Once-maverick ERP vendor Baan climbs out of trough

Business application vendor Baan Co. NV is ready to get out into the limelight and repair its tarnished image. The company, however, faces the prospect of once again losing money, and risks alienating customers with its strong focus on manufacturers in four specific industries.

After six consecutive quarters of profitability, Baan was pushed back into the red in April due to the "seriously depressed" state of the market, Baan President Laurens van der Tang revealed recently. In a strategy briefing with the press, Van der Tang said Baan ran a loss in the six months ending Sept. 30, something corporate parent Invensys PLC had not previously disclosed. The loss is spurring questions over Baan's future.

Van der Tang's target is to bring Baan back to profitability in the next financial year. Key to the company's strategy -- and its new ERP (enterprise resource planning) software due out by September -- is a focus on manufacturers in industrial machinery and equipment, electronics, automotive, and aerospace and defense.

Baan was a trendsetter in the ERP market in the mid-90s. That stopped cold when an accounting scandal involving false sales records ruined the Barneveld, Netherlands, company in the late-nineties. The company faced stiff competition from SAP AG, Oracle Corp., J.D. Edwards & Co., and PeopleSoft Inc., and analysts were all but writing Baan's obituary when it was saved by Invensys, a London engineering company, that bought it in August 2000 for about €700 million (US$706 million).

After a good two years under the Invensys umbrella, Baan is ready to start making noise again, said Dave Wangler, senior vice president for global marketing at Baan. Baan executives gathered last month to discuss company strategy with the press at a Baan office near its headquarters nestled between holiday parks, a golf course and paddocks in a small town in the Dutch Bible-belt.

"We have come through a difficult time. The first phase was really about stability and I think we accomplished the stability in the first six or nine months after the acquisition. The second thing was to get the business to a point of growth, winning new customers and improving the satisfaction of our existing base," Wangler said.

"The management team has spent the last month our so crystallizing our vision and strategy as we go forward. Now is the right time to roll that out," said Wangler, who joined Baan's top management in August. "Over the next couple of months there will be a lot of noise, a lot of buzz from Baan."

One thing Baan will be making noise about is Gemini; the codename for a new generation of its ERP offering. Gemini, slated for September, will support Web services standards such as XML (Extensible Markup Language) and SOAP (Simple Object Access Protocol) and be accessed through a Web browser.

With Gemini, Baan will move further away from the crowded space of general ERP and into the niche of enterprise applications designed especially for manufacturing companies in industrial machinery and equipment, electronics, automotive, and aerospace and defense.

"Absolute and complete dedication to industrial enterprises, that is what we do and what we want to be strong at," said Baan President Van der Tang.

Dedication to the vertical markets is the only way Baan can go, Research Director Brian Zrimsek of Stamford, Connecticut, Gartner Inc. said.

"Other vendors will target automotive and high tech, but the key for Baan is to focus and create that industry-specific functionality. Without that, they will be relegating themselves to the role of generalist in a market where a generalist can't survive," he said.

However, launching a new generation of software also poses threats. About 70 percent of Baan's customers are still on iBaan IV, not the newer iBaan V, and about half of Baan's current 6,000 or so customers are not in the four target markets. Users may see the Gemini launch as the ideal time to move to another vendor.

"Baan runs the risk of installed base attrition when they come out with Gemini. The installed base is the largest buoy that keeps Baan afloat," said Zrimsek.

Baan acknowledges that some customers may switch away.

"If the customers are in a vertical with extremely specialized requirements and those requirements continue to grow and they are not satisfied by our standard offering, you might see some of them find a niche player who is," specialized in their area, said Wangler.

Van der Tang, however, believes that customers outside the focus verticals use Baan for a good reason. For example, Koninklijke KPN NV, the largest phone company in The Netherlands, uses Baan software to manage its logistics and thus fits in the Baan family, said Van der Tang.

The task to upgrade to Gemini also won't incite customers to drop Baan, the company believes.

"We try to really design upgradeability into this product, but it is never trivial. Customers may have done some customizations and will have to reassess if those are needed in Gemini," said Van der Tang.

Customers worry about support for older versions of Baan's software.

"With the majority of Australian customers on a version of Baan which is no longer being developed, there is concern about the future of support for these products in the long term," said a head of IT for an Australian company who uses Baan and asked to stay anonymous.

Those worries will be taken care of, assures Baan's Wangler.

"We are committed to support Baan IV for a long time; we won't try to motivate someone to upgrade with obsolescence. The motivation really is rooted much more in the business needs the customers have," he said.

Gemini will have features and support business processes that are not supported in iBaan IV or iBaan V, Wangler said. The first driver to migrate will be the need for the capability. The second will be reduced cost of ownership based on "zero-client" technology, which lets end users access software from browsers, Wangler said.

Nevertheless, getting customers to upgrade will be a difficult task, said Heath Tipton, chairman of the U.K. and Ireland Baan users group.

"Baan is now addressing one of the most difficult challenges facing many software suppliers; harmonizing its installed user base across a controllable number of active software versions," said Tipton. "This task is more difficult in the ERP market than in just about any other, since once implemented the business and Baan software become inextricably linked. This makes any upgrade a complex and costly process that will only be addressed when the benefits clearly exceed the combined costs and risks."

Upgrade issues aside, users and analysts agree that Baan appears to have made a good start in working out its problems, but that the company still faces an uphill battle when it comes to cleaning its record.

For example, while Gartner's Zrimsek said Baan's market strategy is sound, he agreed that public perception is still a problem. "Baan's challenge continues to be that of execution and the clout of viability that still hangs over them, though it shouldn't," he said. In execution, Baan trails all of its rivals, mainly due to the viability clout and service and support levels, according to a Gartner study released earlier this year, said Zrimsek.

Other analysts agree.

"Baan has matured and knows what it should focus on, they seem to have their feet back on the ground. However, the Baan name, unfortunately, is very tainted. They still have a long way to go to regain people's confidence. It will probably take another seven or eight years" said John Bermudez, senior vice president of enterprise management strategies at AMR Research Inc. in Boston.

The anonymous Australian head of IT who uses Baan agreed that the company name is still marred.

"Quite often when I tell people the ERP system I work with is Baan, they have never heard of it. The other reaction is 'Are they still around, I thought they went under.' Against public perceptions like these, Baan has a long way to go to gain its market position as a tier 1 ERP platform," he said.

In its defense, Baan is adding new customers. In the year to mid-November, Baan said it won about 150 new accounts. Since the takeover by Invensys, the company won about 400 new clients for a total of about 6,000 accounts worldwide. Baan's biggest customer is airplane maker Boeing Co., encompassing about 50,000 users, Wangler said.

Some analysts still aren't impressed.

"Too few to keep a software company of this size running," said Charles Homs, a senior analyst at Forrester Research BV in Amsterdam.

The issue of whether Baan is viable under its current corporate structure will likely plague the company for some time to come. Homs, for one, does not see a bright future for Baan, at least not under the wings of Invensys, which is a maker of production machinery.

"Baan's products are good, but the best products don't always win. Baan needs to get out of Invensys because it will break them. Invensys is not a company that has the insight in the software industry to lead a company like Baan," said Homs, who feels major software players such as Microsoft Corp., Oracle Corp., or SAP AG could scoop up Baan and benefit from the company's expertise.

Homs' statements are a repeat of what he wrote in an August research note that sent jitters through Baan. Since then, Invensys Chief Executive Officer Rick Haythornthwaite has stressed that Baan will remain under the Invensys umbrella.

Wangler repeated that at the strategy meeting with the press: "Baan is not for sale," he said.

Judging from the attitude of users and analysts, however, questions about Baan's future will not go away, at least until customers make their decision on its next-generation product line.

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