In regard to his Model-T automobiles, Henry Ford once boasted that "the customer can have any color he wants, so long as it's black." Ford could get away with this condescending claim, as long as he faced little or no competition. The same is true in any industry. Competition forces companies to be more attentive to customer concerns. Price becomes a bigger issue when customers have more than one vendor choice. Also, a vendor's service and experience become factors in customer decisions.
Unlike Henry Ford, vendors of warehouse management system (WMS) software can hardly afford to dictate decisions to customers. Competition in the WMS space is fierce. "There are a lot of players in WMS, and the result is a fragmented market," says Steve Banker, senior supply chain analyst, ARC Advisory Group. "The top five WMS vendors own about 33% of the market (based on worldwide software and service sales in 1998). The remaining market share is divided among nearly 100 other vendors."
Almost all WMS vendors are now offering some type of packaged solution. This is in sharp contrast to the customized WMSs that were installed less than 10 years ago. "Today, these applications have a set of base code that can be implemented on several different platforms for companies of varying size. A good 70% to 80% of the functionality that a warehouse needs can be configured off the implementation disk. It's much more of a true software sale than it has ever been in the past," states Rich Sherman, senior vice president, visioneering at EXE Technologies. "A vendor's size and ability to serve and support customers over time are more important than ever. The WMS industry is in transition, and this is going to lead to significant consolidation among vendors."
Ultimately, Sherman predicts the WMS market will be whittled down to 10 main players within five years. His company is currently the biggest player in a crowded WMS market. EXE Technologies reported $93 million in revenue in 1998 and has more than 700 employees worldwide. The company was founded in 1997 through a merger of Dallas Systems Corporation and Neptune Systems. EXE Technologies is headquartered in Dallas.
What Tier Of Vendor Are You Working With?
WMS vendors are commonly divided into three tiers. Simply put, tier one vendors are the largest in terms of revenue and employees. Tier two companies are smaller than their tier one competitors. Finally, tier three players are typically significantly smaller companies with only a regional reach.
Tier one vendors will often have customers with revenue of more than $1 billion. Tier two players are generally securing customers with revenue of less than $1 billion but more than $50 million. This does not mean that tier one and tier two vendors don't occasionally cross paths in the marketplace. Obviously, product functionality will separate some tier one and tier two vendors. However, customers must also examine support services that include implementation expertise and classroom training.
It is important to recognize that the distinction between tier one and tier two vendors is somewhat arbitrary. For example, consider the top five WMS vendors (in terms of revenue) as tier one players. What are the differences between the fifth- and sixth-ranked vendors? "There are differences between tier one and tier two companies. But, on the boundary of those tiers, the differences become somewhat blurred," says Ritch Durheim, president of McHugh Software International. Founded in 1975, McHugh is based in Waukesha, WI, and has 485 employees.
Owen Shea, president of Uniteq Application Systems, believes that an annual revenue of $20 million is the line that separates tier one vendors from tier two. "Once you get above $20 million in revenue, you are investing a minimum of $2 million to $3 million back into your product. A $3 million company might only reinvest $200,000. This is the real difference," says Shea. His company is headquartered in Charlotte, NC, and reported $18 million in revenue in 1998. Uniteq was founded in 1990 and has 140 employees. To bolster his point, Shea adds, "Most of our customers are used to working with mid-tier companies in the software space. It's no surprise to a billion-dollar company that it might be dealing with a $20 million software supplier."
Balancing License Fees And Services
Looking at a vendor's financial status is important because customers certainly want to choose a company that is turning a profit and managing its business effectively. However, customers should look closer. "One of the hidden jewels to look for is the split between services and license fees," says John Pulling, vice president and COO at Provia Software. At Provia, Pulling says there is a 1-1 ratio between the license fee and professional services for implementation. "Some companies will quote a 1-1 ratio, but it becomes a 2-1 or 3-1 ratio by the time the project is completed. The license fee didn't go up. It was the services."
Ken Lewis, president and CEO at Provia, says it's common for customers to compare license fees among potential vendors. However, choosing a product based solely on the license fee is a mistake. "One vendor may have a $300,000 license fee while another vendor has a $400,000 license fee. The vendor with the $400,000 license fee probably has a more configurable product. This means the customer will probably spend less money in the long run," explains Lewis. "One of our competitors had a project team that was measured by the number of services it generated. The team was actually compensated based on increasing services. Talk about a motivation to raise the price." Provia Software, formerly Haushahn, was founded in 1988 and employs 200 people. The company is headquartered in Grand Rapids, MI, and reported $18.4 million in revenue in 1998.
EXE Technologies' Rich Sherman agrees with the advice offered by the executives at Provia. "Vendors and customers should know that the overall price of WMS software itself is coming down. The highest percentage of the total cost is coming from licenses and services," says Sherman. "Ten years ago, 10% of the cost of an install was in the license fees and 90% was in the services. We are seeing that move to a 50-50 split. In the next year or two, licenses may be 60% of the total cost, and services may only be 40%."
Matching The Vendor With The Right WMS
There is usually a long list of tier one and tier two vendors that claim to have the right solution for potential customers. Once that list is reduced to the top few candidates, there are some keys to ensure that customers make the right vendor choice and receive the best WMS for their money. While it seems obvious, customers must thoroughly investigate potential solutions. "Large numbers of buyers don't perform their due diligence. You really need to peel back the layers of the onion – in terms of vendor and product capabilities," states McHugh's Ritch Durheim. "Customers need to go beyond an office demo. Get on a plane and travel to a customer site. Customers should see how a vendor's solution addresses the business needs of a company similar to their own."
Additionally, customers should have a clear understanding of their current business processes and how those will change. According to Uniteq's Owen Shea, many customers do not establish these metrics before selecting a vendor. Also, customers do not always give full credence to the advice offered by vendors. Implementing a WMS is usually a one-time event for customers. However, WMS vendors "do this for a living," offers Shea. He adds, "We bring best practices from around the industry. We are selling business processes that just happen to be packaged as software. If we were consultants, we would write books about it."
Customers can also have vendors conduct highly scripted demos of their WMS solutions. Once customers determine the business processes they would like modeled, the vendor can demonstrate the product's ability to match that model. This ensures that a vendor's product can do what the vendor claims it can do.
Of course, the ultimate goal of customers is to automate their warehouses and begin saving money. "There is a real, strong payback with getting the system in more quickly. You immediately start to make money, and your return on investment comes that much quicker," says Ken Lewis of Provia. "These systems are delivering more value than they did three years ago. The quicker you install the system, the quicker you will get a return on your cash outlay."