Next time you wheel a trolley through a Makro store, stop for a moment and consider the technology systems that keep the shelves packed with goods. For behind the scenes is a nationally networked IT system that oversees an increasingly complex electronic supply chain.

As complex as it is, this is just one small manifestation of a new wave that looks set to transform the IT industry — and with it the way business functions — over the next decade.

Some of SA’s largest organisations — in financial services, consumer goods, retail, telecommunications and logistics — are at the forefront of this new model of computing. “We see it as a major wave,” says Standard Bank’s director of architecture & technology engineering, Hemmanth Singh. The SA Revenue Service (Sars), too, supports the trend.

It will force businesses worldwide to revisit the way they manage information and communicate, not only internally, but also with each other.

Back in the late 1990s, Massmart, Makro’s holding company, was one of the first retail groups in SA to realise the potential of electronic business. It saw how it could speed up the supply chain and make it more efficient.

Now Massmart, which also owns other retail brands such as Shield, Game, Servistar and Federated Timbers, is building on its early successes and wants to improve stock management.

“We believe the administrative side of replenishing stock in stores and keeping the supply chain tight and cheap is best done by machines,” says Massmart deputy CEO Grant Pattison. “That frees up our staff to design new products, improve quality and innovation and understand our customers better.”

Much of Massmart’s cutting-edge work has been done at Makro, which has integrated all its internal systems using business software developed by SAP of Germany. Makro knows what stock it has in its stores at any given time and when new stock is received the entire system is automatically updated.

Now the business is moving to the next level: extending its systems beyond the boundaries of its own network. It is gradually integrating its back-office systems with those of its most important suppliers so that all ordering and administration will be done electronically. “Our systems are linked directly to those of our suppliers,” Pattison says. “We have seen a reduction in credit notes, a reduction in stockholding . and a happier relationship with our suppliers.”

Massmart says it will apply the same technology to other retail chains it owns, including the home improvement stores Servistar, Federated Timbers, De La Rey and Builders Warehouse.

Companies’ need to integrate internal systems that use different, often conflicting technologies from different suppliers has for years given chief information officers (CIOs) restless nights.

SA’s banks are a case in point. They put in place various IT systems based on their product lines. Unfortunately, many of those systems came from different software vendors and were not compatible. The credit card division, for instance, often would have no way of knowing that a card user was also a mortgagee who had a current account in overdraft. The information silos became an impediment to new product innovation in the financial services sector.

As a result, banks and many other organisations installed patchworks of “middleware” — software that enables different business applications to communicate with each other across a network. But middleware is complex and expensive to maintain.

Unfortunately for CIOs, the degree of complexity is exploding. Organisations are discovering that they have to interact and trade electronically, but that their systems make it difficult, if not impossible, to do it. When companies trade online, they need to share the information in their back-office systems seamlessly with their partners, customers and employees.

It’s been five years since the dot-com bubble burst. At the time, many tech phobic CEOs breathed a sigh of relief. E business had been an aberration, they assumed; it was business as usual.

Except it wasn’t. And it isn’t. Yes, the hype generated by concepts such as Internet commerce went away, and tech stocks came crashing back to earth. But, as companies are discovering, e-business didn’t die. And the smart ones are investing in new systems to make their business processes more efficient and make it easier and cheaper to trade and communicate with their suppliers, partners and customers.

It is these companies that will have first-mover advantage as business-to business trading becomes electronic, as computers, not people, negotiate deals.

Before this can happen, though, organisations have to find a way of cheaply and easily passing business information between their own systems and external systems.

The software industry is working hard to develop a common solution — a new enterprise software platform — that will make it easier to solve the integration challenge. In fact, the software vendor that can get this right could become the next Microsoft. It could even be Microsoft itself.

The computer industry has been through two broad phases in the past 50 years. The first, which lasted until the 1980s, was mainframe computing; it was an era thoroughly dominated by IBM. The second phase was client-server computing, the genesis of which can be traced back to 1981 and the invention of the personal computer, which shifted computing horsepower out of the back office and on to people’s desks. It transformed the IT industry and led to the rise of Microsoft.

Now, the IT industry is entering a third era, built on what software vendors are calling the service-orientated architecture model, using “Web services”. Founded on open standards rather than proprietary technology, Web services are Web-based software applications that interact with other Web-based applications for the purpose of exchanging data between systems. Web services, or software services as they are sometimes known, promise to make integration easier and facilitate the move to e-business.

The large software vendors say the task they have is to build a new type of software platform, based on the principles of middleware. If the proponents are right, this will change the software business and help entire industries become more agile and productive.

Sars saw the potential early on. Chief technologist André van der Post says a service-based architecture has allowed the taxman to share information easily throughout the organisation. Sars has built what it calls an “integration hub” that provides software services to sometimes incompatible business applications across the organisation. Registration information about taxpayers, for instance, is used by most divisions within Sars. Data can be passed from the central hub, as a software service, through to, say, its business intelligence systems, which look for information that could, for example, identify noncompliance. “We are centralising taxpayer information and presenting that information as a service to whoever needs it in the business,” says Van der Post.

Cutting-edge technologies such as these have assisted Sars in producing revenue overruns year after year. In the past, these have translated into corporate and individual tax cuts.

As an early adopter of the services based model — it began looking at the technology more than two years ago — Sars had to design much the architecture itself as the large software vendors were still struggling to understand how to apply the concept in practice.

For the big vendors, though, it's still all to play for. Unlike Sars, most companies will lean heavily on their software suppliers to help them.

“It is imperative for large, information-intensive organisations to build alliances with the large, enterprise strength software houses,” says Standard Bank’s Singh.

Dramatic consolidation is under way in the software industry. So far it’s shaping up to be a four-way fight between the giants: IBM, Microsoft, Oracle and SAP.

SAP CEO Henning Kagermann says his company wants to extend its market-leading position in business software into the new era. To do this, the company is building a new platform, based on a product called NetWeaver, called the Business Process Platform.

Many of the world’s largest organisations, including some of SA’s biggest industrial companies and financial services groups, use SAP software to help them automate their business processes. Companies that did it right — implementing this type of software is not easy as it requires substantial organisational change — have enjoyed gains in productivity and efficiency. There have also been some notable failures.

“The question now,” says Kagermann, “is whether the software is flexible enough to allow these companies to reconfigure their business processes at the request of their clients.”

Fortunately, companies can approach the new model on a piecemeal basis, Kagermann says. “They can start by looking for the quick wins. Many start with improving the transparency [of business processes]. Others start by saying they need to collaborate better with their partners. Others, such as the banks, want to create multichannel management environments. This can be a journey of several years.”

Because of its strong market position in business applications — its nearest rival, Oracle, is a distant second to it — many analysts believe SAP is the best positioned of the four leading contenders to win the race to own the computing platform of the future. SAP’s rivals, however, are putting up a spirited fight.

Oracle, for instance, has been on an aggressive acquisition spree, buying technology and market share. CEO Larry Ellison is on a crusade to beat his German rival into second place in business applications. In the past 18 months, Oracle has splurged billions of dollars snapping up smaller rivals, including business applications company PeopleSoft and customer management software specialist Siebel.

More recently, in an effort to develop an integration platform, Oracle has introduced Fusion Middleware. Ellison says Oracle already has a head start on SAP because Fusion Middleware is built on open standards, whereas SAP’s solution is not. “SAP has heavily criticised us, but they will have to copy us,” Ellison told the FM earlier this year (Technology & Communications July 1).

Kagermann and Ellison will have to do more than keep a beady eye on each other as the industry transforms. The world’s largest software company, Microsoft, which dominates today’s client-server model of computing, is determined it will not be unseated from its throne as the next phase of computing takes shape.

Microsoft’s strategy is predicated on .Net, a development framework that allows programmers to build applications for its ubiquitous Windows operating system and to develop Web services on top of it.

Microsoft CEO Steve Ballmer denies suggestions that the client-server model of computing is coming to an end. He dismisses the idea that the Web will become the new computing platform (see Q&A below). Web services and the software-orientated architecture model will be a subset of client-server computing, he says.

The more immediate challenge to Microsoft is the threat that open-source software, such as the Linux operating system and the OpenOffice.org productivity suite, poses to its two biggest profit centres, Windows and Office. There is a danger that Microsoft’s profits could dry up as companies turn to cheaper, open-source alternatives.

Microsoft will hope to reinvent itself to become an important player in the next phase of the software industry while at the same time protecting the revenues it enjoys through its client server franchise. So far, large companies have only threatened to implement open-source alternatives as a way of securing better deals from Microsoft. Few, however, have deployed it, especially on the desktop.

Microsoft is, however, behaving as if it knows its Windows and Office businesses are threatened. It is aggressively expanding into new markets, including business applications for small and medium enterprises, where it is butting heads with Oracle and SAP, both of which are retooling their products for smaller companies.

As the IT industry enters the third phase of its development, as software becomes a service, today’s industry heavyweights could find themselves challenged from unexpected quarters. Cisco Systems, for example, may be well positioned to corner the market. The networking equipment maker hopes to solve the integration headache by adding intelligence into the network, enabling it to better understand communication between applications. The company has developed technology that can read messages flowing within the network — such as purchase orders, investment transactions or shipment approvals. It integrates application message-level communication into the fabric of the network.

Sadly, despite the promise of the service-orientated architecture model, it’s unlikely to resolve all the integration challenges that companies face. Though all the prominent vendors are developing solutions based on industry standards for exchanging information, it’s unlikely these solutions will be entirely compatible with one another.

“Interconnectivity between systems will be easier,” says SAP’s Kagermann, “but it won’t be pure plug-and-play.”

So it will probably still be some time before CIOs can stop worrying about the integration problems bedevilling their organisations. With companies demanding that their IT departments help them become more agile and electronic, CIOs have even more reason to lose sleep. The pressure is on.

Inet-Bridge