Sunday, March 16, 2008

The Future of ERP

he 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.”

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