Deal flow was sluggish for most of 2001. However, in December, there was a notable uptick in activity that continued through the end of March.
In addition to the increase in absolute inquiries, we witnessed significant improvement in the following:
$1m-plus deals - We don't expect a return to the elephant shooting days of 1999, but big deals are making a comeback. As the economy shows signs of recovery, end users are starting to realise that large projects also carry large Returns on Investment (ROIs). We expect that larger deals will continue to trend up as the perceived odds of success increase.
Expected evaluation cycle time - This metric hit a seven-month low. This is an indicator that sense of urgency is increasing, pent-up demand is building, and end users have pain points that they would like to eliminate quickly. Our data suggests that deal closures should begin to surge in early Q3.
Evaluation completions - End users are moving beyond tyre kicking. Negotiations are becoming more prevalent. The timing of this uptick is significant, considering our expectations of a four- to six-week negotiation cycle. In other words, we can expect a heavier-than-typical rush to close deals at the end of Q2.
From an industry perspective, end-user demand for Enterprise Resource Planning (ERP) is rebounding faster than any other application category. Our contacts in the systems integration industry concur.
Given the recent pre-announcements from Oracle and PeopleSoft, this surge couldn't have come too soon. Q2 could prove to be challenging for the ERP vendors, but our visibility foretells good things for Q3 and beyond.
Supply chain software is also enjoying renewed interest from end users. The surprise here is that Manugistics figures more prominently in our evaluations than i2. Of course, given their respective results this quarter, perhaps that isn't such a shock after all.
All said, we believe that Manugistics will continue to outperform. We also believe that SAP will have a good year in supply chain, along with smaller supply chain vendors with compelling value propositions, such as SynQuest.
On a relative basis, customer relationship management (CRM) is not showing the same degree of strength. This may be an indication that end users are more focused on operational efficiency than customer-facing projects at this point in time. That said, it's only fair for us to mention that our selection projects are concentrated in the manufacturing and retail verticals. CRM is more predominant in non-manufacturing verticals, such as finance and telecoms.
From a vendor perspective, most of the major vendors have been receiving their fair share of increased interest. In particular, this quarter we saw the biggest spikes in interest for Manugistics, JD Edwards, and Retek, respectively. Interest in PeopleSoft and SAP was also up, but their upticks lagged that of the average vendor. Oracle was the only major vendor for which we saw a decline in interest in Q1. Among smaller vendors, IMI and SynQuest appear to be experiencing a notable increase in interest - a positive sign that smaller vendors can survive the downturn if they offer unique and compelling products.
From a vertical perspective, Automotive and Pharma continue to lag. On the opposite end of the spectrum, Retail and CPG are showing particular strength. In the coming months, this should benefit vendors with heavy concentrations in one or both of these verticals. We'd highlight JDA Software, Manugistics, Manhattan, and Retek. BroadVision, EXE, KANA, and Vignette stand to benefit as well.
Looking at negotiation cycles, users are still exercising a fair degree of caution. Shelfware is still a concern, prompting users to buy only what is needed at a given time. That said, middle managers do appear ready and willing to take a seat at the bargaining table. The critical watch factor will be whether they can put together the business case to get projects approved by senior management.
After witnessing three straight months of surging evaluation activity, it's clear to us that end users are starting to see some light at the end of the economic tunnel. As such, they are beginning to explore ways that enterprise software can be exploited to assist in the recovery. Barring a double-dip recession, sales should closely follow. Based on our street-level visibility into end-user demand, evaluation cycles, and negotiation cycles, we believe that a sustainable pickup in demand should commence in late June or early July.