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2003 closes out as planned rays of sunshine for it market in 2004

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  • 1. THOUGHT LEADERS FOR MANUFACTURING & SUPPLY CHAIN ARC INSIGHTS By John Moore, et. al. This year will close with promising signs that the long recession in IT spending is abating. The coming year will see a number of changes as spending increases, consolidation continues and a wide-range of suppliers position themselves for RFID. INSIGHT# 2003-52E DECEMBER 18, 2003 2003 Closes Out as Planned Rays of Sunshine for IT Market in 2004 Keywords Trends, 2004, RFID, PLM, SCM, EAM, Wireless Summary 2003 came in like a lamb and may not leave like a lion, but will none the less be stronger, can we infer a ram? Of ARC’s 10 predictions for 2003, 7 were on target and remaining were mixed. For 2004, 3 predic- tions are modifications to ones in 2003, the remaining 7 target new significant new developments. Analysis For 2003, ARC’s predictions were on target with seven clear “Hits” and three “Mixed”: 1. Spending for Large Enterprise Applications Remains Weak HIT: Enterprise application sales were anemic most of the year, show- ing only modest recovery from the later half of third quarter onward. 2. Consolidation of Independent Software Vendors (ISVs) Continues HIT: Consolidation continued at a frenetic pace in 2003, particularly among ERP companies as consolidators looked to bulk-up on new ca- pabilities, markets, and most importantly customers. 3. Collaborative Production Management Market Comes into Its Own HIT: One of the few bright spots for IT spending growing over 10% (eliminating the semi-conductor sector and growth exceeded 18%), as manufacturers replace proprietary systems with commercial solutions. 4. Web Services Moves beyond Trial Applications to Broad Roll-outs MIXED: Web services is no longer and “if” but a “when & where” phe- nomena as companies look to deploy such capabilities internally. Broader roll-outs remain elusive.
  • 2. ARC Insights, Page 2 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com 5. Centralization of Business Functions Grows in Europe HIT: Rapidly becoming the norm as the European community moves to standard processes, partially driven by European Union directives. 6. Merging of Outsourced Manufacturing and Logistics HIT: Flextronics and Solectron continue to enhance their logistics offer- ings. In CPG, packaging service providers are adding logistics and 3PLs are adding packaging and light manufacturing capabilities. 7. Mid-tier Software Suppliers Split Into Two Distinct Camps HIT: Clearly driven by consolidation and belief among many ISVs that Microsoft is either their future parent or a clear and present danger, the market continues to split, either.Net-centric or J2EE-centric. 8. Software Suppliers Take on Greater Services Role HIT: Looking for revenue growth, software suppliers grow their service offerings at the expense of SI partners and other service providers. 9. Asset Optimization and Servicing Becomes Strategic MIXED: Asset intensive industries such as refining, chemical and utili- ties are taking a strategic view. Broader adoption across all manufacturing sectors remains lackluster. 10. PLM Continues to See Strong, but Focused Growth MIXED: PLM market saw only modest growth (~8-10%) but small niche areas, such as Portfolio Mgmt., saw nearly double that growth. A Breath of Fresh Air & Spending in 2004 ARC’s 10 predictions for 2004 are: 1. IT Spending Accelerates 2. Consolidation Continues Unabated 3. ASP Acceptance Grows: Splits in Two 4. SCE Suppliers Win RFID Sweepstakes 5. HOS Regulation Sparks Greater Collaboration 6. SCP Suppliers Look to Services for Revenue Growth 7. Value Proposition Difficulties Gives PLM Vision Cataracts 8. Wireless Stays Outdoors 9. EAM Suppliers Struggle for Differentiation 10. Integration, Security & Open Source Push IDE Simplification
  • 3. ARC Insights, Page 3 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com IT Spending Accelerates After nearly three years of lackluster sales, the IT market is starting to show signs of life. Manufacturing is on the rise, access to capital is cheap, and companies are coming to grips with the need to replace aging systems and capitalize on capabilities of newer IT solutions. Suppliers are reporting in- creased activity, with well-defined budgets. This has created some relief from the freefall in pricing as prices begin to stabilize. Users also report better access to experienced consultants at up to 25% discounted rates. This combined with offshore outsourcing is allowing a few of the early spenders to capitalize on some very attractive opportunities. The free-spending ways of the ‘90s, however, are long gone and may never return. Investment in IT, while on the rise, will be focused on key strategic areas with well-defined implementation timeframes on the order of months, not years, coupled with equally well-defined business value for such investment. It’s getting better, but not necessarily easier for suppliers. Consolidation Continues Unabated 2003 saw numerous consolidation plays, especially in the ERP market. The largest potential deal, which has yet to be consummated, is Oracle’s hostile bid for PeopleSoft. The bid by Oracle saw a vehement response by People- Soft, one which will not lessen in 2004 and ultimately we see PeopleSoft prevailing. But beyond the Oracle-PeopleSoft saga, other deals will occur as the market is undergoing a fundamental transformation. To lower cus- tomer acquisition costs, stronger players are taking advantage of low valuations to acquire weaker players and their customers. ERP has seen the majority of acquisitions but be prepared for consolidation in other maturing sectors – there are simply too many suppliers. Both SCM and CRM are two areas where one can expect significant consolidation in 2004. Potential acquirers have already scrutinized most potential targets in the US. However, in Europe there are still many relatively small, quality software companies available at attractive valuations. ASP Acceptance Grows: Splits in Two The application service provider (ASP) model has finally evolved from “quirky idea” to viable option. Currently referred to as “hosted solutions” (ASP moniker has negative connotations from the dot com era), this soft- ware delivery model is seeing strong growth, which will only accelerate in 2004. Not soon enough, unfortunately, for most VC-backed ASP’s who, for
  • 4. ARC Insights, Page 4 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com a wide-range of reasons, failed. The future of this market will split in two, one being the large established players with global reach, like Oracle and IBM who can offer a wide range of offerings. Second, will be niche applica- tion suppliers, such as AssetPoint in EAM and Arena in PLM. Three prime factors will drive accelerated growth in 2004; controlling costs including leveraging lower cost offshore services, focusing on core compe- tencies, and evolution of apps from large monolithic systems to smaller, more module, composite apps. A portend of the future is found Oracle’s most recent Quarterly statement released this week. For the third quarter, Oracle saw strong growth of 27% in its application business. Within that unit, though, the growth in hosted solutions (Oracle refers to them as out- sourced) was a phenomenal 82%. Now that’s growth! SCE Suppliers Win RFID Sweepstakes It requires no crystal ball to forecast that spending on passive RFID will in- crease. In the UK, retailer Marks and Spencer led the way, and in the US both Wal-Mart and the Dept. of Defense have announced their time line. This will generate at least $150M in spending in 2004 and probably closer to $250M. The real question is who will win the sweepstakes to support manufacturers’ compliance efforts. The main competitive camps include: Supply Chain Execution (SCE) companies (Manhattan, RedPrairie, Provia, HighJump), global & niche consulting firms, or new best of breed RFID suppliers (Alien, GlobeRanger, Matrics). The best of breed RFID suppliers are young and financially suspect. In 2004, SCE suppliers will win the bat- tle against global consultants because their solutions will be more cost effective. Leading SCE supplier will sell bolt on software modules. Con- sultants will be more apt to provide more expensive integration and customization to existing enterprise applications to support RFID. While the ratio of services to software will still be high among SCE suppliers, ini- tial analysis suggests it will remain a more cost effective solution. Biggest no-shows are CPM suppliers. They have been slow to recognize that as many as a quarter of CPG manufacturers will look to apply RFID tags at the back-end of their production lines rather than in their warehouses. HOS Regulation Sparks Collaboration In Europe and the US, changes in Hours of Service (HOS) regulations will reduce the productivity of trucking companies. In an industry already plagued with high insurance rates, driver shortages, new engine regula-
  • 5. ARC Insights, Page 5 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com tions, and rising fuel costs, HOS completes the perfect storm. The threat of increased rates is certainly catching the attention of shippers, but what really worries them is further erosion of trucking capacity. To ride through this "perfect storm" shippers and carriers will need to col- laborate better. In 2004, expect trucking companies to be more selective in who they work with, namely customers that enable them to keep their trucks moving and pay them on time. Similarly, shippers will invest in making their freight more attractive to carriers in order to secure capacity. SCP Suppliers Look to Services for Revenue Growth The supply chain planning solutions is challenging with Tier I saturated and lower tiers remaining too conservative to adopt complex SCP solutions, SCP suppliers must find other revenue sources. An extension of last year’s prediction that services would play a more important role for software suppliers; in 2004 we will see increasing service activity among SCM sup- pliers, particularly those that provide SCP solutions. SCP solution providers are recognizing that they have capabilities that are rarely fully exploited. These capabilities go beyond developing and sup- porting implementation of solutions going to the heart of understanding the real SCM business issues. SCP suppliers will leverage their Best Prac- tice knowledge to help clients through significantly more advanced custom consulting projects. In such projects, SCP providers will assume increasing responsibility for actually managing their clients SCP planning activities. This will include increased sales of “Rent-a-Planner” services. This is being driven by the complexity of SCP software and continuing efforts by manu- facturers to downsize and focus on core competencies. Some SCP suppliers will include this as an extension of their current activities as ASPs. Value Proposition Difficulties Give PLM Vision Cataracts The grand vision for PLM has cataracts. As a strategy, PLM focuses on a product’s lifecycle from ideation through retirement. Despite the concerted effort of many a software supplier and consultant, such a broad vision has yet to materialize and demonstrate real value for users. Rather, PLM re- mains extremely fuzzy and one could argue that all this grand talk of PLM has actually confused the market, instead of enlightening it. In 2004, we will see a pull-back from such a comprehensive view of PLM. In its place, PLM will split into two distinct areas. This will allow all stake-
  • 6. ARC Insights, Page 6 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com holders to more clearly identify and measure the value contribution of new initiatives. The first will be new product development and introduction (NPDI) the second, product service management and retirement. NPDI, the more mature of the two, addresses all business processes associated with a new product, from ideation through launch and will be dominated by de- sign, PDM, and ERP-centric suppliers. Product service and retirement, still an immature market with a host of small players, will be dominated over time (but not in 2004) by CRM, ERP, and SCM-centric suppliers. Wireless Stays Outdoors Wireless proponents always expect wireless adoption to take off next year. Next year will see the same predictions. In 2004, wireless will not penetrate the office market as cable continues to tether cubicle-workers to their sta- tions. However, mobile workers, particularly in sales, field maintenance and logistics will continue to adopt wireless technology at a rapid pace. Costs continue to fall, bandwidths are improving, best practice processes are being defined, and enterprise application suppliers are architecting so- lutions to be accessed via wireless devices accommodating their limiting form factors and memory capacity. Despite these advances that drive adoption, adopters will struggle with security and privacy issues. EAM Suppliers Struggle for Differentiation Large ERP suppliers are continuing to put strong pressure on best of breed EAM suppliers. To counter, 2004 will see the leading EAM suppliers focus their efforts to provide much deeper functionality to differentiate them- selves from the ERP companies, as well as each other. DataStream is looking to provide the best analytic capabilities, Indus is looking to expand capabilities around service management and MRO Software wants to pro- vide an expansive solution to cover all assets, from IT, to mobile, to plant floor, and facility assets. It remains to be seen whether or not these strate- gies will prove successful. By the end of 2004, we may have an answer. Integration, Security & Open Source Push IDE Simplification Integrated Development Environments (IDE) will see much greater atten- tion in 2004. A number of factors will drive this trend, including: development has become far too complex and monolithic in many applica- tions, integration has become a common requirement (even more critical in a consolidating market), security features must be built into development
  • 7. ARC Insights, Page 7 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com patterns, and applications must now evolve more rapidly to changing busi- ness environments. These factors will heighten interest and acceptance to improvements in de- velopment methods, environments, and tools. Large suppliers will move to consolidate all application development and configuration into one envi- ronment. Open-source will increasingly help in converging application environments and tools beyond a single supplier’s products. The demands for productivity increases will heighten, driving suppliers to provide appli- cations specialist with simpler, more powerful tools. Management Actions: IT Spending Accelerates Invest in well-defined projects and strongly consider replacing legacy sys- tems. There is still an abundance of quality consultants and proven solutions, at reasonable price-points. Delay may cost you. The IT market is stabilizing and future increases in software pricing and consulting rates are projected. Consolidation Continues Unabated Monitor financial performance, market share, and strategies of all your software providers. Favor investments in modules that are widely used. If there is a change of ownership, such modules are more likely to continue to receive funding and enhancements. ASP Acceptance Grows: Splits in Two Closely analyze total costs, including hardware, software, maintenance, etc., for every application. Consider an ASP for those applications that are not core to operations, internal skill sets or are difficult to support. SCE Suppliers Win RFID Sweepstakes Kick off an RFID pilot project, even if your customers are not demanding a pilot, and your ROI analysis is shaky. Currently, few fully understand how to exploit the technology, so most are networking, talking and trading tips. When leading users figure out best practices, the talking will stop. Your best partner is probably your SCE software supplier. Most others are cur- rently busy polishing their marketing literature.
  • 8. ARC Insights, Page 8 ©2003 • ARC • 3 Allied Drive • Dedham, MA 02026 USA • 781-471-1000 • ARCweb.com HOS Regulation Sparks Greater Collaboration Need to deliver supply chain cost-savings and service improvements? The default place to look is logistics, in particular at better collaboration and integration with your carriers. SCP Suppliers Look to Services for Revenue Growth Invite and pay your SCP supplier to review your practices and processes. Require them to identify low-cost changes rather than massive initiatives that coincidentally need major software investment. Difficult Value Proposition Gives PLM Vision Cataracts Carefully choose where you will devote your precious resources for sup- porting your products over their lifecycle. Do not over-reach with a broad PLM vision that will only get mired. Instead, create a roadmap with clear priorities that align to corporate strategy and competencies. Wireless Stays Outdoors Enable your mobile workforce with wireless systems to improve efficiency but insure early and rapid buy-in by being inclusive of the various parties affected. Also, pay close attention to security insuring systems are in place and employees are properly trained. EAM Suppliers Struggle for Differentiation Best of Breed EAM suppliers still have much to offer, though their offerings are diverging rapidly. Carefully assess the strengths of their offerings, the direction they are heading, and how you might benefit in the future as your supplier today may not be the one to best meet your needs tomorrow. Integration, Security & Open Source Push IDE Simplification Define which IDE is your company’s core platform, just as many years ago you defined your company’s hardware and database platforms. Partner with suppliers that work in that environment, to create long term savings in application integration costs. Please help us improve our deliverables to you – take our survey linked to this transmittal e-mail or at www.arcweb.com/myarc in the Client Area. For further information, contact your account manager or the author at jmoore@arcweb.com. Recommended circulation: All EAS clients.