward verticalization is taking center stage, with more vendors touting their industry-specific capabilities. "Health care in particular is an area ripe for BOB specialization, and more players are developing expertise in that industry," points out Paul Hamerman, Midlothian, Va.-based vice president of enterprise applications at Forrester Research. "In addition, perhaps the hottest new BOB category is compliance, which has been ramping up not only due to Sarbanes-Oxley, but to meet broader compliance issues beyond SOX."

Sellers of stand-alone applications tend to develop products that supplement what enterprise resource planning (ERP) vendors provide, according to Hamerman. "Now BOB [companies] are moving toward Web services, which is the path toward integration and flexibility," Hamerman says. "The use of open integration standards is good for BOB [vendors] because it makes them easier to integrate with the ERP [suites], although they're not quite all the way there yet technologically. While BOB and ERP [companies] compete, they also partner. It's a complex relationship." He adds that by becoming application service providers (ASP vendors) -- companies that offer customers access through the Web to applications and services -- a growing number of vendors are tapping into a more reliable income stream that helps them thrive.

Functionality that helps customers meet global business challenges, such as handling currency and exchange rates and setting up operations in diverse locations, is also receiving greater emphasis in stand-alone applications. All of these improvements translate into an ever-expanding array of choices for users and a heightened need to perform due diligence before they buy to make certain that the application they're planning to implement will be an appropriate fit for their corporate culture.

BPM: Stage Two

Business performance management (BPM) software, which includes forecasting, budgeting, planning and reporting applications, has grown into a more mature market over the past few years. With that maturity has come continued consolidation as larger players in this space seek to fill gaps in their expanding suites of offerings. For example, in January 2005, Hyperion Solutions Corp. acquired Razza Solutions to enhance its data-management capabilities. According to BPM Partners Inc., the trend toward consolidation will continue as business intelligence, business performance management, advanced analytics and business process management tools continue to converge.

Although BPM users have matured as well over the past year, they still suffer from silo syndrome. "Companies have moved from level one of BPM maturity -- which focuses on projects targeted to increasing visibility into a specific department's performance -- to level two," says John Hagerty, analyst and vice president at AMR Research in Boston. "At level two, companies become eager to invest in additional technology and to spread the BPM gospel more broadly. Companies at this level concentrate on data integrity. Dashboards begin to appear as a launching pad to more detailed analysis. However, [business units] continue to operate in silos."

The silo syndrome is symptomatic of persistent cultural issues surrounding BPM. "The biggest BPM issue right now is cultural; that is, trying to change behavior in order to bring people and processes in alignment with performance management objectives," says Mark Smith, CEO and senior vice president of research at Ventana Research in San Mateo, Calif. "What's needed are better performance-based incentives and rewards systems so people can see what they'll be getting out of it."

Part of the user maturity curve includes better integration as well. David Klementz, CFO of Progress Rail Services Corp. in Albertville, Ala., has seen the benefits of a more integrated BPM solution just within the last six months. "With our BPM enhancement from SAS, now we're able to integrate the financials directly into our scorecard," Klementz says. "It's easier to extend data nets to balance sheets than it used to be, and it's easier to develop customized reporting and gain greater flexibility in the way we can look at our business."

Compliance Beyond Sarbanes-Oxley

Compliance-assistance software has been driven primarily by Sarbanes-Oxley requirements, but it's been put to other uses as well. "Companies in sectors such as financial services and life sciences have had compliance issues to deal with for the past 10 years, and this type of software helps those kinds of industry-specific compliance requirements as well," points out Hagerty. "One prime target area for these vendors is health care, where patient information privacy is such a big concern."

Compliance software vendors want to make the case that companies using their products can handle compliance issues holistically, as opposed to managing those issues on a project-to-project basis. Steve Derivan, director of IT, Oracle Applications, at The Reader's Digest Association Inc., chose a compliance-assistance tool from Logical Apps, not only as a way to meet Sarbanes-Oxley requirements, but also to provide rules-based support for internal corporate policies.

"Logical Apps, [from] an Oracle-certified solutions partner, allows us to automate and enforce controls that were previously handled manually," says Derivan in the $2.4 billion publishing and direct marketing company's Pleasantville, N.Y., offices. "It enables us to enforce compliance rather than having to report on noncompliance. Before we implemented this software in March 2004, procedures were handled by [manual reporting processes] and mitigated after the fact. With Logical Apps, we reduce our need to report after the fact. If noncompliance were occurring, it would mean we had installed the software incorrectly. In addition, the software enables us to exert control over who has access to certain accounts, which reduces errors and redundancies.

"We're using it for SOX requirements as well as for our internal procedural compliance requirements within our manufacturing systems and our purchasing," adds Derivan.

HR Tools: More Robust Functionality

Enhanced capabilities in human capital management software help users not only hire a higher-quality employee, but also better track that employee's performance, according to Jason Corsello, senior analyst at Yankee Group Research Inc. in Boston. He says that companies are looking for a stronger link between employee performance and compensation. They want to be able to raise the bar for high performers while placing low performers on a performance improvement plan. HR management tools help companies achieve those goals, he adds.

Corsello also applauds the integration capabilities of the new software. "Whereas in the past software was more transactional-oriented and siloed away from the company mainstream, now it has more robust functionality and can be better integrated into the organization's other systems," he says.

Products in this space increasingly include features that users previously added to the standard software, eliminating the need to create a customized application. Fluor Corp., a global $9 billion construction company, has seen the benefits.

"Things we had customized in the past are now included in the latest upgrade of our software solution from Authoria," says Steven Bragg, Aliso Viejo, Calif.-based senior IT consultant, IS, with Fluor Corp. "Before, with all the customization we'd done, if there was a problem, it was more difficult for the help desk to assist us. Now it will be a more stable product to use because it eliminates that customization we'd built into it.

"The new upgrade will also make it easier for managers to plan for employee salaries and retention for the upcoming year," Bragg adds. "It will improve our budgeting function on a global basis because it handles differences in currencies and exchange rates, giving senior management a single currency view and a better idea of how the [HR] budget will impact the budget for the overall company."

Controlling Expenses

Expense-management software helps businesses contain travel and entertainment expenses by automating key processes, reducing paperwork, and imposing more controls over payables and receivables to reduce expense-related fraud. "These vendors are now offering more of a combination of services to manage payables and receivables," says Nigel Rayner, vice president of research at Gartner Inc. in Egham, Surrey, U.K. "Particularly on the receivables side, more expense-management vendors are providing Web-based solutions to ease the debt-resolution process. They're also working to bring buyers and suppliers together to match invoices. Larger companies in particular are taking advantage of this kind of software to bring their disparate payables processes together."

This is a mature industry with little merger and acquisition activity, according to Henry Ijams, managing director at PayStream Advisors Inc. in Charlotte, N.C. "Most vendors in this space are very similar. But where there are differences, they lie in providing an outsourced audit process," says Ijams. "For example, Gelco says they will audit your expense reports for you removed from your office politics to produce a more thorough, objective audit."

At Applera Corp., a life sciences company, field employees faced up to two months reimbursement time because of disparate business controls across business units. The organization was paying seven full-time employees to process expense reports. "We recognized that automating this process would save time and money," says Bob Mendence, Norwalk, Conn.-based project manager. "What we didn't realize is just how quickly we would see results. We implemented the Concur Technologies expense software solution in November 2003, and within just a few weeks we were able to reduce the number of people managing expense reports from seven to one and a half."

Project Balance And Insight

Software products that concentrate on improving the performance of individual projects are becoming increasingly welcome to companies interested in figuring ROI, allocating project funding and identifying initiatives that deserve the most financial support from one quarter to the next. When users of project portfolio management (PPM) software are armed with real-time information about the performance status of their projects, they are better equipped to nip problems in the bud before they become costly headaches. Consequently, they can boost productivity significantly at their quarterly meetings by making strategic decisions instead of merely reporting on each project's recent history.

Uses for this software are as diverse as the projects themselves, including everything from new products and plants to research and development. To date, however, most software vendors in this space are targeting project management needs within IT departments.

"IT is the number one breadwinner for PPM vendors," says Daniel Stang, principal analyst for project and portfolio management applications at Gartner Inc. in Delran, N.J. "That's where new licenses are being won." He explains that PPM providers are promoting products as tools for managing IT as a business. They want to show customers how these systems connect IT projects more tightly with the company's overall business so that IT can better align its efforts to the company's current and changing strategies.

Cash Management

Reducing days sales outstanding (DSO) and improving cash-flow forecasting are among the results that cash-management applications continue to offer users. Significant merger and acquisition activity has been occurring in this field. "We track about 40 treasury and cash-management vendors closely, and of that group, 10 have been involved in some type of merger and acquisition activity within the past year," says Albert Pang, enterprise applications research director at IDC in San Mateo, Calif. "In many cases, these vendors end up being bought out because they fail to achieve critical mass, unable to hold on to customers and sustain revenues without the backing of a large group of investors. As a result, we've seen banks and ratings firms buying or investing in these firms in order to cross-sell cash management services to their existing customers." He adds that the surviving vendors will increasingly opt for the ASP business model within the next year as end users search for a more affordable way to access cash-management solutions.

Another trend in cash management is portfolio modeling. "Increasingly, these vendors are realizing it's important for users to look at the whole portfolio of businesses they own and assess risk levels across those areas more broadly," Pang says. "Plus, we'll see more XML functionality in products sold by these vendors."

Jack Pacheco, CFO at Smart Modular Technologies Inc., a 1,400-employee company that provides memory and display products, reports that his company went live in May 2005 with a new upgrade of its cash-management software. "This latest version, from Emagia, produces a better forecasting tool to determine when we're likely to receive payment from our customers," says Pacheco, who works in Fremont, Calif.

His company can't achieve the results it wants with its ERP vendor's cash management tool, he explains, because that system's functions are based on standard payment data instead of on actual customers' paying history -- a capability the Emagia's software provides. "We get a forecast based on what our collectors believe they're going to be able to get, and we can see where we stand much more precisely in relation to where we want to be."

Credit Management Status

New functional enhancements to credit management (also called receivables and collections management) products include expanded features such as electronic invoicing, better analytics and pre-bill management, which helps users understand why payments are not being made. However, many of today's credit-management offerings lack the capability for integration with other applications -- a shortcoming common to many of the other BOB categories.

"This software is still focused on collections and is not integrated with other cash functions," explains PayStream Advisors' Ijams. "What's missing is tight integration with processing and sales applications, which is needed in order to manage the entire order-to-cash process. There's also a need to change existing business processes from a user standpoint and to put more of a strategy around the collections effort. We expect business-process management and performance management to impact this space from a strategic viewpoint more in the future."

Much of current user demand centers on achieving higher levels of customer satisfaction. "The worst thing is for us to terminate a customer for the wrong reason," says Richard Yang, Chicago-based vice president of card products at Fifth Third Bancorp. "Our industry is always playing catchup to the customer. The credit-management product we're currently implementing from Experian automatically determines whether to grant an increase to a customer based on that customer's information. So if a customer uses the card and goes over his limit, the software can immediately evaluate everything we know about that customer and grant an increased line of credit automatically if he qualifies, which avoids customer embarrassment."

Bringing disparate sources of customer data to a single location that users can view easily is another functional enhancement offered by some software applications. "Now, with the solution we implemented from 9ci in September 2004, all of our transaction activities are online," says Jim Torongo, vice president of HMX Tailored, a subsidiary of Hart Marx Inc., a clothing manufacturer in Chicago with approximately 2,000 employees. "It's brought together data in various ways so we can better understand dispute issues, and it tells us what collection efforts have been made and the amount collected."

Integration of these various applications is perhaps the final frontier for companies that sell stand-alone software. While that goal is within reach of some best-of-breed classes, all of them have more to do on this most important client front. On the positive side, standalone software offerings are richer in functionality than ever before, and a greater number of BOB vendors are succeeding in providing more of an end-to-end solution. Even so, room will likely remain for sellers that are specialized enough to carve out a niche no other company has explored as specialization and verticalization continue to be major themes.