Competitive Advantage in a Saturated Market: How Will the Big Few Do It?

How The Big Few Will Cope

Saturation of the application systems market and money-conscious enterprises are causing vendors to change gears in their business models. New accounts are hard to come by and, instead of ripping and replacing older systems, enterprises are looking for add-on enhancements and integrations. As a result, vendors are turning towards their existing customer bases for revenue. In the case of the "Big Few," who are vendors with about 20,000 or more customers and at least $1 billion (USD) in revenues, the customer base is a logical choice. By establishing business models that focuses on the existing customer base, primary streams of revenue can come from support and maintenance revenues and through developing operational efficiencies. Vendors can also sell additional software and services to their base, and, in case of Oracle, SAP, IBM, or Microsoft and other large companies, they can offer more infrastructure platform components. Securing a large customer base will also give the surviving vendors the economy of scale for support, services, and technology investments.

This is Part Two of the Achieving Growth: New Accounts versus Up-selling to Existing Accounts series.

How large of a customer base will prove large enough? The top two leaders, SAP and Oracle, now claim nearly 25,000 and 23,000 customers respectively, many of which are large and mid-size global enterprises. Infor and SSA Global currently claim around 17,000 primarily mid-size global customers, a number that is to likely grow through more acquisitions.

We expect Microsoft Business Solutions (MBS) and Sage/Best Software to fall into the Big Few category. They now have several hundred thousand and even millions customers respectively, albeit most of them are small businesses (not including small or home offices [SOHOs]). For more information, see Will Sage Group Cement Its SME Leadership with ACCPAC and Softline Acquisitions?). We also envision room for a company or two to acquire its way into the Big Few. Likely candidates from this category include, the once stampeding SSA Global, which may be on respite to focus on a sort of a "Project Fusion" before its next major acquisition. Infor, which has been particularly active recently with its still fresh acquisitions of MAPICS, Lilly Software, Mercia Software, etc. may also become a member.

In the past, some vendors have justified acquisitions by anticipating that the acquired customer base will buy new software. Even recently Oracle, for example, had a wayward "back to the future" ploy against the current market trend of enhancement and integration. It tried to persuade customers to obtain everything from Oracle, even if it meant several years of waiting for functionality. Hopefully Oracle will follow the example of other vendors and abandon this strategy since it is very expensive for the customer to change application software in terms of both money and disruption.

Most customers want to keep the software they have, increase the value received from it, and grow with it. One such product is the venerable MANMAN product. Version 12 has had notable enhancements under SSA Global's roof, although it is facing the inevitable predicament from the discontinuation of the HP e3000 hardware platform in 2003, which was beyond the control of SSA Global. MANMAN will also eventually be converged (or "fused") in the future SSA ERP LX product; however, users will, reportedly, be supported indefinitely on all older versions, albeit with likely support price tag increases. For more information, see SSA Global—The Right Product Strategy.

This is Part Two of a three-part note.

Part One detailed recent events that may change the business model of major vendors.

Part Three will discuss the choices facing customers and make user recommendations.

How Real is the Replacement Threat?

Meanwhile, other vendors are growing through acquisitions must continually simplify their development systems so they can profitably support once (or still) disparate businesses, allowing them to invest and grow. Successful vendors must be able to meet both goals simultaneously—doing what is right for the customer, while doing what is right for their business. Nonetheless, we see a challenge for every vendor who acquires its way into the Big Few: how to manage many different products to reach these two objectives concurrently. For more information, see Support for Old Releases-Good for the User but Is It Good for the Vendor?.

With industry consolidation, we naturally see apprehension on the part of end user companies, especially given that many PeopleSoft (especially former J.D. Edwards) users are concerned about Oracle's plans. This is due, in part, to Oracle's unfriendly remarks about the competitor's products, which recently softened as the merger grew imminent. But first impressions tend to stick with the PeopleSoft and J.D. Edwards faithful, especially a perceived "flip-flopping" (as seen during the recent US presidential elections). We also see increased activity in the vendor community, as competing vendors see consolidation as an opportunity to replace existing systems with their products. So, for both users and vendors, what does the efforts by these "replacement vendors" mean?

While vendors attempting to replace another vendor's products tend to offer special programs to entice customers into switching, will it be enough? Replacement vendors typically offer (sometimes hefty) discounts on products and services, and they also offer some conversion tools. Discounts and conversion tools make it more affordable to convert, but it is still impossible for the replacement vendor to address the major costs of the conversion. Namely, the checks written to software vendors and service providers for license and consulting fees are only a small percentage of the total cost—the major costs come from people and disruption.

What benefits does a replacement vendor bring to a customer who may want to switch? Today, most systems have similar functionality, so it is more of an exception when replacement vendors offer functions not available from the incumbent. Marginal business benefits may exist, but it is also the exception when these benefits can justify the expense and disruption associated with a change. For the most part, any highly discounted schemes or offers are probably not worth the disruption, exasperation, man-hours, change management, and money spent on the new implementation, integration and data conversion. It is especially less appealing if a company is replacing a functional ERP system because their current provider was acquired by another, seemingly less likeable company.

Acquisitions have been, and will be a constant occurrence in the future, and it might not be justifiable for enterprises to jump ship every time one occurs. Replacing an ERP system is often comparable to brain surgery—only to be performed if the patient is dying, or if at least will be seriously incapacitated otherwise. Hence, installed base and current customers are generally a conservative, risk-averse crowd, and, unless flagrantly pushed away (which is not likely to happen any time soon, unless the vendor is completely out of touch), will take a wait-and-see approach with the likes of Oracle. For more pertinent information and discussion, see The Old ERP Dilemma— Should We Install The New Release?, The Old ERP Dilemma—The Refresh Option and The "Old ERP" Dilemma: Replace or Add-on.

New Accounts and the Big Few

Of course the Big Few will continue to sell new accounts, particularly in still unpenetrated or emerging markets. In Asia-Pacific, East and Central Europe, Africa, and South America, new accounts will represent significant license growth. This infusion of "fresh blood" is also important for the future health of these companies, driving them to innovation and to replace natural installed-base attrition. To that end, one might acknowledge Oracle's rationale to acquire its archrival, given that Oracle has had protracted and sagging applications license revenues that have been riding on the coattails of database and platform revenues (see Stalled Oracle Fumbling For A Jump-Start Kit). Given the outcome of the merger and Oracle's recently declared "Project Fusion" plans, not only should PeopleSoft customers get some closure and have a better idea where they now stand, but Oracle applications customers should also be assured of the vendor's commitment to the market.

With this deal, Oracle becomes a formidable applications player, so that only it and SAP emerge as the two, main, isolated, dominant players. Both can now expect to be the "usual suspects" on most major prospective customers' selection shortlists.

On their hand, Big Few vendors also serve an extremely varied set of customers in dozens of industries, hundreds of countries, and companies range from a dozen employees to dozen of thousands and more. Therefore, some of these customers will want entire, integrated enterprise systems, while others might only be looking to tackle one burning business issue right now. Additionally, nowadays these vendors struggle to make their flagship product lines fit every need in a one-size-fits-all fashion.

Thus, there seems to be hope for the smaller vendors' business model, which focuses on a relatively small, tightly defined market with specific requirements that cannot be met with more generic products (see Smaller Vendors Can Still Provide Relevant Business Systems). Usually, these markets will be too small for the Big Five to want to compete in. Moreover, they will also have unique requirements which cannot be easily built into the more generic, monolithic products. These boutique vendors (see Boutique Vendors Can Bring Real Value) can compete by having in-depth product functions and intimate knowledge of their market place or by offering services (content or location) that is not available from the Big Few or independent service providers. Examples of these markets are industrial, such as fresh meats, jewelry retailers, dentist offices, law offices, etc. or have a regional (e.g., Albuquerque, Boise, New Orleans, etc.) focus.

In summary, what will the application market look like in a few years? We see a few very large vendors with products that are aimed at a very large percentage of business, plus many smaller vendors whose products are tightly focused on specific vertical markets as illustrated in the figure below.

This concludes Part Two of a three-part note.

Part One detailed recent events that may change the business model of major vendors.

Part Three will discuss the choices facing customers and make user recommendations.

Olin Thompson is a principal of Process ERP Partners. He has over twenty-five years experience as an executive in the software industry. Thompson has been called "the Father of Process ERP." He is a frequent author and an award-winning speaker on topics of gaining value from ERP, SCP, e-commerce, and the impact of technology on industry. He can be reached at Olin@ProcessERP.com.

Predrag Jakovljevic is a research director with TechnologyEvaluation.com (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP. He was also a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade, Yugoslavia, and he has also been certified in production and inventory management (CPIM) and in integrated resources management (CIRM) by APICS.