State of the System i: How 2007 Went for Tool Vendors, and How 2008 Is Looking

December 3, 2007 Timothy Prickett Morgan

Back in October, I did two stories that gauged the pulse of the System i business among resellers of new equipment and then dealers of second-hand servers. In this third installment of the State of the System i series, I want to look at how one of the bedrocks of the IBM midrange–application development tool providers–are faring in 2007 and how they expect to do in the coming year. (This story, by necessity, offers the viewpoints of several of the dozens of dominant application development tool providers, which are but a subset of the hundreds of companies that provide some kind of application development tools that interact with the i5/OS and OS/400 platform.)

According to the companies I have talked to, business is brisk, despite whatever issues IBM is having with peddling new machines to the installed base. This is, of course, very good news. And it is to be expected, considering there are more than 200,000 OS/400 and iSeries shops out there, many of whom create, maintain, and now modernize their own applications. If a tool vendor gets even a small slice of this pie, it is a healthy chunk of business. And IBM, for its part, is content for there to be a vibrant mix of i5/OS and hybrid operating system development tools for the System i platform–rather than hog the whole business for itself with its WebSphere development tools and middleware and existing RPG tools–because these application development tool vendors, to varying degrees, help keep OS/400 and i5/OS servers doing important jobs out there in the business world. This, in turn, helps drive IBM’s own System i hardware, software, and services revenue stream, which is larger than its quarterly reported hardware sales by far, and considerably more profitable than Big Blue will ever admit publicly. This is one reason why so much private equity money has come into the i5/OS and OS/400 market in the past three years.

Still, with IBM’s System i sales down in the double digits for seven of the past eight quarters, with the stock market bobbing up and down like an oil well in East Texas, with the subprime mortgage crisis looming large over the Western economies, and with the likelihood that economic growth in many Western countries predicted to slow in 2008, it is understandable that everyone in the i5/OS and OS/400 ecosystem wants to know how everyone else is doing now and what they expect for 2008.

The Sitters and the Doers

BCD has been in business since 1976–yes, that is three years before the System/38 was in full production–and Eric Figura, director of sales and marketing at the application development tool company, has been there since 1979. He has seen a lot of economic uncertainty in all of those years, and he is unfazed by the prospects for more uncertainty. And he explains why.

“While some companies are going to have budget issues in 2008, BCD has always been in the software-driven productivity business,” says Figura. “If companies have to cut their staff, they really need their remaining people to be more productive. If they keep all of their people and business is good for them, they still need to make them more productive and they still need to make new applications to grow and support their businesses. You know what? People always find the money to improve the productivity in their IT departments. And right now, I do not see a slowdown at all in application modernization.”

Figura says that capturing that opportunity is not as simple as taking orders, of course. It requires a constantly evolving product line that makes the i5/OS and OS/400 platform relevant as new programming paradigms come to market. BCD has evolved alongside of RPG, adopted its tools for Java, provided a portal environment alongside more traditional reporting tools, and most recently, with WebSmart PHP, extended its toolset and integrated development environment to kick out PHP code as well. Keeping a development tool business growing requires integration of products and top-notch support, too.

“There is a group of companies out there that rest on their laurels, collecting maintenance, not really investing in the System i market,” says Figura with a laugh. “Then there is another set of companies that are very active, who put a lot of effort into research and development. We keep companies on the platform, and that has always been our focus.”

BCD’s latest product, WebSmart PHP, has only been shipping since September, but it is now selling at multiple companies per week. And rather than stopping here, BCD has another product in the works for early 2008, which it will use to broaden its line. This breadth is what helps drive sales. Figura says that the software side of the BCD business has been growing in the 20 percent range for the past couple of years, and that the company’s services and consulting business grew in excess of 50 percent in 2007. “Growth has been very strong,” he says. “We have focused on the largest of the large and the smallest of the small, and this has helped us close deals at companies that have 30 or 40 developers as well as those who have just one. We are expecting the same growth in the coming year.”

David Russo, the project manager in charge of services and development of custom applications at Profound Logic Software, says that the services business is taking off at his company and that new products for legacy application modernization–in this case, a product called Genie–are taking off.

“We have seen a lot of demand for modernizing legacy applications, and this has been a good year for services,” says Russo, explaining that companies are buying traditional training and consulting as well as custom application development and modernization services, too. “We have also been riding the AJAX and Web 2.0 wave with our tools.”

Like BCD, Profound Logic, which was founded in 1999 and has been growing fast, is revving up new tools to expand its arsenal of products. And Profound Logic is also very optimistic about its prospects in the coming year. “We feel like the System i market is pretty strong. If anything, we are at a stage in our growth where there are more opportunities than we can grab and tie down, and a slowdown is not on our radar right now. There’s a lot of hustle and bustle around here.”

Over at LANSA, Steve Gapp is the new president of the company after a long stint at software change management vendor SoftLanding Systems and the founder of British midrange company Oasis/400 Software, which was established in 1988 and acquired by SoftLanding in 2002. Gapp has been involved in the midrange market since the days of the System/32, and has seen his share of ups and downs on the global economy and the midrange platform, as well as challenges as midrange customers undergo technological phase changes.

Gapp says that people think of LANSA as a tool vendor, but the company is really more than that; he adds that the sales environment in the System i market is evolving, too, as companies demand greater return on investment in a shorter period of time.

“Nobody is doing legacy application modernization just to make a pretty screen for Windows,” says Gapp. “You may call LANSA a tool vendor, but the process by which we work with customers is very business oriented.” The point is, when companies modernize applications, they also change them, to make them a better fit for business today than when an application was coded five, 10, or even 15 years ago. “We are making our numbers,” says Gapp. “But the challenge for us is that the sales cycle is longer and people are looking for ROI and improving their business processes at the same time.”

LANSA’s sales have not been affected by the issues affecting the larger economies at the macro level this year. “Our business is growing in 2007,” explains Gapp, and he is not at liberty to say by how much–as is usually the case at privately held companies. “And 2008 will have growth for us. I don’t know how much yet, since our year closes in March, but I will be budgeting a bigger number and our product line, particularly with RAMP, has evolved to drive that growth.” RAMP, short for Rapid Application Modernization Process, has been on the market since March 2006 and is as much a process for modernizing legacy i5/OS and OS/400 applications as it is a toolset to accomplish the modernization.

ProData Computer Services has been in the IBM midrange since it was created in 1981 to peddle database tools to help customers convert from System/3 minis to the new-fangled System/38 of the time. The company has, like other tool vendors, expanded its product portfolio over the years,

“We are a healthy flat this year,” says Shelli Peck, vice president of business development at ProData. “We continue to successfully drive our secondary products and new plug-ins back into our customer base for new revenue, which is important since there has been a serious slow down new System i customers coming into the base.” Of course, that base is so large that there is still, ironically, a lot of green field opportunity out there. Which is, once again, why so many companies in the System i space are being looked at by private equity firms.

“We look forward to a solid 2008 with our newest data integration tool, RDB Connect, coming on strong with our customers,” says Peck. “We will also be releasing DBU 8.0 at the same time i5/OS V6R1 is released.”

Exactly when i5/OS V6R1 will come out is still a mystery, but the latest word on the street is that it will be available in March, with perhaps a January or February announcement.

New Blood, New Tools, Same Market

Not everyone in the tool market is one of the established players who have been selling AS/400, iSeries, and System i development tools for one or two decades–or longer, if you add in the companies that started out with System/3X tools. A relative newcomer to the System i tool space is Krengel Technology, which launched its RPG XML Suite of native RPG XML tools two years ago.

“We have a niche market, with one core product, and we have not felt that any external economic factors have affected us one way or another,” explains Jeff Skistad, sales and marketing manager at the company. “In terms of dollars and cents, we will easily triple or quadruple our sales in 2008, since XML is the de factor standard for Web services and our tools do not require Java or WebSphere. For us, 2007 was really a foundation year, and 2008 will be a year of growth.”

Skistad adds that Krengel Technology has a number of other products on the whiteboards that it wants to deliver to the market, but it has to balance the available RPG and XML programming resources it has for supporting and enhancing its existing product. With all that extra revenue projected in 2008, which will be further bolstered by maintenance revenues coming online from existing customers, it is possible that the company could move a new product into 2008, but it is too early to tell right now.

“We think 2008 should be a much better year than 2007,” says Skistad. “I hear all kinds of gloom and doom out there in the System i market, but I guess it all depends on your product and your position.”

When a Development Tool Is Not Enough

Of course, the application development tool market is not just providing application development tools, legacy application modernization extensions, integrated development environments, database utilities, and other gizmos and gadgets that go into creating modern end user software. Increasingly, companies have to deploy software change management and application lifecycle management tools to keep track of their modular–and often cross-platform and mixed tool–application components. And this is also presenting opportunities for companies who sell SCM and ALM tools in the System i space.

Paris, France-based Arcad Software, which was founded 15 years ago based on winning a software deal with the European Space Agency, has been growing fast in recent years, and is using that growth to fuel its expansion from the European i5/OS and OS/400 server market into the United States. While there are more AS/400, iSeries, and System i servers in Europe than in the States, the size of American companies tends to be larger (especially for those that can serve all 50 states), and that means bigger system sizes, more programmers, and a higher likelihood of complex applications that require ALM software. The System i space tends to like three strong competitors–if not more–and with SoftLanding downsizing in the wake of its acquisition by Unicom Systems last year, Arcad is pushing harder in the North American market where Aldon and MKS are the two other dominant players.

Arcad grew its business by 26 percent in 2006, hitting $4.5 million in sales at then-current exchange rates with the franc. Phillipe Magne, Arcad’s chairman and chief executive, says that the company is targeting about 25 percent revenue growth in 2007–about the same as last year–and that its U.S. business will grow by around 100 percent. “Within the next two years, Arcad will have most of our business coming from North America,” says Magne. The sheer number of large i5/OS and OS/400 shops in the United States is what allows Magne to make such a prediction. In Arcad’s home market of France, Magne says that its largest customer has 100 developers and the average site has around 7 developers where its Skipper and related ALM tools are sold; but in the U.S., Arcad’s largest customer to date has 200 developers and the average number of developers is more like 15. The bigger the customer, the more complex the workloads and the more necessary ALM tools become. Magne reckons that about 60 percent of the opportunity in the ALM space is in North America, in fact.

While competition between vendors in any market segment or sub-segment gets the headlines, this is not where Arcad is getting its growth. “A certain number of accounts change vendors,” admits Magne. “But the largest part of our business comes from new customers who do not have SCM or ALM tools. Sometimes they might have their own homegrown tools and these have become obsolete and cannot keep up with the technology changes.

No matter what size shop any software tool vendor is pursuing, the key lesson for survival and then growth seems to be to have tools that are appropriate for many different kinds of customers. “The gap between large customers and small customers is getting larger,” says Magne. “At the high end, this looks more like the mainframe market, with a relatively small number of customers having big demands. Large customers continue to invest in the System i platform and are not worried about its future. Small accounts have application modernization issues, too, but the problem is that they do not necessarily have the resources to deal with them. There are a lot of shops with one or two developers, and they are trying to evolve their applications.” To that end, Arcad can put together a toolset for $5,000 that is suitable for them, compared to a $50,000 for a much larger toolset that has more features and bells and whistles that is appropriate for a larger customer.

Like other software companies, Aldon has been for several years expanding beyond its i5/OS and OS/400 roots and taking its SCM, ALM, compliance, and service desk software out into the distributed systems world where Unix, Windows, and Linux are the norm. Aldon was acquired by Marlin Equity Partners back in May, and has made no secret that it sold itself to the private equity firm as a means of getting the resources to build out its product line and to make acquisitions if that is a better or quicker option.

Thus far in 2007, Aldon has been able to grow just fine without doing any deals. “We’re doing well,” says Matt Scholl, president and chief operating officer at the company. “We were targeting between 15 percent and 20 percent growth this year, and everything has more or less gone as expected. Our pipeline of deals in both the United States and in our international business is healthy, but I will say that the United States has underperformed a little as the international side has done better than expected.”

Like other tool vendors in the System i space–and indeed, in the IT market at large–the sales cycle is longer for Aldon these days than it was years ago, and the kinds of problems it is solving with its products are inherently more complex and so are the number of problems that its tools try to address. “This is not just about software change management for RPG shops any more,” says Scholl, in no way denigrating such shops. “Even the shops that are primarily developing RPG applications are using other programming languages, such as Java, and deploying on other platforms in addition to the System i.”

As for growth in fiscal 2009 (which runs from May 2008 through April 2009 for Aldon), Scholl is expecting that Aldon can match the growth it expects to see in fiscal 2008 (which will end next April)–again, between 15 percent and 20 percent revenue growth. Scholl says that Aldon’s System i-related business is pretty predictable at 15 percent growth, but that it is harder to predict how sales outside the System i will go. “The potential for growth there is much larger, but the market is also a lot more crowded,” says Scholl.

That said, Aldon is very big on the System i market, and Scholl is not seeing any macroeconomic effects in the economies having a big affect on the company’s sales yet. But he is, like all CEOs, watching the situation like a hawk. “The System i market seems alive and kicking to us,” says Scholl, “but I have to admit, when I watch the news and read the papers, I sometimes get concerned. But, then again, we do a lot of business in the financial services sector, and if anything, financial services is a growing part of our business.”

Next week, I will talk to vendors of application and system software and see how 2007 went and what they think about their prospects in 2008.

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