MSI Magazine - April 2003

Mike Braatz is intimately familiar with the challenge of launching a software company in today's maturing enterprise applications market. Braatz, who co-founded Boston-based inventory optimization vendor Optiant in 2000, says the key to survival for start-ups is avoiding the big guys.

"As a smaller company, trying to go head-to-head with [the big] guys often can be suicide," says Braatz, vice president of business development-likening such an approach to "storming up a fortified hill."

According to most experts, the biggest hills in the enterprise software market have been staked out, dug in, and reinforced. Additionally, the economy remains cool, making it hard for new companies to secure funding and customers in the face of cautious information technology (IT) investment. Despite these facts, a number of new companies are entering the market. Where are these new software vendors coming from? How are they planning to compete? These questions are difficult, but not insurmountable, say experts.

"There are clear signals to me that we've entered a period of maturation and consolidation," says M.R. Rangaswami, founder of Sand Hill Group, a San Francisco-based IT consultancy. "We have several large vendors in the $1-billion range that offer broad application suites. If you're a little guy with a brilliant idea, you have to wonder what to do."

Rangaswami-who has held executive marketing positions with Baan, Avalon, and Oracle-teamed up with Constantin Delivanis to co-found Sand Hill Group in 1996 to give advice to emerging technology companies. One would think that the current climate is far from fertile for new businesses, but Rangaswami insists the negative economy and mature market actually offer more opportunities for entrepreneurs than they might get in a boom. "You can go to a Fortune 500 company and offer to take on non-core roles and perform them more efficiently. People are looking to cut costs and outsource, so it's a great time."

Living off the edge(s)

There is a caveat, however. As Bill Swanton, a vice president with Boston-based analyst firm AMR Research, points out, the opportunity for launching a killer app in the enterprise applications space and riding it to the billion-dollar business stratosphere is long gone. "The ideas that get huge usually are large installs, with lots of space around the footprint for expansion. You need a whole lot of open space if you are going to grow. ERP [enterprise resources planning] only exists as it is today because someone started with a financial package and decided to extend it to material management."

The simple fact is, this kind of space is no longer available, so current opportunities exist predominately on the fringe of the supply chain, or in addressing the intricacies of the plant floor. These opportunities aren't big enough to generate the type of growth that rivals the size of major enterprise suite vendors like SAP, Walldorf, Germany. "The new companies that are going to evolve are going to come up with ideas that identify a technology gap between areas that are covered by existing systems, or create a business process that does something in a different way," says Swanton. "Those [gaps] are getting narrower."

Swanton points to supplier relationship management (SRM) as an example. "It fills the gap between supplier and buyer systems, making it possible for the business process to bridge the gap. Now you are starting to see some of that functionality being incorporated into larger systems."

This is exactly the approach being taken by Optiant. Its PowerChain suite of applications enables manufacturers to design and configure optimized supply chains-determining cost-effective inventory placements and integrating supply chain strategy into sourcing and distribution processes.

According to Braatz and colleague Jim Lawton, an Optiant vice president, success is all about picking your spot on "the technology stack." Put simply, ERP forms the base of a pyramid of technologies upon which other technologies, such as advanced planning and scheduling (APS) systems, sit. Optiant, founded out of MIT in 2000 with $7 million in venture capital, targets the tip of the pyramid with its supply chain network design solution. This means rather than going head-to-head with the enterprise suite giants, Optiant can partner with them to extend the value of both.

"None of the larger supply chain players are competing in our space," says Lawton. "There is no 800-pound gorilla, so we only see smaller companies like SmartOps and Logic Tools."

Carefully avoiding a strongly competitive-and potentially suicidal-situation, Optiant has kept its focus cantered on this gap. "As a small company, you can't be all things to everyone," Braatz says. "We know what we are good at, and in those areas where someone else is better, we have partnered to bring that in. This has allowed us to invest more heavily in our core competency."

AMR's Swanton stresses that maintaining this kind of disciplined focus is critical to sustaining the advantage that small vendors have over larger ones. "The advantage small vendors have is seeing an opportunity and moving quickly to exploit it for a few years until the big boys catch up, and then sell out and move on. The big question is whether small vendors will continue to be separate, or become features in larger suites," he says.

Inside policy

The challenges facing new vendors go beyond technology and marketing. According to Mark Anderson, director of supply chain finance for Hewlett-Packard (H-P), Palo Alto, Calif., many large companies shy away from using small vendors as a matter of policy.

"We don't engage a lot of small vendors," says Anderson. "With the SAPs of the world, you don't have to worry about their financial health. With small vendors, you must have a keener eye on their businesses."

While Anderson states H-P has a "guideline" geared toward avoiding any reliance on a single vendor that may not be around long-term, that doesn't equate to a moratorium. In fact, H-P is a partner in i4Cast, a Houston-based joint venture with Alliance Data Corp. that started as a software-consulting project at pre-merger Compaq four years ago.

Compaq wanted a better handle on product cost information than was offered by the enterprise systems it was using. The initial solution was designed to pull in product costing data from nine disparate systems-none of which were consistent-filling a critical gap in the ERP footprint. The project was a success, and H-P was so pleased with it that the company believed there was a wider value proposition for the technology, and the joint venture was formed.

The ERP opportunity

As a market matures, niche segmentation becomes the mantra for new vendors. No space in the enterprise applications space is more mature than ERP. Today's largest enterprise suite vendors rose to prominence via ERP sales, and in recent years, the ERP market has seen continued consolidation. And yet, Norfolk, Va.-based OpenMFG sees this space as one of opportunity.

As any first-year marketing student knows, the only way to compete in such a market is to segment it so thinly that the 800-pound gorilla doesn't see enough value in the piece you want to fight over. OpenMFG focuses attention on small manufacturers-specifically those companies with revenues under $50 million. There are more than 300,000 such companies in the U.S. alone-a substantial market opportunity, but one that's hard to reach for large suite vendors.

"I was completely blown away by the market opportunity," says Ned Lilly, OpenMFG president and CEO. "These [small manufacturers] are increasingly global, and typically late in their adoption of new technology. It was far from clear that the benefits were there for them, given the costs associated with ERP. But that's not to say they don't need the benefits. Half of them couldn't tell you how much it costs to manufacture a particular product, what they have in inventory, or what the schedule is."

To deliver what it claims are the features and functionality commonly found only with higher-end ERP systems, but at a price point that beats most ERP vendors, OpenMFG bases its system on standards-based, open source code such as the "Qt" toolkit for C++, the PostgreSQL database, and the Linux operating system. "We were engineered from the ground up to bring mid-market functionality to small companies," says Lilly. "By using open-source software, we've taken the price off every piece except for our software."

Price and maneuverability aren't the only advantages a small vendor has in today's market. As H-P's Anderson points out, the smaller vendor often can provide superior customer service.

"No matter what upgrade we've asked for, [i4Cast] has never come back and said 'no.' They make it easier for me, as a business manager, to suggest enhancements," he says. "We liked the personal touch, and offering superior customer service definitely is a differentiating factor."

Keys to success

So what do you do if you are a new vendor looking to break into the market? There's no shortage of advice, much of which stands to benefit end users.

"We started with a customer [Eastman Kodak was the original development partner], and that has been crucial to our success," says Optiant's Braatz. "There are many ideas that come out of academia that don't have a real business application. You've got to be relevant to the real world."

Rangaswami weighs in with a number of points. To begin, he recommends going back to the early 1990's mentality for software vendor success, well before the short-lived dot-com boom generated some unrealistic expectations on the likely trajectory for success in the software market. "Things went crazy for about four years, but they are back to normal now," he says. "You need a sound business plan, products that people will pay for, and you should aim to start with $3 million to $5 million in capital rather than $20 million. It's a 5- to 10-year work ethic that may bring a pot of gold at the end."

These more sober expectations need to be matched, however, with the right insight on the capabilities that will appeal to today's enterprises. "There are great opportunities for entrepreneurs to be successful," Rangaswami concludes. "You just have to be careful, conduct plenty of due diligence, and be disciplined to the plan."

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