Workhorse technology such as enterprise resource planning (ERP) software and hardware systems that integrate all data/processes of an organization's operations may not be sexy, but the C-suite knows it's the backbone of their operations. Innovation in this space can have wide-ranging impact on an executive's ability to improve and grow the business. But over the last several years, heavy consolidation has dramatically altered the ERP landscape and not everyone is convinced it's been for the better.
According to IDC Research, between 2004 and 2006, there were 550 mergers and acquisitions among ERP vendors, with the majors accounting for about $74 billion in acquisitions. The market is now essentially a duopoly dominated by two giants, SAP and Oracle, which generated revenues of US$11.7 billion and $6.3 billion respectively in 2006. (The next three by revenue are Infor, the Sage Group, and Microsoft, according to Forrester Research.)
Other changes are afoot. Vendors are now targeting SMEs (small and medium enterprises), a huge but previously under-serviced segment, says Joel Martin, VP of enterprise software at Toronto-based IDC Canada. “These companies didn't have access to the same level of functionality as big enterprises did in the past,” he says. “They're looking for packages in the $25,000 to $150,000 range.”
Vendors such as SAP and Oracle are also adding specialized industry capabilities to their core financial and HR systems to extend their reach into new terrain (related to specifically tailored solutions for finance, retail and other sectors).
The Nova Scotia Liquor Corp. (NSLC) is a case in point. Although the crown corporation generates $500 million in annual revenues, top-tier systems were beyond its range when it implemented its first ERP system in 1999 which was supplied by a small retail vendor. The system lacked flexibility, and wasn't implemented with good change management around processes, says Mark Brown, VP of IT at the NSLC.
The company had to build so many workarounds with spreadsheets and legacy system feeds that it quickly became a legacy system itself. “It was an inexpensive system, but not low-cost in terms of time spent making it work,” he says.
Business transformation drove the NSLC to rip and replace it with an SAP system in 2006. “We wanted to change from a place to buy products to a place where people wanted to shop, which is a completely different customer experience,” says Brown. A flexible system was needed to map business to IT requirements. “We needed analytics around sales to measure the effectiveness of promotions, which brands were more popular and decide if we were making the right trade-offs.”
Brown believes there is more choice in ERP functionality today. “Smaller ERP vendors don't have the R&D funds an SAP has they offer modules that can let us do just about anything we want without customization,” he says.
However, best-of-breed vendors offering top-line specialized applications are also a source of competitive pressure for SAP. The NSLC plans to shop around for HR and warehouse modules next year, says Brown. “We'll evaluate if SAP's offerings stack up against best-of-breed providers.”
Other customers are less satisfied with the new ERP landscape. In 2002, Alvarez & Marsal, a New York-based professional services firm, selected an ERP system from Agresso (No. 9 in Forrester's rankings with 2006 revenue of $298 million) after shopping for a solution that could keep pace with its booming business, explains Paul Williams, CIO at Alvarez & Marsal.
“Other ERP systems didn't have the growth capabilities for the firm we knew we were going to be,” says Williams. “We expected to spend about $250,000, but we wanted a solution that would grow to support 500 employees without extra spend.”
Initially a small firm of 70 employees, the privately-held company has enjoyed a 70% average growth rate annually for the past five years. Today, the company employs about 1,150 staff, generates annual turnover of close to $500 million, and continues its high-growth trajectory.
Agresso was one of the first to offer hosted solutions a key selling point for a young firm with no in-house IT team. And the flexibility it offered due to the microscopic granularity designed into its data capture mechanisms was another, says Williams. “You could twist it around to do anything you wanted.”
The company recently upgraded its Agresso system after a fresh look at the new ERP landscape, and Williams' impressions are largely negative. “It's hard to say if there's more innovation, as they all sell features you don't necessarily want to buy.”
He believes consolidation has resulted in less choice and higher costs. “There's too much digestion of systems migration going on now, and not enough effort on what needs to be done in the next round of business development. Oracle is focused on replicating functionality that already existed out there in the environment. SAP says it's innovative to customers coming off PeopleSoft [acquired by Oracle in 2005], but they're both still focused on changing and moving customers around instead of looking at new innovations.”
While Alvarez & Marsal hasn't formally gone to market, Williams says his perception that ERP costs have increased is based on market logic. “Current customers usually pay fixed contract prices in maintenance. And vendors have to spend money to change their ERP frameworks to keep up with new business requirements and adding new functionality; otherwise their product sales process goes away. But Oracle has to spend millions figuring out how to convert historic data and functionality from PeopleSoft into its systems. Since the market demands ERP vendors keep their own margins up, the money has to come from somewhere.”
But Williams' technical concerns are the short-term teething pains of an industry moving away from proprietary systems to standardization and interoperability, says Carmi Levy, SVP of strategic consulting at Toronto-based AR Communications. “Open or closed, which is better for the market? Vendors are making it easier to move ERP data between companies, suppliers and vendors as easily as basic Microsoft Office documents,” he says. “Over time, it makes sense for the market to speak fewer languages.”
Jim Shepherd, SVP at Boston-based AMR Research agrees vendor consolidation helps businesses run more smoothly. “No one wants to go back to the 1990s when everybody had a different word processing or spreadsheet system from different vendors. Those were not the good old days.”
However, analysts agree the costs of ERP software are about the same as before consolidation. “We've added functionality without increasing costs, which allows people to reduce their total cost of ownership,” says Bob Courteau, president of Toronto-based SAP Canada. He also cites year-over-year market share gains of 3% as evidence its organic growth model is more successful than the acquisitive approach. (While the company has made some selective acquisitions recently, SAP's strategy is primarily to build rather than to buy capability, says Martin.)
Wal-Mart-type economies of scale don't apply in the enterprise software development market, says Shepherd. “Vendors aren't selling widgets they create a library of capabilities and sell licenses to access intellectual property that's constantly enhanced.” Assuming companies of similar size, the costs of ERP implementations hinge on the nature of these projects, not the software itself, he says. “There's no indication costs would be more or less because it was one brand of software versus another.”
Martin agrees, pointing out that IDC considered a multitude of variables in its recent quantitative study. “There's no clean apples-to-apples comparison,” he says. A large enterprise's operational environment is typically far more complex than an SME's in terms of operations, corporate governance, security and other business requirements. “You can't even do a per employee ratio comparison. A larger company has more systems tied into its daily business operations, versus an [SME], which will likely have a point solution.”
The needs of SMEs are driving the current wave of innovation in ERP, says Levy. To appeal to companies that can't afford dedicated staff tending to their systems, vendors are simplifying front-ends to further reduce complexity. “This is why Microsoft has designed [its ERP solution] Dynamics the way it has it's investing billions to combine it into a consolidated code base that integrates with Office.”
“This is not your father's ERP system anymore,” says Levy. “These systems are moving out of the hands of ERP administrators to the average line workers who now have direct access to them. To ensure companies aren't wasting their investments in people, systems are being designed so they don't require massive retraining and integration, which reduces the costs over time.”