Essential ERP - Current Market Trends - Part II

Essential ERP - Current Market Trends - Part II
P.J. Jakovljevic - May 3, 2000


This is the second part of an extended note on the current market trends for Enterprise Resource Planning.

The growth of ERP has been a direct result of the fierce global competition, short product life cycles, highly distributed operations, and information-driven management that characterize today's business environment. The vast majority of companies have always hoped to purchase an information system as a product, not as a collection of technologies, components and services. Leading ERP vendors have been successful so far because they have been attempting to build such a product.

A typical ERP system today offers broad functional coverage; vertical industry extensions; a robust technical architecture; training, documentation, implementation and process design tools; product enhancements; global support and an extensive list of software, services, and technology partners. While it is not a system-in-a-box yet, the gap between its desired and actual features is becoming smaller every day.

Pressures on ERP vendors (discussed in the TEC Technology Note Essential ERP - Current Market Trends - Part I) lead us to believe that the following trends in the ERP market are the direct consequence of vendors' attempts to 1) resolve current ERP functional and/or technological deficiencies, and/or 2) expand software sales both within their existing and potential customer bases, particularly in the lower-end of the market.

About This Note

The ERP Market Trends covered in the TEC Technology Note Essential ERP - Current Market Trends - Part I are:

  1. ERP Functional Scope Expansion
  2. Sharper Vertical Focus
  3. Flexibility Enabled by Adaptable Architecture

The ERP Market Trends covered in this note are:

  1. Web- and E-commerce Enablement of ERP Systems
  2. Intensified Market Merger & Acquistion Activity
  3. Advent of Application Hosting Services

4) Web- and E-commerce Enablement of ERP Systems

Indisputably, one of the most significant trends in the ERP market today is the advent of e-business. No industry remains unaffected by the changes created by the explosive development of the Internet. As the reality of enabling seamless web-based collaboration between companies and their customers and suppliers becomes more of a reality each day, ERP applications are poised to play a pivotal role.

The concept of e-commerce is not really new to ERP: electronic data interchange (EDI) and electronic funds transfer (EFT) have been a part of ERP applications in varying forms for years, and are now in the process of being redefined (and given a makeover at the same time) to embrace the Internet and Web. The focus of EDI, EFT, and e-commerce in general is on transactions, which is something that traditional ERP applications excel at handling.

While extending these transactions beyond the corporate walls to the world of the Web poses its own set of challenges - namely, maintaining transaction integrity and security - the real challenge for ERP is enabling intelligent collaboration between companies and their customers and suppliers. This is the notion of e-business, of which e-commerce and its transactional focus play a role. Traditional ERP applications have so far proven inadequate in this new world of e-business because their primary focus has been on automating internal processes and coordinating transactions, not on enabling external collaboration between a business and its constituents. However, this is rapidly changing as the notion of extended ERP takes hold. Extended ERP takes a different view of the world, and has been promoted by most of the major ERP vendors in the form of two emerging application areas:

  • Supply chain applications - The focus here is on extending the production planning, scheduling, and delivery execution processes to a company's suppliers and trading partners. While there are transactional components to supply chain, the primary focus to date has been on business-to-business (B2B) planning and collaboration. Business-to-business procurement can also fall in this category, yet the focus is often on procuring non-production related goods from suppliers.

  • Customer management applications - These applications focus on extending sales, marketing, and customer service/support beyond corporate boundaries to the customer doorstep. There are transactional components here as well, as in the case of Web storefronts and unassisted sales. The broader picture includes Web-based self-service, promotions and one-to-one marketing, and content delivery.
Extending ERP to the Internet stems from the intent of many IT organizations not to reinvent the wheel in their scramble to create e-commerce applications. By extending the existing ERP system to support e-commerce, organizations not only leverage their investment in the ERP solution, but can also speed the development of their e-commerce capabilities.

However, as mentioned earlier, ERP systems have proven difficult to change and extend. Barricaded behind complex, proprietary APIs and based on complex, nearly indecipherable relational database schemas, ERP systems do not readily take to e-commerce. Nevertheless, IT managers are finding an increasing set of options for not only extending these systems to support the Web and e-commerce but for other key activities, such as decision support.

Underlying the new options are ongoing initiatives to break ERP systems into separate components (componentization), open up the core databases and proprietary application interfaces, and provide tools for customization.

Leading ERP vendors have been trying to oblige users' demand for e-commerce capabilities in their ERP solutions. SAP revealed a slew of Web and e-commerce solutions at its last SAPPhire conference in 1999. Since then, SAP introduced, a suite of e-commerce components for SAP. Oracle has numerous initiatives, including one that will allow its ERP, CRM, and e-commerce solutions to share the same database. Baan and J.D. Edwards have both rolled out some e-commerce modules. Finally, Peoplesoft's newest version includes a number of e-commerce capabilities, including support for online procurement and eStore, PeopleSoft's online sales and customer management solution. Lawson Software, Epicor Software, Infinium Software, Great Plains Software, Symix Systems, and American Software are the mid-market ERP vendors with similar initiatives, to name but a few.

The first stage in the ERP's conquest of the Web is to allow browser access through support for HTTP, HTML, and Java. This stage has almost been completed by a majority of ERP vendors. The next stage, which has just begun, is to extend the ERP applications themselves to the Web, where they can be accessed and run by outside partners and customers. These Web-based applications are hybrid in form, bringing together proprietary legacy elements, either host-centric or client/server, with thin client interfaces.

In order for traditional ERP systems to be Internet ready, they will have to be:

  1. Fully browser enabled
  2. Redesigned to be available to all corporate users, not just the special few
  3. Redesigned to be available to customers and suppliers
  4. Redesigned to use new data interchange language, most likely extensible markup language (XML), rather than proprietary protocols
With an Internet-only ERP system in place, client-side software upgrades become unnecessary. Browser-based applications significantly simplify the training, and tying together far-flung locations of an enterprise becomes simpler too.

Enterprise portals on intranets leverage this architecture's value in aligning intranet workplace resources more closely with business objectives. Leading ERP vendors have also made moves to adopt web portal strategies.

The basic goal is to create a virtual workplace and marketplace for ERP users, where the ERP applications, other disparate back-end systems, and external content and services (catalogs, directories, travel services, benefits administration, etc.) can be seamlessly and transparently accessed by users via the Web. By personalizing, profiling, and presenting its information, business applications and inter-organizational interfaces in the context of roles and work processes, an enterprise portal provides a thin-client link to work-based resources within the enterprise.

While the concept of an ERP portal is an interesting one, we identified the following challenges for vendors pursuing this route:

  • Integration - the success of a portal is predicated on how well it ties together internal and external transactions, content, and services.
  • Effective partnering - ERP vendors face a whole slew of potential new partners, many of which are not traditional technology companies.
  • Pricing and, more importantly, an ERP portals' business model are still very obscure.
  • Nevertheless, with these Web initiatives, ERP vendors are falling into line with what their customers actually want and need. We believe that, within the next four years, over 40% of Fortune 1000 Companies will manage their own enterprise portals to enable effective use of personalized decision content, to provide role-based access to internal business applications and workflow, and to facilitate B2B e-commerce integration (70% probability).

5) Intensified Market Merger & Acquisition Activity

    The ERP market appears to be consolidating. The top 6 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software, J.D. Edwards & Company, and Baan Co., account for over 65% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify.

    Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side (for more information see the TEC Market Note on ERP published in January 2000). We believe that this will become more accentuated, with customers becoming more vendor viability wary.

    We expect larger ERP vendors to swallow up their smaller brethren, both in ERP and related markets, such as the recent IFS AB acquisition of Effective Management Systems, Inc., the manufacturing execution systems (MES) vendor, MAPICS' acquisition of Pivotpoint, the vendor of extended ERP for mid-market companies, and Symix' acquisition of Profit Soutions, the eCRM vendor.

    We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc. with its acquisition of Marcam Solutions.

    Intensified M&A activity also stems from the fact that while the concept of best-of-breed will not go away. Users will increasingly look for one strategic vendor to fulfill the majority of their business application needs. This is particularly true for the lower end of the market and for the companies operating highly centralized organizations with a conservative bent. This trend, bundled with strong vendor competition, will drive increased merger & acquisition activity in the entire business applications market.

    Smaller ERP vendors and best-of breed CRM or SCM vendors will acquire new functionality and merge to protect themselves. We predict that more than 50% of current ERP vendors will not survive until 2004 (65% probability). About half of these will transform into system integrators, while either relegating their product to a niche 'bolt-on' or legacy status. The remaining half will be acquired.

    The most likely acquisition candidates will be those vendors with poor financial performance and undervalued market capitalization but with a large customer base and a deep focus and expertise in a certain industry. This should not necessarily be a bad thing for current users of those products. The acquirer will either continue product development and support of the acquired product (40% probability) or offer a relatively attractive migration path to its product (35% probability). However, there is a 25% probability that the acquirer is only interested in milking the maintenance revenue without ongoing product support. These users may find themselves left in the lurch with a legacy product.

    In addition, we predict some unconventional acquisitions, such as the acquisition of ERP vendors by best-of-breed CRM or SCM vendors, with a view to offer a more comprehensive solution. We believe that, within the next two years, Siebel Systems and i2 Technologies will have to resort to acquiring an ERP vendor (60% probability). Furthermore, ongoing merger & acquisitions as well as the need to develop new product features will increase R&D investments in the future, measured as a percentage of total revenue.

    The large players (i.e., the Big Six) have inherent advantages and incentives to develop or acquire needed competencies: their installed base, their market clout, and their ability to commit resources to development. To separate themselves from the rest of the pack, they will either (1) have to use those internal resources to develop their own extended products and capabilities, as SAP has done, or (2) have to buy/use someone else's superior technology/product, which was the route generally pursued by other large vendors.

    Small vendors should either (1) try to develop the above mentioned required competencies and build up as much market share as possible, either under their own steam or by means of mergers & acquisitions, thereby strengthening their position, or (2) align themselves with a major vendor.

6) Advent of Application Hosting Services

    Application Service Providers (ASPs) have arisen on the Internet in response to such ERP woes as support expenses, misbehaving application, and server downtime. Assuming an organization ports all application functionality to an ASP, the only real concern for internal IT individuals would be ensuring a rich and stable connection to the Internet.

    ASPs use a "Thin Client" configuration, which means that any hosted application accessed by an end user, such as e-mail or word-processing application, is transmitted to the desktop via a series of streaming screenshots, thereby minimizing the need for excessive bandwidth and software installations on the client machine.

    The downside is the long-term cost of "leasing" the service. One of the primary benefits of outsourcing is the initial negation of "up-front" costs associated with the implementation of a production system. However, after certain period of time, the outsourced system will cost more than an "in-house" production system. An analogy may be made to a group of 3 college roommates who need a big-screen television to watch football. Each roommate pays $20 per month for 3 years, totaling $2160 when the television could have initially been purchased for $1200. The appeal is immediate gratification coupled with reduced initial financial pains.

    The main challenge facing most ASPs is how to drive down long-term costs while accumulating a solid revenue stream. One of the cost inhibitors for ASPs is the amount of dedicated bandwidth they must maintain to support thousands of users. Another challenge facing ASPs is Service Level Agreements (SLA); if for some reason the ASP loses Internet connectivity, customers will lose connectivity to outsourced production systems, which negatively impact their internal SLAs.

    The key to an ASPs success will lie in the targeted marketplace. Those ASPs targeting large organizations will most likely fail (probability 75%) or scale back their profit margin in order to gain business. Those ASPs who can successfully market to small-to-midsize enterprises (SMEs) and emerging '.com' companies while providing good technical support coupled with frequent software and hardware upgrades will experience good success. We believe that, within the next three years, application hosting will be the dominant delivery model for packaged delivery for SMEs (70% probability).

    Outsourcing Advantages:

  • Predictable, fixed cost for a customer
  • Reduced setup and configuration time, and greater operational simplicity
  • All upgrades applied to ASP servers. No need for client or desktop upgrades.
  • Limited funds required for initial startup Reduced need for internal IT support
  • ERP package maintenance performed automatically by external experts

    Outsourcing Disadvantages:

  • Outsourcing is still in its infancy, first customers being early adopters
  • Potential security risk since customers' confidential and mission-critical data reside at the ASP's location
  • Becomes more costly over the long run Offers little or no support for software modifications/customizations
  • Decreased control over infrastructure and deployment
  • Limited to Direct Access Points for your ASP or need for secondary Internet access account depending on user travel plans
  • Little to no control over hardware and software upgrades
  • Support costs are essentially negated and a monthly per user charge is assumed

    The following types of enterprises should consider using ASP services:

    1. Those with limited investment capital and those that do not have an IT department
    2. Those that do not anticipate a high rate of change in the way they do business
    3. Those investing in an application to streamline costs rather than to enhance revenue
    4. Those that lack resources for the rapid implementation of a distinct project that possibly does not require complex integration with existing applications (e.g., HR/Payroll administration, e-mail, etc.)


Summary and Overall User Recommendations

    Without a doubt, ERP remains the information backbone for contemporary manufacturing enterprises. However, today's ERP systems are required to address more than the processes taking place within the walls of an enterprise. They must be able to address the players and processes involved in extended enterprise - the people and partners that the manufacturers collaborate and coordinate with in their supply chains.

    While the Web and e-commerce will continue to be a major ERP direction, we foresee more ERP trends will appear on the radar screens of industry observers and IT managers. Easier enterprise applications integration (EAI), more flexible pricing, reduced urge to customize an application, and embedding analytical applications and knowledge management are some of the best prospects among the next wave of ERP hot-buttons. The lesson to draw, however, from the past few years as ERP fad after fad jumped into the spotlight and then receded almost as quickly, is to be selective. Some, but certainly not all of these trends will prove worthwhile.

    Users' need to understand their business requirements and critical business processes can never be overemphasized. Not knowing their present business state of affairs as well as their strategic intent and direction will disqualify any future ERP system implementation from being a success. Clarifying this should help users create a long list of vendors to include in an ERP package selection. Precedence should be given to vendors with a proven vertical focus on the user's industry. Users should also be aware of consolidation in the ERP market, and corporate viability should play a prominent role in every selection process. Virtually all software selection teams appreciate the importance of product functionality and product technology requirements in making the right decision. (For more information see TEC Technology Note Essential ERP - Current Market Trends - Part I.) Too often, however, these are the only criteria that play a role in the decision-making process. Other often overlooked factors can determine the eventual success or failure of a new system, including vendor corporate strategy, global service and support capabilities, financial viability, and, of course, cost.

    After receiving the final proposal from each of the vendors included in the negotiation stage, users may want to put into action any counter-proposal or negotiation steps, which may include a combination of the following: a request to lower initial software costs, a decrease in maintenance fees, negotiating the license fee per module, negotiating discounted license fees for casual users, provision for future incorporation of "extended ERP" components by bundling them into the contract now at negotiated license fees, etc. 'Bolt-ons' should be selected only from official business partners of the primary ERP vendor, after making sure that partnership is not a mere marketing pitch.

    Finally, users should ensure that their critical requirements are unequivocally spelled out in a contract with a selected ERP vendor. Future clients are also advised to request the vendor's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for recently released products and products whose release date is due in the near future.

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