In a market noted for its turbulence, the ongoing turnaround success of IFS, a global enterprise applications supplier, has gone somewhat unnoticed. IFS was the fastest growing enterprise resource planning (ERP) supplier in the mid-to-late 1990s. But the early 2000s marked a severely painful period for the vendor, including losses peaking at about $85 million (USD) on revenues of about $313 million (USD) for 2002. The IFS turnaround is impressive, and its management attributes the success to its more focused sales strategy, increased organizational efficiencies, and continued emphasis on a selected, manageable number of vertical industries. For more information on IFS' background, see Enterprise Applications Vendor Reverses Fortunes—But Will Perseverance and Agility Be Enough?. Also see Resilient Enterprise Solutions Vendor Displays Sociability and Pragmatic Product Development for more on the keys to the vendor's turnaround.
Part Three of the series Enterprise Applications Vendor Reverses Fortunes—But Will Perseverance and Agility Be Enough?
Despite many observers' feelings that competition is only intensifying, IFS says it likes its chances, if only because most of its fierce competitors are currently distracted for various reasons. On one hand, the giants like SAP and Oracle are battling the ecosystem war and spending high research and development (R&D) dollars, possibly at the expense of new functionality. Given that IFS has brought to market the seventh generation of its component-based applications (while its competitors are mostly still on their first, or second at best), the popularity of the service-oriented architecture (SOA) concept means that competitors' development dollars have to be used to break up their monolithic applications, build humongous SOA platforms, and integrate and support disparate applications—and all this while their customers wait for promises to be delivered. In other words, their customers might be paying an "agility tax," while conversely, IFS can concentrate on industry-specific business functionality that should give its customers a competitive edge.
IFS acknowledges that some customers will have preconceived (sometimes almost religious) notions about going for SAP or Oracle as a safe choice, but will gladly take part in any selection with a due diligence that entails demonstrations of how the software would simulate real-life business scenarios. As a matter of fact, IFS had a much stronger opponent in that regard in former JD Edwards, and is quite relieved by its market exit (or, at least, by the product's substantially reduced presence in new business opportunities of late). A similar case holds true for Intentia, which has lately been embroiled in merger with Lawson Software. IFS believes it can thus offer a real alternative—big enough to deliver, while still being small enough to care (see How Some ERP Vendors Demonstrated—Warts And All).
On the other hand, so-called "collectors" or acquirers such as Infor/SSA Global and Sage Software face the issue of where to focus their R&D budgets so as to balance technology and functionality demands, and are still far from a common technology platform or vision. Microsoft Business Solutions (MBS) is not to be dismissed, but IFS believes that MBS value-added resellers (VARs) have not always been uniformly globally strong, competent, or impressive. They typically do not exhibit the depth and history of serious manufacturing implementations, and there are lots of them in a fragmented market, all competing for the same slice of pie. Time will tell whether MBS' recent Industry Builder initiative or the SAP PartnerEdge approach that sounds a little more hands-on (a select number of channel partners will be invited to build industry-specific, vertical templates on top of the company's mid-market offering, SAP All-in-One) will prove IFS wrong. For more information, see The Cha(lle)nging World of Value-Added Resellers.
For the reasons mentioned above, IFS remains happy to exploit its advantage as a global independent software vendor (ISV), owing to its ability to deliver a single-product, industry-focused broad ERP suite globally. IFS differentiates on lower total cost of ownership (TCO), since all its applications are based on the same code base and have the same user interface. This, together with offshore R&D, has enabled the vendor to lately keep its efficient product development costs well covered by its recurring revenue from service and maintenance paying customers.
The IFS Applications 7 suite, which was made generally available in April 2006 (as promised at IFS World Conference 2005), features the seventh generation of componentized business applications and the second generation of SOA. The early 2000s phase that saw IFS consolidate after expansion also saw the vendor building a solid technology framework based on SOA concepts and business components. For the sake of some facts and figures, IFS Applications 7 has 159 business and technology components that are granular enough to deliver publicized SOA benefits. These components are grouped into 115 business modules, and customers buy only the modules they need. Underpinning the components are nearly 6,000 business objects and documents that are used in business processes, and over 800 Web services that perform actions on the business objects (including 200 "report services") and that have been increasingly used to link IFS to external systems via XML. To that end, the vendor has long moved in the direction of Web Services and composite applications: the first composite application was developed with partner ABB and has been available since 2003, and a number of other composite applications have also since been available, or are in progress.
Consequently, the agility resulting from the technology mentioned above, and from market-driven product development, has become the vendor's main re-branding theme—"we'll get in quickly and make you agile." As an illustration of agility (or the ability to foresee and react to potential problems ahead of time), IFS cites a Norwegian car importer that has recently expanded to importing running shoes and handling property management, and which needed a system that would not hold it back.
Even Sleeping With the Enemy?:To best demonstrate its nimbleness and the ability to offer industry-focused components that will plug into other SOA frameworks (including even those of fierce competitors), in June 2006, IFS signed a contract with Oracle USA, Inc. As a result, IFS will provide the maintenance, repair, and overhaul (MRO) portion of an integrated logistics system that Oracle is delivering to the US Air Force (USAF). In accordance with the Oracle contract, the system will support 250,000 users of the Expeditionary Combat Support System (ECSS) program, which is a commercial-off-the-shelf (COTS) software system established to improve weapons systems availability by streamlining the current Air Force logistics process. The system, which is the largest IT acquisition program for the USAF, will replace and perform the functions of more than 500 logistics systems that the Air Force currently uses. The Oracle team is providing a logistics system consisting of the IFS MRO solution, an ERP solution from Oracle, and an advanced planning and scheduling (APS) solution from Click Commerce (following the recent Xelus acquisition). Oracle reportedly turned to IFS because it admittedly has a more robust MRO solution for the A&D market, and IFS will thus provide weapon system depot support, including complex MRO, component repair, and fleet management
ECSS will allow commanders at all levels in the logistics chain to automate the process of gathering logistics data, interpret that data, and make decisions on a near real-time basis. It will provide an integrated set of ERP and APS applications that should allow the Air Force to accomplish its logistics mission, which is to provide the right material to the right place, at the right time, in the right quantity, and in the right condition to support global military operations. The first phase entails an over $88 million (USD) software expenditure for the first six years, which includes Oracle, IFS, and Click Commerce (Xelus). It is hoped that ECSS integration will replace over 500 separate and legacy systems, and deliver savings of 20 percent, while the total number of users will reach 250,000. The total license value for IFS, including maintenance fees, is expected to amount to over $13 million (USD) over six years, out of which $1.2 million (USD), including services, is expected to be recognized as revenue in 2006.
IFS North America State of Affairs:A good example of how individual regions are in tune with IFS corporate-wide guidelines, albeit with their own nuances, is North America, where the business is also in building mode. With about 300 customers, North America now contributes 18 percent of total company revenue, and the percentage is expected to grow. The region has also had a relatively recent leadership change, with Cindy Jaudon (also an IFS "old hand," and former leader of the global A&D team) taking the helm in early 2005. Coincidentally or not, for the last seven quarters, IFS North America has experienced a more balanced revenue stream. For one thing, IFS has realized that being driven by new accounts remains an expensive business model, with an uncertain payback in the near term, while exploiting the existing install base could have a more profound effect on both the IFS top and bottom line. That is to say, satisfied customers tend to be more amenable to many additional ways for the vendor to add value (which translates into new license and service and support revenues) to the customer in an effort to maintain the long-term relationship, such as enhancements, extensions, refresh and upgrade services, and so forth. The enterprise applications market is indisputably a mature and fairly saturated field, and all players must accordingly adjust their investment strategies from those of the emerging and growing market in the 1990s. That means painstakingly finding a perfect balance between cultivating the install base versus the zeal for hitching brand new customers.
Furthermore, most sales were direct until 2005, when IFS started building a reseller channel in the region, in part feasting on nervous integrators that support JD Edwards products and that are uncertain about the future. The vendor has six offices in North America, and its direct sales force focuses on large and complex prospective customers, while resellers target local businesses with less than $150 million (USD) in revenues. Consequently, 32 percent of sales in 2005 came from the channel, which is somewhat higher than the global average of 23 percent. IFS Applications 7, as mentioned earlier on, will come in handy with its improved user interface, workflow, and enhancements in the supply chain modules. These modules respond to the requirements for the "splits" between manufacturers and third-party suppliers (subcontractors) which are becoming more common today. Especially in North America, one can see a shift in the manufacturing environment to one that is based on projects and outsourcing to other countries, and the companies making money are the ones that are outsourcing and doing a good job managing the whole project.
In North America, in addition to the A&D industries, where the vendor is leveraging the broad background and solution depth in EAM and MRO, the medical device sector is another vertical of some potential. IFS' solution capability to provide Level 3 regulatory compliance has been key to success here. In May, IFS formed a strategic alliance with MTSI, Inc., an industry-focused VAR in the North American market, to launch new service managements solution for the medical device industry. IFS then also announced the launch of SLiM (Service Lifecycle Manager), a software package that aims at improving the efficiency, compliance, and control of day-to-day operations in the medical device industry. Powered by IFS Applications, SLiM is an integrated service management system combining industry-specific best practice processes, knowledge, and functionality to address key business concerns facing the medical device industry, including lifecycle management and regulatory issues.
US Food and Drug Administration (FDA) compliance is a mission-critical requirement for medical device manufacturers. When a manufacturer violates FDA rules, the consequences are serious and can include warning letters, mandatory product recalls, inability to ship product, and even criminal penalties for individual managers. SLiM meets or exceeds the current regulatory requirements for operating procedures, document control, training records, product traceability, and configuration management mandated by Title 21, Parts 11 and 820 of the US Code of Federal Regulations (CFR), and the Sarbanes-Oxley Act (SOX). Targeting medical device manufacturers, equipment re-manufacturers, hospitals, and independent service organizations, SLiM provides a solution at a low entry cost, along with the scalability to grow into a corporate-wide, integrated out-of-the-box solution as needed.
Bundled with focusing on only a handful of selected industries, these moves have lately resulted in an increased sales win rate, larger average sales, and a lower cost of sales. Additional hiring, greater quarter-on-quarter profits, and upbeat news have prompted (and in part resulted from) the vendor's expanded market coverage in the region. Specifically, there has been a 15 percent increase in direct sales and marketing functions, and tripled indirect sales and marketing resources, year over year.
Striking the Happy Medium of New versus Current Customers :At the same time, IFS aims to protect its existing customer base in North America (and elsewhere) by keeping them highly satisfied. IFS realized a few years ago that it might have been better off slowing development to ensure the ability to build increased quality into the product, and to refine its product (and services) management and development processes to allow customer input and feedback at every phase (via user advisory groups, product update and feedback seminars, IFS Applications 7 "test drives," dedicated customer groups, and so on). Its management has lately instituted a "love your customer" culture, and redefined product management and development priorities, with a focus on enriching the software ownership experience (for example, through improved ease of use, or truly needed functional enhancements) rather than a flashy buying experience. This strategy has been in tune with the general feeling of low customer loyalty and staying power of enterprise applications providers.
The IFS change of mindset came due to the fact that enterprise software is now a mature market, where the grow-at-all-costs strategies of the ebullient 1990s simply do not work any longer. Namely, the stock market of the 1990s saw brand new accounts as a key metric when valuing application software companies, which drove them to a business model designed to win new accounts that were seen as the primary source of revenue by most. For both the investor and vendor, this "new accounts at all costs" theory was the right business model.
But times have drastically changed, as the market penetration is so high that only a few new account opportunities exist. Moreover, economic uncertainty has tightened the purse strings of most prospective user companies, so that selling new systems is much more difficult. Therefore, more successful application vendors are focusing on their install base of late as their primary source of revenue, while cutting cost to provide profitability. Many are even vying for existing dissatisfied customers of competitors. The result is a dramatic change in their business model. Thus, the old "new accounts at all costs" business model must now morph to a "love the customer" model, where the strategic goal remains on focusing more resources on servicing existing customers than on attracting new ones. These strategies have typically been made with three objectives in mind:
1. to align the organizational structure with current characteristics of the market (meaning to produce a more tightly focused target market and results-based new account sales and marketing operations, and to maintain emphasis solely on sensible product and services development while protecting existing technology investment)
�
2. to improve the stability of operations and the staying power of company (in other words, to achieve profitable growth, financial strength, access to capital, and operational excellence—and to maintain consistent profitability and positive cash flow as a result)
�
3. to increase the focus on adding value primarily to existing customers (by instituting redefined product management and development priorities; by focusing on enriching the software ownership experience rather than the software buying experience; and by continuing with vertical and niche product enhancements, with a focus on quality [rather than speed], product performance and stability, depth of functionality, and customer needs).
All these prudent moves are expected to help IFS increase and sustain profitability, and IFS North America forecasts a 21 percent growth in license revenues in 2006. From the perspective of the top line (revenues), the focus is on more recurring licence revenues from satisfied customers, whereas from the bottom line perspective, responsive and efficient operations will continue to keep costs under control, while running highly profitable (with a 61 percent margin) maintenance and support revenues. Overall, IFS is now financially stable and viable, has made the right organizational changes, is fairly impervious from (unwanted) acquisitions (almost 40 percent of the shareholder votes are held by a small, tightly knit, and proud group, comprised of Gustaf Douglas, a Swedish entrepreneur, as well as the founders and management), and has a componentized, future-proof Web services-based technology and pragmatic product development (harnessing the goodwill and experience of some renowned partners) that should equip it with the means to win deals in its chosen verticals.
Some Challenges Persist:However, not everything is absolutely rosy for IFS going forward, at least in terms of declining revenues, which are far below the SEK 3.1 billion mark from way back in 2001. The vendor still has a way to go to fully reverse any lingering negative sentiments in the market and to reverse the stalled momentum dating from the turn of the century. The power of the major and much larger players also cannot be underestimated, despite IFS' possible advantage in terms of flexibility and lower TCO in certain environments. Another problem might be coming from lower net license revenues in 2005 year over year (which is a crucial benchmark for investors and observers), due to more seats being casual users (cheaper seats), and lower margins owing to indirect business. But IFS believes that was a necessary adjustment which will be rectified by higher sales volumes down the track.
While the company is showing impressive resilience in a harsh market, it is still often viewed as just a regional player, since about 72 percent of revenues still comes from Europe, the Middle East, and Africa (EMEA); 18 percent comes from North America; and 10 percent comes from growth markets like China, India, Turkey, and Russia. Some markets, like Australia and New Zealand, are hardly covered at all. Thus, if IFS truly wants to be a global player, it will have to bolster its image (and true capabilities) as a company with strength in the target verticals, regardless of the location. Alliances with some truly global partners should help, but it is a process that just does not happen overnight. Ironically, IFS' relatively short implementation cycles might not be attractive to big consulting houses that have been accustomed to lengthy engagements at hefty consulting rates. Therefore, IFS will have to figure out which add-on incentives (for example, ownership of intellectual property owing to help with developing a particular vertical add-on module) it should present to these firms in order to get them onboard as committed system integration partners.
IFS must become even more focused in its chosen verticals such as A&D, high tech, automotive, construction, and service and facilities management, and it must seek new partners who are leaders in their field. A good possible cooperative match would be with Deltek, which is the undisputed leader in North American project-based segments, but also in need of strong manufacturing, MRO, service management, and PLM capabilities, among others (see Mountainous Investment Transforms Enterprise Management Software). A similar alliance should be expected for more advanced supply chain execution (SCE) capabilities. Last but not least, IFS must selectively co-exist and integrate with key applications such as SAP and Oracle, in order to maximize customer satisfaction and return on investment (ROI).
The market should appreciate the IFS attempts to become more focused, better financed, and structured for profitable growth. The vendor is doing this while investing in existing customers, products, and technology—and also while targeting leadership positions in well-defined markets. The vendor is seemingly delivering on its strategy in terms of having a deep industry focus and partnerships, a single global product, technology dexterity, and a reputation for providing rapid implementations and ongoing low TCO.
We generally recommend including IFS in a long list of an enterprise application selection for upper mid-market and low-end tier one companies (with up to $1 billion in revenue) within the aforementioned seven industries of IFS focus. IFS should be included on a short list in any selection within the A&D sector, and in environments with strong engineer-to-order (ETO), project delivery, and service management needs, on the condition that payroll or warehousing modules are not of primary significance to the customer.
Given that IFS can provide a full, industry-focused suite, but also deep industry components that plug into other platforms, some users might benefit from a best-of-breed combination. While such combinations are encouraged, prospective users should bear in mind and check out the past integration prowess and experience of the involved vendors. While IFS service and support is very strong overall, its industry focus and implementation execution can vary significantly by geographic region. Therefore, potential clients should conduct preliminary research on industry expertise and reference sites of a regional IFS office or an affiliate service provider when IFS is included in the selection process.
Part Three of the series Enterprise Applications Vendor Reverses Fortunes—But Will Perseverance and Agility Be Enough?
Despite many observers' feelings that competition is only intensifying, IFS says it likes its chances, if only because most of its fierce competitors are currently distracted for various reasons. On one hand, the giants like SAP and Oracle are battling the ecosystem war and spending high research and development (R&D) dollars, possibly at the expense of new functionality. Given that IFS has brought to market the seventh generation of its component-based applications (while its competitors are mostly still on their first, or second at best), the popularity of the service-oriented architecture (SOA) concept means that competitors' development dollars have to be used to break up their monolithic applications, build humongous SOA platforms, and integrate and support disparate applications—and all this while their customers wait for promises to be delivered. In other words, their customers might be paying an "agility tax," while conversely, IFS can concentrate on industry-specific business functionality that should give its customers a competitive edge.
IFS acknowledges that some customers will have preconceived (sometimes almost religious) notions about going for SAP or Oracle as a safe choice, but will gladly take part in any selection with a due diligence that entails demonstrations of how the software would simulate real-life business scenarios. As a matter of fact, IFS had a much stronger opponent in that regard in former JD Edwards, and is quite relieved by its market exit (or, at least, by the product's substantially reduced presence in new business opportunities of late). A similar case holds true for Intentia, which has lately been embroiled in merger with Lawson Software. IFS believes it can thus offer a real alternative—big enough to deliver, while still being small enough to care (see How Some ERP Vendors Demonstrated—Warts And All).
On the other hand, so-called "collectors" or acquirers such as Infor/SSA Global and Sage Software face the issue of where to focus their R&D budgets so as to balance technology and functionality demands, and are still far from a common technology platform or vision. Microsoft Business Solutions (MBS) is not to be dismissed, but IFS believes that MBS value-added resellers (VARs) have not always been uniformly globally strong, competent, or impressive. They typically do not exhibit the depth and history of serious manufacturing implementations, and there are lots of them in a fragmented market, all competing for the same slice of pie. Time will tell whether MBS' recent Industry Builder initiative or the SAP PartnerEdge approach that sounds a little more hands-on (a select number of channel partners will be invited to build industry-specific, vertical templates on top of the company's mid-market offering, SAP All-in-One) will prove IFS wrong. For more information, see The Cha(lle)nging World of Value-Added Resellers.
For the reasons mentioned above, IFS remains happy to exploit its advantage as a global independent software vendor (ISV), owing to its ability to deliver a single-product, industry-focused broad ERP suite globally. IFS differentiates on lower total cost of ownership (TCO), since all its applications are based on the same code base and have the same user interface. This, together with offshore R&D, has enabled the vendor to lately keep its efficient product development costs well covered by its recurring revenue from service and maintenance paying customers.
The IFS Applications 7 suite, which was made generally available in April 2006 (as promised at IFS World Conference 2005), features the seventh generation of componentized business applications and the second generation of SOA. The early 2000s phase that saw IFS consolidate after expansion also saw the vendor building a solid technology framework based on SOA concepts and business components. For the sake of some facts and figures, IFS Applications 7 has 159 business and technology components that are granular enough to deliver publicized SOA benefits. These components are grouped into 115 business modules, and customers buy only the modules they need. Underpinning the components are nearly 6,000 business objects and documents that are used in business processes, and over 800 Web services that perform actions on the business objects (including 200 "report services") and that have been increasingly used to link IFS to external systems via XML. To that end, the vendor has long moved in the direction of Web Services and composite applications: the first composite application was developed with partner ABB and has been available since 2003, and a number of other composite applications have also since been available, or are in progress.
Consequently, the agility resulting from the technology mentioned above, and from market-driven product development, has become the vendor's main re-branding theme—"we'll get in quickly and make you agile." As an illustration of agility (or the ability to foresee and react to potential problems ahead of time), IFS cites a Norwegian car importer that has recently expanded to importing running shoes and handling property management, and which needed a system that would not hold it back.
Even Sleeping With the Enemy?:To best demonstrate its nimbleness and the ability to offer industry-focused components that will plug into other SOA frameworks (including even those of fierce competitors), in June 2006, IFS signed a contract with Oracle USA, Inc. As a result, IFS will provide the maintenance, repair, and overhaul (MRO) portion of an integrated logistics system that Oracle is delivering to the US Air Force (USAF). In accordance with the Oracle contract, the system will support 250,000 users of the Expeditionary Combat Support System (ECSS) program, which is a commercial-off-the-shelf (COTS) software system established to improve weapons systems availability by streamlining the current Air Force logistics process. The system, which is the largest IT acquisition program for the USAF, will replace and perform the functions of more than 500 logistics systems that the Air Force currently uses. The Oracle team is providing a logistics system consisting of the IFS MRO solution, an ERP solution from Oracle, and an advanced planning and scheduling (APS) solution from Click Commerce (following the recent Xelus acquisition). Oracle reportedly turned to IFS because it admittedly has a more robust MRO solution for the A&D market, and IFS will thus provide weapon system depot support, including complex MRO, component repair, and fleet management
ECSS will allow commanders at all levels in the logistics chain to automate the process of gathering logistics data, interpret that data, and make decisions on a near real-time basis. It will provide an integrated set of ERP and APS applications that should allow the Air Force to accomplish its logistics mission, which is to provide the right material to the right place, at the right time, in the right quantity, and in the right condition to support global military operations. The first phase entails an over $88 million (USD) software expenditure for the first six years, which includes Oracle, IFS, and Click Commerce (Xelus). It is hoped that ECSS integration will replace over 500 separate and legacy systems, and deliver savings of 20 percent, while the total number of users will reach 250,000. The total license value for IFS, including maintenance fees, is expected to amount to over $13 million (USD) over six years, out of which $1.2 million (USD), including services, is expected to be recognized as revenue in 2006.
IFS North America State of Affairs:A good example of how individual regions are in tune with IFS corporate-wide guidelines, albeit with their own nuances, is North America, where the business is also in building mode. With about 300 customers, North America now contributes 18 percent of total company revenue, and the percentage is expected to grow. The region has also had a relatively recent leadership change, with Cindy Jaudon (also an IFS "old hand," and former leader of the global A&D team) taking the helm in early 2005. Coincidentally or not, for the last seven quarters, IFS North America has experienced a more balanced revenue stream. For one thing, IFS has realized that being driven by new accounts remains an expensive business model, with an uncertain payback in the near term, while exploiting the existing install base could have a more profound effect on both the IFS top and bottom line. That is to say, satisfied customers tend to be more amenable to many additional ways for the vendor to add value (which translates into new license and service and support revenues) to the customer in an effort to maintain the long-term relationship, such as enhancements, extensions, refresh and upgrade services, and so forth. The enterprise applications market is indisputably a mature and fairly saturated field, and all players must accordingly adjust their investment strategies from those of the emerging and growing market in the 1990s. That means painstakingly finding a perfect balance between cultivating the install base versus the zeal for hitching brand new customers.
Furthermore, most sales were direct until 2005, when IFS started building a reseller channel in the region, in part feasting on nervous integrators that support JD Edwards products and that are uncertain about the future. The vendor has six offices in North America, and its direct sales force focuses on large and complex prospective customers, while resellers target local businesses with less than $150 million (USD) in revenues. Consequently, 32 percent of sales in 2005 came from the channel, which is somewhat higher than the global average of 23 percent. IFS Applications 7, as mentioned earlier on, will come in handy with its improved user interface, workflow, and enhancements in the supply chain modules. These modules respond to the requirements for the "splits" between manufacturers and third-party suppliers (subcontractors) which are becoming more common today. Especially in North America, one can see a shift in the manufacturing environment to one that is based on projects and outsourcing to other countries, and the companies making money are the ones that are outsourcing and doing a good job managing the whole project.
In North America, in addition to the A&D industries, where the vendor is leveraging the broad background and solution depth in EAM and MRO, the medical device sector is another vertical of some potential. IFS' solution capability to provide Level 3 regulatory compliance has been key to success here. In May, IFS formed a strategic alliance with MTSI, Inc., an industry-focused VAR in the North American market, to launch new service managements solution for the medical device industry. IFS then also announced the launch of SLiM (Service Lifecycle Manager), a software package that aims at improving the efficiency, compliance, and control of day-to-day operations in the medical device industry. Powered by IFS Applications, SLiM is an integrated service management system combining industry-specific best practice processes, knowledge, and functionality to address key business concerns facing the medical device industry, including lifecycle management and regulatory issues.
US Food and Drug Administration (FDA) compliance is a mission-critical requirement for medical device manufacturers. When a manufacturer violates FDA rules, the consequences are serious and can include warning letters, mandatory product recalls, inability to ship product, and even criminal penalties for individual managers. SLiM meets or exceeds the current regulatory requirements for operating procedures, document control, training records, product traceability, and configuration management mandated by Title 21, Parts 11 and 820 of the US Code of Federal Regulations (CFR), and the Sarbanes-Oxley Act (SOX). Targeting medical device manufacturers, equipment re-manufacturers, hospitals, and independent service organizations, SLiM provides a solution at a low entry cost, along with the scalability to grow into a corporate-wide, integrated out-of-the-box solution as needed.
Bundled with focusing on only a handful of selected industries, these moves have lately resulted in an increased sales win rate, larger average sales, and a lower cost of sales. Additional hiring, greater quarter-on-quarter profits, and upbeat news have prompted (and in part resulted from) the vendor's expanded market coverage in the region. Specifically, there has been a 15 percent increase in direct sales and marketing functions, and tripled indirect sales and marketing resources, year over year.
Striking the Happy Medium of New versus Current Customers :At the same time, IFS aims to protect its existing customer base in North America (and elsewhere) by keeping them highly satisfied. IFS realized a few years ago that it might have been better off slowing development to ensure the ability to build increased quality into the product, and to refine its product (and services) management and development processes to allow customer input and feedback at every phase (via user advisory groups, product update and feedback seminars, IFS Applications 7 "test drives," dedicated customer groups, and so on). Its management has lately instituted a "love your customer" culture, and redefined product management and development priorities, with a focus on enriching the software ownership experience (for example, through improved ease of use, or truly needed functional enhancements) rather than a flashy buying experience. This strategy has been in tune with the general feeling of low customer loyalty and staying power of enterprise applications providers.
The IFS change of mindset came due to the fact that enterprise software is now a mature market, where the grow-at-all-costs strategies of the ebullient 1990s simply do not work any longer. Namely, the stock market of the 1990s saw brand new accounts as a key metric when valuing application software companies, which drove them to a business model designed to win new accounts that were seen as the primary source of revenue by most. For both the investor and vendor, this "new accounts at all costs" theory was the right business model.
But times have drastically changed, as the market penetration is so high that only a few new account opportunities exist. Moreover, economic uncertainty has tightened the purse strings of most prospective user companies, so that selling new systems is much more difficult. Therefore, more successful application vendors are focusing on their install base of late as their primary source of revenue, while cutting cost to provide profitability. Many are even vying for existing dissatisfied customers of competitors. The result is a dramatic change in their business model. Thus, the old "new accounts at all costs" business model must now morph to a "love the customer" model, where the strategic goal remains on focusing more resources on servicing existing customers than on attracting new ones. These strategies have typically been made with three objectives in mind:
1. to align the organizational structure with current characteristics of the market (meaning to produce a more tightly focused target market and results-based new account sales and marketing operations, and to maintain emphasis solely on sensible product and services development while protecting existing technology investment)
�
2. to improve the stability of operations and the staying power of company (in other words, to achieve profitable growth, financial strength, access to capital, and operational excellence—and to maintain consistent profitability and positive cash flow as a result)
�
3. to increase the focus on adding value primarily to existing customers (by instituting redefined product management and development priorities; by focusing on enriching the software ownership experience rather than the software buying experience; and by continuing with vertical and niche product enhancements, with a focus on quality [rather than speed], product performance and stability, depth of functionality, and customer needs).
All these prudent moves are expected to help IFS increase and sustain profitability, and IFS North America forecasts a 21 percent growth in license revenues in 2006. From the perspective of the top line (revenues), the focus is on more recurring licence revenues from satisfied customers, whereas from the bottom line perspective, responsive and efficient operations will continue to keep costs under control, while running highly profitable (with a 61 percent margin) maintenance and support revenues. Overall, IFS is now financially stable and viable, has made the right organizational changes, is fairly impervious from (unwanted) acquisitions (almost 40 percent of the shareholder votes are held by a small, tightly knit, and proud group, comprised of Gustaf Douglas, a Swedish entrepreneur, as well as the founders and management), and has a componentized, future-proof Web services-based technology and pragmatic product development (harnessing the goodwill and experience of some renowned partners) that should equip it with the means to win deals in its chosen verticals.
Some Challenges Persist:However, not everything is absolutely rosy for IFS going forward, at least in terms of declining revenues, which are far below the SEK 3.1 billion mark from way back in 2001. The vendor still has a way to go to fully reverse any lingering negative sentiments in the market and to reverse the stalled momentum dating from the turn of the century. The power of the major and much larger players also cannot be underestimated, despite IFS' possible advantage in terms of flexibility and lower TCO in certain environments. Another problem might be coming from lower net license revenues in 2005 year over year (which is a crucial benchmark for investors and observers), due to more seats being casual users (cheaper seats), and lower margins owing to indirect business. But IFS believes that was a necessary adjustment which will be rectified by higher sales volumes down the track.
While the company is showing impressive resilience in a harsh market, it is still often viewed as just a regional player, since about 72 percent of revenues still comes from Europe, the Middle East, and Africa (EMEA); 18 percent comes from North America; and 10 percent comes from growth markets like China, India, Turkey, and Russia. Some markets, like Australia and New Zealand, are hardly covered at all. Thus, if IFS truly wants to be a global player, it will have to bolster its image (and true capabilities) as a company with strength in the target verticals, regardless of the location. Alliances with some truly global partners should help, but it is a process that just does not happen overnight. Ironically, IFS' relatively short implementation cycles might not be attractive to big consulting houses that have been accustomed to lengthy engagements at hefty consulting rates. Therefore, IFS will have to figure out which add-on incentives (for example, ownership of intellectual property owing to help with developing a particular vertical add-on module) it should present to these firms in order to get them onboard as committed system integration partners.
IFS must become even more focused in its chosen verticals such as A&D, high tech, automotive, construction, and service and facilities management, and it must seek new partners who are leaders in their field. A good possible cooperative match would be with Deltek, which is the undisputed leader in North American project-based segments, but also in need of strong manufacturing, MRO, service management, and PLM capabilities, among others (see Mountainous Investment Transforms Enterprise Management Software). A similar alliance should be expected for more advanced supply chain execution (SCE) capabilities. Last but not least, IFS must selectively co-exist and integrate with key applications such as SAP and Oracle, in order to maximize customer satisfaction and return on investment (ROI).
The market should appreciate the IFS attempts to become more focused, better financed, and structured for profitable growth. The vendor is doing this while investing in existing customers, products, and technology—and also while targeting leadership positions in well-defined markets. The vendor is seemingly delivering on its strategy in terms of having a deep industry focus and partnerships, a single global product, technology dexterity, and a reputation for providing rapid implementations and ongoing low TCO.
We generally recommend including IFS in a long list of an enterprise application selection for upper mid-market and low-end tier one companies (with up to $1 billion in revenue) within the aforementioned seven industries of IFS focus. IFS should be included on a short list in any selection within the A&D sector, and in environments with strong engineer-to-order (ETO), project delivery, and service management needs, on the condition that payroll or warehousing modules are not of primary significance to the customer.
Given that IFS can provide a full, industry-focused suite, but also deep industry components that plug into other platforms, some users might benefit from a best-of-breed combination. While such combinations are encouraged, prospective users should bear in mind and check out the past integration prowess and experience of the involved vendors. While IFS service and support is very strong overall, its industry focus and implementation execution can vary significantly by geographic region. Therefore, potential clients should conduct preliminary research on industry expertise and reference sites of a regional IFS office or an affiliate service provider when IFS is included in the selection process.
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