The ERP Market 2001 And Beyond – Aging Gracefully With The ‘New Kids On The Block’

Executive Summary 

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 (CRM).

For a list of the major ERP vendors and their market share, see Figure 1.

Figure 1.

This is Part One of a five-part article. This part is an overview of the ERP market and how ERP is expanding to included SCM, CRM, and e-procurement. Part Two will discuss the vendors' reaction to market changes. Part Three will briefly analyze some of the major ERP vendors. Part Four will contain market predictions. Part Five will contain recommendations for the vendors and users. Part Five will also contain links to the preceding parts.

Market Overview 

One could distinguish the following two segments within the ERP market:

• Corporate ERP solutions are primarily focused on the consolidated data management, financial and human resources needs of large Fortune 1000 companies. It evolved from accounting and contract management systems in the early 1980s. Human resources and more comprehensive financial planning and analytical systems were added in the 1990s. Leading vendors of these solutions are SAP, Oracle, and PeopleSoft, although J.D. Edwards, Baan, GEAC, Lawson Software and Infinium Software can fit the bill in some instances.
  
  
• Plant/Operations ERP solutions are primarily focused on the specific needs of small and mid-range manufacturing plants and distribution sites or the operations level of global companies. This ERP market segment's roots are in the control automation market of the 1960s and 1970s and the manufacturing requirements (MRP) planning software market of the 1980s. This evolved into the ERP of the 1990s (see The Essential ERP - Its Genesis & Future, for more details). Leading vendors of these ERP solutions include SAP, Oracle, PeopleSoft, J.D. Edwards, Baan (now a division of Invensys), GEAC Software Corporation, SCT Corporation, Intentia, Microsoft Great Plains, Lawson Software, QAD, IFS, SSA Global Technologies, InterBiz (division of Computer Associates), Epicor, Frontstep (formerly Symix Systems), MAPICS, Navision, Infinium Software, American Software, Sage, Ross Systems, Fourth Shift (now part of AremisSoft), Made2Manage Systems, Lilly Software, ROI Systems, Macola Software (now a division of Exact), Syspro, Scala, Ramco Systems, Pronto, and several dozens more of smaller or niche ERP players.

In the 80's and 90's, businesses were subject to increased global competition, resulting in a pressure to lower production costs, improve product performance and quality, increase responsiveness to customers and shorten product development and delivery cycles. Furthermore, globalization greatly increased the scope and complexity of multinational manufacturing organizations. Therefore, companies have long been urged to develop or purchase and implement software applications to automate their business processes, leverage their transnational data stores in order to make more informed decisions, and ultimately, decrease operating costs. Companies realized the need to be able to react rapidly to change due to increasing competition, deregulation, globalization, and mergers & acquisition activity.

During the second half of the 1990s, the market for ERP systems experienced strong growth rates in excess of 50% per year, from US$ 5.7B in 1995 to US$ 16.6B in 1998 [Source: AMR Research]. Some of the key drivers, in addition to the above-mentioned underlining reasons, were:

• The transition from custom-designed legacy software (software developed by or for a specific customer) to the implementation of standard systems that can be applied across different types of industries. This was particularly true for the largest companies, who previously thought that they had the resources to develop business solutions under their own steam.
  
  
• In addition to the transition to standard systems, ERP systems have been extended to support an increasing number of business processes in integrated solutions like engineering, customer support, sales support, human resources, etc.
  
  
• The customer base has also expanded from mainly manufacturing, trade, and distribution to the public and financial sectors, transportation, infrastructure, defense, federal and local governments, utilities, etc.
  
  
• In the past three years, Year 2000 (Y2K) and the adoption of the Euro currency have been important driving forces in the development of the market. As a matter of fact, resolving the Y2K problem has, in many instances, led to the installation of a new ERP system.

ERP vendors, however, experienced mixed fortunes towards the end of this period. The worsening plight of many ERP vendors is mostly attributable to the Y2K-problem, which caused a 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 profitable during 1999 and 2000 than in 1998, measured in the total raw $ net income (See Table 1).

Table 1.

[Source: TEC]

We believe that the continued ERP market slowdown during 1999/2000 was in part attributable to the following factors:

• The historical growth in sales of ERP applications came from large, Fortune 1000 multinational corporations. This market is now highly penetrated (over 70%), and new, large-scale back-office implementations in the F1000 customer base had all but stalled.
  
  
• The relatively untapped Small-to-Medium Enterprises (SME) 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. This fear has 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 ERP vendors' marketing rhetoric.
  
  
• The ongoing technology paradigm shift from Client/Server to the Internet created uncertainty about investing in traditional Client/Server technologies, which are still present (however in an obfuscated manner) among leading ERP players' offerings.
  
  
• Continued focus of companies on Year 2000 (Y2K) remediation brought the purchases of new ERP systems in 1999 to a significant standstill.

Adaptation to the Internet  

The second half of 1999 also 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. We believe that the transition of core business processes to the Internet will be a primary driver for growth in enterprise applications use in 2001 and beyond. However, contrary to some pundits that were quite swift to write ERP off as an obsolete technology the first time it showed signs of faltering and inadequacy, we believe that e-business will only render the outdated architectural and business perspectives of traditional ERP obsolete.

In order to reinvent itself for the new collaborative external world, ERP 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 (for more information, see Where Is ERP Headed (Or Better, Where Should It Be Headed)? Part 2: Product Architecture and Web-Basing). The new generation of ERP systems will be more customer-focused and will extend beyond the enterprise through e-commerce interaction and collaboration with business partners. The key to the Internet-driven, dynamic trade environment is agility, which is where traditional ERP packages have stumbled in the past.

The business world having experienced a rude awakening from both the dot-com carnage and an economic downturn, has backed away from yesterday's hot items like customer relationship management (CRM), supply chain management (SCM) or e-procurement. Many customers have redirected their buying focus from 'what looks cool' to 'what we do need and can justify'. Customers have suddenly realized the importance of solid back office transactional systems, causing the market analysts to predict a moderate growth for ERP, despite unfavorable economic conditions. There are indications that many companies will still reinvest in ERP and involve it into the mainstream of e-business. Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function. Consequently, more nimble ERP vendors may benefit from customers' realization that the new technology is not deployed at the cost of divorcing front-end systems from back-end systems.

Market Consolidation Continues 

The market size for 2001 is estimated by TEC at $20.5B-$22.5B (3%-13% growth over 2000) as the market continues to consolidate. The top 5 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., J.D. Edwards & Company, and Baan, account for close to 60% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify.

Over the last three years, the enterprise applications market became stratified into growing and profitable vendors on one side, and stagnating and cash burning vendors on the other side. The Y2K-problem caused a market slump in 1999 and the recent global economic slowdown has been excruciatingly hard on the smaller vendors. They also need to expand their offerings and introduce service-oriented product architectures, 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 cautious.

Intensified M&A activity also stems from the fact that while the concept of best-of-breed will not go away, users will typically 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.

While we do not necessarily expect larger ERP vendors to swallow up their smaller brethren, a number of intra mid-market acquisitions and/or mergers are likely: examples are 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. We also expect companies with related software products (e.g., plant automation or Internet trade exchanges providers) to move into the ERP space through acquisition like Invensys, Plc., a UK-based plant automation manufacturer with its acquisition of Marcam Solutions and Baan, as well as Microsoft's very recent acquisition of Great Plains.

This concludes Part One of a five-part article on the ERP Market 2001 and Beyond. Part Two will discuss how vendors are reacting to market changes.