If that’s not depressing enough, the front page of today’s The Wall Street Journal notes that investors have lost $8.4 trillion, yes trillion, in wealth the past 12 months. And to think that we were worried about what would happen when the 76 million baby boomers retired. Who can afford to quit?

Is the end in sight? As I write this on Friday morning, the Asian and European markets performed badly and the US exchanges are gyrating wildly. Shortly after the market opened, the Dow dipped below 8,000 before climbing into positive territory.

If the market closes up today, can we assume that yesterday marked the nadir for tech/software stocks? Here’s how companies fared at the close on Thursday.

At the same time, Google ($338.11) and QAD ($4.76) also reached the new 52-week nadir. While shares of Epicor ($ 6.84) and i2 ($12.09) also trended down, they may have some protection from the bottom as both are in the midst of being acquired. Last week hedge fund Elliott Associates offered to buy Epicor for $9.50 a share, while JDA is expected to complete its acquisition of i2 later this fall.

As for good news, you might want to read the recap of the exciting Red Sox win against the Angels in Game Four to capture the American League Division Series.

Yesterday, when I looked at my.yahoo, nearly every one of the 35 stocks I track was flashing red numbers. The Dow was down another 508.39 points to 9447.11, its lowest close in more than five years. In five trading days, the Dow dropped 1403.55 points, down 13%. You might as well take those Fidelity envelopes and put them in a drawer, unopened.

The story in the tech market was ugly, too, with many companies setting new 52-week lows. While this may be a buy signal for risk-takers, a lot will depend on the earnings results that many companies will announce for the recently concluded third quarter.

Here’s a look at some software/tech stocks at the close on Tuesday, October 7. I’ve included the closing price, current market cap, and 52-week range (low-high). The * on the closing share price indicates the new low for the last 12 months.

The current market tumult has raised the fear factor for potential buyers. In the press release, Co-CEO Henning Kagermann said that “these concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter.”

Wall Street’s reaction was harsh. Prior to the pre-announcement, SAP’s shares were trading around $44. After the call with analysts, the share price fell as low as $37.60, down nearly 15%. SAP was in great company, though, as nearly all enterprise software stocks were ablaze in red numbers and the overall Dow dropped to below 10,000 for the first time in nearly 4 years.   

At that time, the company recognized that it needed to be more than a technology provider. Mr. Costello recognized that he needed to build a strong services component to augment Ariba's software and Network. This was a sharp departure from the higher margin “software factory” model that was in vogue.

Today, Ariba has 700 consultants with expertise across more than 400 categories. The company maintains service centers in Bangalore, Pittsburgh, Prague, and Shenzhen, using these sites to help customers set up and manage international procurement centers.

Ready for “Spend Management 2.0”?

During our last conversation, Ariba executives outlined their plans for the next generation. They seem to be borrowing some ideas from salesforce.com, including a “walk-up” user interface and simpler configuration and administration. While it may be a stretch to draw a comparison to salesforce’s AppXchange, Ariba wants to open its network further to include all sorts of third-party applications and services, including those from Oracle and SAP. After all, it’s all about transactions and content.

Ariba is also going deeper into web-based community services such as a best-practice center and “Category Playbooks,” as well as providing more role-based spend dashboards. Ariba Sourcing customers can directly access Ariba Category Playbooks, which provide current supply market dynamics, cost drivers, and RFP templates for more than 50 spend categories, all within the context of their application. Customers can also punch out from Ariba Sourcing to search, discover, and assess new suppliers via Ariba Network Discovery.

This week in the First Thing Monday newsletter

You can read more of our conversations with Ariba in this week’s First Thing Monday newsletter (subscribe here), where you’ll also find our Economic Turmoil Survival Guide.

With the exception of BEA, it’s unlikely that you could name any of the other eight. If you’re in the insurance business, you might have heard of AdminServer or Skywire Software. What about Moniforce, Captovation, Empirix, Global Knowledge, or ClearApp? The ninth remains a mystery. It might have been the Interlace Systems deal from last October. Mr. Phillips said that Oracle had spent $30B to complete the deals; another executive said the price was closer to $34B. 

In addition to buying products and customers, Oracle continues to spend significant amounts on R&D. The budget hovers around $3B. If you add up all of the R&D spending over the same 44 month acquisition binge, one executive said it would come very close to “$10B in organic R&D.” Believe it or not, there are close to 3,000 products in the Oracle arsenal.

If you’re looking where the money is going, here is a partial list:

Some of the new highlights in Oracle E-Business Suite 12.1 include demand signal repository, advanced planning command center, service parts planning, and manufacturing operations center.

Unfortunately, PowerPoint was more effective than the demo, which showed how co-workers could share documents. This looked like a poor imitation of IBM’s Lotus capabilities. While it did provide strong security (the originator can “delete” the document once you no longer have permission to view it even if it appears to remain on your hard drive), I was disappointed that it didn’t take better advantage of the newer technology.

If you visit IBM’s Lotus operations in Cambridge, you see a lot of clever innovation that you would love to have. Take presence. If I am working on a client inquiry, it would be helpful to know if Shep or Derek Prior are available and how best to contact them: email, IM, VoIP, or video. Imagine what we will be able to do when we have GPS functionality built in. I could see if Shep was in the building or at OpenWorld.

Beehive has been incubating at Oracle for three years. Maybe the next demo will be more interesting.

Oracle recently unveiled “AIA for Industries.” The company started with six or seven core industries, financial services, retail, telco, insurance, utilities, and cross-industry (includes hi tech and manufacturing). The first step was to identify a couple of core business processes involving people and system interactions/transactions and links to third party applications. To do so, developers had to de-compose business processes. 

This has lead to the AIA “foundation pack.” The pack includes programming models, objects and services, conceptual business process views and a best practice design model. There is also a new “composite application validation system, that provides simulation, documentation, and testing.  

If you want to think of this as “Lego for composite apps,” the pack includes 23 enterprise processes, 1,500 activities, and 7,000 tasks. In addition to the foundation pack, Oracle also provides process integration packs and direct integrations. (Bill Swanton did a thorough job, last fall, analyzing Oracle’s strategy). 

The company has been recruiting integrators to serve as co-development partners. This involves hosting 10-20 partner employees at an Oracle site for nine months or so to train them on AIA and the new tools. One partner is working on developing new PLM tools using E-Business Suite and Agile, while another is creating an “order-to-activate” process for telcos.  

As I sat through the AIA briefing, I couldn’t help thinking about a piece I wrote two years ago, “ERP Doomsday Scenario: Death by SOA?” In that piece, I wondered if service-oriented architectures would help eliminate the need for more software from ERP vendors. Instead, you would turn to your favorite integrator—or internal IT department—to create new killer business processes. Unfortunately, my briefing ended before I got to ask about it.

FTM: At last count, SAP has somewhere around 350 customers on MaxAttention. This was SAP’s first offering for customers that were willing to pay more of net license value per year. What does MaxAttention provide? Why haven’t more companies adopted it?

DP: MaxAttention is still SAP’s premier service for customers that run their enterprises 24/7/365. It provides a highly personalized and highly customized support service. Our original article, “SAP Enterprise Support Contracts: Deal or no Deal?” explains the key differences between the services, but Standard Support has gone for good. Our second article, “SAP Enterprise Support Contracts: Counting the Real Costs,” explains the typical SAP lifecycle cost impact of Enterprise Support.

There are only about 350 right now, but many more have actually used it for critical periods of their SAP lifecycle, like an upgrade. MaxAttention makes most sense for companies that incur a very high cost from business down time.

FTM: Can you explain what exactly the Run SAP bit of Enterprise Support is?

DP: Run SAP is a new methodology that SAP has developed for the implementation of end-to-end system operations and support of SAP systems plus third-party applications. It’s very good, especially for new customers, but most existing customers are already highly experienced in this area. They developed their methods and procedures long ago because they had to. They usually don’t want to replace them with something newer, unless it is better and cheaper.

FTM: I’ve seen the e-mail strings and blog posts from angry customers and been to some of the chat rooms. That said, it seems that 22% maintenance is inevitable. What other choices do customers have?

DP: 22% is inevitable, as you say. A clear best practice is to accurately measure your actual use of existing SAP software, right now and in the future. A number of independent tools are available to quickly and independently do such a measurement. You need this insight to be sure that you are making the best possible use of all your existing SAP licenses before buying more plus its annual maintenance, whether it is 17, 22, or any other percentage. Professional software asset management is an integral part of proper SAP lifecycle planning.

So far I have not heard of anyone threatening to use third-party maintenance providers. If your systems are important to your business it’s probably not worth taking unnecessary risk.

FTM: What advice do you have for CIOs?

DP: Several CIOs we have spoken to are anticipating a really tough ride at their next board meeting. I really think that they have to present what a fantastic job that they are already doing right now with their major investment in SAP. That means long-term SAP lifecycle planning and careful cost management at every stage in that plan. We know that they are already doing that too. I think that CIOs should also carefully monitor the quality of all support delivered by SAP Active Global Support and regularly review it with them.

Another thing that we are doing at AMR Research is to try and help hard-pressed CIOs to refocus on the actual value delivered by their overall SAP Program. We simply have to shift gears from cost to value. We have some stunning new research from AMR Research’s SAP Peer Forum that will really help here.

SAP is urging customers to be aware of and take advantage of the support that is available to them in Enterprise Support. This includes Continuous Quality checks.

It’s always wise to invest some time with third parties that specialize in contract negotiation. Many SAP customers think they have the skills in-house. It turns out that they cannot keep up with the complexity of the ERP landscapes and the new changes to the contracts. That’s an area where AMR Research’s own Contract Negotiation and Benchmarking Service can be of great help to CIOs and their legal/contract counterparts.

FTM: What advice do you have for SAP?

DP: I think that SAP needs to start treading much more carefully. SAP continues to do very nicely from a revenue point of view. In my conversations with many SAP customers, I have noticed that they are becoming more concerned with increased system landscape complexity due to NetWeaver and the sheer number of different software components to tuck up in bed at night.

Secondly, more and more are finding that license complexity means that ease of doing business with SAP is receding. The license fallout of the Business Objects BI roadmap alone is pretty big. Along comes more good news in the form of 22% software maintenance. SAP needs to understand that you can stretch customer loyalty only so far, even if you are the market leader. I think SAP needs to be careful.

FTM: Is 22% the ceiling? Or can you envision a period where we get to 24% or 25%, or even higher?

DP: Higher prices are not inevitable, but I think they are quite likely in a couple of years. All customers should always try to lock in the 17% or 22 % figures into their SAP contracts for as many years at they can. The only problem is that customers will realistically only be able to achieve this through smart negotiation when buying more software from SAP.

Bruce, if our readers feel strongly about this issue, I really hope that they will get directly it contact with us to discuss it further. My e-mail is dprior@amrresearch.com.

FTM: Thank you, Derek.

As always, we welcome your feedback.

Not quite true. The buzz on the Street was that Oracle’s first quarter revenues could come in below expectations due to seasonal factors (who buys software in June, July, or August) and the meltdown in financial services. While application license revenues were down 12% year over year to $331M, this was more than offset by strong growth in databases and middleware. Total revenues were up 18% to $5.3B. Maintenance now accounts for half of revenues.

Oracle’s share price was $18.75 at the close on Thursday, giving it a market cap of $96.67B. Shares rose $.51 in after-hours trading. As of mid-day Friday, Oracle’s shares are at $20.62. The current market cap is $106.31. This is a $10B jump in less than 24 hours. Not bad for a real nothing special quarter.

The first reaction we got from some quarters upon the publication of our note about Chrome was “so many words about a browser???” But clearly, this isn’t just any browser (or even just a browser) from any company: it’s Google and it’s a major platform play. This makes it incredibly noteworthy. As a matter of fact, we had to leave out some interesting discussions, or give them short shrift, in the name of space. You know something’s important, though, when it gets mention on the editorial page of The New York Times. Not the technology section, not the business section, but the editorial page.

 

Here are a couple of more observations for discussion that didn’t make it into the note:

• Could we look back in a few years and say “Chrome was the most notable product introduction of the 00s”? That’s not an inconceivable thought. What else could be a competitor? Microsoft’s Windows Vista? Um, no. Apple iPhone? More on that in a moment.
• Google does so many product introductions without much of a roadmap and often apparently without much of a strategy. Make no mistake about it: this one definitely has a Google roadmap (even if they’re not telling it to anyone) and this one has a well-thought out strategy (even if they’re not interested in communicating it yet). Like the Microsoft of old, Google is most interested in meeting the needs of users, with the enterprise very much an afterthought. Launching it in this fashion, as a browser, lets them ignore for the time being the very significant enterprise implications we raise in our research.
• Unlike the Microsoft of old, Google is relentlessly focused on meeting the needs of advertisers (or at least deriving revenue from them).Before this, Google’s information flow was “confined” to searches users did. Now it has the potential for a massive new information flow, the keystrokes of users not just in the Google search box but in the browser bar as well. Vocal users will rail about security; casual users will find the functionality useful.

• Apple’s iPhone, on just a whizzy interface and decent mobile browsing experience, has become the sexy tech product of 2008. Much less obvious but much longer-term important is how the iPhone has galvanized application developers. We could argue that there’s not much you can do on the iPhone that you couldn’t do on Windows Mobile, Symbian, or a Blackberry, but that would be missing the point. Many developers bet on Apple’s ability to get applications in the hands (literally) of iPhone users; early download numbers suggest that they made the right call (more on Apple’s retail strategy). Apple’s success could throw a kink into Google’s plans. Google’s mobile platform Android is already late and Google is dealing with many of the same challenges previous attempts to provide a generalized, standardized software platform (diverse hardware, recalcitrant carriers). Without the promise of an omni-platform strategy, Google risked being yet another iPhone wannabe platform. If, however, Chrome is viewed by developers as superior for omni-platform development, it blunts Apple’s momentum on mobile devices and offers something Apple can’t really deliver: access to the Windows installed base.  Yes, Apple has some limited proof of ability to deploy software on Windows devices (iTunes) but if you’re going to bet who can do better on Windows, you’d bet on Google.  This breathes life into Android.

• When does Google begin scaring you? It’s already scaring the advertising industry with its increasing control to a point where industry associations are asking the government to take a critical eye toward the proposed Yahoo/Google outsourcing deal. When do businesses get nervous about the amount of information Google is capturing: its search, its browser keystrokes, its Gmail, its Google Apps. Google’s information footprint is growing larger and our only saving grace is that its penetration in some of these markets is small. Microsoft tried to bundle Internet browsing into the operating system and was taken to task by the Department of Justice. Google is trying to marginalize the operating system through Internet browsing. Its small market share in apps and browsing probably renders an antitrust action unlikely at this point in its evolution, but should we worry about Google’s control? And if so, should anything be done about it?

 

Google is by far the most important enterprise software provider with whom most of us have (virtually) zero relationship. What would you like to see from Google?

Meanwhile, in a parallel universe, Oracle set off on Project Fusion. This was to be the lunar landing of convergence, melding the best of Oracle, PeopleSoft, and J.D. Edwards into the Apollo of enterprise applications.

Today, Project Green lives on as a set of design principles for future application development. The dream of one product is long past the REM stage.

Project Fusion has become the service-oriented architecture (SOA) framework for connecting the original Fusion ERP components with the subsequent acquisitions (such as Agile, BEA, Demantra, G-Log, Hyperion, Retek, Siebel, and the rest). Given that it’s likely that Oracle has other application purchases in mind, it might have been unrealistic to expect the company to ever deliver one master software suite.

Epicor 9: Living the dream

Like Microsoft and Oracle, Epicor has grown its product line through acquisitions. In the early part of the decade, the company was supporting nine different products. By the first quarter of 2005, the product set had been reduced to four brands. This was manageable, but not really optimal for a mid-size vendor.

Based on the current plans, the company will ship Epicor 9 later this year. While it will continue to support and enhance the heritage brands, this will be the one path forward for new customers in manufacturing, distribution, retail/hospitality, and services. Getting to one brand obviously offers the potential for greater efficiencies in sales, marketing, consulting and services, and product development.

While the hard work is nearly done in development, the next challenge will be to see how quickly Epicor can migrate its 20,000 customers to the new release. Until then, Epicor 9 will be the fifth (or 10th) product in the mix.

Getting to 9: Protect, extend, converge

Epicor has developed a three-phased approach for existing customers: “protect, extend, and converge.” The goal of the first phase is to assure customers that there will be no forced migrations. Customers can move to Epicor 9 when they are ready for the new functionality.

The extend phase represents the side-by-side coexistence of the old with elements of the new, while converge brings the existing base over to the new release. Epicor 9 has “converged” the best features of the other products with Vantage 8 and added deeper functionality across a broader product footprint, a “second generation SOA,” new composite apps, a replication server (for backup or support for other sites, suppliers or partners), enterprise performance management, and a new-and-improved user experience (including mobile device support).

One of the few remaining mid-caps

Epicor is one of the largest mid-size software vendors. The company closed 2007 with revenues of $429.8M. The latest guidance for 2008 is $525M-$535M. This is down from the $545M-$555M provided last January due to some slower than expected sales in the retail industry. As I write this, the company’s market valuation is $506M, or less than one times the expected revenue for this year.

During a meeting with CEO Tom Kelly, he explained that the company was continuing to add new customers (150-plus in the last quarter) and to win back previous customers (more than 175 last quarter). He also discussed one metric that may be unique to Epicor: average software selling price of the 10 largest deals. This has trended up from $193K in 2003 to $422K last year. For the first half of 2008, it has inched up to $462K. This could be affected by large year end deals. For 4Q07, the company reported that the average software license fee for the Top 10 deals hit $600K.

Given all of the market’s attention to SAP and Oracle, it’s easy for the mid-cap vendors to get overlooked. Epicor needs to successfully execute the launch of the new release. Customer adoption and testimonials will be critical. Done well, the company will have a much higher profile by the end of the year.

Here’s a closing thought for you: If Epicor can execute, does it find itself on the Oracle acquisition ledger as the new Fusion ERP upgrade product for J.D. Edwards? My colleague Jim Shepherd questioned me as to why Oracle might want a product based on Microsoft and Progress technologies. I say it’s all part of the next land grab.

Let me know what you think.

We opened with: “What’s it like to be part of SAP?” Mr. Schwarz responded with two perspectives.

For his core customer base, there is little difference. He told us he is maintaining a “separate sales force, brand and naming …. There’s no SAP influence.” Business Objects is not forced to adopt any SAP products or processes.

The real opportunity though lies in working the SAP base. Thanks to the SAP connection, Business Objects has the “longest pipeline and the deepest” and “deals are getting richer, there are more deals in the pipeline.”  He described the Americas opportunity as unbelievable and said business was “getting strong” in Europe and “terrific” in Asia.

Challenge: Selling to a new buyer – the CIO

With SAP, Business Objects is able to pursue corporate-wide agreements versus departmental deals, though there are some selling challenges such as having to sell to IT and the business buyer (the latter was his core constituency), and persuading customers to pay for something that was free or that they think they already bought.

Customers are also buying more. He described it this way: “Yesterday, customers bought BI (business intelligence) and reporting. Today, they are buying BI, reporting and analytics. Tomorrow, they will be buying that plus data integration and predictive analytics.”

BI skills shortage: “7,000 -10,000 in the Americas”

The conversation shifted to whether integrators were hiring or training enough people to keep up with demand. Mr. Schwarz said that before SAP bought his company there was a shortage of 7,000 to 10,000 BI experts, and noted that “It hasn’t gotten better” since the acquisition closed. He declined to offer a perspective on a global shortage.

He said one of the challenges is the lack of a “uniform view of enterprise performance management.” Too often it’s viewed as reporting or analytics or data integration.

Top 5 developments to watch the next 12 months

We closed our conversation with our request for a sneak preview of what we should expect the next 12 months. Mr. Schwarz immediately offered his Top 5:

1. More in-memory offerings to take advantage of SAP’s BIA (Business Intelligence Accelerator), wrappered with BI query and search tools.
2. Integration of SAP financial applications with Virsa, Pilot, SRC, OutlookSoft, and Cartesis. There will be a common user interface, data model, and user experience.
3. Embedded analytics in the SAP Business Suite (cross-process analytics will be offered later)
4. Joint work with SAP around master data management.
5. New collaboration tools to make SAP/Business Objects the “environment of choice for users.”

Based on our conversations with Mr. Schwarz and other Business Objects executives, the integration with SAP seems to be proceeding smoothly. One executive marveled at the high-level access that SAP has with executives at brand-name accounts: “We can get right to the CEO.”

Still, will SAP accelerate or put the brakes on Business Objects’ rapid innovation cycles? Mr. Schwarz said that Business Objects delivered more than 50 releases last year. While that may be the right cycle times in BI/performance management, it’s too fast for SAP’s CIO customers. Can SAP and Business Objects find the right balance?

What do you think?

Being a good sport, Mr. Schaper offered to meet me for coffee the next morning at 6a.m. The naturally caffeinated CEO showed up promptly and on message. We began our conversation with a review of his fourth quarter (ended June 30). Total revenue for the privately-held company came in over $600M, up 9.8% from the previous quarter. License revenue came in at $154.2M, up 25% from 3Q. In all, Infor added 561 net new customers in the quarter.

Deal sizes trended up, too. In the quarter, Infor closed 38 transactions worth more than $500K, with three to four of the deals valued at more than $1M.

A closer look at geographies showed that the Americas had a “record quarter” after relatively lackluster performance for the first nine months of FY08. This is an important region for Infor, accounting for 80% of licensing deals … and half of all revenue.

Europe had a very strong quarter, too, after uneven performance in the first three quarters. First and third quarters sales were weak, while the second and fourth quarter was very strong. Asia results were up 40%, with “very good” sales in China.

IPO next year?

Infor closed FY08 with $2.27B in total revenue. The company is the third largest ERP vendor behind SAP and Oracle. Given its size, we always ask about a potential initial public offering. Mr. Schaper said that he was preparing the company to be “public-ready.” This includes all of the necessary audit work. He estimates that the company will have a 10-K out in the first quarter of next year that will look like that of a public company.

Mr. Schaper is also a master negotiator. He’s grown the company through a series of well-timed acquisitions. When asked if a potential IPO might deter him from deals, he said that “we’re looking at five to six companies … mostly large deals.”  Stay tuned.

Before he left to catch a flight, Mr. Schaper disclosed two other organizational moves. The first is to transition his Indian development center to a services organization. His plan is to shift development to a new near-shore site in Monterey, Mexico.

The second move is his new “green bean” program. Infor is aggressively adding new college grads and young workers with a year of work experience to its payroll. The company hired 25 in June and another 55 a few weeks ago. It is complementing the hiring with a new mentor program. Mr. Schaper hopes to use the program to build a new Infor culture similar to the one he remembered fondly from his days at MSA.

Next up, Lunch with Logility

When the meal ended, the conversation turned to Logility’s performance. Revenue for FY08 (ended April 30) came in just under $45M, up 3% from the year earlier period.

While we didn’t talk about it that day, FY08 results were hurt by a relatively poor fourth quarter. Total revenues came in at $11.9M, down 8% from the year earlier period. Software licenses in the quarter represented $4.1M, off 27% from a year ago. Maintenance represented the one bright spot, with revenues up 16%.

While the US accounts for 83% of Logility’s revenues, the company has close to 1,400 customers spread across 74 countries. Looking at the results, domestic growth was slower last year. This was partially offset by international sales. Mr. Edenfield said that Europe and Asia showed double-digit growth, especially for small and mid-size businesses.

License fees for FY08 were $14.5M, down 10% from the previous year. Mr. Edenfield said that this was due to some downward pressure on prices and elongated sales cycles. The good news is that Logility added 101 new customers last year and has a strong pipeline heading into FY09. Despite slower growth, Logility generated $9.5M in operating income and has a strong balance sheet with $42.7M in cash and investments and no debt.

The SMB leader in supply chain

Since acquiring certain assets and the distribution channel of Demand Management, Inc. for $8.7M in cash in September 2004, Logility has worked to expand the distribution channel. Today, 70%-75% of indirect deals come through the channel. Last year, Logility added more resellers in the US, Mexico, China, Hong Kong, Russia, and Italy, and signed another reseller to focus on the federal government. The FY09 goal is to add more resellers in the US as well as in Brazil, India, and Korea.

While Logility is also looking at potential acquisitions, I think the company would be a very attractive buy due to its strong presence in supply chain planning, especially in demand planning and sales and operation planning. The primary barrier to the deal is the significant ownership stake held by American Software. American Software and company insiders own 88%. If you want to buy Logility (current market cap is $89M), you may have to buy American Software, too (current market cap is $152.2M).

Next up, Servigistics.

CEO Pete Sinisgalli opened with a recap of the company’s performance. During the five years from 2003 to 2007, revenues grew at 14% compound annual rate from $196M to $337.4M, nearly all organic. Maintaining that trajectory will require a strong second half. Revenues for the first two quarters came in at $167.8M, up 7% from the same period last year. Part of the slower growth is due to lower license sales. First half software sales grew only 1%.

During the past four to five years, Manhattan has invested $200M to build out its new X-Suite product line for supply chain planning and execution. R&D spending consumes about 14% of gross revenues. The increased spending is reflected in hiring, too. The R&D group has grown to 810 people, up 40 from the start of the year. Developers account for about a third of the company’s total headcount of 2,370.

The R&D investment has lead to the introduction of some very innovative products around red-hot business processes and Web 2.0 technologies. On the business process front, many of our clients have been dealing with the challenges of managing “total landed costs.”

The current rage now is “total delivered costs,” an acknowledgement of the variability of individual orders. This quarter Manhattan will unveil its newest product for the “total cost to serve” space. The first phase includes total delivered cost, including all known costs relating to manufacturing, transportation, labor, and financing over a time-phase horizon. The second phase includes future cost to serve assumptions. The plan is to include what-if capabilities and the impact of changing modes, such as switching from ocean to air.

The CNN mash-up

The Web 2.0 demo is very compelling. Unveiled at its recent user conference, the demo includes the integration of structured and unstructured content in 3D/multi-media presentation. In one example, a potential order is affected by an earthquake in China. Imagine assessing the optimal response based on data from CNN, specific carriers and ports, the Weather Channel, and other sources and you’re on the right track.

A year ago, customers were excited by relatively simple mash-ups, overlays of orders or shipments on Google maps. Companies like Manhattan are showing that we’re at the very early stages of what will soon be possible.

Speaking of headcount, I mentioned that I liked Infor’s new “green bean” program. Mr. Sinisgalli said that Manhattan has as similar program. This year, the company will add 100 new college graduates. He bragged that the company was become the largest employer of newly minted Georgia Tech graduates.

What do you think? Let us know with your comments.

• Method for Planning Key Component Purchases to Optimize Revenue
• System and Method for Allocating Manufactured Products to Sellers
• Optimized Deployment of Parts in a Distribution Network
• Generation and Execution of Custom Requests for Quote
• Guided Buying Decision Support in an Electronic Marketplace Environment
• System and Process Allowing Collaboration Within and Between Enterprises for Optimal Decision Making
• System and Method for Tracking Web Campaign Effectiveness
• Generating a Sales Volume Forecast

You can quickly see where Shep was heading.  If i2 was able to settle patent litigation with SAP America and SAP AG for a one-time cash payment to i2 of $83.3M, what would other supply chain vendors pay to avoid litigation?  Could i2’s patents be worth more to JDA than i2’s maintenance and services revenue?  

For the curious, here’s the link to the Edgar filing from the i2 website.

What do you think?  Let us know here.

The news didn’t get much better on the Delta Shuttle to New York.  The headline of the lead article on the second page of The Wall Street Journal (July 28 ) read “India’s swelling deficit has potential to set off cascading economic troubles.”  Here are some of the points raised:

• 2.9 million government employees are due for a “once-in-a-decade” salary increase that could be as much as 40% according to estimates by Standard & Poor’s.
• Annual inflation rates are running above 11%
• India’s GDP growth will slow from 9.1% for FY08 to between 7 and 7.5% for FY09 (ends March 31).  The Indian government will issue bonds representing 3.6% of GDP to oil and fertilizer companies as partial compensation for selling their products at below global rates.
• Morgan Stanley estimates that India’s fiscal deficit will rise to 11.4% of GDP, up from 7.7%.  To put that into perspective, in FY08 India’s IT and BPO accounted for $64B or 5.5% of the country’s GDP.
• The country needs to spend an estimated $500B to improve the country’s infrastructure.  This will likely require a combination of government and private funding.

On August 2, The New York Times published an AP article on a recent report by India’s central bank that predicted more difficult economic times, higher inflation, and a decline in corporate profits.  The bank surveyed 20 forecasters who said they expected GDP would fall from 9% to 7.9% over the next three fiscal quarters, and that corporate after-tax profits would decline from 25% to 16% over the same period.  Inflation was expected to rise to 11.7% this quarter, then fall to 11.4% and 8.2% in the subsequent quarters.

When we were in Mumbai in February everyone we met asked us about the status of the US economy.  Ironically, when we return this fall or winter, we will be asking them about the state of the Indian economy.

What do you think? And what do you think of India Inc.’s weathering of the U.S. downturn as we talked about in this week’s newsletter column? Let us know here.

As I write this, SAP’s market cap is hovering around $69B. While this is welcomed news to shareholders, it’s still $40B less than archrival Oracle. The delta also happens to be slightly less than the total amount that Oracle has paid for the more than 40 acquisitions it has made since closing the PeopleSoft deal in January 2005.

Many sources of future growth

SAP has a lot of ways to grow the top line. Take maintenance, for example. Support generated Euro 1.099B in 2Q08, up 16% from 1Q08. The new Enterprise Support increase will add 8% next year.

The services industries are red hot. In my call with Bill McDermott to discuss 2Q results, he was very happy with the success SAP is achieving in retail, banking, insurance, public sector, and higher education. The service industries market is about twice the size of the manufacturing market. While SAP no longer breaks out vertical results, I’d bet that process and discrete industries still outsell all the services industries. That leaves a lot of runway.

SAP needs a stronger story to help drive add-on sales of CRM, Business Objects, and GRC (governance, risk management, and compliance). It’s running CRM as a separate business unit under Bob Stutz. Business Objects, GRC, and other software outside the Business Suite and NetWeaver are now under Doug Merritt, executive vice president and general manager of Business User Global Sales.

SAP did not break out revenue from Business Objects during the earnings call. In my call with Mr. McDermott, he noted that Business Objects added 16 points to SAP’s 2Q results. It’s unclear whether this was related to the license sales, support, and/or consulting and other services, or how the unit’s performance compared to the same period last year when Business Objects was an independent company. A year ago, Business Objects reported $363.2M in total 2Q07 revenue, including $149.1M for net license fees, $152.3 for maintenance, and $61.8M for consulting and training.

What do you think? Can SAP catch Oracle in the market cap race? Let us know here, and be sure to read this week's First Thing Monday newletter column (subscribe here), where I discuss the New SAP, and some of the big changes the company has made in recent months. It's a whole new ballgame.

Xconomy, a local online publication, featured an interesting piece based on data from the National Venture Capital Association. Did you realize that there wasn’t a single tech IPO in Q2?  The last time that happened was 1978. Based on the NCVA data, the years 1991-1996, and 1999 market the golden age of IPOs. More companies went public than were acquired. This changed in 2000. Now it’s far more likely that your exit strategy will be via acquisition. Take a look for yourself.

Oh, and let me know if you want me to set up that meeting with Oracle … or IBM, Infor, Microsoft, Oracle, Progress, SAP …. And leave your comments here about this or about this week's column, where we predict who might buy who in 2H08.

While ClearOrbit pre-dates Pure Digital by 13 years, the two firms have a similar approach to product design: building products that are simple to use. Since its formation in 1994, ClearOrbit has developed innovative software for use by employees in manufacturing plants and warehouses.

We update what ClearOrbit is up to and how it is revolutionizing its corner of the market in this week's column (subscribe here). Let us know your thoughts here.