The ERP Market 2001 And Beyond – Part 4: Market Predictions

Part 4: Market Predictions
P.J. Jakovljevic - October 11, 2001

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

Market Predictions  

Although we believe that exorbitant growth rates are a matter of the past, growth will remain the word associated with the ERP market in the 2000's despite unfavorable economic conditions that were exacerbated with the tragic terrorist events. In addition to the growth created by the fact that many companies have not yet solved their basic ERP needs, particularly in non-manufacturing sectors and in small-to-medium manufacturing market segment (with penetration lower than 30%), we believe that the following factors will further drive this growth:

• The great number of companies who were reticent in making their strategic ERP investments before 2000 and resolution of Y2K, will have to make that investment in the foreseeable future in order to meet competitive pressures. The economic downturn has also highlighted the importance of both internal and external enterprise effectiveness. There is a growing awareness that one has to improve internal operations before effectively conducting collaborative e-business.
  
  
• The emergence of Internet-based system solutions will lead to a faster flow of information between all members of the logistics chain. Demands on quality, customer-focus and faster deliveries are intensifying at an increasing pace. Globalization and increased competition drive companies to seek to differentiate themselves through distribution and delivery models. This will require extensive change and a need for new enhanced ERP systems. The future of ERP lies in improving the supply chain and fostering better collaboration across multiple enterprises. Some ERP vendors have already started creating private trading exchanges (PTX) consisting of their large existing users and their trading partners, whereby ERP vendors provide all the necessary 'plumbing' work.
  
  
• The enhanced functionality offered by ERP vendors will increase the number of end users within the current customer base. Currently, ERP is used by less than 20% of a company's employees, on average. We predict that number to double within the next 3 years (70% probability).
  
  
• Some large companies that are only completing first implementations at their headquarters, now must expand their ERP reach to many divisions within the company. Conversely, some global corporations that let their divisions implement heterogeneous, disparate ERP products may benefit from consolidation and rationalization of ERP instances. Furthermore, a number of mergers and divestitures require immense efforts to rationalize incumbent ERP assets.
  
  
• Many sectors, such as utilities and the public sector, that have been late adopters of ERP as they could afford expensive internally developed legacy systems in the past, are now exposed to increased competition due to deregulation and increased globalization, and are turning to deployment of ERP software at least for centralized finance and HR/payroll in order to remain competitive (see Fed Gives ERP A Shot In The Arm).

ERP and Adolescent ERP-Adjacent Applications 

While far from being dead, ERP will, nevertheless, have to step aside and share the spotlight with the fast growing adolescent ERP-adjacent areas like SCM, CRM and e-procurement. Furthermore, ERP growth will become obscured in the future since many vendors fail to specify how much of their revenue comes from core ERP as opposed to extended-ERP modules. Therefore, ERP will eventually forsake its identity within the enterprise applications market, which will be a concoction of ERP and the above-mentioned relevant markets.

We believe that, in the meantime, ERP will be redefined as a platform for enabling e-business globally. Originally focused on automating internal processes of an enterprise, ERP systems will include customer and supplier-centric processes as well. The conclusive evidence of this redefinition is the move of all major ERP players into CRM and SCM applications.

ERP software suites will become universal business applications that will encompass front-office, business intelligence, and e-commerce/supply chain management, and ERP acronym will no longer be sufficient to cover it, so we would like to suggest new acronyms - iERP, meaning inter-enterprise resource planning and/or cRP, meaning collaborative resources planning.

ERP vendors have been taking ever-bigger slices of SCM and CRM pies. SAP and its peer Tier 1 ERP vendors might have a head start over niche vendors even if they are still not functionality on par - it may suffice to satisfy the critical majority of current business requirements now. Conversely, the CRM and SCM niche vendors' current value proposition of uneasy integration to existing back-office systems can be much more than prospects are prepared to digest it at this stage. Therefore, we predict that within the next three years, over 70% of the license revenue of the SCM market and over 50% of the license revenue of the CRM market will come from current ERP vendors (70% probability). Currently, these figures are estimated to be less than 30%. By the same token, we predict that within the same time period, more than 60% of ERP revenues will come from outside of core ERP applications. As a result, core ERP applications will contribute only around 30% of the entire enterprise applications market, while the rest will be almost equitably shared among SCM, CRM and e-procurement markets.

How Will Vendors Adapt? 

While the concept of best-of-breed will retain its appeal (see Single Source or Best of Breed -The Debate Continues) in the high-end of the market, users will often 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 applications market.

Smaller ERP vendors and best-of breed CRM or SCM vendors will 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.

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 (See Table 1). Despite the user preference for a single, 'one-stop shop' vendor, componentized software products, interoperability standards and Internet technology will lead to fewer large-scale projects and an ongoing stream of smaller ones. Easy integration to third-party applications has become a key selling point for ERP vendors as many of them tout the provision of connectors to/from their systems and/or provision of integration development tools. This will force third-party system integrators and consulting companies toward fixed-price, fixed-time implementations. Moreover, vendors will increasingly attempt to conduct system integrating and consulting work themselves, which will further decrease the industry average license revenue/total revenue ratio (See Table 1).

Table 1.

[Source: TEC]

This concludes Part Four of a five-part article on the ERP Market 2001 and Beyond. Part One contained a market overview. Part Two covered how vendors are reactive to market changes. Part Three analyzed the major vendors in terms of Market Leaders/Winners, Challenger, and Losers. Part Four contained Market Predictions. Part Five will contain recommendations for vendors and users.