Jan Baan, the Calvinist CEO of Dutch software company Baan, is known for his modest management style. So the brazen ambition he displayed at the announcement of the company’s 1997 annual results must have surprised many. Baan, he said, would assume the number one spot in the US business application software market by 2001. Certainly, the company’s strong results must have buoyed his confidence. For the fourth quarter, net profits were up 76% to $29.1m, on revenue that rose 65% to $220m. For the year, profits soared 111% to $77.2m on revenue up 65% to $684m. And certainly, the enterprise resource planning (ERP) software market is booming at present. Investment bank Lehman Brothers describes it as an exceptional environment, and analysts at Banc-America Robertson Stephens have forecast that sales of client/server business applications software will reach $21.4bn by 2001, from $5.8bn in 1997. But Baan is not alone in exploiting this environment. In the US and the rest of the world, Baan faces cut- throat competition not only from the worldwide market leader, SAP of Germany, but from a host of US companies including Oracle, PeopleSoft and JD Edwards. Many of Baan’s competitors are not only reporting similarly impressive growth rates, but are actually growing faster in the US. SAP recently reported preliminary US revenues for 1997 up 84% to $1.1bn. PeopleSoft reported US revenues of $691m. That leaves Baan, whose 1997 US revenues were up 74% to $287.3m, with some catching up to do. Klaas Waagener, the company’s chief financial officer, insists that Baan is closing the gap on SAP. In 1995, he says, license revenues from SAP’s R/3 outstripped Baan’s license revenues by a ratio of 10:1. In 1996, the ratio had narrowed to 7:1. Last year, it was just 4.3:1. If Baan is to narrow this gap further, it must extend the scope of its software, and given the growing saturation among big corporations at the high-end of the market, continue its drive into the mid-market. Most importantly, it must move beyond its traditional customer base of manufacturing companies something that SAP is managing with some success. Other rivals are also enjoying the benefits of supplying a complete suite of software, covering financials, HR, sales force automation and logistics. In order to fill the gaps in its product line, Baan has been on a shopping spree. In 1996, it bought supply chain management specialist Berclain and sales configuration specialist Antalys. This was followed in 1997 with the purchase of Aurum, a vendor of sales force automation software. The company also strengthened its financial offerings by reselling software from specialist Hyperion. There has been no sign of a slowdown in 1998. In January, Baan invested in Meta4, a Spanish vendor of HR software. These acquisitions and partnerships seem to be paying off. In the fourth quarter, Baan’s Aurum subsidiary closed 31 deals, only seven of which came from Baan’s installed base. But the bulk of sales are still centered on manufacturing software. This must change if Baan is to challenge the leaders.

Historic weakness

In late February, the company announced a further deal, the acquisition of UK-based accountancy software firm Coda for $86m. This, say analysts, could prove to be the most significant purchase of all. First, it will remedy a major flaw in Baan’s product line its historic weakness in financial software. This, admits Waagener, has caused the company to lose major accounts to competitors in the past. It is Baan’s third attempt to solve the problem: It initially tried to write its own financials, but this project was stopped. Then came the re-badging agreement with Hyperion Software. The financial reporting software, however, was too specialist a general accounting package was still needed. With Coda comes a cadre of 150 R&D personnel with strong accountancy expertise. And it brings an installed base of 1,500 sites. But there are potential problems. Coda has reported losses for the past two years (although it has posted revenue growth of around 25%) and has very

little US presence. In addition, there is little integration between the product lines of Coda and Baan, which means some urgent recoding will be required. Baan has just announced it has more or less completed an ambitious rewrite of its entire product line into a new component-based architecture (the product will now be known as Baan Series). Now Coda’s financials package will have to undergo the same process. Charles Phillips, an analyst with investment bank Morgan Stanley, thinks time is running out for Baan. By having to settle on a second tier vendor [Coda] for a third shot at this market, this is Baan’s last chance at coming up with a credible accounting offering, he says. But he is cautious, not pessimistic. If Baan can produce a more credible accounting product over the next 18 months to round out its application suite and retain the talent it has acquired from Coda (something it has been good at in the past), he believes the acquisition could prove a smart move in the long-term. But the long-term prospects for all the ERP vendors may not be as bright as in the recent past. Many sales in the ERP area, say analysts, have been driven by the Year 2000 crisis and will now begin to dry up. With that in mind, it is essential that Baan leverages its strong growth and shores up its installed based at the expense of its competitors in the next year.

Computer Business Review.

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