The ERP Market 2001 And Beyond - Part 2: Vendor Reactions

The ERP Market 2001 And Beyond

Part 2: Vendor Reactions
P.J. Jakovljevic - October 5, 2001

Executive Summary 

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 (CRM).

For a list of the major ERP vendors and their market share, see Figure 1.

Figure 1.

This is Part Two of a five-part article. This part discusses the vendors' reaction to market changes. Part One contains an overview of the ERP market and how ERP is expanding to included SCM, CRM, and e-procurement. 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 contain links to the preceding parts.

How Are Vendors Reacting? 

On the other hand, in the ERP market, the major vendors focused on the high-end of the market have virtually evolved into providers of comprehensive e-Business suites (see Where Is ERP Headed (Or Better, Where Should It Be Headed)? Part 3: E-Business and Mid-Market Shakeout). They also compete with a slew of smaller extended ERP vendors for the market for small to medium enterprises (SMEs). While the heyday of the ERP market in the mid 90s may have postponed the consolidation in the lower tiers of the market, it is, however, not the case today. The acquisitions mentioned in Part One reflect the morphing enterprise applications landscape as vendors scramble to outrival competition or, more often, survive during the next phase of e-Business.

While at the high end of the market, vendors of enterprise applications suites face fierce competition from CRM, SCM, B2B exchange providers and other niche players, in the mid-market, a more conventional consolidation has been taking place, mainly with an aim of combining the resources to deliver extended enterprise software suites that meet the 'one-stop shop' requirements of smaller companies.

ERP Pricing Options 

ERP systems have earned the general perception of being exorbitantly expensive to license and implement (see ERP Trivia - Every Why Should Have Its Wherefore), and vendors have recently been trying to change that infamous image with new pricing options in order to keep users' costs down. Users typically pay an up-front per-user (either concurrent, role-based, or named) license fee and an annual maintenance charge to use ERP systems (typically 12%-20% of the license fee). The per-seat price for ERP varies greatly depending on the number of users, the number of modules to be deployed and what "bells and whistles" are added, and whether the company belongs to the high-end Tier 1 (Fortune 500) or the small-to-medium enterprises - SMEs (Tier 2 and 3) market segment.

The per-user price range has been from $1,000 to $6,000 (typically higher values for larger companies), with the continual price decline trend owing to fierce competition and the reduced or postponed demand for software. Many vendors offer per-month per-user rental or outsourcing deals as an alternative to traditional up-front licenses (for more information, see Where Is ERP Headed (Or Better, Where Should It Be Headed)? Part 4: ASP's and New Pricing Models). Fixed price, preinstalled, pre-configured ERP is also available and is particularly attractive for the lower-end of market (see Fast-path Implementations - Are They Good or Bad?).

Competitive Changes 

Sales cycles vary from months to years depending on the company size, its organizational structure (single or multi-site, international or not), and the functional scope of the project. While the selection phase of software acquisitions will increasingly gain critical importance (due to customers' increased awareness of possibly fatal consequences from selecting the wrong software), the pressure for faster decision-making will mount both from vendors (who want shorter and less fluctuating sales cycles) and users (in order to stay ahead of their competitors). As a rule, every $1 of ERP software sales drives on average another $3-$6 of additional hardware, third party integration and consulting, and resellers revenue, although in some cases additional costs can reach $10-15 for each dollar spent on software.

Early ERP adopters discovered to their dismay that implementing these systems was only the first step toward creating a competitive information technology infrastructure. They and new users alike are now looking for significantly more comprehensive functionality - from advanced planning and scheduling (APS) and manufacturing execution systems (MES), to sales force automation (SFA) and collaborative business-to-business (B2B) e-commerce tools - and demanding that they be integrated into their ERP backbone. Consequently, during the last few years, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), professional services automation (PSA), product data management (PDM), manufacturing executions systems (MES), business intelligence (BI)/data warehousing (DW), and e-Business (see Where Is ERP Headed (Or Better, Where Should It Be Headed)? Part 1: Functional Scope and Vertical Focus).

Faced with competitive inadequacies, the major ERP vendors have been vigorously busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning & management, and human resources. While most traditional ERP software enables the integration and management of critical data within enterprises, companies have increasingly recognized the need to deploy more advanced software systems that manage the global supply chain by enhancing the flow of information to and from customers, suppliers and other business partners outside the enterprise.

A typical ERP system now offers broad functional coverage nearing the best-of-breed capabilities; 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. Consequently, we believe that the above outlined trends in the ERP market are the direct consequence of vendors' attempts to:

  1. Resolve current ERP functional and/or technological deficiencies,

  2. Expand software sales both within their existing and potential customer bases, particularly in the lower-end of the market, by allaying the ERP complexity and costs perceptions, and/or

  3. Harness the Internet, which has been reshaping the enterprise applications market by making possible unprecedented visibility and information sharing both within an enterprise and between business partners.

This concludes Part Two of a five-part article on the ERP Market 2001 and Beyond. Part One contained a market overview. Part Three will analyze the major vendors in terms of Market Leaders/Winners, Challenger, and Losers.

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