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November 27, 2005

IBS looks to micro verticals for survival and growth

Enterprise application vendor IBS AG has remained under the radar during the recent market upheaval and believes its focus on micro verticals is the competitive differentiator it needs to continue as an ISV.

By CBR Staff Writer

On the surface IBS looks like another acquisition target due to its modest customer base of 5,000 and its equally modest revenue of SEK 519.7m ($64.5m) in the July to September 2005 quarter, of which SEK 116.6m ($14.5m) was derived from license revenue. In common with other tier 2 and 3 vendors, it has been hit by losses and the need to restructure.

However, UK managing director Simon Shorthose pointed out that with the exception of the last two years, the company has operated profitably for 20 years. Past performance is not necessarily an indicator of future performance, but IBS believes its record indicates that it is a sound business. As part of its repositioning for the future, it has sold off some assets such as its UK public service business and acquired others that either add technical competency such as Java expertise or provide geographical or vertical market benefits. Third-quarter revenue was up 6% year on year although license revenue fell by 5% due to the sale of the public service business.

Shorthose believes it is over the worst and has the strength to carry on as an ISV as demonstrated by its steady and improving financial performance combined with advances in its applications suite. You cannot say it [acquisition] will never happen but our shareholding is tightly controlled and that is a significant advantage when looking at a company, he said. Swedish furniture store Ikea is a majority shareholder. However, fellow player Intentia also thought its tight-knit majority shareholder group would save it, but it is in the process of being acquired by Lawson Software.

IBS’s approach differs from its peers because where they tend to be suppliers of generic ERP software with additional vertical market capabilities, IBS approaches the market from a supply chain perspective. [The ASW application suite] is a full business suite but our philosophy is supply chain-focused. We are a supply chain-oriented company but we provide business software to customers who need good supply chain functionality, said Shorthose. It is about the supply chain but you have to join everything up to finance, distribution and so on and then make it available at a price point [suitable for] mid companies. Its supply chain approach has more in common with QAD Inc than Intentia or Lawson or the tier-one vendors.

The target market also differs from the norm because ASW is designed for micro verticals, namely manufacturing and wholesale trade distribution organizations operating within a small number of verticals such as paper, packaging and supplies, or publishing. Where it does address broader verticals like pharmaceuticals or automotive, it is not the mainstream operators it targets but the suppliers working in the field. All verticals have different level of detail that general purpose ERP cannot deal with. Our focus is on niches, said Shorthose. He said that by focusing on niche markets the company can articulate how the software can help the business as opposed to just making it fit the business which is what generic software does. In the complementary CRM software market, it was shortly after Epiphany reaffirmed its belief that niche was good and that was where it opportunities lay that it was snapped by SSA Global.

The challenges are still daunting. ASW is based on IBM DB/2 running on the i/Series platform. With the 2006 release of version 6.0 it plans to make the suite available on additional databases and the i5/OS, Linux, Unix, and Windows platforms. It faces a real dilemma here, however. By opening up it should create more opportunities, but a broader base also requires more resources in terms of development and support which is a challenge for a company the size of IBS. However, staying with the current platform is not an attractive option in the light of SSA Global’s success in the area because IBS’s offerings are more limited and the business lacks the financial stability of the mid-market consolidator.

IBS’s future is not easy to predict. Its size and limited market marks it out as a prime candidate for merger or acquisition, but its supply chain focus and more particularly its distribution and micro vertical emphasis suggests it could have the key attributes required for a niche ISV of the future.

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