The Enterprise Resource Planning (ERP) Market: Potential Buying Window Beginning to Close? by Jeff Freyermuth and Jim Shepherd T he Bottom Line: Many companies are struggling with older ERP systems that no longer meet their business needs. Further delays of new ERP projects may damage morale and leave companies with inefficient business processes and inadequate information access. With the macro economy showing signs of stabilization, firms with older technologies and out-of-date business processes should seriously consider a new ERP implementation as a vehicle to drive business transformation and be prepared for the next business cycle. Some sense of urgency as macro economic concerns ease In the fourth quarter of 2009, we began to witness a greater sense of urgency from companies that require new enterprise resource planning (ERP) systems. It is worth noting that ERP has developed well beyond manufacturing resource planning, financials, and human resources (HRMS). AMR Research defines ERP as an enterprise-wide information system designed to coordinate all resources, information, and activities needed to complete business processes and measure performance. ERP is the foundational layer that provides information structure, knowledge capture, business control, and opportunity response optimization. The most recent recession came so swiftly that many companies simply cut off all spending without evaluating the long-term consequences. Twelve to fifteen months later, there are a number of firms, especially in the midmarket, that are stuck with applications that are functionally deficient and technologically obsolete. These organizations still need to acknowledge the inherent economic dangers in kicking off a software project, but they also need to recognize the potential missed opportunities and associated risks of further delays, as the economy continues to stabilize and show early signs of recovery. The globalization push continues to gain momentum ERP systems have been through numerous transitions during the past 20 years, as companies have moved from highly decentralized to highly centralized organizations. ERP systems have transitioned with prevailing management strategies from plants and divisions, to regions and large countries, to shared service functions, to integrated global corporations. Prior to the recession, we witnessed a high percentage of midmarket enterprises look to expand their geographic reach. In order to remain competitive and costeffectively serve customers globally, these firms were evaluating single global ERP systems. These midmarket organizations looked to move from traditional, forecast-based, push supply chains into broader, end-toend supply networks. Instead of a linear supply chain, more organizations now have complex supply networks of suppliers, co-packers, outsourced manufacturers, retailers, and distributors that must operate in concert to profitably respond to customer demand. With this transformation, new pressures, such as increased product variances, diversified customer demand, regulatory oversight, better demand sensing, and forecasting, have emerged. The first wave of the globalization push brought with it a renewed focus on increased profit- 2010 AMR Research, Inc. 1
ability and revenue, while reducing complexity from various point applications. Another demand that is being placed on more and more midmarket firms revolves around their ability to serve global customers (i.e. large multinational type organizations). The new global marketplace presents organizations with greater growth opportunities, but organizations will need to address certain added requirements as multilingual, multicurrency, and multicultural to successfully penetrate into these larger diverse firms. Cost savings, business insight, and IT consolidation are top IT drivers for 2010 With revenue growth remaining challenging in most markets, companies have spent a great deal of time and energy managing the bottom line. Organizations initially turned to head count reductions to right-size, but we are now seeing midmarket firms take the next step looking for additional cost savings and process efficiencies from business system improvements. AMR Research recently conducted an extensive global study of ERP spending in October and November of 2009 to get a better sense of organizations top priorities and IT drivers for the next year. We interviewed close to 200 small to midsize companies (100 to 999 employees) and deliberately included a wide range of manufacturing and services industries. The survey results show that cost reduction and efficiencies continues to rule the day as the primary driver heading into 2010, with 50% of respondents stating it s among their top two IT priorities for next year (see Figure 1). In addition, during the downturn Business Intelligence (BI) and analytics moved to the forefront in terms of spending priorities. From a number of recent surveys, we expect this trend to continue. It was second in AMR s recent survey with 37% of respondents highlighting it as one of their top two priorities, and it was first in a recent survey by IBM, entitled The New Voice of the CIO, responses from more than 2,500 CIOs. Figure 1: Top 2 IT Priorities for Mid-Market Firms Cost savings 29% 21% Improve business intellegence information access IT consolidation 17% 17% 20% 19% Enabling business process innovation 16% 10% Service level improvements 10% 19% Support globalization of the business 7% 6% First priority Major project delivery 4% 6% Second priority N=180 50% Source: AMR Research, 2010 2 2010 AMR Research, Inc.
It s apparent that the downturn and preparation for the rebound has forced firms to get a better handle on their business by demanding increased clarity inside and outside of their organizations. User expectations have also increased with embedded analytics, as the role of BI has covered everything from a patch over a weak ERP implementation, to a de facto an integration layer, to an environment to provide access to strategic data for decision making. Favorable market conditions for buyers with a business need If companies have a business need for a new ERP system or an ERP upgrade, the current market conditions remain favorable in terms of discounting, flexibility, and financing. With the majority of ERP vendors reporting lackluster financial results, vendors continue to be aggressive with terms and conditions to help drive revenue. We have witnessed firsthand the increased purchasing power, as the users that have opted to move forward with ERP projects have received greater purchasing flexibility (options) and pricing discounts. Customers are not only receiving better terms from the ERP software vendors. Based on customer expectations for the ratio of cost of applications, to hardware, to consulting, we ve seen additional discounting on the needed hardware, database, middleware, and consulting associated with these projects. Further, with a relatively small number of new ERP projects underway, there s a bench of internal and external implementation resources available to buyers although as the economy stabilizes and uncertainty dissipates, the window of opportunity is beginning to close, as utilization rates, price stabilization, and increased consulting fees are beginning to return. Further, buyers now have greater flexibility in terms of licensing and deployment, especially in the mid-market. Companies are becoming more comfortable with software as a service (SaaS) as a delivery platform. SaaS allows users to pay a monthly or annual subscription fee versus a traditional up-front license. We ve also observed a noticeable shift by customers to fund software projects out of their operating budgets versus capital budgets. The variable monthly expense is somewhat easier to incorporate into the operating budget relative to a large, fixed, one-time capital expense. If negotiated, customers also have the ability to cancel or change the subscription as requirements change. SaaS continues to be a more viable option and more widely deployed within the small-to-midsize business community. Lastly, with midmarket organizations continuing to be impacted by the credit crunch, a number of the technology vendors are offering alternative financing options. Capital preservation remains top of mind for many mid-market firms, so having the ability to spread out payments over longer periods of time or with interest free financing is appealing. Business plan and commitment from business executives is essential to success Over the years we ve learned that all ERP projects must have a formal business plan plus full business support to be successful. The lack of commitment and buy in from the business side is one of the primary reasons ERP projects fail. As IT organizations have become more strategic, they ve been repositioned within companies as a vehicle to drive innovation and growth. It s critical that ERP projects are aligned with the strategic business goals and objectives of the company. Companies need to consider what kind of information systems will be required to support their three- to five-year business plan. Senior management has an obligation to provide a strategic context that outlines expected growth, business model, product lines, channels, and geographic locations so that the project team can consider all of the possible ERP solutions. Based on these developments we ve seen more CIOs take on dual roles, acting like CFOs and building business cases for all new purchasing decisions. The need for faster payback and return on investment (ROI), coupled with the recognition of the risks and time frame associated with purchasing an entire ERP suite, has led a high percentage of midmarket firms to pursue a more fluid step-by-step project rollout. One thing is for sure the CIO s role continues to evolve, becoming more of a partner that drives innovation. 2010 AMR Research, Inc. 3
Furthermore, we are seeing many organizations invest in governance discipline so that they can continually look at how to optimize their investments in technology. Over the last five years, AMR Research has worked with many companies that were interested in implementing portfolio management to create a structured framework for assessing the cost/benefit/risk tradeoffs of IT investments. Most companies initiated their portfolio management journey by assessing and prioritizing the new projects that deliver incremental business functionality. While this has been a large success (we have seen companies reclaim up to 15% of their new project budget after realignment of the portfolio), many companies recognize that the dollars spent on new projects only represent a small percentage of their overall IT budget. Companies with more mature portfolio management processes are setting their sights on their existing application portfolio to help them optimize their existing investments, ensure that business objectives are being met, and mitigate risks associated with older technology. A structured application portfolio management approach should be at the core of any decision a company makes when determining the best course of action for their key enterprise applications. Companies should look to shift their investment percentages away from being skewed toward maintenance of old applications to more strategic projects. Ultimately, the CIO needs to decide what type of business they want to run simply maintaining applications or being a partner to the business and driving strategic objectives. It is also essential that firms create project teams that will help facilitate process change and drive business transformation. Assembling a diverse team from several departments that can identify critical business needs will help ensure ERP implementation success. This project team must include both business and IT executives. Opportune time to undergo business transformation We ve witnessed many midmarket organizations undergo changes during the past decade because of mergers and acquisitions (M&As), companies growing from regional to global, and shifts in sales strategies from direct to indirect or even to web self-service. These market changes require that companies constantly evaluate existing business processes and systems. Organizations that have put off projects and still have older technologies and out-of-date business processes should look to take advantage of the slow recovery period and seriously consider a new ERP implementation. New ERP projects often are the catalyst needed to drive business transformation in order to ensure a company is well positioned as the economy improves. If not, midmarket firms risk the loss of revenue resulting from suspended business operations when ERP systems fail. During an ERP project companies should focus on the business, not the software. Once the ERP implementation is done, what will the business look like? Companies should strive for business value creation to streamline the operations to remain competitive in the market. With more streamlined operations long-term margin expansion and stronger topline growth because of better customer experiences are primary goals of these types of projects. It s a bit forward-looking as you have to spend money now, in order to make (and save) more money later. In addition, from a change management standpoint, we view the current economic climate as a good opportunity to implement this type of project and these types of changes across organizations. The acceptance of change inside companies and with their partners is much greater now than during normal economic circumstances. 4 2010 AMR Research, Inc.
Latest trends and product enhancements Customers need to consider the benefits from the business improvements and value associated with the product enhancements (i.e., architecturally and increased functionality), since the last round of buying was conducted 10 to 20 years ago. In addition, buyers should no longer be intimidated by these big projects, as the latest products have been designed in a more modular fashion. It s also important to note, as of right now, there are greater amount of skills available inside and outside the organization to deploy for these types of projects. Buyers still appreciate the concept of integrated ERP suites and consistent architecture, but as of late, they don t want to contractually commit to the suite sale. Customers have demonstrated a preference to buy in smaller increments around business process solutions, geographic phases, and departmental solutions. Basically, buyers now request a greater degree of flexibility. Companies want to deploy in phases, reflecting their current business needs. The shift hasn t dramatically impacted the ISV community, as it s simply a more phased approach. The expanded ERP footprint and the advancements with service-oriented architecture (SOA) have helped to fuel this fire as well. This shift also creates bit of an opportunity for the SaaS and cloud computing vendors to wiggle their ways into the picture. The new pricing model that does not require capital investment and goes around IT has helped these firms get in the door in certain software selections. We ve also seen user interfaces (UIs) make great strides and improve dramatically. This is important as the number of ERP users continues to expand inside organizations beyond the core power users in finance and IT. The general increase in users is the result of ERP vendors products becoming broader in scope. We ve also witnessed an increased interest in mobile access to ERP systems and new requirements for collaboration that has driven the ERP vendors to develop new interaction modes leveraging Web 2.0 technology. BI and embedded analytics are also a critical component of the user experience for ERP moving forward. Deeper vertical functionality Deep vertical functionality is no longer simply for large enterprises. We ve seen a greater percentage of small and midsize companies pounding the table and demanding vertically focused solutions. Almost all of the ERP vendors have assembled and now offer packaged industry solutions that are being delivered either directly by the vendor themselves or by one of its business partners. The amount of useful IP developed around these solutions has increased dramatically. IT service partners are also expected to declare industry majors and invest in substantial IP and even software extensions. The vertical push continues into micro-verticals, as the first tier of industry products has stabilized and matured. Vendors (and partners) are beginning to offer sub-vertical functionality, so instead of going to market simply with retail or manufacturing offering, it s a grocery or shoe manufacturing product. Midmarket buyers should look to take advantage of the new vertically rich functionality that extends deep into the core operations of the business. Organizations that want this vertical functionality, but are reluctant to commit to multi-year projects, have forced a number of ERP vendors to begin to offer vertically focused preconfigured applications. Examples of these products include Lawson s QuickStep, SYSPRO s STARS, Microsoft s Sure Step, SAP s Fast Start, and Oracle s Accelerate. The appeal to customers is a reasonable amount of vertical functionality with a rapid deployment (as short as three to five weeks!) and predictable implementation costs. Basically, the vendors have invested and worked with partners to make applications easier to buy and consume. Summary The latest economic volatility coupled with the forecasted slow recovery has forced companies to embrace a new reality. The recent slow down has provided an opportunity for organizations to take the time to seriously evaluate their existing ERP systems. With the worst appearing to be behind us, we recommend organizations move forward with ERP projects that have been on hold during the past two years. 2010 AMR Research, Inc. 5
Buyers should look to take advantage of the favorable market conditions, the latest architectural enhancements, the deeper vertical functionality, and the breadth of the ERP products scope to transform their businesses in preparation of the next economic cycle. Firms can no longer tolerate business disruption that is associated with the long, drawn-out evaluation and implementation cycles of years past. Phased projects, preconfigured applications, and software as a service all look to provide buyers with options for quicker, more manageable deployments. We believe that progressive companies that decide to invest in ERP projects during the transition will be better positioned longer term. The firms will have leaner staffs and updated business processes that will hopefully reap margin expansion during the next economic cycle. They also have new business requirements, such as real-time access to information that couldn t be met with their legacy systems. As the economy stabilizes and the risk of uncertainty eases, the potential window of opportunity for purchasing a new ERP system will begin to close. 6 2010 AMR Research, Inc.