2000s—Back to the Future
Integrated enterprise resource planning (ERP) software solutions became synonymous with competitive advantage, particularly throughout the 1990's. The idea behind ERP systems was to replace "islands of information" with a single, packaged software solution that integrates all traditional enterprise management functions like financials; accounting; payroll; human resource (HR) management; and manufacturing and distribution, and thereby ensure enterprise-wide transaction system coherency. Knowing the history and evolution of ERP within the broader enterprise applications concept is essential to understanding its current use and its future developments. The following is the genesis of enterprise applications by era.
ERP systems should help companies become leaner by integrating the basic transaction programs for all departments, allowing quick access to timely information. However, ERP inherited MRPII's basic drawbacks, which are the assumption of infinite capacity and the inflexibility of scheduling dates, preventing companies from taking full advantage of speedy information flow.
This brings us to the still ongoing phase of users' disillusionment and their consequent wising up, while the vendors had to take the school of hard knocks and adapt accordingly or fail. Namely, the growth and heydays of ERP throughout the most of the 1990s had been a direct result of the fierce global competition, shortening product life cycles, highly distributed operations, and information-driven management that largely characterize today's business environment. The vast majority of companies have always hoped to purchase an information system as a product, not as a collection of technologies, components and services. Leading ERP vendors have been relatively successful at that stage because they had attempted to build such a product.
A typical ERP system indeed now offers broad functional coverage nearing the best-of-breed capabilities; vertical industry extensions; a strong 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.
However, ERP vendors have by and large not fared so well lately. The initial plight of the vast majority of ERP vendors was mostly attributable to the Y2K-problem caused 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 expanding and profitable during 1999 and 2000 than in
1998, measured in the total raw dollar revenues and net income. But, the 2000s
have proven to be even more adverse years in the entire enterprise applications
market. Following the whopping growth rates of the late 1990s, and the short-lived
spending surge on sexy e-business-related technology in 2000, hard times worldwide
and in almost all sectors have since subsequently morphed into harrowing times
for all enterprise systems providers alike. While the biggest and richest vendors
have been able to hang onto flat new sales, potentially modest declines, or
in other cases, potentially modest growth, only the lucky or the most apt few
with a true differentiation in a selected number of markets (such as warehouse
management systems [WMS]/supply chain execution [SCE] or strategic sourcing)
(see Glossary*)
have bucked the trend and have recently shown some enviable growth (see The
Hidden Gems of the Enterprise Application Space).
This
is Part Three of a six-part note.
Parts
One and Two covered developments from the 1960s through the 1990s.
Parts
Four and Five will discuss ERP evolution.
Part
Six will look at the future.
*There
is a Glossary
for the terms italicized throughout this article.
Causes of Market Slowdown
We
believe that the ERP market slowdown since the end of the 1990s has in a great
part been attributable to the following factors:
- The
historical growth in sales of ERP applications had come from large, Fortune
1000 multinational corporations. This market has consequently been highly
penetrated (well over 70 percent), and new, large-scale back-office implementations
in the F1000 customer base have all but stalled. For that reason, most vendors,
tier 1 and lower tier ones alike have lately focused more on the less penetrated
lower-end of the market, with variable success. For more info on large vendors'
attempts at the market segment, and on incumbent mid-market vendors' defensive
moves, see Software
Giants Make Courting A Small Guy Their 'Business One' Priority.
- However,
even the relatively untapped small-to-medium enterprises/businesses (SME/SMB)
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.
Namely, it has long been an open secret, general feeling based on rumors,
news headlines, and many survey reports albeit hidden within trade publications'
or analyst houses' vaults and largely inaccessible to mass audience owing
to exorbitant subscription fees—the fact that many major companies are still
having difficulty achieving effective ERP systems even after a full year of
implementation.
The above information
is based on the report titled ERP Trends (Research
Report 1292-01-RR), which was released in 2001 by The Conference Board
(www.conferenceboard.org),
the premier business membership and research network worldwide. The general
feeling, however, is that the situation can be mirrored across the entire
enterprise applications space. Namely, when at the end of the 1990s many decided
to put ERP down as systems for merely "crunching back-office transactions,
which remain locked up therein ever after," guess what, the seemingly sexier
customer relationship management (CRM) or supply chain management
(SCM) systems have not meanwhile proven any more beneficial either.
In any
case, approximately 40 percent of participants in The Conference Board survey
reportedly failed to achieve their business case even a year after having
implemented ERP. What has generally not been known for sure though was the
more exact percentage of failed implementations. Vendors and consultants,
on one hand, would argue that these were mere individual cases out of thousands
of implementations, and that the bad perception is merely a product of media's
overzealous attention to only the bad news. On the other hand, many prospects
and customers may believe that the situation has even been worse than some
may have thought as most of these problems typically never make it to the
headlines because either a more convenient and less embarrassing justification
exists or the company cannot reliably trace the problem back to the software
or implementation. Although the report does not mention it specifically, the
general feeling is that the percentage of failed implementations is higher
in the higher-end of the market. For more information, see The
'Joy' Of Enterprise Systems Implementations.
- Closely related
to the above would be the inherent adequacies that traditional ERP systems
have had, some of which have been noted earlier, and which have left enterprises
struggling with a system that does not mesh with their operations. This has
particularly been true for manufacturing companies that account for the lion
share of ERP customers given their early adoption, as also depicted earlier.
Thus, the lean, flow or demand-pull manufacturing support philosophy
has lately been getting an increased interest, given the ERP systems of the
1990s have been burdened with the liability of carrying on some well-publicized
MRP problems like complex multilevel BOMs, infinite capacity, inefficient
workflows, and unnecessary (for example, no value-adding) transactions, activities
and data collections, which have not been amenable to mass-customization but
rather to traditional push-demand, mass production, and inventory building
trends. For more details, see Pull
versus Push: a Discussion of Lean, JIT, Flow, and Traditional MRP.
The fact is also
that only a minority of all ERP vendors properly support certain manufacturing
environments, such as engineer-to-order (ETO) or process manufacturing.
This brings us to so called "fatal flaws", which are missing functions that
may make it extremely difficult if not impossible for the application software
to run the physical business. For more details, see Find
The Software's Fatal Flaws To Avoid Failure and The
Fatal Flaws for Process Manufacturers.
- Further, many
ERP systems have also been based on a top-down, centralized organization,
which does not enable effective planning and management of autonomous satellite
plant operations. What will thus differentiate the leaders from the rest of
the ERP pack will be the breath, depth, and diversity of plant-level, and
distribution centers requirements (this includes flow-based manufacturing,
work instruction, dynamic dispatching, etc.). The planning functionality will
have to extend to the shop floor or distribution center level, whereby manufacturing
and distribution functions will become intermingled. For more information,
see Trends
Affecting Manufacturers and ERP and Standardizing
on One ERP System in a Multi-division Enterprise.
- The above predicaments
have 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 enterprise vendors' marketing
rhetoric. This will be the topic of another forthcoming article on the evolving
core-ERP scope. Meanwhile, for more information at this stage, one can peruse
Best
of Breed Versus Fully Integrated Software: The Pro's and Con's, Single
Source or Best of Breed - The Debate Continues.
- The ongoing
technology paradigm shift from client/server to the Internet-based
architectures has created uncertainty about investing in traditional client/server
technologies, which are still present (however in an obfuscated manner) among
many ERP players' offerings. The second half of 1999 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, which has rendered the outdated architectural and business perspectives
of traditional ERP obsolete.
In order to reinvent
itself for the new collaborative external world, ERP products 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. The new generation of
ERP systems will have to be more customer-focused and will extend beyond the
enterprise through e-commerce interaction and collaboration with business
partners. Like some of the above bullet points, this one too will be the topic
of another forthcoming article on the underlying technology of enterprise
applications. For more information at this stage, one can peruse What's
Wrong With Enterprise Applications, And What Are Vendors Doing About It?
Consequently,
many have failed to see deploying ERP (and other enterprise applications for
that matter) as a competitive advantage. Therefore, we believe that many outlined
trends in the enterprise applications market, some of which will be analyzed
here and will be the subject of another forthcoming article on the trends in
the enterprise applications market, are the direct consequence of vendors' attempts
to
1) Resolve current
ERP functional and technological deficiencies, as to finally fulfill the initially
over-hyped benefits in the past,
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, or
3) Further 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 Three of a six-part note.
Parts
One and Two covered developments from the 1960s through the 1990s.
Parts
Four and Five will discuss ERP evolution.
Part
Six will look at the future.
Sources
and Recommended Further Readings
- ERP:
Tools, Techniques, and Applications for Integrating the Supply Chain. Second
Edition;
Carol A. Ptak, CFPIM, CIRM, and Eli Schragenheim; The St. Lucie Press/APICS
Series on Resource Management; 2nd Edition, 2003
- Selected
Readings in ERP;
APICS Complex Industries SIG, 1999
- Maximizing
Your ERP System: A Practical Guide for Managers;
Dr. Scott Hamilton; McGraw-Hill Trade, 2002
- APICS
Dictionary;
10th Edition