The ERP Market 2001 And Beyond - Aging Gracefully With The 'New Kids On The
Enterprise resource planning (ERP) integrated software solutions have
become synonymous with competitiveness, particularly throughout the 1990's.
ERP systems replace "islands of information" with a single, packaged software
solution that integrates all traditional enterprise management functions
(transactions) like financials, human resources/payroll, and manufacturing
& logistics (See Essential
ERP - Its Functional Scope for more details). We also believe that
having an ERP system is a prerequisite in most business environments to
fully take advantage of the latest business information processing trends,
such as collaborative e-Business and customer relationship management
a list of the major ERP vendors and their market share, see Figure 1.
is Part One of a five-part article. This part is an overview of the ERP
market and how ERP is expanding to included SCM, CRM, and e-procurement.
Part Two will discuss the vendors' reaction to market changes. Part Three
will briefly analyze some of the major ERP vendors. Part Four will contain
market predictions. Part Five will contain recommendations for the vendors
and users. Part Five will also contain links to the preceding parts.
One could distinguish the following two segments within the ERP market:
ERP solutions are primarily focused on the consolidated data management,
financial and human resources needs of large Fortune 1000 companies.
It evolved from accounting and contract management systems in the early
1980s. Human resources and more comprehensive financial planning and
analytical systems were added in the 1990s. Leading vendors of these
solutions are SAP, Oracle, and PeopleSoft, although
J.D. Edwards, Baan, GEAC, Lawson Software
and Infinium Software can fit the bill in some instances.
ERP solutions are primarily focused on the specific needs of small and
mid-range manufacturing plants and distribution sites or the operations
level of global companies. This ERP market segment's roots are in the
control automation market of the 1960s and 1970s and the manufacturing
requirements (MRP) planning software market of the 1980s. This evolved
into the ERP of the 1990s (see The
Essential ERP - Its Genesis & Future, for more details). Leading
vendors of these ERP solutions include SAP, Oracle, PeopleSoft, J.D.
Edwards, Baan (now a division of Invensys), GEAC Software Corporation,
SCT Corporation, Intentia, Microsoft Great Plains,
Lawson Software, QAD, IFS, SSA Global Technologies,
InterBiz (division of Computer Associates), Epicor,
Frontstep (formerly Symix Systems), MAPICS,
Navision, Infinium Software, American Software,
Sage, Ross Systems, Fourth Shift
(now part of AremisSoft), Made2Manage Systems,
Lilly Software, ROI Systems, Macola
Software (now a division of Exact), Syspro, Scala,
Ramco Systems, Pronto, and several dozens more
of smaller or niche ERP players.
In the 80's
and 90's, businesses were subject to increased global competition, resulting
in a pressure to lower production costs, improve product performance and
quality, increase responsiveness to customers and shorten product development
and delivery cycles. Furthermore, globalization greatly increased the
scope and complexity of multinational manufacturing organizations. Therefore,
companies have long been urged to develop or purchase and implement software
applications to automate their business processes, leverage their transnational
data stores in order to make more informed decisions, and ultimately,
decrease operating costs. Companies realized the need to be able to react
rapidly to change due to increasing competition, deregulation, globalization,
and mergers & acquisition activity.
second half of the 1990s, the market for ERP systems experienced strong
growth rates in excess of 50% per year, from US$ 5.7B in 1995 to US$ 16.6B
in 1998 [Source: AMR Research]. Some of the key drivers, in addition to
the above-mentioned underlining reasons, were:
- The transition
from custom-designed legacy software (software developed by or for a
specific customer) to the implementation of standard systems that can
be applied across different types of industries. This was particularly
true for the largest companies, who previously thought that they had
the resources to develop business solutions under their own steam.
- In addition
to the transition to standard systems, ERP systems have been extended
to support an increasing number of business processes in integrated
solutions like engineering, customer support, sales support, human resources,
- The customer
base has also expanded from mainly manufacturing, trade, and distribution
to the public and financial sectors, transportation, infrastructure,
defense, federal and local governments, utilities, etc.
- In the
past three years, Year 2000 (Y2K) and the adoption of the Euro currency
have been important driving forces in the development of the market.
As a matter of fact, resolving the Y2K problem has, in many instances,
led to the installation of a new ERP system.
however, experienced mixed fortunes towards the end of this period. The
worsening plight of many ERP vendors is mostly attributable to the Y2K-problem,
which caused a market slowdown that started in the fourth quarter of 1998
and continued in full force throughout 1999 and 2000. Indications of it
winding down finally surfaced late in 2000. Particularly affected was
license revenue, and the market (with some honorable exceptions) was dramatically
less profitable during 1999 and 2000 than in 1998, measured in the total
raw $ net income (See Table 1).
Market Financial Data
Revenue ($ billion)
revenue growth of the market
Licenses Revenue/Total Revenue Ratio
license revenue growth
income growth over previous year
R&D Investment/Total Revenue Ratio
that the continued ERP market slowdown during 1999/2000 was in part attributable
to the following factors:
- The historical
growth in sales of ERP applications came from large, Fortune 1000 multinational
corporations. This market is now highly penetrated (over 70%), and new,
large-scale back-office implementations in the F1000 customer base had
all but stalled.
- The relatively
untapped Small-to-Medium Enterprises (SME) market has been cautious
about starting new projects due to the bad publicity caused by a large
number of unsuccessful ERP implementations in the past. This fear has
been additionally aggravated by the need to integrate disparate systems,
given that currently no single vendor can offer a complete end-to-end
solution (from supplier to end customer), despite some ERP vendors'
- The ongoing
technology paradigm shift from Client/Server to the Internet created
uncertainty about investing in traditional Client/Server technologies,
which are still present (however in an obfuscated manner) among leading
ERP players' offerings.
focus of companies on Year 2000 (Y2K) remediation brought the purchases
of new ERP systems in 1999 to a significant standstill.
to the Internet
The second half of 1999 also marked a dramatic and fundamental shift in
the enterprise applications market with the emergence of the Internet
as a viable platform for Business-to-Business (B2B) e-commerce transactions.
We believe that the transition of core business processes to the Internet
will be a primary driver for growth in enterprise applications use in
2001 and beyond. However, contrary to some pundits that were quite swift
to write ERP off as an obsolete technology the first time it showed signs
of faltering and inadequacy, we believe that e-business will only render
the outdated architectural and business perspectives of traditional ERP
order to reinvent itself for the new collaborative external world, ERP
will have to exhibit Web-based, service oriented architecture embodied
in componentized products and better data availability (internally and
externally published and subscribed) among ERP and non-ERP applications
(for more information, see Where
Is ERP Headed (Or Better, Where Should It Be Headed)? Part 2: Product
Architecture and Web-Basing). The new generation of ERP systems will
be more customer-focused and will extend beyond the enterprise through
e-commerce interaction and collaboration with business partners. The key
to the Internet-driven, dynamic trade environment is agility, which is
where traditional ERP packages have stumbled in the past.
business world having experienced a rude awakening from both the dot-com
carnage and an economic downturn, has backed away from yesterday's hot
items like customer relationship management (CRM), supply chain management
(SCM) or e-procurement. Many customers have redirected their buying focus
from 'what looks cool' to 'what we do need and can justify'. Customers
have suddenly realized the importance of solid back office transactional
systems, causing the market analysts to predict a moderate growth for
ERP, despite unfavorable economic conditions. There are indications that
many companies will still reinvest in ERP and involve it into the mainstream
of e-business. Users' visions of ERP are evolving from tactical to strategic,
and users are no longer willing to choose between integration and function.
Consequently, more nimble ERP vendors may benefit from customers' realization
that the new technology is not deployed at the cost of divorcing front-end
systems from back-end systems.
The market size for 2001 is estimated by TEC at $20.5B-$22.5B (3%-13%
growth over 2000) as the market continues to consolidate. The top 5 ERP
vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., J.D. Edwards & Company,
and Baan, account for close to 60% of total ERP revenue. Consolidation,
mergers and acquisitions are expected to intensify.
the last three years, the enterprise applications market became stratified
into growing and profitable vendors on one side, and stagnating and cash
burning vendors on the other side. The Y2K-problem caused a market slump
in 1999 and the recent global economic slowdown has been excruciatingly
hard on the smaller vendors. They also need to expand their offerings
and introduce service-oriented product architectures, but much scarcer
resources at their disposal to do this than their bigger counterparts.
We believe that this will become more accentuated owing to the growing
demands on the underlying product architecture and functionality, with
customers becoming more vendor viability cautious.
M&A activity also stems from the fact that while the concept of best-of-breed
will not go away, users will typically look for one strategic vendor to
fulfill the majority (at least 70%) 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
we do not necessarily expect larger ERP vendors to swallow up their smaller
brethren, a number of intra mid-market acquisitions and/or mergers are
likely: examples are the recent Sage Group's acquisition of Interact
Commerce, MAPICS' acquisition of Pivotpoint, Exact Holding's
acquisition of Macola Software, AremisSoft's acquisition of Fourth Shift,
Great Plains acquisition of Solomon Software, and the merger
of Navision Software and Damgaard. We also expect companies with
related software products (e.g., plant automation or Internet trade exchanges
providers) to move into the ERP space through acquisition like Invensys,
Plc., a UK-based plant automation manufacturer with its acquisition of
Marcam Solutions and Baan, as well as Microsoft's very recent
acquisition of Great Plains.
concludes Part One of a five-part article on the ERP Market 2001 and Beyond.
Part Two will discuss how vendors are reacting to market changes.