Where Is ERP Headed (Or Better, Where Should It Be Headed)? Part 1: Functional Scope and Vertical Focus

Part 1: Functional Scope and Vertical Focus
P.J. Jakovljevic - April 18, 2001

Executive Summary 

A typical ERP system now offers broad functional coverage nearing the best-of-breed capabilities; 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.

ERP vendors, on the other hand, are not doing so well, possibly because they have been busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning & management, and human resources.

Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function. Within the next two years, ERP will be redefined as a platform for enabling e-business globally.

Therefore, users need to be aware of the trends within the ERP market so they can take into account all the necessary factors when making an ERP software selection: product functionality, product technology requirements, vendor corporate strategy, and vendor corporate viability. Even more important, however is that the users' need to understand their e-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.

About This Note 

This is a four part note, which each part covering two of the eight trends we have identified. Each part contains links to the preceding parts. The trends covered in each part are:

Introduction 

The growth and heydays of ERP throughout the most of the 90s 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 relatively successful so far because they have been attempting to build such a product.

A typical ERP system now offers broad functional coverage nearing the best-of-breed capabilities; 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.

ERP vendors, on the other hand, are not doing so well. The worsening plight of most ERP vendors is 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 profitable during 1999 and 2000 than in 1998, measured in the total raw $ net income.

We believe that the continued ERP market slowdown during the last 24 months was in part attributable to the following factors:

• The historical growth in sales of ERP applications has come from large, Fortune 1000 multinational corporations. This market has been highly penetrated (over 70%), and new, large-scale back-office implementations in the F1000 customer base have 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.

Consequently, we believe that the eight outlined trends in the ERP market are the direct consequence of vendors' attempts to:

1. Resolve current ERP functional and/or technological deficiencies,
   
   
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, and/or
   
   
3. 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.

1 - ERP Functional Scope Expansion 

ERP has entered another step in its evolution. While ERP packages traditionally excelled at combining financial control with multi-plant manufacturing & distribution coordination, they generally lacked extended supply-chain planning (beyond the four walls of the enterprise) and flexible execution functionalities that can enable one business process today but change rapidly to handle tomorrow's new models. They were also often found lacking when it comes to delivering special financial features such as robust budgeting or international consolidation.

The new ERP generation of products is more customer-focused and extends 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.

Early ERP adopters discovered to their dismay that implementing these systems was only the first step toward creating a competitive information technology infrastructure. They and new users alike are now looking for significantly more comprehensive functionality - from advanced planning and scheduling (APS) and manufacturing execution systems (MES), to sales force automation (SFA) and customer relationship management (CRM), to business intelligence (BI) and business-to-consumers (B2C) and business-to-business (B2B) e-commerce tools - and demanding that they be integrated into their ERP backbone. Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function. ERP users who have gone live in the past three years have been making purchases of extended ERP products (bolt-ons) to provide tangible ROI for their multi-million-dollar investment.

Consequently, during the last three years, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), product data management (PDM), manufacturing executions systems (MES), business intelligence (BI)/data warehousing (DW), and e-Business. The major ERP vendors have been busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning & management, and human resources.

Implications of This Trend

We believe that, within the next two years, 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, e-commerce and SCM applications (either through acquisitions, partnerships or internal development). As a result of this trend, 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%.

Multi-national financial capabilities (including support for the Euro), advanced planning and scheduling (APS), product configurators via the Web, supply chain management (SCM), customer relationship management (CRM), e-Commerce, business intelligence (BI), document management, and component-based (object-oriented) architecture will remain the order winners for the next two years. After that period of time, we believe these functional and technological features will be demoted into commodities (order qualifiers). During the same period of time, the offerings of some leading ERP vendors will become so close to best-of-breed capabilities that most users will not need to look for multiple vendors' offering.

What will differentiate the leaders from the rest of the ERP pack will be the breadth, depth and diversity of plant-level and distribution centers requirements (e.g., flow-based manufacturing, work instruction, dynamic dispatching, etc.). Supply chain planning functionality will have to extend to the shop floor and/or distribution center level, whereby manufacturing and distribution functions will become intermingled.

2 - Sharper Vertical Focus 

While competitive costs (low and flexible software license pricing and implementation costs) and outstanding global service (proven fast implementations and customer loyalty) will remain important requirements for success, particularly in the lower end of the market, vertical focus will be the key factor for survival.

Vendors that will weather the next three years will have focused their business and product on particular industries, preferably those with a current low penetration (e.g., healthcare, insurance, utilities, transportation, government institutions, food & beverage, chemicals, pharmaceuticals, etc.), instead of a more generic, horizontal approach. Winning ERP products will demonstrate deep industry functionality and tight integration with best-of-bread 'bolt-on' products in a particular vertical. This also means adding sector-specific, fine-grained front-office capabilities such as billing for utility companies.

Verticalization can be seen as part of a larger effort by ERP vendors to ease the implementation of their products. By now, almost everyone in the IT industry has heard horror stories of ERP implementations that took two or three years and cost tens of millions of dollars. That happens, in part, because the ERP packages usually arrive needing to be configured for the business and the industry entirely from scratch. By configuring parts of the package in advance for a given industry and circumventing functions not required in that industry, vendors can shorten and ease the implementation process. The pre-configuration may be based on the size of the company, the specific hardware or the vertical market.

Rapid implementation tools and industry-specific templates add value to the ERP investment by streamlining the process-modeling phase for fast implementation and time to return on investment. In fact, software implementation time reduction is a key element of success in any enterprise-wide technology project.

Users have increasingly looked for an ERP system designed for a specific business. Software that combines industry-specific functionality with the flexibility to accommodate each company's unique processes goes a long way toward improving the functional fit and the speed of implementation. This pragmatic approach helps companies close the gap between system performance expectations and final results achieved.

Another advantage lies in the fact that industry-specific, global enterprise solutions based on open architecture and proven technology standards facilitate faster integration of companies being acquired as part of a corporate growth strategy. Namely, while using implementation templates may provide a company with the 'jump start', these endeavors only support common processes that are likely emulated by the competition. For differentiation purposes, however, customers must give advantage to vendors that provide strong configuration & development tools and that have sound product interoperability strategies.

Implications of This Trend

In addition to core ERP functions, integrated industry-specific applications can add significant value. Vertical focus indicates that the software contains industry-specific features and that ERP vendors have certain industry expertise. Finally, in implementing an industry-specific application, it is important to ensure that the application provider's implementation team includes members with in-depth knowledge and experience in that industry. Vendors geared toward certain industries should have solid integration skills or strong relationships with systems integrators that have industry-related expertise. This should significantly streamline implementation time by eliminating a lengthy vendor or integrator learning curve.

Conclusion of Part 1 

This concludes Part 1 of a four part note on ERP applications trends. This part covered two trends: ERP functional scope expansion and sharper vertical focus.

Part 2 covers the challenge ERP vendors face in developing an adaptable architecture that is flexible, agile, enabled for interoperability, as well Web-basing ERP systems.

Part 3 covers provision for e-Business components and mid-market shakeout.

Part 4 covers the advent of application hosting services and new pricing models.