They are all gathered in Scott's office. It's the end of the year, and on the surface, it's the best year in BGSoft's history. In spite of tightening conditions they not only succeeded in maintaining their rate of growth, they substantially increased their annual profits.
But Scott's frightening predictions are coming true. The ERP industry as a whole is now under the gun. A month ago, one of their main competitors forecasted negative growth for the quarter. Just before Christmas another announced that they were going to lay off six hundred people. The investment community is shocked. Of course the shares of these two ERP companies have plummeted, and are now trading at twenty percent of last month's value.
The investors are looking for an answer to the real question: what is the future of the ERP industry? Is what they see just the separation of the wheat from the chaff, the emergence of the true leaders? Or has the industry reached its growth limits? The answer is extremely important. If the first answer is right, then the companies still leading are the hottest bets around. But if the second alternative is true, then the faster the shares are dumped the better.
"Well, my dear friends," Scott starts the meeting, "our shares are still holding up, but last week was just the prelude. Next week is our real test. We'll have to give a lot of answers to a lot of prudent people. The situation, as you are well aware, is extremely sensitive. So we'd better make sure that we are all radiating exactly the same, clear message. Any hesitation on our part, any discrepancy, and we'll be drawn and quartered."
"Do we have a clear message to radiate?" Lenny asks.
"The problem is not the clarity of the message, but which message we choose to radiate," Scott answers confidently. "There are two alternatives and we have to choose one. This is probably the most important decision we have ever had to make."
All three quietly wait for him to continue.
"We are now at a crossroads," Scott explains. "We always knew that the time would come when we would be unable to continue growing at the phenomenal rate we've maintained for the last five years. The question is, are we going to decide that it's time to slow down, or do we have what it takes to keep going?"
Gail is uncomfortable. "Scott, you talk as if it's our decision, as if it isn't dictated by the objective conditions of our markets."
"Yes," Scott replies. "I'm convinced that it is in our hands. We can decide to continue doing business as we have always done. In that case we'd better admit that we are quickly reaching the saturation of our main and most lucrative market.
"Or we can decide to change the way we do business. It is risky, very risky. But, if we have the vision, the courage, and the determination to institute such a change, then in my opinion, the market is practically unlimited. Then, what we have achieved so far is nothing compared to what is waiting around the corner."
None of them says a word. They still wait for him to continue.
"If we choose the first alternative, then my advice is to tell the story as it is. There is no point in trying to persuade the analysts that we can sustain a forty percent rate of growth for long, when we can't do it, not for more than two or three quarters. Now is the best time to lower expectations."
"Can we do that without hurting our reputation?" Maggie asks.
"Yes," Scott answers. "We'll explain to the analysts the facts of life in our industry, the fact that the only real market is the large companies, and that in this market the ERP industry has reached saturation. If we do a good enough job we won't lose our reputation, and therefore should feel no negative impact on our market share.
"We are a solid company with a large customer base, with no debts to speak of and plenty of cash in the bank. The company's survival is not in question. Yes, our share value will dive, but after a time the market will stabilize. I think that the shares will level off at about a third of where they are now. But we all knew what would happen once we reached maturity."
Scott stops, waiting for the others to comment.
After a long silence, Gail starts to talk slowly, sharing her thoughts with the others. "This is strange. I always thought that it would be nice to slow the pace, to live without the constant pressure of meeting the next quarter's forecast. But now, when for the first time this option becomes real, I feel the opposite."
Almost apologetically she adds, "I don't know about you guys, but I don't think I can enjoy life without constant pressure. After so many years, I think I've become addicted to it."
"I don't have the option of relaxing," Maggie comments. "The relationship between our companies is such that even if BGSoft slows down to zero growth, KPI will still have to expand for the next couple of years. But Gail," Maggie smiles sympathetically, "I understand exactly what you mean. We're too young to slow down."
"Scott," Lenny says, "we heard one very unattractive option. What's the other?"
"The other alternative is to convince the analysts that we are a company with tremendous future potential. In the current state of affairs, I'm afraid that it's not sufficient to promise that we can maintain our traditional growth. To insure that the analysts will not ignore our explanation as just not air we have to up the stakes. If we want to convince them that we will continue to be the dominant player, we have to declare that our target is to grow at a rate of at least sixty percent—and then convince them that it is doable."
"But that's impossible!" Gail exclaims.
"If you believe that it's impossible, then it is impossible," Scott replies flatly. "Then we're back to the first alternative."
"But Scott, be reasonable," Gail pleads. "It will not be easy to make five hundred million a quarter, and you're talking about promising much more than that."
"Yes, Gail. That is exactly what I'm saying. We cannot do it if we continue to do business as we have always done. If we elect to go the growth path we must institute an entirely different strategy and tactics. We have to change."
"To what?" Gail snaps.
Scott answers decisively. "We have to switch from selling information technology to selling value."
Scott's answer is not a surprise to Gail. For the last three months it's been floating in the air. So far she has been unwilling to even consider it. Now she realizes that there is something she hates even more. Stagnation. Still, she doesn't like it, not at all.
"Selling value is a nice phrase," Gail says flatly. "But can you tell me what it really boils down to?"
"We've just started understanding what it's really all about," Scott answers. "At this stage, we only know where to start and where to look for more answers." Then he adds, "I wish we had more time to explore things, but as it stands we have to make our decision now. Still my intuition tells me that concentrating on value will enable us to grow BGSoft to at least tenfold the size it is now."
It is Gail's responsibility to bring in the sales, and for that she needs much more than just a gut feeling. "Where do you suggest we start? And why do you think it will bring in the numbers we need?" she asks.
"In the last quarter we established a solid beachhead," Scott replies. "I hope that it's enough for a good start. Maggie, can you brief us on the latest developments in Pierco? In detail, please."
"Let me first stress," Maggie says, "that the implementation at Pierco was done under ideal conditions. We cannot expect as wonderful a setting in other places. As you know, it was done under the blessing of the CEO, and the divisional VP saw it as the only thing that could save his ass. It was led by the plant managers who personally supervised the education. And it was done under real pressure to achieve results in a very short time; they had to get enough increase in sales before the end of the year."
Lenny remarks jokingly, "Nothing focuses people's attention more than the realization that they are going to be hung the next morning."
"You can say that again," Maggie smiles. "Everybody collaborated, the resistance was minimal. Actually, I didn't see resistance at all. What about you, Lenny? You visited them at least once a week."
"I didn't see any resistance," he confirms. "On the contrary, my impression is that everybody was enthusiastic. I think that they did an excellent job bringing everybody on board."
"Did you start in all the plants at the same time?" Gail asks.
"No," Maggie answers. "We started with the two plants producing a new product line, plants that did not have enough capacity."
"How much time did it take you to install our new MRP module?"
"That was beautiful. They understood exactly what they wanted from our system. And we were not distracted by demands to force the system to do what their old systems used to do. It's hard to believe, but we were generating schedules two weeks after we started, and those schedules were followed from day one. Lenny, I think that you struggled a bit with the Buffer management, but even that was up and running a week later."
Lenny comments. "We needed to do quite a few additions, they had many things that we hadn't taken into account when we wrote the code. But it wasn't a big deal. Actually it was a delight. It's been a long time since I've worked on something that made perfect sense. We didn't have to complicate the system just to accommodate some irrational demands. In every case it was obvious to everybody what should be done. I think that the fact that everything was geared to one thing, achieving real results, gave everybody this rare clarity."
"I agree," Maggie says. "In all the years I've been implementing systems I've never seen such a focused, speedy implementation."
"Why are you surprised?" Gail asks. "Correct me if I'm wrong, but BGSoft was installed there before you started with this effort. So it wasn't a real implementation, it was just polishing what was already there."
"No, Gail," Maggie corrects her. "As you know, we usually start our ERP implementation with the financial modules, and the last thing installed is the MRP. In these plants, in fact in most Pierco plants, we hadn't even started the MRP implementation. And you know how much time it takes to install. In spite of all the promises that the data is accurate, it never is, and it's a long and tedious hassle to clean it up."
"So what was different? How did you manage a full, live implementation in just two weeks?"
Maggie smiles. "I have to agree with Lenny. When everything is focused toward results it is totally different from what we are used to. Having accurate data on the computer is not a target. Results are. The beauty of the Drum-Buffer-Rope is that it focuses your efforts. It tells you what the one percent is that's really important, and what's just niceties."
Realizing that Gail cannot possibly understand, Maggie elaborates. "They told us where the bottlenecks are, and together we cleaned the data up to the point that the system reached the same conclusion. Nothing more. It took less than two days. We left all the rest of the data as is and we went live on the floor. Surprise, surprise, it was good enough. Once Buffer management was up and running, all other meaningful mistakes got highlighted and then we corrected them."
"What are the results?" Scott asks.
Maggie beams. "Better than anyone hoped for. Brian, the VP in charge of the division where we did it all, was wrong about one thing. He underestimated how much the market is eager to buy his new product line. He thought that he needed twenty percent more capacity to satisfy the market demand. Well, in November we produced thirty-five percent more than in September, and we were still barely coping with the market pull. Needless to say, he is very happy. We moved fast enough to enable him to exceed the sales forecast for the year, so now he's a hero."
Gail is still trying to process this information. "Maggie, you are saying that our system provided thirty-five percent more capacity? Just like that?"
Maggie answers cheerfully. "It's even better than that. December daily rates are better than November and we haven't yet seen the full impact. You see, Gail, there's another factor that we didn't think about when we started. And that is LEAN."
"You mean the method that combines TQM and JIT?" Gail is surprised. "I don't know much about it but it was my understanding that LEAN aims at reducing waste, at eliminating non-value-added activities?"
"Well," Maggie answers, "under Buffer management, it's doing much more. All LEAN initiatives are now directed by the information that is generated by Buffer management. So in Brian's plants they don't waste any effort dealing with vague concepts like non-value-added activities. In his plants LEAN is now focused on increasing capacity and increasing the flow. It's amazing how much capability is unearthed every week."
"Does Brian plan to spread Drum-Buffer-Rope and Buffer management to the other five plants in his division?" Scott asks.
"Already done," Lenny answers. "A week before Christmas we provided the features that were needed for the last plant."
"All seven plants are up and running," Maggie assures him. "And listen to this. Next week I'm going with Brian to Stan's division. We have an entire morning with all the plant managers. Also, Craig wants us to do the same for every plant in Pierco—all thirty-two of them. This thing turned out to be much bigger than I originally thought."
"Good for you," Gail says.
"It's also good for us," Lenny comments.
"Of course."
Deducing from Gail's tone of voice that she is probably unaware of the real impact it has on BGSoft, Lenny says, "There's something else that's important for you to know," he stresses. "This implementation in the plants has a major positive side effect on us."
"Besides our reputation, you mean?"
"Yes. Did your account manager have a chance to update you on the concurrent users in these plants?" Lenny asks.
Gail looks at Maggie.
Maggie explains. "Traditionally the plants have not been a good source of concurrent users for you. As you know, in a plant of a thousand people you rarely have more than twenty concurrent users. Well, with Buffer management the picture is very different. Every single foreman and everyone in the service department is now intensively using our system. In Brian's division, and I'm talking about all seven plants, the number of concurrent users is over six hundred. I believe that yesterday George notified your account manager to invoice Pierco in accordance."
"Yahoo!" Gail squeals.
"Yes, I knew you'd be happy to hear about it," Lenny says. "It does change the picture, doesn't it?"
Gail nods. "It certainly does. Maggie, do you think that such a jump will happen in any plant that uses Buffer management, or is it unique to Pierco?"
"I don't think it's unique. Lenny, you understand the system much better than anybody else. What do you think?"
"It's generic," he says flatly.
"Well, my friends," Scott says, "what can we deduce from the Pierco experience? Gail?"
"I still have to digest what I've just heard," she answers. "But if our new addition really has such an impact on the number of concurrent users, it's very good news."
Scott is still looking at her, so Gail elaborates. "As you know, I've always claimed that there is still a very large market within our present group of customers. Many BGSoft clients have a relatively low number of concurrent users.
"In industrial companies the largest department, in terms of people, is production—often production comprises more than half of the total employees. Until now that has always been the department with the least number of users. We are very strong in finance, in sales, and even purchasing, but never in production. Now, if what I'm hearing is true, we can use it to bring in much more income. Considering our large, existing customer base, the potential here is big."
"That's what I thought," Scott confirms.
For the first time Gail sees this vague concept of selling value translated into something meaningful, very meaningful. She is forced to rethink her position.
While she is still trying to assimilate, Scott continues. "Maggie, do you have anything to add?"
"Not at this stage."
"Maggie," Scott tries again, "we are now facing a new situation. The reputations of two of our major competitors have been severely damaged. Their names are smeared in the newspapers and all the business magazines. That can't possibly give their customers a sense of security.
"Now we also know that ERP's strong side is not in the plants, and that the production modules, like the MRP, are usually the last to be implemented." He stops.
Maggie sees clearly where Scott is heading. "And you think that we now have something extraordinary to offer them."
"Don't we? Maggie, you've performed miracles in Brian's plants. How long did it take to reach tangible results? Six weeks? Eight?"
"Less than that. But Scott, that was a unique case. We didn't have to persuade them to change the rules, they did it themselves. We didn't have to do the really difficult part, the education. They did it themselves."
To Scott's surprise, Gail addresses Maggie's concerns.
"Since Lenny reappeared from his Intelogic week, I have done a market survey," Gail says.
She didn't like the fact that Lenny had initiated his survey on Intelogic customers, using her people, without having the decency to even inform her. Knowing that there was no point discussing it with Lenny, as he wouldn't even understand what she was complaining about, she moved to block any future intrusion on her territory. Sensing that Lenny and Scott would soon want to know more about the extent to which TOC is known and spread, she initiated a survey. Now she can share the information with them.
"Maggie, the market, and I'm also talking about plants of large companies, is ready for our new product. And there are many excellent consultants with good reputations who are advocates of TOC. Almost zealots, I should say. I've assembled a long list of them."
Lenny comments, "I'm not surprised. The logic of TOC is addictive. It's so refreshing to finally find something that's comprehensive, practical and still common sense."
Maggie leans forward, nodding in agreement. "After the Pierco implementation I know exactly what you mean. To answer your question Scott, considering what we've just heard, I think you're right. If a significant portion of the market is already using TOC, then there is a tremendous opportunity for us to do more business. We should target the production plants of the clients of our less fortunate competitors. I have no intention of promising results within four weeks. But if they buy the concept and are committing up front to do the education, I will not hesitate to guarantee results within less than three months. That should be enough."
"If you promise to deliver such fabulous results within three months, that's more than enough," Gail tells her. "We have a good chance of quickly penetrating many of their clients. Once in, we can spread out to replace the entire system." She quickly runs the numbers in her mind. "That's an even bigger opportunity than capturing more concurrent users within our own clients." Gail is becoming enthused.
Maggie nods in agreement and Gail continues. "So we have to team up with the TOC consultants and work out a joint presentation. Their job will be to sell the concept, ours to sell the software. Maggie, do you see any problem here?"
"Looks like a win-win to me," Maggie confidently answers.
Scott smiles. He is pleased. However, he knows that what they have discussed so far is not enough for the long run. He wants to make sure that they all see the big picture.
"We've discussed the opportunities open for us now in production," he says, "but in addition to production, there are two large sectors of our clients to whom we have offered, so far, very little. I'm referring to the engineering and Information Technology departments. In many companies these two sections combined are as large as production, if not larger."
Lenny bursts out laughing.
"Isn't it funny?" he says, still laughing loudly. Seeing the others' surprised looks he calms himself and explains, "For years we've been dealing with IT people. They're our main contacts. Still, what help do we offer them with their daily work? Nothing. Don't you think that's funny?"
"What do you mean by helping with their daily work?" Gail is slightly irritated.
Scott interjects in his calm voice, "Both Information Technology and engineering are quite different from the other functions in an organization. They deal with projects. And not just one project at a time. Almost each person is involved with multiple projects. We've found out how to help production, think what will happen if we can help these multi-project sections. If we can help them finish their projects on time, within budget, and without compromising on the content, think how much more we can offer our clients."
"Is it feasible?" Gail is all business.
"I think so," Scott answers. "We used a TOC solution for production, and there's a comparable application for multi-project environments. In the last month I've read everything I could put my hands on. The logic seems impeccable. If it works even half as well as the production solution, it's of tremendous value. As a matter of fact, I want to test it here, in BGSoft. What do you think Lenny?"
"We can sure use help in our programming projects," Lenny doesn't hesitate to announce. "And Scott, I wanted to surprise you, but since you happened on it, we are already testing in our Santa Cruz development center and in our center in India. In each case we're testing on a cluster of several projects."
"When did you write the software?" Scott is surprised.
Lenny smiles. "I didn't. And in Santa Cruz we're using a different software than in India."
"There are already commercially available packages?" Scott concludes more than asks.
"Yes. Very new and provided by very small companies. I've already checked." Lenny is pleased with himself. "We can buy them for a song. And to answer your unspoken question, Scott, so far it looks good; all early indications show that the theory does work."
Scott takes this aspect almost for granted. He moves on. "When do you think we can be ready with a multi-project module fully integrated into our ERP?"
"Third quarter next year shouldn't be a problem."
"Gail," Scott smiles, "what do you think about having such a product? It will open huge, new markets—the construction industry, software vendors—not to mention industries like banking and insurance, with so many projects."
"It opens interesting possibilities." Gail is still hesitant.
Scott doesn't press the issue. "You beat me to it," he congratulates Lenny.
"For a change." Lenny smiles back.
Scott lets the mood settle and then asks, "What are we going to say to the analysts? 'Gloom and doom' or the 'we just started' alternative?"
None of the three says a word, they just nod and share a small smile.
"We need a good presentation for the analysts," Scott reminds them. "And we need it for the second of January. That gives us less than three days, assuming you don't want to work on New Year's."
"We sure don't," Gail agrees. Knowing that she will be the one to prepare the presentation she pushes on. "How do you think we should start the presentation?"
Scott doesn't have any difficulty answering. "I suggest we begin by trying to convince the analysts that the only real market for our industry is the large companies. We show them that conventional ERP is of tremendous value for large companies and not such a great deal for mid-sized companies. I don't think that they understand this. We didn't."
Gail understands quickly. "We'll give statistics about the time, effort and resulting income for a sale to a mid-sized company as compared to a large company. Then we can present data on the current ERP penetration into the large-size market."
"What's the point starting like that? Why don't we begin with what we are planning to do permanently?" Maggie asks.
Scott answers. "We have to start with a good explanation of the problem. That will guarantee that our competitors will not be able to pretend that business is going as usual. If the problem is understood, our competitors will be forced to come up with solid answers on how they are going to continue to expand. I believe that at the moment, we are the only one with answers. If the analysts buy it, they will flag us as the clear leader."
"Besides," Gail contributes, "presenting them with a solid analysis of what's really going on gains their trust."
"Once this stage is reached," Scott continues, "they will probably ask about our plans. Then we'll present our strategy, enlarging within existing clients and expanding to competitors' clients. But if we just explain the strategy without backing it up by facts, they will ignore it as wishful thinking and we are doomed."
Gail picks up the baton. "We'll show them that we're actually prepared to do it. That it's not just empty words. I suggest that before we present our new modules we show what these modules can do. We show them the results actually achieved in Pierco, That will knock their socks off. Maggie, can you check with Craig and get his permission? I would like to use Pierco's name."
"No problem. He owes us so much, I don't think he will object. I suspect he might be willing to personally talk to the analysts."
"That would be superb," Scott remarks. "Gail, can you prepare some numbers? How many more concurrent users do we expect to get in our client base, how many in our competitors' clients? Broken down by country, quarter and so on?"
"No problem," Gail says. "What do you want the final number to be?"
"Gail, whatever we say next week to the analysts, we'll have to deliver. So what's the highest we can commit to?"
Gail immediately responds, "Can I answer after I do some checking? Maggie, I need your help here."
"We can work on it today," Maggie answers. "And if necessary, I'll clear tomorrow as well."
"Thanks. Scott you'll get our answer no later than tomorrow night."
Scott nods. "It's important to show the analysts that we don't put all our eggs in the production basket." He turns to Lenny. "We'll need a great presentation about our multi-project offer. We need to prove that we can take the entire market. I'll prepare the numbers to give a good indication of the size of that market. Lenny can you prepare the presentation?"
"Consider it done."
Five minutes after they all leave, Lenny is back again. "Scott, we forgot to talk about the most important direction. What about the mid-range market?"
"What do you think we should do about it?"
"What do you mean, 'what should we do about it'?" Lermy is excited. "We should charge! We have a product that brings value. What are we waiting for?"
Scott stays calm. "Charge? With what troops?"
"You mean, we can't tell Gail what to do?" Lenny is disgusted.
"That's not the issue. What we have just put on the table will absorb the time of every person she has for the next year."
Lenny doesn't buy it. "We can start a marketing campaign now and hire more people. With the other companies shaking, it will not be expensive to grab their best people."
"Lenny, if it was just a problem of manpower then you would be right. But it's more a problem of management attention. It is dangerous to charge in too many new directions at once. Besides, don't you see that we're not yet ready to approach the mid-market?"
Lenny sits down. After a long silence, he asks, "Why aren't we ready?"
"Lenny, so far we've succeeded in providing value only for production. What about the other functions? Don't you see that going with what we have now into the mid-market puts us on the same level as the APS companies? This might hurt our image—our image as an ERP company, as a provider of enterprise-wide systems. We invested so much effort to build this image, should we ruin it now?"
Lenny thinks about it. "I see your point. Right now we have one module that brings value. Once we're ready with the multi-project, we'll have two. I agree that to preserve our image as a quality provider of enterprise-wide systems we need much more than that. Scott, when do you think we'll be ready? Will we ever be?"
"It will take time, but I'm sure we will be able to come up with a new, and great value-driven enterprise system."
Lenny is skeptical. "What makes you so confident? To come up with an enterprise system that brings value we need much more than just the ability to write computer code. We need to know what to program."
"Of course. So what?" Scott asks, forcing Lenny to verbalize his concerns.
"Judging from our experience in production, the key to writing a good system is finding the right rules to follow. We know that it isn't easy to identify the wrong rules. And it's even more difficult to find the new right ones. How are we going to do it?"
"We will, sooner than you think," Scott assures him.
Lenny narrows his eyes. "You know something I don't?"
"No," Scott answers. And then, smiling, he adds, "If you don't include using what we have between our ears."
"Another Sherlock analysis?"
Scott continues to smile. "Not another one, the same analysis. Lenny, you have all the facts. You can figure it out."
Seeing that Lenny is not in the mood, Scott gives in. "The wrong rules will expose themselves," Scott says confidently. Then he explains. "If we've learned anything from our ERP system it's that all functions in an organization are strongly connected to each other. Look at how much information we have to exchange between them.
"We have now incorporated a major change in one function. What does Maggie call it? A cultural revolution. Since the functions are strongly dependent, and since the other functions didn't change the way they're doing business, it must cause an imbalance. It must be that soon, the changes introduced in one section will clash with the wrong rules that still exist in the other sections. If we're paying attention, we can spot the wrong rules. We just need to keep our eyes open."
Lenny is far from relaxed, but at this stage he doesn't have anything to add.
"I hope you're right," he sighs.