The ERP Market 2001 And Beyond
Part 4: Market Predictions
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 Four of a five-part article. This part contains Market Predictions.
One is an overview of the ERP market and how ERP is expanding to included
SCM, CRM, and e-procurement. Part
Two discussed the vendors' reaction to market changes. Part
Three briefly analyzed some of the major ERP vendors. Part Five will
contain recommendations for the vendors and users. Part Five will contain
links to the preceding parts.
Although we believe that exorbitant growth rates are a matter of the past,
growth will remain the word associated with the ERP market in the 2000's
despite unfavorable economic conditions that were exacerbated with the
tragic terrorist events. In addition to the growth created by the fact
that many companies have not yet solved their basic ERP needs, particularly
in non-manufacturing sectors and in small-to-medium manufacturing market
segment (with penetration lower than 30%), we believe that the following
factors will further drive this growth:
great number of companies who were reticent in making their strategic
ERP investments before 2000 and resolution of Y2K, will have to make
that investment in the foreseeable future in order to meet competitive
pressures. The economic downturn has also highlighted the importance
of both internal and external enterprise effectiveness. There is a
growing awareness that one has to improve internal operations before
effectively conducting collaborative e-business.
emergence of Internet-based system solutions will lead to a faster
flow of information between all members of the logistics chain. Demands
on quality, customer-focus and faster deliveries are intensifying
at an increasing pace. Globalization and increased competition drive
companies to seek to differentiate themselves through distribution
and delivery models. This will require extensive change and a need
for new enhanced ERP systems. The future of ERP lies in improving
the supply chain and fostering better collaboration across multiple
enterprises. Some ERP vendors have already started creating private
trading exchanges (PTX) consisting of their large existing users and
their trading partners, whereby ERP vendors provide all the necessary
enhanced functionality offered by ERP vendors will increase the number
of end users within the current customer base. Currently, ERP is used
by less than 20% of a company's employees, on average. We predict
that number to double within the next 3 years (70% probability).
large companies that are only completing first implementations at
their headquarters, now must expand their ERP reach to many divisions
within the company. Conversely, some global corporations that let
their divisions implement heterogeneous, disparate ERP products may
benefit from consolidation and rationalization of ERP instances. Furthermore,
a number of mergers and divestitures require immense efforts to rationalize
incumbent ERP assets.
sectors, such as utilities and the public sector, that have been late
adopters of ERP as they could afford expensive internally developed
legacy systems in the past, are now exposed to increased competition
due to deregulation and increased globalization, and are turning to
deployment of ERP software at least for centralized finance and HR/payroll
in order to remain competitive (see Fed
Gives ERP A Shot In The Arm).
and Adolescent ERP-Adjacent Applications
While far from being dead, ERP will, nevertheless, have to step aside
and share the spotlight with the fast growing adolescent ERP-adjacent
areas like SCM, CRM and e-procurement. Furthermore, ERP growth will become
obscured in the future since many vendors fail to specify how much of
their revenue comes from core ERP as opposed to extended-ERP modules.
Therefore, ERP will eventually forsake its identity within the enterprise
applications market, which will be a concoction of ERP and the above-mentioned
believe that, in the meantime, ERP will be redefined as a platform for
enabling e-business globally. Originally focused on automating internal
processes of an enterprise, ERP systems will include customer and supplier-centric
processes as well. The conclusive evidence of this redefinition is the
move of all major ERP players into CRM and SCM applications.
software suites will become universal business applications that will
encompass front-office, business intelligence, and e-commerce/supply chain
management, and ERP acronym will no longer be sufficient to cover it,
so we would like to suggest new acronyms - iERP, meaning inter-enterprise
resource planning and/or cRP, meaning collaborative resources planning.
vendors have been taking ever-bigger slices of SCM and CRM pies. SAP and
its peer Tier 1 ERP vendors might have a head start over niche vendors
even if they are still not functionality on par - it may suffice to satisfy
the critical majority of current business requirements now. Conversely,
the CRM and SCM niche vendors' current value proposition of uneasy integration
to existing back-office systems can be much more than prospects are prepared
to digest it at this stage. Therefore, we predict that within the next
three years, over 70% of the license revenue of the SCM market and over
50% of the license revenue of the CRM market will come from current ERP
vendors (70% probability). Currently, these figures are estimated to be
less than 30%. By the same token, we predict that within the same time
period, more than 60% of ERP revenues will come from outside of core ERP
applications. As a result, core ERP applications will contribute only
around 30% of the entire enterprise applications market, while the rest
will be almost equitably shared among SCM, CRM and e-procurement markets.
Will Vendors Adapt?
While the concept of best-of-breed will retain its appeal (see Single
Source or Best of Breed -The Debate Continues) in the high-end of
the market, users will often 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.
ERP vendors and best-of breed CRM or SCM vendors will acquire new functionality
and merge to protect themselves. There is a multitude of players in the
market and it is very unlikely that all will survive in the long run.
We predict that more than 40% of current ERP vendors will not survive
until 2004 (70% probability). About half of these will transform into
system integrators, while either relegating their product to a niche 'bolt-on'
or legacy status.
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.
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 (See Table 1). Despite the user preference for a single,
'one-stop shop' vendor, componentized software products, interoperability
standards and Internet technology will lead to fewer large-scale projects
and an ongoing stream of smaller ones. Easy integration to third-party
applications has become a key selling point for ERP vendors as many of
them tout the provision of connectors to/from their systems and/or provision
of integration development tools. This will force third-party system integrators
and consulting companies toward fixed-price, fixed-time implementations.
Moreover, vendors will increasingly attempt to conduct system integrating
and consulting work themselves, which will further decrease the industry
average license revenue/total revenue ratio (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
concludes Part Four of a five-part article on the ERP Market 2001 and
One contained a market overview. Part
Two covered how vendors are reactive to market changes. Part
Three analyzed the major vendors in terms of Market Leaders/Winners,
Challenger, and Losers. Part Four contained Market Predictions. Part Five
will contain recommendations for vendors and users.