appears that the federal market's hunger for enterprise resource planning
(ERP) systems will not subside any time soon. Namely, driven by system consolidation
at the Department of Homeland Security and Administration management
mandates, the federal market for ERP products and services will hit $7.7 billion
(USD) in fiscal 2009, a 37 percent increase over fiscal 2004 spending of $5.6
billion (USD), according to a report released at the end of August by INPUT
(www.input.com), the leading provider of
government market intelligence based in Chantilly, Virginia (US).
ERP systems combine many disparate software applications for such business functions
as financial, accounting, purchase management, human resources (HR),
supply chain and logistics, into a single integrated system (for more information,
Applications The Genesis and Future, Revisited). INPUT estimates
the federal market for those products and services will grow at a 6.4 percent
compound annual growth rate (CAGR) with civilian agencies accounting
for the largest portion of spending—$3.4 billion (USD) by fiscal 2009. The Department
of Homeland Security will lead civilian agencies in spending as it continues
to consolidate redundant systems within the various agencies that make up the
department. Department of Defense (DOD) spending
on the same products and services will also reach a hefty $2.7 billion (USD)
by fiscal 2009 and will increase at a higher annual compound growth rate than
that of civilian agencies—by 7.7 percent—led by strong growth in the financial
and supply chain management (SCM) categories.
"The President's Management Agenda and its five areas of focus—workforce management, competitive sourcing, improved financial performance, expanded e-government and budget and performance integration— are to credit for the healthy market for ERP," said Chris Campbell, senior analyst of federal market analysis at INPUT. "We expect this growth to continue regardless of what the November elections bring."
reportedly continue to make up the bulk of federal ERP spending, accounting
for more than 50 percent of total dollars, whereby INPUT predicts that increasing
systems integration (SI) work, especially related to cross-functional
solutions, will drive the need for even greater spending on professional services.
INPUT's forecast shows spending for ERP professional services increasing from
$3.7 billion (USD) in fiscal 2004 to $5.1 billion (USD) in fiscal 2009. As leading
providers of ERP systems and services, the document mentions Computer
Sciences Corporation (CSC), Northrop Grumman
Corporation, Lockheed Martin Corporation, Oracle,
Accenture, Science Applications International,
General Dynamics, Electronic Data Services,
IBM, end so on. More information can be obtained from the above
cited INPUT's web site.
is Part One of a two-part note.
Two will discuss the challenges and make user recommendations.
Despite arguably ongoing difficult economic times in most sectors, the growth of contract manufacturing has continued largely unabated. For instance, while the commercial aircraft industry may have suffered following on the dreadful 2001 terrorist attacks and stalled economic activity afterwards, it is quite the opposite case in the defense and government industries.
The federal market opportunity thus comes as no surprise given that it has long been the segment with a low penetration of off-the-shelf, integrated enterprise applications. During the salad days of economic boom and federal surplus, agencies, contrary to their private sector and commercial counterparts, have not had many qualms about devising large-scale, fragmented, homegrown, maintenance-intensive informational systems from scratch. Times have drastically changed almost overnight, and cost-cutting remains one of the most important reasons that agencies are implementing ERP systems. Yet, although cost-cutting is important in every business, the federal government might be more willing to be upfront about it. To accomplish this, the government agencies have been increasingly turning to readily available integrated ERP systems, since they urgently need them.
Further, with the General Accounting Office's assessment that a third or so of all federal employees will retire over the next few years, upgraded ERP applications appear to be a convenient way to prevent civic paralysis. Commercially available business applications can replace the inefficiencies and liabilities of legacy islands of information that only the retiring federal employees understood and maintained. On the other hand, the more efficient processes may require fewer job replacements, both in terms of technical and customer-facing personnel. Additionally, with commercially available business applications, the product development costs are spread among a large user population. This large installed base also allows for a greater aggregated vendors' experience, resulting thereby in higher-quality, tried-and-true products.
federal agencies, having the privilege of relying on the always-certain taxpayers
money (albeit reduced during the times of reduced earnings), will likely more
easily opt for acquiring a new ERP system, as opposed to making virtue out of
necessity and finding reasons to stick with a piece of an outdated technology,
like is the case with many private sector companies (see The
Old ERP Dilemma: Replace or Add-on).
There might be other reasons why ERP has recently become a far more attractive option for the federal market. Namely, this market has benefited by vicariously learning from the mistakes and failed ERP implementations of many commercial companies in the past. Additionally, many ERP systems are now componentized, which provides phased implementations in more manageable chunks (instead of a traditional "big bang" approach) in addition to vendors' developed implementation methodologies that are based on bypassing the usual traps of past failures. For that reason, and since ERP implementations are expensive and difficult, most projects within the agencies focus on specific functional areas, such as finance or HR, rather than on integrated
all-encompassing enterprise solutions, whereas "organizational streamlining and real-time data access" are the two major reasons why agencies are contemplating ERP systems.
ERP systems have meanwhile been Web browser-enabled too, which also allows for
a quicker and simpler implementation, because client machines do not have to
be configured time and again. Consequently, an agency also has a choice of either
installing software on its own intranet or renting it via a hosting or application
service provider (ASP). Further, the leading ERP vendors have incorporated
customer relationship management (CRM), SCM, e-procurement, business
intelligence (BI) or analytic and many other extended-ERP modules by developing
them in-house, by acquisition or through strategic partnerships with the best-of-breed
vendors. Therefore, agencies should benefit from aligning back-office systems
with CRM, e-government, BI, Internet technologies and so on, as part of the
overall plan, instead of managing it as multiple separate projects, with all
subsequent integration ramifications. e-government initiative, with its need
to extract usable data real-time across several agencies and to provide it to
constituents too, is also driving the adoption rate of ERP systems that can
provide a unified picture of their data.
Vendors Respond to the Market
vendors have also spotted the opportunity and have been addressing the rigorous
requirements of the project- or contract-based complex manufacturing industries
Vendors Moving to Aerospace and Defense Markets). As an illustration,
aerospace and defense (A&D) producers are typically high-tech or electronic
manufacturers, and must handle complex production processes and large, complex
supplier networks. Sophisticated customer order management applications are
typically not required. Instead, customer service needs are more oriented toward
precise contract management and cost reporting. Frequent changes force contract
supplier engineers and original equipment manufacturer (OEM) engineers
to be in constant collaborative communication throughout the design and production
cycle of the unit. One of the most manual functions in a supplier organization
is the sell-side request for quote (RFQ) management, which usually
revolves around a few key individuals that have direct knowledge of the product
or who can manually pull together the diverse information sources into a unified
combination of outsourced manufacturing with increasingly common configure-to-order
(CTO) or build-to-order (BTO) production environments is making unit-level
data management an increasingly high priority for contract manufacturers and
the companies that retain them. Additional tracking and reporting requirements
are another big issue. The ability to track every product, each of its parts,
and its stage in the production cycle has become a prerequisite to production
efficiency and profitability, especially for contracting maintenance, repair,
and overhaul (MRO) organizations. Additionally, the ability to store and access
quality tests history data on an ongoing basis and the ability to thoroughly
analyze that data is crucial in keeping costs low and quality high.
The unique business needs of project-oriented organizations, when addressed by large ERP vendors that offer general-purpose enterprise software, typically require heavy customization in order to work. On the other hand, when project-oriented organizations turn to small, off-the-shelf, project-management solutions, these solutions are soon outgrown by the user company. These organizations are looking for systems to support the project manager, who is responsible for sharing and tracking the revenue, expense, and profitability of a project. Again, most enterprise-wide business systems sold by software vendors are general purpose in design and, without significant tweaking, do not address many of the unique requirements of businesses engaged primarily in providing products and services under project-specific contracts and engagements.
Project-oriented organizations have many project-specific business and accounting requirements including the need to track costs and profitability on a project-by-project basis, to provide timely project information to managers and customers, and to submit accurate and detailed bills and invoices, often in compliance with complex industry-specific and regulatory requirements. Yet, traditional, generic general ledger-oriented (GL) accounting systems have not been designed with project phases, work breakdowns, or detailed time capturing in mind, and thus, they merely can report how much has been spent or collected, but not why a certain project is losing or winning money.
number of articles on the TEC site have incisively depicted the peculiar traits
of engineer-to-order (ETO) and project-based manufacturing, such as Project-Oriented
Versus Generic GL-Oriented ERP/Accounting Systems and Caution!
Will a Traditional ERP System Help You Deliver Projects?
APICS Dictionary defines ETO as "products whose customer specifications
require unique engineering design, significant customization, or new purchased
materials. Each customer order results in a unique set of part numbers, bills
of material, and routings". Closely related term to ETO is project manufacturing,
which is defined as "a type of manufacturing process used for large, often unique,
items or structures that require a custom design capability (ETO). This type
of process is highly flexible and can cope with a broad range of product designs
and design changes".
already stated in TEC's earlier research article ERP
Systems and the ETO Manufacturing Market, a vast majority of manufacturing-oriented
ERP systems have been largely amenable to repetitive, volume-based manufacturing
environments that rely on the movement of materials either through functionally-oriented
work centers or product-oriented production lines, and are designed to maximize
efficiencies and lower unit cost by producing products in large lots. Standard
products with similar routings are therefore made using virtually the same process,
while production is planned, scheduled, and managed to meet a combination of
actual sales orders and forecast demand.
concludes Part One of a two-part note.
Two will discuss the challenges and make user recommendations.