Tag: ERP

Koch Industries’ Takeover of Infor Signals Key Bet on Cloud ERP Market | Blog

Infor – a global leader in business cloud software specialized by industry – announced on February 4, 2020, that Koch Equity Development (KED) LLC, the private investment arm of Koch Industries, Inc., has entered into a definitive agreement to acquire Golden Gate Capital’s equity stake to take 100 percent ownership of Infor. Before the agreement, Koch Industries owned about 70 percent of Infor. While the official figures are not out, public sources peg the deal at close to US$13 billion, including preferred shares.

Why did Koch do this? Here’s our analysis of the key reasons.

  1. Riding the ERP demand bandwagon: Our recent analysis indicates that ERP-focused process transformation and modernization drove over 30 percent of all digital transformation initiatives in 2019. While Oracle and SAP are the largest players in this space, more than 35 percent of the market is still comprised of a long tail of bespoke ERP, where there is likely to be huge churn and consolidation. Infor promoters wanted to ride this growth opportunity through an IPO.
  2. SAP/Oracle in the equation: SAP is the largest player in the ERP market, and its current licenses are reaching end of life in 2025. Also, it’s well known that SAP is currently offering significant incentives to nudge enterprises to accelerate their move to S/4HANA, especially its cloud version. Oracle is using a similar incentive-oriented approach for its cloud-based applications. Promoters of Infor probably saw how this competitive dynamic would play out.
  3. Taking the private route instead of IPO: In a market driven by incentives, a privately-owned organization backed by a diversified cash rich promoter probably gives Infor a better shot at competing with its much larger competitors. For a listed firm, navigating a growth-oriented strategy (by de-emphasizing margins) would have been a tough nut to crack. Plus, competing with larger peers will require a significant investment in product modernization.
  4. The Koch portfolio companies: The jury is still out on whether Infor can credibly compete with SAP and Oracle in the broader ERP market. However, as the second largest privately-owned conglomerate in America (Cargill is the largest), the parent Koch Industries can enable a captive market for Infor to start with.

Deal implications

For Infor – potential growth through synergies: As we’ve already noted, this acquisition may give Infor access to a captive customer base in Koch Industries’ subsidiary and partner network. Given Koch’s presence in more than 60 countries, this may also allow Infor to expand the geographic footprint of its client base, especially in markets outside of North America where it has limited presence. This is coming at a time when enterprises in Europe and APAC are beginning to embrace SaaS offerings.

For Koch – potential RoI: We see this takeover as a typical private equity play to improve the value of an existing asset by riding the ERP demand wave. While Koch Industries has been making investments in its portfolio on the technology sector, we do not see this tweak in ownership as a sign of change in Koch’s portfolio mix. Given that a large chunk of Infor’s client base is still struggling with aging on-premises applications, Infor will need strong investment backing to convince its existing user base of its long-term cloud ERP vision.

For systems integrators – potential opportunities: Koch industries generated over US$100 billion in annual revenues in FY19. While we do not have estimates for the ERP transformation opportunities within Koch portfolio companies, it is likely to be a significant opportunity for systems integrators to focus on, using an Infor playbook.

For enterprises – better incentives, more supply-side investments: If Koch backs its investment with a large innovation fund, enterprises may gain on the following parameters:

  • Better incentives: Due to intensifying competition, enterprises may see more creative financial solutions and incentives around cloud-based ERP
  • Verticalized product offerings: Industry-focus and verticalization is gaining traction in the ERP space. Koch’s expertise in industries including manufacturing, chemicals, energy, petroleum, finance, and commodities may lead Infor to accelerate micro-vertical solutions faster than its competition.

The path forward

Infor has seen almost flat growth of around 3 percent over the past five years, due primarily to its long-term focus on SaaS revenues, which directly cannibalized its existing license revenues from on-premises offerings. In FY19, Infor’s SaaS revenue – which is about 20 percent of its overall revenue base of US$3.2 billion – grew at approximately 21 percent, while its licensing fees declined at about 12 percent. Given this strong focus on SaaS, Infor is well positioned in the manufacturing and allied verticals to overcome some of the critical cloud migration challenges and cater to some industries’ process-specific demands.

However, over the past year, there have been multiple big-ticket acquisitions in the enterprise platform market, geared to improving product capabilities – especially in areas related to cloud and analytics. In this hyper-competitive space, it will be challenging for Infor to compete credibly at scale based only on promoter-backed cash flow. Watch this space for more on how this move pans out.

Everest Group Identifies Pharmaceutical Firms Leading the Way in Digital Effectiveness | Press Release

Adoption of digital is creating a new pecking order of technology savvy life sciences firms led by Astra Zeneca, Johnson & Johnson, Novartis, Pfizer, Roche and Sanofi.

Fewer than 15 percent of all life sciences transactions signed in 2015 had an element of digital services in their scope; nevertheless, digital technologies are the pivotal driver for life sciences companies as they restructure to become leaner and pursue agility in operations to drive new product development, according to Everest Group, a consulting and research firm focused on strategic IT, business services and sourcing.

To illustrate this point, Everest Group profiled 15 global pharmaceutical companies regarding their digital functionality and business impact. In “Life Sciences IT Industry: An Assessment of the Market Opportunity and APEX MatrixAssessment,” Everest Group identifies Astra Zeneca, Johnson & Johnson, Novartis, Pfizer, Roche, and Sanofi as industry leaders.

This new research from Everest Group indicates that the key market trends driving digital adoption include the rising number of “born digital” healthcare consumers, the need for operational efficiencies and cost optimization, and the movement towards data-driven, personalized, evidence-based medicine.

The life sciences industry’s data-rich environment (including scientific, clinical and operational data) coupled with its many market challenges make analytics a key lever to provide real-time, actionable insights and improve operational efficiency. Analytics presents value in three key areas for life sciences organizations: cost reduction, top-line growth, and risk and compliance management.

Driven by the focus on analytics and infrastructure services, recent life sciences ITO deals focus on datacenter, end-user computing, and databases/middleware services, as well as application, development and maintenance (ADM) and enterprise resource planning (ERP).

“Most of the 2015 IT outsourcing contracts in the life sciences that did include digital services, did so as an add on to existing contracts, with a focus on remodeling existing ADM agreements,” said Jimit Arora, partner at Everest Group. “Digitally native contracts in life sciences are still a rarity, but we will see an increase in these contracts in the future. In fact, the adoption of digital is creating a new pecking order of technology savvy firms, with those that successfully use digital technology to both drive internal operations and customer-focused channels—i.e., digital for efficiency and digital for growth—leading the way.”

Other key findings:

  • Market imperatives to drive 12 percent CAGR growth till 2020. The life sciences industry is in a “recovery phase” as it grapples with a multitude of challenges that are stifling R&D efficiency, changing the portfolio mix and increasing M&A/restructuring. To address the challenges, market participants are adopting technology as a means to enable quicker product development, better consumer connections and significantly improved time-to-value.
  • Growth is a key driver of digital investment. While efficiency and enablement of digital are aspects gaining primacy, the life sciences industry is focused on driving growth via digital channels, consumer engagement, and healthcare ecosystem collaboration.
  • Analytics and cloud are aspects that will drive most digital investments in the short term. When it comes to enabling a cohesive digital strategy, organizations are going to extensively leverage hybrid cloud models and focus on analytics (both prescriptive and predictive) to get to outcomes quicker

*** Download Complimentary, Publication-Quality Graphics Here ***
High-resolution graphics illustrating key takeaways from this research can be included in news coverage, with attribution to Everest Group. Graphics include:

  • The changing value proposition in life sciences global services
  • On- and nearshore delivery on the rise in life sciences IT
  • IT opportunity in the life sciences industry
  • Digitization in life sciences IT contracts

ERP Hits the Wall | Sherpas in Blue Shirts

The services industry is facing a big issue. The market for ERP implementation cycle and corresponding transformation projects has matured and is coming to an end.

We can see the ERP decline in the reported results from IBM and Accenture and HCL. These three providers have had very big SI practices around large-scale ERP implementations. I’m not saying there are no more ERP implementations or transformation projects; it’s just that this market is in decline.

Factors driving the market decline

One of the contributors of the decline is maturity. Most large companies that need ERP now have ERP. Furthermore, they are now in their second or third generation of their ERP and are much smarter about how they use ERP. So there is much less transformation.

The green field is gone. Much of the ERP market it now add-ons to the existing base. And companies have learned how to implement ERP within the guidelines of ERP manufacturers, SAP and Oracle, which enables less costly implementation when new releases come out. Further, moving into an as-a-service or cloud future will continue to erode or diminish the re-implementation markets driven by software upgrades because they become a monthly occurrence via SaaS products.

So ERP implementations and its associated SI and transformation projects is hitting a wall, and we’re going to see far less of it in the future.

What will drive future growth?

The decline is a big issue for the industry because much of the discretionary spend used to be captured by the ERP implementation and renewal cycle. It has been one of the big secular drivers of growth in the services space since the mid-1990s, but we’re now seeing its decline as a primary driver for growth.

Many SI consultants, shared services consulting companies and BPO firms that ride the ERP wave have, wittingly or unwittingly, linked their growth engines to the dislocation and transformation activities that happen around ERP implementations.

So the current decline has very significant implications in terms of where these service providers will find growth in the future services market.

What we know about technology is that, given enough time, there is always another big technology disruption that will drive large integration services. Right now the best case for this is the digital revolution and the huge company-wide implications that embrace the digital marketplace for large organizations. Much like ERP, digital affects everything and requires significant transformation for alignment.

So the open question is: will digital take up the mantle that ERP is shedding?

Why the Avon – SAP News is Important for Your Business | Sherpas in Blue Shirts

Did you see the news earlier this week about the Avon – SAP relationship in Canada? The eye-grabbing headline, “Avon halts work on big SAP implementation, cites lack of ROI,” thrusts the deal to the attention of both service providers and enterprises planning or in the midst of business transformation deals. The services industry has decades of piercingly clear evidence that large-scale implementations can be problematic and disruptive, and Avon stated that its decision to halt the further roll-out was to stop further disruption to its business.  But I believe we can conclude much more than that from this news. In short, this action by Avon suggests that a good deal of change is happening in the services market.

In uncovering what is behind the headlines in the Avon – SAP relationship, let’s start with the fact that both Avon and SAP affirmed that the products company will continue using the SAP system in Canada, the system is working as designed, and their relationship “remains solid.” And they had experienced an earlier successful pilot of the project. So what sparked this recent decision to end the full-scale implementation?

As the saying goes, often what you don’t know will cost you. Here’s what you need to know about this deal.

We see this as a shining example of a phenomenon we are observing in the marketplace. The SAP implementation was part of a broad-based business transformation Avon was trying to drive. But in today’s market companies now are skewing away from the $100 million-plus or large-scale ERP implementations and instead look to buy outcomes and functionality or capability on as as-needed basis.

Fundamentally companies don’t want to spend hundreds of millions of dollars on transformative IT implementations because it’s too expensive, takes too long, and usually the return isn’t there. However, they still need new functionality or capability for competitive advantage so they can drive their businesses forward. This is where the as-a-service models come in; these models allow them to get the new capability without replacing their entire ERP system.

We see a significant movement in this direction. It manifests itself sometimes by companies asking for outcomes. (“We need these results.” “Just give us the insight from the analytics.” “Give us this new market access.” “Allow our retail business to deal with stock-outs.”) They are willing to pay good money for these capabilities, but they want to pay for it in this manner:

  • On a consumption basis, paying for it as they use it
  • In a phased adoption or in incremental phases where they experiment with it and then drive more into it in subsequent phases
  • As a way to avoid buying huge server farms and signing up for licenses, many of which they don’t use
  • As a tactic for loosely coupling the solution with their existing ERP or IT systems.

We find that the as-a-service models open opportunities for a different kind of sale. It allows a new breed of vendor or new breed of offering to get the customer out of the complexity of buying the component parts of a solution and focuses purely on the outcome of what the company is trying to accomplish.

Avon is happy with its existing ERP vendor, SAP; but it no longer wants the cost and time of the large-scale transformation project and replacement of its ERP system. We see the Avon decision as important.

Buyer and providers, take note: Avon’s action heralds a new set of industry offers that allow organizations to buy parts of ERP as a service and layer it on top of existing ERP implementations. How will the as-a-service models impact your business?


Photo credit: Marlon Malabanan

ERP and the Cloud: Enterprise Migration Quietly Begins | Gaining Altitude in the Cloud

Given how much of the typical large enterprise IT budget is consumed by ERP, we’re not surprised to find a growing curiosity among many CIOs to understand how cloud delivery models could reduce costs. On the surface, you wouldn’t think that production ERP applications would be at the top of the list for cloud migration. ERP apps are mission critical, complex and highly customized, often with significant data security and compliance requirements.

That’s why we think one of the more interesting, underreported stories in cloud are the examples of large enterprises that have migrated existing ERP environments to  private, hybrid and community cloud models. We’re actually finding quite a number of quite interesting, global scale ERP cloud deployments particularly among SAP customers. Why SAP? While Oracle is obviously the other large enterprise ERP heavyweight, as we’ve discussed here before, Oracle’s licensing policies are creating roadblocks for customers to migrate to even virtualized models, let alone private or public clouds.

The market for SAP cloud services is surprisingly robust with at least 10 major service providers that deliver SAP ERP capabilities via managed or host private or hybrid cloud models, including IBM, T-Systems, Fujitsu, Accenture CSC, CapGemini and others. T-Systems alone already supports 500 customers and 1.9 million SAP users via cloud-based models. Not surprisingly, most of these service providers started by originally providing SAP hosting services and have since extended their offerings. What’s the customer value proposition for SAP in the cloud?

  • Cost variablization – given the significant capex investments associated with SAP deployments and upgrades, cost variability is central to cloud-based SAP offerings. Nearly all providers offer consumption-based pricing models for SAP cloud services.
  • TCO reduction – many service providers are claiming the ability the reduce TCO for customer SAP environments by 30+% through the typical cloud levers. Several providers have customer references that have achieved these efficiencies and more in live production.
  • Flexibility – service providers are touting the ability of cloud-enabled deployments to more rapidly and easily provide new capabilities to users.
  • Standardization – in conjunction with cloud migration, many enterprises desire to consolidate data centers, rationalize SAP instances and standardize global processes to drive efficiency and flexibility.

Unlike other enterprise cloud use cases focused more on business agility and flexibility, in most cases cost appears to be the major driver of SAP cloud migration. Some of the more interesting examples include:

  • British American Tobacco (BAT) – just last month BAT announced a seven-year, US$160 million deal with T-Systems to consolidate its current SAP deployments into a single, cloud-based instance by 2016. The deal will enable BAT to variabilize its SAP costs through a usage-based pricing model.
  • Domino Sugar – leveraging Virtustream’s virtual private cloud platforms, Domino Sugar has been able to reduce SAP costs by over 30%, while actually improving availability and performance for several thousand users. As with BAT, SAP costs are variabilized and based on actual resource consumption.
  • Shell – to drive standardization, increase flexibility and shift to consumption-based pricing, Shell migrated its SAP environment to private cloud models (delivered by T-Systems) in support of 102,000 global employees across 100 countries.

Other notable enterprise examples include Audi, Freeport McMoran, Siemens,  and Suntory.

Why haven’t we heard more about these and other examples?  With the exception of IBM, most leading SAP cloud service providers and many of the early enterprise adopters of SAP in the cloud aren’t U.S.-based and are outside of the cloud hype and “echo chamber.” Also, details on many of these deployments tend to be tightly held both by both service providers and customers.

While many segments of enterprise cloud appear to be stuck in pilots and proofs of concept, ERP is surprisingly providing some early examples of large scale enterprise cloud migration.

Cloud Computing and Finance and Accounting Operations | Gaining Altitude in the Cloud

I recently spent time surveying the cloud computing landscape, and was struck by the minimal information focused on back-office services; nearly everything I read was generic and/or IT-centric. So I decided to look at cloud-based service offerings for Finance and Accounting (F&A).

Given the conservative nature and outlook of accounting professionals, you would probably think that F&A would be a laggard in the adoption of cloud computing models, right? Wrong! In fact, the American Institute of Certified Public Accountants promotes and recommends F&A Software-as-a-Service (SaaS) solutions to both accounting firms and their clients in industry. A number of firms – including NetSuite, Intacct, and Adaptive Planning – are marketing solutions for F&A that they developed specifically to run in the cloud, as opposed to retrofitting pre-existing software applications for deployment to a cloud infrastructure. In addition, SAP and Oracle are developing strategies and service offerings for cloud-based ERP solutions. Available F&A applications for the cloud are a mixture of both point solutions and ERP-like suites that cover all transactional activities, as well as other more judgment-based activities such as management reporting and budgeting & forecasting. Auditing and treasury activities are probably the least served areas right now.

The adoption of cloud computing for F&A has been limited primarily to small- and medium-sized businesses. This is counter to an industry trend in which large-cap companies have been the most likely to adopt cloud computing models. Why is this? As above, many of the F&A applications have been developed specifically for the cloud. While this makes them easy to deploy, in many instances they still have limited functionality. There is also the ongoing concern regarding the security of data stored in a public cloud, but this issue is slowly losing ground as an inhibitor to adoption. The single largest barrier to the adoption of cloud computing models by large-cap firms is the significant investment many have made in the deployment and customization of ERP Finance and Accounting platforms.

Going forward, I predict these barriers will gradually recede, especially as ERP vendors develop offerings to move large- and mid-sized firms toward the cloud. In addition, as the functionality of the current generation of applications continues to improve, it becomes increasingly likely that larger firms may leverage them for a low cost solution to replace a legacy application or meet a need that is currently unmet by their ERP system. We need to remember that some of the most significant SaaS vendors in the marketplace are focused on F&A point solutions. Prime examples are ADP for payroll and Concur for T&E. F&A cloud solutions may also be attractive in a situation in which a large firm is in the process of starting up a new business segment or integrating a smaller acquisition.

Is Cloud-Based F&A Right for You?

When deploying F&A applications in the cloud, you need to consider the appropriate industry dynamics and requirements as well as your current inventory of application workload types. Industry dynamics such as large volumes of M&A or industry-wide margin pressures may make the deployment of cloud solutions more attractive. On the other hand, industry requirements and regulatory constraints may dictate a less aggressive approach. In any event, you will need to evaluate both the applications that are good candidates for deployment to the cloud, and which of the three cloud models – public, private, or hybrid –makes the most sense for a particular application workload type. You would probably only move mission critical and/or proprietary systems with significant data privacy requirements to a private cloud environment, while non-proprietary back-office applications may be more easily deployed into a public cloud environment.

There are other factors to consider when evaluating how to potentially leverage F&A cloud solutions, e.g., what is your company’s approach to its global services model for back-office functions like F&A, HR and Procurement? While many firms have made significant investments in time and resources to deploy shared services and outsourcing solutions for back-office functions, few have been able to fully achieve the benefits associated with standardization and transformation leading to an end-to-end global delivery model. Cloud services can be part of the solution to help a company address the technology and process barriers in a more timely and cost-effective manner. For example, a company might look at deploying cloud-based reporting and control tools for better oversight across all divisions and regions.

CFO Imperatives

CFOs and other financial leaders in large firms have an obligation to ensure that their function does not lag other areas of the enterprise in adopting cloud computing models. They must understand the hype and the reality of cloud computing across functional areas and within their industry. This requires that they:

  • Recognize cloud-related benefits like faster deployment times and reduced CAPEX and OPEX
  • Balance the challenges inherent in cloud computing such as data security and system interoperability
  • Target adoption to high value areas by developing a robust set of evaluation criteria and insisting on a broad assessment of opportunities
  • Define a global strategy roadmap, and map opportunities to the criteria and strategy

Hopefully my thoughts have shed some light on the current landscape for cloud-based F&A services, and will generate some further discussion.


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