The Future Of ERP

Published on: November 15, 2006
Last Updated: November 15, 2006

The Future Of ERP

Published on: November 15, 2006
Last Updated: November 15, 2006

The dream of enterprise resource planning systems is that a single application can track and monitor all of a business’s functions.

In a perfect world, a manager opens a single ERP app to find data about any aspect of the business, from financials to HR to distribution schedules.

Alas, we’re not there yet – or at least most companies aren’t.

Looking at the ERP landscape, “there still tends to be a lot of disparate components, that are either homegrown or older packages,” says Forrester analyst Paul Hamerman.

Moreover, there are still a lot of gaps in ERP systems, particularly in industries where ERP functionality has grown up from its historic origins in manufacturing.

There are even gaps in core ERP areas, Hamerman tells Datamation, “where they just haven’t done a particularly good job, in areas like budgeting, and recruitment…where the vast majority of customer use something other than their ERP vendor.”

But despite the challenges, the movement toward a global ERP system is a key factor shaping the future of enterprise resource planning.

“It’s a trend that’s going on, and most companies are going in this direction: to have fewer and fewer ERP systems running,” Hamerman says.

“And the systems are now more scalable to the extent that they move toward a global, single instance type of a product.”

Yet aren’t hopes of a single unified system essentially a pie-in-the-sky fantasy?

“It’s real for some companies, where the ERP system can meet the vast majority of their requirements, and they’re not so big that they run into scalability issues,” he says.

“So some companies can do it, but the vast majority of companies will never get there.”

“So it is kind of a fantasy, but some companies have been able to do it. And I think if you can get at least your core applications, like HR and financials, onto a global single instance I think you have accomplished something.”

Today’s ERP Market

The ERP market is dominated by two 500-pound gorillas, SAP and Oracle. Or rather, Oracle is a 500-pound gorilla, and SAP is the veritable King Kong of the ERP market.

Of the top 10 ERP vendors by total 2005 revenues, SAP hauled in a massive $10.5 billion, to Oracle’s $4.6 billion.

In contrast, the other ERP vendors are mere also-rans: Infor, $1.6 billion; Sage Group, $1.4 billion; Microsoft, $855 million; Lawson, $747 million.

Not only are Oracle and SAP the industry giants, “they’re tending to outgrow the industry overall,” Hamerman says. It’s a clear case of the big getting bigger.

These two giants have divergent strategies for growth. While Oracles’s growth is through acquisitions, SAP is growing through a number of partnering and mid-market strategies.

“Oracle’s future growth strategy, I think, is going to be dependent on acquiring vendors that have a particular strength in an industry,” Hamerman says, noting Oracle’s recent purchase of SPL, known for its utilities industry billing software. In contrast, SAP’s strategy is “more around developing those capabilities rather than acquiring them.”

However, the ERP vendor to watch is Microsoft, he says. “They’re really investing heavily in product development. They’re innovating around usability, which can be fairly compelling.”

Given that ERP is a $25 billion industry, Microsoft’s market share is a modest 4 to 5 percent, “but I do see them growing pretty rapidly.”

But for all the ERP vendors, growing by landing new contracts with large enterprises is getting tougher.

“In terms of large deals, it is very saturated at the high end of the market,” Hamerman says.

Therefore, the big players are attempting to fish in smaller waters. While most large enterprises have already chosen their ERP package, “The mid-market is more competitive. There’s a lot of opportunity in the mid-market, and more players.”

The SOA Factor

Looking ahead, the need to implement Service Oriented Architecture (SOA) will continue to grow as a factor in ERP purchase decisions.

Notes Hamerman: “The way this market is changing is that, it used to be about ‘What is the product capability you have today?’ and now it’s more about ‘What is the product capability that you’re promising to have in a few years?’

“The big shift is about so much more creative marketing around product strategies, versus buying what’s currently available.”

In other words, vendors are making their pitch with a clear subtext: “If you want to stay current with the rush toward SOA, you need to be on our platform.”

Significant shifts are taking place in how ERP vendors generate revenues. Echoing changes taking place throughout the software industry, the transition is toward recurring and variable revenue models – with maintenance charges driving industry growth.

Indeed, “Oracle gets about 50% of its revenues from maintenance. It’s a recurring revenue stream,” Hamerman says. Not only is this highly important to them, but “it’s driven some of their acquisitions,” he says.

The other format for recurring revenue, software as a service, SaaS, isn’t working for the big players.

“We don’t see SAP or Oracle getting much revenue that way, in terms of the hosted subscription-based applications, but you see a number of players, notably (in some other areas), who get substantial revenue from the subscription model.”

Variable revenue schemes, however, are becoming the sweet spot for big ERP vendors.

Faced with scarce possibilities for new large licensing deals, “vendors have adjusted their pricing models so that they can get incremental license revenue though higher levels of usage.”

The vendors’ use of variable revenue contracts is pretty clever, Hamerman says. These contracts call for additional payment based on the metrics of their customers’ usage. If the customer uses the platform more, the customer pays more.

“So they’re able to generate some license revenues almost automatically.”

And pricing can get tricky. “We’re starting to see the pricing become more complex, with some of these variable factors built in,” Hamerman says.

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Written by Bobby

Bobby Lawson is a seasoned technology writer with over a decade of experience in the industry. He has written extensively on topics such as cybersecurity, cloud computing, and data analytics. His articles have been featured in several prominent publications, and he is known for his ability to distill complex technical concepts into easily digestible content.