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The ERP Ecosystem

Written By: Yu Chen
Published On: December 5 2008

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Considering the short life cycles of many things we experience these days, enterprise resource planning (ERP) has a long history, if we trace it back to the advent of inventory management and control systems in the 1960s. After forty years of development, ERP has grown to an industry with over $30 billion (USD) in application revenue (AMR Research, 2007), with an ecosystem that has grown to a mature level allowing every party within to function together, with all other factors of the economic environment.

A Three-party Game

The ERP ecosystem is comprised of three major parties: software vendors, consulting services (including both consulting firms and independent consultants), and adopting organizations. In the ERP game, these parties work closely to achieve a common goal—to improve operation performance for the adopting party, through the establishment of ERP systems.

The vendor is the main source of software technologies. Without the software (behind which are methodologies, system designs, programming and testing, and all other efforts that make the delivery of a software package possible), the adopting organization would have to build its own system from scratch at much greater cost.

The adopting organization is the financial source for the whole ecosystem. Without this party, the whole ERP industry would not exist.

Consulting services are the bridge between the other two parties. The existence of consulting is the result of a division of labor, which allows every party to focus on what it does the best.

If we look at this three-party game from a short-term perspective, or on the level of a single case, it is possible to see that only one or two parties win the game at the cost of the rest. For example, we have seen certain cases in which vendors made good money, but the systems they provided didn't work well. However, taking a long-term perspective, this game is able to reach a triple-win situation in which every party receives what it deserves.

"Triple-win" Success Factors

As there are already many articles talking about key factors for successful ERP projects, it would be interesting to take a different view of success. And so I'll begin by zooming in on the main factors each party requires to be successful in this ecosystem, based on observations and perceptions formed as a result of recent visits to different parties within the ERP ecosystem. To the vendors, the most important factors are development capability, market leadership, and the ability to maintain the balance of the ERP food chain. To the consulting services, knowledge capital, human capital, and creativity are critical, while to the adopting organizations, winning factors are in-house expertise, financial capacity, and independency.

Success Factors for Vendors

1) Development capability
Development capability can be divided into two parts—the technology side and the business side. First of all, as application system developers, vendors need to have sufficient technology inventory. Generally speaking, all the technologies that are involved in a software package for commercial purposes should be mature. However, due to the fast pace of the IT industry, application system developers should always work with the latest mature technologies. For example, the evolution from SAP R2 to R3 and then to mySAP is in tune with improvements to the architecture of information systems.

Secondly, development capability on the business side is also critical since the value of ERP software is to help businesses run better. Some exemplary approaches include: building solutions and best practices on an industry level; maintaining a certain proportion of employees as an in-house consulting team in order to insure direct and tight connections with customers' businesses; and having a group of industry experts who keep the development in line with business processes, to accommodate real business needs.

2) Market leadership
Developing software that fits a great variety of enterprise requirements demands tremendous resources. However, only a few market leaders have enough resources to do so. The competition for market share is probably one of the major forces that led to a series of mergers and acquisitions in the ERP industry during the past few years. Seeing that the adoption of ERP systems had reached a plateau in big organizations, major ERP players are now trying to maintain their market leadership via two major dimensions. One way is by expanding the scope of their products to include other relevant application areas, such as customer relationship management (CRM), supply chain management (SCM), supplier relationship management (SRM), and product lifecycle management (PLM). The second way is by expanding the range of their customer base to reach smaller-sized customers with different offerings.

Besides the in-house development forces that maintain major ERP developers' leadership in the technology dimension, establishing partnerships with major universities and research institutions is a critical approach to maintaining leadership by influencing the upper-stream in the ERP food chain. Another approach to maintaining market leadership is to incubate new concepts and products or acquire small but innovative players that represent new trends.

3) Ability to "weave the net"
Although all three parties are responsible for maintaining the harmony of the ERP ecosystem, it's the vendors that take the most responsibility to keep the food chain healthy. Through the distribution of knowledge and benefits, ERP vendors manage to ensure all parties stay in the winner's circle, an intricate and dynamic equilibrium amongst the players.

Major ERP vendors have successfully woven knowledge networks. The distribution of knowledge to consulting services and customers could happen at any stage of an ERP project, from presales to after-sales services. In addition, the vendors' training and certification programs are ideal channels through which to provide quality and profitable knowledge transfer. Some vendors also have built an extensive knowledge repository and community to support third-party developers, consultants, and customers. Maintaining the balance of benefit distribution is done in a more subtle way through pricing policies, partnership programs, and other marketing activities.

Success Factors for Consulting Services

1) Knowledge capital
Nowadays, renowned consulting firms have built massive knowledge assets to conduct their business effectively and efficiently. These firms all have a powerful consulting methodology (as examples, Deloitte's value-driven approach and Capgemini's Collaborative Business Experience), which is believed to be one of the core competencies of being successful in the consulting industry.

These intangible assets are comprised of three elements. The first includes general consulting methodologies, models, and tools that allow consultants to build requirement models and implementation plans accurately and promptly. Another is the industry knowledge that aids in having a better understanding of customers' businesses. And finally, there are the project management experiences that reduce project risks and ensure on-time delivery.

2) Human capital
Consulting is probably one of the few industries that rely on human capital development the most. It's not a surprise to see how actively the top consulting firms compete to acquire the most talented people, and to provide sophisticated programs to help employees to grow.

Some consulting firms are working creatively to develop their people. In 2007, Accenture published a book titled Return on Learning, which tells the story of how the company reignited learning for a whole new generation of its people, including details about its award-winning study and demonstrating the return it makes on its learning investment. "Your Accenture Education experience begins the first day you walk through the door, and continues each day of your career. Every step of the way you're learning, growing, and building yourself—getting ready to meet the next challenge that comes your way," states the training and development section on the company's web site[1]. Nevertheless, the highly competitive work environment itself is already a great place to learn and grow.

3) Creativity
IT plays an important role in how companies manage their business in response to instant changes. In today's business environment, simply adopting an ERP system associated with predefined best practices may improve operation performance, but may hardly confer competitive advantages. The value that a consulting firm brings to its clients should not be limited to regular project planning and delivery. The ability to inspire clients to practice better but different ways of doing business and to support those differentiations through ERP implementation has become the dividing line between good consulting firms and mediocre ones.

The first time I visited a global consulting company's Toronto office, its kindergarten-like appearance didn't allow me to make a connection between the company's image in my mind and what I saw. Later on, after participating in a brainstorming session, I had to agree that this ambiance did help people to think more freely and differently.

Success Factors for Adopting Organizations

1) In-house expertise
Very often, adopting organizations overestimate their capability on the business processes side and underestimate their need to become stronger on the IT side. Although there are consultants that help enterprises build ERP systems, adopting organizations should not limit themselves to being passive adopters of the technology.

If companies can have or develop their own expertise in areas such as project management, information integration, and other technological aspects during ERP implementation, they will have better control of their ERP initiatives, and thus lower risks. I had a chance to listen to GSK Canada's ERP project leader Diane Connolly describe her experiences in integration, and discovered how these experiences not only helped the business unit achieve its project objectives, but also how they became an asset for ERP implementation across the whole corporation.

2) Financial capability
The investment in an ERP system is usually comprised of two major parts: software licenses and implementation services. When project scope and scale are determined and a software vendor is selected, the license investment is relatively stable, but the implementation part is associated with more uncertainties (consulting fees are more likely to change, compared with license fees). It is not rare to see an ERP project go over the initial budget due to unexpected issues or changes that come up during implementation. As soon as it is realized that things aren't going as planned, the adopting organization needs a strong contingency plan to address the uncertainties.

Another reason that the adopting organization needs financial capability is that the implementation may: 1) require the business to go into a period of downtime; and 2) cause the business to performs below its pre-implementation level for a period of time. These two factors both place additional financial pressure on the organization and should be foreseen and planned for.

3) Independency
On one hand, it is essential for adopting organizations to build strategic partnerships with vendors and consulting services to maximize the output of their ERP investments. But on the other hand, adopting organizations should be aware that there are risks associated with these close relationships with the other two parties.

When an ERP system is established, it is expected to be in service for years, if not longer. Mergers and acquisitions, downsizing, business or release discontinuations, and price and service policy changes that happen on the provider side may all have an impact on ongoing or completed ERP projects. Adopting organizations must develop IT governance policies in order to reduce risks that may arise from selecting a product and service provider. Doing so means the organizations need to pay more attention to major technology trends and maintain a certain degree of independency (or neutrality) from vendors and consulting firms.

Human Dynamics

One interesting observation of the ERP ecosystem is that, although the three parties are very different from each other and there are clear organizational boundaries between one another, the barriers for ERP professionals to switch from one party to another are not that significant. An employee at an adopting organization may move to a consulting firm after accumulating enough experience working on the company's ERP project. A seasoned ERP consultant may be invited by an adopting organization to fill the chief information officer (CIO) position. Consultants may also have a choice between being hired by a firm and working as an independent consultant. In addition, migrating between vendors and consulting firms is also not unusual.

There are several benefits of this mobility. For one, the whole ERP industry benefits, as this human dynamic improves knowledge exchange and transfer. Also, this provides a bigger human resource pool for specific needs of each party in the game. And of course, to the individual professionals, mobility helps them to be better rounded, which aids them in reaching higher achievements in their careers. Each time they switch, it might be an opportunity for them to improve their professional status.

The Commoditization of ERP and External Challenges

In his famous article IT Doesn't Matter, Nicholas G. Carr "examine[s] the evolution of information technology in business and show[s] that it follows a pattern strikingly similar to that of earlier technologies like railroads and electric power"[2] . It is true that IT is commoditized and becoming a necessity for today's companies. ERP is not an exception. A decade ago, limited knowledge of SAP might not have hindered a person from starting a career in ERP consulting, but nowadays, the bar has been raised to a much higher level. The massive adoption of ERP makes it an indispensable part in the business environment—and ERP knowledge is no longer limited to a small pool of professionals.

Following the commoditization of IT and standardization of business processes, the halo of ERP may fade out if the industry can't add new elements to it. The prosperity of business intelligence (BI) is a recent example that ERP is moving with market needs. Generally speaking, as long as the industry can always stay on the edge of using IT for better business operation and performance, this ecosystem will exist; but one has to be aware that everything has a life span and that commoditization implies it has reached a stage of maturity.

There are also external factors that threaten the traditional ERP business model. The first is open source ERP. Developers such as ComPiere and Openbravo represent a new business model in which collecting license fees might no longer be developers' strongest approach towards profitability. This new model may impose significant impact on the technology source in the ERP ecosystem: the vendors.

Another threat comes from the prosperity of web applications. When business processes become more standardized, browser applications will be able to move to more sophisticated areas. For example, founded in 1999 by former Oracle executive Marc Benioff, SalesForce.com (an on-demand CRM solution vendor) went public on the New York Stock Exchange (NYSE) in June 2004. The company, according to its web site, has its services translated into 15 different languages and currently has over 43,600 customers and 1,000,000 subscribers. Within the web application model, to what extent consulting services can be involved becomes a question.

Exposed to these challenges, the landscape of the ERP ecosystem may change. Either the vendors or the consulting services may experience significant consequences, and conflict between players may arise if the trends keep growing stronger.

Conclusion

The ERP ecosystem has proved to be successful as a multiplayer business environment by delivering tremendous performance improvements to adopting organizations and distributing the benefits through the food chain. However, challenges exist from factors both internal and external to the ERP ecosystem. In order to maintain a sustainable ecosystem, all the parties need to work together to push ERP to a new height.

 
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