Jakovljevic - May 3, 2000
This is the second part of an extended note on the current market trends
for Enterprise Resource Planning.
growth of ERP has been a direct result of the fierce global competition,
short product life cycles, highly distributed operations, and information-driven
management that 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 successful so far because they have been
attempting to build such a product.
typical ERP system today offers broad functional coverage; 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.
on ERP vendors (discussed in the TEC Technology Note Essential ERP
- Current Market Trends - Part I) lead us to believe that the following
trends in the ERP market are the direct consequence of vendors' attempts
to 1) resolve current ERP functional and/or technological deficiencies,
and/or 2) expand software sales both within their existing and potential
customer bases, particularly in the lower-end of the market.
The ERP Market Trends covered in the TEC Technology Note Essential
ERP - Current Market Trends - Part I are:
- ERP Functional Scope Expansion
- Sharper Vertical Focus
- Flexibility Enabled by Adaptable Architecture
The ERP Market Trends covered in this note are:
- Web- and E-commerce Enablement of ERP Systems
- Intensified Market Merger & Acquistion Activity
- Advent of Application Hosting Services
Web- and E-commerce Enablement of ERP Systems
Indisputably, one of the most significant trends in the ERP market today
is the advent of e-business. No industry remains unaffected by the changes
created by the explosive development of the Internet. As the reality of
enabling seamless web-based collaboration between companies and their
customers and suppliers becomes more of a reality each day, ERP applications
are poised to play a pivotal role.
concept of e-commerce is not really new to ERP: electronic data interchange
(EDI) and electronic funds transfer (EFT) have been a part of ERP applications
in varying forms for years, and are now in the process of being redefined
(and given a makeover at the same time) to embrace the Internet and Web.
The focus of EDI, EFT, and e-commerce in general is on transactions, which
is something that traditional ERP applications excel at handling.
extending these transactions beyond the corporate walls to the world of
the Web poses its own set of challenges - namely, maintaining transaction
integrity and security - the real challenge for ERP is enabling intelligent
collaboration between companies and their customers and suppliers. This
is the notion of e-business, of which e-commerce and its transactional
focus play a role. 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 emerging application areas:
ERP to the Internet stems from the intent of many IT organizations not to
reinvent the wheel in their scramble to create e-commerce applications.
By extending the existing ERP system to support e-commerce, organizations
not only leverage their investment in the ERP solution, but can also speed
the development of their e-commerce capabilities.
- Supply chain applications - The focus here is on extending
the production planning, scheduling, and delivery execution processes
to a company's suppliers and trading partners. While there are transactional
components to supply chain, the primary focus to date has been on business-to-business
(B2B) planning and collaboration. Business-to-business procurement can
also fall in this category, yet the focus is often on procuring non-production
related goods from suppliers.
management applications - These applications focus on extending
sales, marketing, and customer service/support beyond corporate boundaries
to the customer doorstep. There are transactional components here as
well, as in the case of Web storefronts and unassisted sales. The broader
picture includes Web-based self-service, promotions and one-to-one marketing,
and content delivery.
as mentioned earlier, ERP systems have proven difficult to change and
extend. Barricaded behind complex, proprietary APIs and based on complex,
nearly indecipherable relational database schemas, ERP systems do not
readily take to e-commerce. Nevertheless, IT managers are finding an increasing
set of options for not only extending these systems to support the Web
and e-commerce but for other key activities, such as decision support.
the new options are ongoing initiatives to break ERP systems into separate
components (componentization), open up the core databases and proprietary
application interfaces, and provide tools for customization.
ERP vendors have been trying to oblige users' demand for e-commerce capabilities
in their ERP solutions. SAP revealed a slew of Web and e-commerce solutions
at its last SAPPhire conference in 1999. Since then, SAP introduced mySAP.com,
a suite of e-commerce components for SAP. Oracle has numerous initiatives,
including one that will allow its ERP, CRM, and e-commerce solutions to
share the same database. Baan and J.D. Edwards have both rolled out some
e-commerce modules. Finally, Peoplesoft's newest version includes a number
of e-commerce capabilities, including support for online procurement and
eStore, PeopleSoft's online sales and customer management solution. Lawson
Software, Epicor Software, Infinium Software, Great Plains Software, Symix
Systems, and American Software are the mid-market ERP vendors with similar
initiatives, to name but a few.
first stage in the ERP's conquest of the Web is to allow browser access
through support for HTTP, HTML, and Java. This stage has almost been completed
by a majority of ERP vendors. The next stage, which has just begun, is
to extend the ERP applications themselves to the Web, where they can be
accessed and run by outside partners and customers. These Web-based applications
are hybrid in form, bringing together proprietary legacy elements, either
host-centric or client/server, with thin client interfaces.
order for traditional ERP systems to be Internet ready, they will have
an Internet-only ERP system in place, client-side software upgrades become
unnecessary. Browser-based applications significantly simplify the training,
and tying together far-flung locations of an enterprise becomes simpler
- Fully browser enabled
to be available to all corporate users, not just the special few
to be available to customers and suppliers
to use new data interchange language, most likely extensible markup
language (XML), rather than proprietary protocols
portals on intranets leverage this architecture's value in aligning
intranet workplace resources more closely with business objectives. Leading
ERP vendors have also made moves to adopt web portal strategies.
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.
the concept of an ERP portal is an interesting one, we identified the
following challenges for vendors pursuing this route:
Intensified Market Merger & Acquisition Activity
- the success of a portal is predicated on how well it ties together
internal and external transactions, content, and services.
partnering - ERP vendors face a whole slew of potential new partners,
many of which are not traditional technology companies.
and, more importantly, an ERP portals' business model are still very
with these Web initiatives, ERP vendors are falling into line with what
their customers actually want and need. We believe that, within the
next four years, over 40% of Fortune 1000 Companies will manage their
own enterprise portals to enable effective use of personalized decision
content, to provide role-based access to internal business applications
and workflow, and to facilitate B2B e-commerce integration (70% probability).
Advent of Application Hosting Services
The ERP market appears to be consolidating. The top 6 ERP vendors,
SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software, J.D. Edwards
& Company, and Baan Co., account for over 65% 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 (for more information see the TEC Market Note
on ERP published in January 2000). We believe that this will become
more accentuated, with customers becoming more vendor viability wary.
We expect larger ERP vendors to swallow up their smaller brethren,
both in ERP and related markets, such as the recent IFS AB acquisition
of Effective Management Systems, Inc., the manufacturing execution systems
(MES) vendor, MAPICS' acquisition of Pivotpoint, the vendor of extended
ERP for mid-market companies, and Symix' acquisition of Profit Soutions,
the eCRM vendor.
We also expect companies with related software products to move into
the ERP space through acquisition like Invensys, Plc. with its acquisition
of Marcam Solutions.
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 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
Smaller ERP vendors and best-of breed CRM or SCM vendors will acquire
new functionality and merge to protect themselves. We predict that more
than 50% of current ERP vendors will not survive until 2004 (65% 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 CRM or SCM vendors, with
a view to offer a more comprehensive solution. We believe that, within
the next two years, Siebel Systems and i2 Technologies will have to
resort to acquiring an ERP vendor (60% probability). 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.
The large players (i.e., the Big Six) have inherent advantages and
incentives to develop or acquire needed competencies: their installed
base, their market clout, and their ability to commit resources to development.
To separate themselves from the rest of the pack, they will either (1)
have to use those internal resources to develop their own extended products
and capabilities, as SAP has done, or (2) have to buy/use someone else's
superior technology/product, which was the route generally pursued by
other large vendors.
Small vendors should either (1) try to develop the above mentioned
required competencies and build up as much market share as possible,
either under their own steam or by means of mergers & acquisitions,
thereby strengthening their position, or (2) align themselves with a
Application Service Providers (ASPs) have arisen on the Internet in
response to such ERP woes as support expenses, misbehaving application,
and server downtime. Assuming an organization ports all application
functionality to an ASP, the only real concern for internal IT individuals
would be ensuring a rich and stable connection to the Internet.
ASPs use a "Thin Client" configuration, which means that any hosted
application accessed by an end user, such as e-mail or word-processing
application, is transmitted to the desktop via a series of streaming
screenshots, thereby minimizing the need for excessive bandwidth and
software installations on the client machine.
The downside is the long-term cost of "leasing" the service. One of
the primary benefits of outsourcing is the initial negation of "up-front"
costs associated with the implementation of a production system. However,
after certain period of time, the outsourced system will cost more than
an "in-house" production system. An analogy may be made to a group of
3 college roommates who need a big-screen television to watch football.
Each roommate pays $20 per month for 3 years, totaling $2160 when the
television could have initially been purchased for $1200. The appeal
is immediate gratification coupled with reduced initial financial pains.
The main challenge facing most ASPs is how to drive down long-term
costs while accumulating a solid revenue stream. One of the cost inhibitors
for ASPs is the amount of dedicated bandwidth they must maintain to
support thousands of users. Another challenge facing ASPs is Service
Level Agreements (SLA); if for some reason the ASP loses Internet connectivity,
customers will lose connectivity to outsourced production systems, which
negatively impact their internal SLAs.
The key to an ASPs success will lie in the targeted marketplace. Those
ASPs targeting large organizations will most likely fail (probability
75%) or scale back their profit margin in order to gain business. Those
ASPs who can successfully market to small-to-midsize enterprises (SMEs)
and emerging '.com' companies while providing good technical support
coupled with frequent software and hardware upgrades will experience
good success. We believe that, within the next three years, application
hosting will be the dominant delivery model for packaged delivery for
SMEs (70% probability).
- Predictable, fixed cost for a customer
- Reduced setup and configuration time, and greater operational simplicity
- All upgrades applied to ASP servers. No need for client or desktop
- Limited funds required for initial startup Reduced need for internal
- ERP package maintenance performed automatically by external experts
- Outsourcing is still in its infancy, first customers being early
- Potential security risk since customers' confidential and mission-critical
data reside at the ASP's location
- Becomes more costly over the long run Offers little or no support
for software modifications/customizations
- Decreased control over infrastructure and deployment
- Limited to Direct Access Points for your ASP or need for secondary
Internet access account depending on user travel plans
- Little to no control over hardware and software upgrades
- Support costs are essentially negated and a monthly per user charge
- Those with limited investment capital and those that do not have
an IT department
- Those that do not anticipate a high rate of change in the way they
- Those investing in an application to streamline costs rather than
to enhance revenue
- Those that lack resources for the rapid implementation of a distinct
project that possibly does not require complex integration with existing
applications (e.g., HR/Payroll administration, e-mail, etc.)
and Overall User Recommendations
Without a doubt, ERP remains the information backbone for contemporary
manufacturing enterprises. However, today's ERP systems are required
to address more than the processes taking place within the walls of
an enterprise. They must be able to address the players and processes
involved in extended enterprise - the people and partners that the manufacturers
collaborate and coordinate with in their supply chains.
While the Web and e-commerce will continue to be a major ERP direction,
we foresee more ERP trends will appear on the radar screens of industry
observers and IT managers. Easier enterprise applications integration
(EAI), more flexible pricing, reduced urge to customize an application,
and embedding analytical applications and knowledge management are some
of the best prospects among the next wave of ERP hot-buttons. The lesson
to draw, however, from the past few years as ERP fad after fad jumped
into the spotlight and then receded almost as quickly, is to be selective.
Some, but certainly not all of these trends will prove worthwhile.
Users' need to understand their business requirements and critical
business processes can never be overemphasized. Not knowing their present
business state of affairs as well as their strategic intent and direction
will disqualify any future ERP system implementation from being a success.
Clarifying this should help users create a long list of vendors to include
in an ERP package selection. Precedence should be given to vendors with
a proven vertical focus on the user's industry. Users should also be
aware of consolidation in the ERP market, and corporate viability should
play a prominent role in every selection process. Virtually all software
selection teams appreciate the importance of product functionality and
product technology requirements in making the right decision. (For more
information see TEC Technology Note Essential ERP - Current Market Trends
- Part I.) Too often, however, these are the only criteria that play
a role in the decision-making process. Other often overlooked factors
can determine the eventual success or failure of a new system, including
vendor corporate strategy, global service and support capabilities,
financial viability, and, of course, cost.
After receiving the final proposal from each of the vendors included
in the negotiation stage, users may want to put into action any counter-proposal
or negotiation steps, which may include a combination of the following:
a request to lower initial software costs, a decrease in maintenance
fees, negotiating the license fee per module, negotiating discounted
license fees for casual users, provision for future incorporation of
"extended ERP" components by bundling them into the contract now at
negotiated license fees, etc. 'Bolt-ons' should be selected only from
official business partners of the primary ERP vendor, after making sure
that partnership is not a mere marketing pitch.
Finally, users should ensure that their critical requirements are unequivocally
spelled out in a contract with a selected ERP vendor. Future clients
are also advised to request the vendor's written commitment to promised
functionality, length of implementation, and seamless future upgrades,
particularly for recently released products and products whose release
date is due in the near future.