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Gauging Long-Term Viability of Software Vendors – Examining Revenue-per-Employee

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One of the key areas companies attempt to gauge as part of their ERP selection projects is the long-term viability of potential ERP software companies.  On the surface, one might initially assume the vendor’s annual revenue is the key element to consider, but is it really?

In recent years, Oracle bought PeopleSoft, who had previously acquired JD Edwards.  In using Software Magazine’s Software 500 as the data source, PeopleSoft reported corporate revenue of $2.27 billion in 2004 – the last year they reported data as a separate business entity prior to their acquisition by Oracle.  Likewise, JD Edwards reported corporate revenue of $904 million in 2003.  Assuming revenue alone could be used to gauge long-term viability, would anyone have come to the conclusion that these software vendors would be gobbled up?  Some other large entities that have been acquired in recent years with their last reported annual corporate revenue from the Software 500 include Siebel at $1.34 billion, Hyperion at $765 million, SSA Global at $712 million, Geac at $444 million, and Intentia at $425 million.

Rather than merely reviewing revenue, it is our recommendation that potential buyers of ERP systems and consultants with whom they work take a good look at the various vendors’ revenue-per-employee ratios.  For example, let’s examine this in light of the recent announcement that SoftBrands was being acquired by Infor.  SoftBrands reported corporate revenue of $93.4 million with 775 employees in 2008.  This equates to a revenue-per-employee ratio of roughly $120,500.

In reviewing a series of twenty-five software businesses (including ERP, supply chain management, CRM, and financial management software companies) which have been acquired by other ERP software businesses since 2002, seven of these had revenue-per-employee ratios between $100,000-150,000 in their last year of reporting, nine were between $151,000-200,000 (including PeopleSoft and JD Edwards), five were between $201,000-250,000, and three were between $251,000-280,000 (Hyperion, Mapics, and Siebel).

So, what are the revenue-per-employee ratios of some of the familiar ERP software vendors in the market today?  For 2008, Microsoft led the pack at approximately $647,000 in revenue-per-employee, followed by SAP at $344,000, and Oracle at $240,000 respectively; however, these numbers include these organizations’ complete portfolios of products and services rather than ERP software sales and associated services revenue alone.  In reviewing data for the top ten big name Tier 2 ERP vendors included in the study – using 2008 data if they reported or their most recent reporting in 2007 or 2006 otherwise – four of these businesses reported revenue-per-employee ratios between $100,000-$150,000, while the other six were between $151,000-200,000.

Based on the percentage of employees with strong technical talent that software businesses must attract and retain, and considering a typical employees’ salary and benefits, ERP software companies whose revenue-per-employee ratios are at or below $150,000 may start to raise some serious questions about their long-term viability.

Businesses that are selecting new ERP systems are doing so with the knowledge that they are making a long-term commitment to run their businesses on the new software packages and to work with the associated software vendor for roughly 8-12 years, on average.  In doing so, gauging the long-term viability of the software vendor is a key element to this long-term success.  We encourage software selection teams to examine potential vendors’ revenue-per-employee ratios and trends over the past several years before making a final commitment to move forward together.

Note: Software Magazine’s Software 500 has been the source of all revenue and employee data for this article.

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