Where Is ERP Headed
(Or Better, Where Should It Be Headed)?
Part 3: E-Business and Mid-Market Shakeout
P.J. Jakovljevic - April 25, 2001
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.
ERP vendors, on the other hand, are not doing so well, possibly because they have been busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning & management, and human resources.
Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function. Within the next two years, ERP will be redefined as a platform for enabling e-business globally.
Therefore, users need to be aware of the trends within the ERP market so they can take into account all the necessary factors when making an ERP software selection: product functionality, product technology requirements, vendor corporate strategy, and vendor corporate viability.
About This Note
This is a four part note, which each part covering two of the eight trends we have identified. Each part contains links to the preceding parts. The trends covered in each part are:
- ERP Functional Scope Expansion
- Sharper Vertical Focus
- Flexibility, Agility & Interoperability Enabled
by Adaptable Architecture
- Web-Basing of ERP Systems
- Provision of e-Business Components
- Mid-Market Shakeout
- Advent of Application Hosting Services
- New Pricing Models
5 - Provision of e-Business Components
As mentioned earlier, one of the most significant trends in the ERP market now is the advent of e-business. As business processes shift outward from the enterprise, ERP vendors have realized the need to evolve into comprehensive supply chain solution providers to satisfy market demands. Almost every vendor has begun repositioning and re-branding itself as an e-business enabler, although many admit they are still figuring out the rules on the fly. Web storefronts, users' self-service, portals, e-procurement, trading exchanges, and net markets are the most common e-commerce offerings available today, but technology and customer feedback may likely re-shape future applications.
Traditional ERP applications have so far proven inadequate in this new world of e-business because their primary focus has been on automating internal processes and coordinating transactions, not on enabling external collaboration between a business and its constituents. However, this is rapidly changing as the notion of extended ERP takes hold. Extended ERP takes a different view of the world, and has been promoted by most of the major ERP vendors in the form of two still emerging application areas: 1) Supply chain applications and 2) Customer management applications.
Although the information flow through the Internet is becoming more amenable to transaction-processing all the time, particularly with the advent of new technologies like Java and XML, it is still mostly processed by applications, ERP packages being the best example. The great benefit of ERP is integration - enabling all users to use the same information and business processes and obtain the same results when the system is queried.
While there is a myriad of exciting point-specific applications with a strong Internet orientation, these applications do not currently provide strong information integration among companies. Integration with ERP has never been easily achievable, although it is generally worth the trouble. The integration allows firms to offer services such as available-to-promise (ATP) inventory, which means that customers do not order 'pies in the sky'. If procurement systems are not integrated with sales, manufacturing and logistical systems, ATP is just a teasing hallucination. A lot of the pure play e-commerce vendors cannot provide it at this stage, despite their highly Web-enabled applications. Therefore, the merits of ERP will prevail for a long time to come, as the focus will be the management of e-commerce through ERP.
5a - Web Storefronts, Self-Service and Portals
One of the first e-commerce initiatives ERP vendors offered to its customers was Web storefronts, mainly for business-to-consumers efforts. Partnerships with Internet Service Providers (ISP) allow companies to post product catalogs and pricing information on the Web. Through recurring interactions, companies can learn more about their customers and personalize the storefront experiences for each customer. On the other hand, existing and prospective customers can browse product offerings, place items into electronic "shopping carts," and select shipping and payment methods. An integrated storefront with a back-office ERP system will automatically transmit and update order and product availability information throughout the database. Consequently, storefronts help companies provide accurate sales information over the Internet with minimal cost and effort.
With self-service, companies can provide a web-enabled interface to parts of their ERP system for a casual interaction. Customers, for example, can then access critical information through the Internet, which allows them to update their contact information or place and view orders' status at their convenience, round the clock. Self-service supplements front- and back-office applications by allowing business partners and employees to obtain and/or change certain data. Seamless integration between the self-service application and the ERP solution obsoletes "office hour" time constraints, inefficiencies, and errors that often occur when business partners exchange information.
Aptly named, portals open a window of communication between ERP vendors and communities of customers, partners, content providers, advertisers, and, in most cases, the general public. Leading ERP vendors have therefore made moves to adopt web portal strategies. The basic goal is to create a virtual workplace and marketplace for ERP users, where the ERP applications, other disparate back-end systems, and external content and services (catalogs, directories, travel services, benefits administration, etc.) can be seamlessly and transparently accessed by users via the Web.
By personalizing, profiling, and presenting its information, business applications and inter-organizational interfaces in the context of roles and work processes, an enterprise portal provides a thin-client link to work-based resources within the enterprise. Portals are a natural result of competition, the need for better customer support, and the Internet. If nothing else, portals also afford more backward vendors a low cost, low risk entry into the Internet marketplace. Portals also allow vendors to reach a greater number of users, which increases system usage and creates the opportunity for higher license revenues.
5b - e-Procurement and Trading Exchanges
Online communities where companies can buy and sell products have become very popular in the past few years. Companies look to these business-to-business (B2B) communities to reduce administrative costs, improve turnaround, and to help control inventory and spending. In response, ERP vendors are developing, both internally and through partnerships and/or acquisition, tools and applications targeted at this rising segment of the Internet procurement market.
The first e-procurement applications focused on indirect MRO (maintenance, repair, and operations) supplies. E-commerce vendors introduced concepts of putting supplier catalogs online and facilitating any authorized party to place an order within established contracts and pricing.
ERP vendors are beginning to offer integration that will automate the Request for Quotes (RFQ) process. Through a direct link with their financial software, companies can electronically download invoices into their accounting system, which is cost effective for both buyers and suppliers. In the future, procurement sites will offer in-depth information on vendor performance, online order tracking and history, and integration with financial institutions.
E-markets fall into different categories depending on where the software resides, who controls or sponsors the market, and whether direct or indirect goods procurement is available. Though current exchanges predominantly involve only spot, commodity-level purchases, there is a move towards making e-markets responsible for the full trading lifecycle spanning procurement, SCM, and CRM. ERP vendors are actively pursuing strategic relationships with e-commerce vendors, industry groups, and trading exchanges.
Trading exchanges, such as eSteel.com, Elemica, or ecFood.com, are typically organized by industry and serve as intermediaries, connecting suppliers and buyers in one database. They often list and rate products, helping companies find compatible business partners. Companies can use these marketplaces to negotiate prices, trade online, and perform basic purchasing transactions and business directory functions. Integration with ERP software will allow companies to automate the requisition process and eliminate unnecessary paperwork. Using online services to gather product information, companies can participate in bidding and compare costs with other vendors, while their customers can configure products, view prices, and search catalogs.
On the other hand, net markets, such as SupplierMarket.com and FreeMarket.com, use a reverse-auction process that employs an online "broker" to find suppliers for companies, which should eliminate commission costs and help companies find the lowest available prices on needed parts and materials. For companies who participate in net markets as suppliers, they benefit through the opportunity to sell in a global marketplace, which allows small suppliers to attract larger corporations.
Implications of This Trend
Because so many vendors offer e-procurement capabilities, it is becoming increasingly important for them to distinguish their portals from competitors. We believe that ERP vendors are uniquely capable of doing this by providing value-added services that relate to procurement in fundamental ways.
Users who want to cut their indirect material costs should not delay in selecting an appropriate vendor that offers online procurement, either a package vendor or Internet-based portal. For direct material purchases, where on-time deliveries are an imperative, users should partner with an ERP package vendor or a portal backed by supply chain planning that can bring the intelligent backend planning capabilities to fulfill online material purchases.
ERP- driven e-business will have to extend well beyond providing business partners self-service portlets. It will have to allow trading partners not only order status tracking but also the enterprise plans and conditions down to plant level for more efficient two-way interaction and support.
6 - Mid-Market Shakeout
ERP vendors have long been consolidating. The top 5 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., J.D. Edwards & Company, and Baan Co., account for close to 60% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify.
Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side. The Y2K-problem caused market slump has been particularly hard on the smaller vendors. They have the same need to expand their offerings 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 wary.
While we do not necessarily expect larger ERP vendors to swallow up their smaller brethren, a number of intra mid-market acquisitions and/or merger such as 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, is very likely. We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc., a UK plant automation manufacturer with its acquisition of Marcam Solutions and Baan, as well as Microsoft's very recent acquisition of Great Plains.
Intensified M&A activity also stems from the fact that while the concept of best-of-breed will not go away, users will increasingly 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 bent.
Implications of This Trend
ERP has long moved into the small-to-medium enterprises (SMEs) market and evolved into a more stable technology that makes fewer demands on the IT staff and has become less expensive and time consuming to implement. This trend, bundled with strong vendor competition, will drive increased merger & acquisition activity in the entire business applications market. Smaller ERP vendors should 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. The 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.
In addition, we predict some unconventional acquisitions, such as the acquisition of ERP vendors by best-of-breed e-commerce, CRM, SCM, or plant automation vendors, with a view to offer a more comprehensive and integrated solution. Furthermore, ongoing 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.
Conclusion of Part 3
This concludes Part 3 of a four part note on ERP applications trends. This part covered two trends: the provision for e-Business components and the mid-market shakeout.
Part 1 covered two trends: ERP functional scope expansion and sharper vertical focus.
Part 2 covered the challenge ERP vendors face in developing an adaptable architecture that is flexible, agile, enabled for interoperability, as well Web-basing ERP systems.
Part 4 covers the advent of application hosting services and new pricing models.