A Report on -Market Enterprise Resource Planning by The Pegasus Group: Mario Rosso Phillip Randolph Submitted in partial fulfillment of the requirements for the graduate course MBA 253 Seminar in Information Technology California State University Fresno Fall 2001
Changing Market Trends The Enterprise Resource Planning (ERP) market has traditionally been confined to those businesses that fit into the Fortune 1000 category. During the last decade, numerous large industrial companies implemented ERP projects to streamline their information systems to operate from one integrated, organization-wide database. The major ERP manufacturers (SAP, Baan, Oracle, PeopleSoft, JD Edwards) accordingly focused and designed their products for large, high revenue companies. Recently, however ERP sales to Fortune 1000 companies have undergone a considerable decline. As a result, ERP manufacturers have begun to shift their focus toward mid-market companies where a potentially large market exists. The complexity of these systems, their massive implementation processes and associated high costs have generally restricted the use of ERP to those companies who had the necessary capital to invest. However, the market shift has forced many of the major ERP vendors to reevaluate and redesign their products to make them more accessible to mid-market companies. Additionally, numerous smaller ERP vendors have emerged to meet the demand for mid and small-size company deployments. -Market Company Profiles Analysts with the research firm Gartner Group have defined mid-market companies as those with annual sales between $200 million and $1 billion. While the Gartner Group believes this to be a generally accepted definition, in practice the numbers are much lower. Marcam, a Cambridge, Massachusetts-based mid-market ERP systems vendor defines the mid-market as companies with annual revenues of between $50 million and $500 million, and others put the lower end of the range at $20 million. 1
Perhaps a better definition of mid-market companies comes from the Association for Computing Machinery (ACM). The ACM defines the high end of the market to be companies with more than 1,000 employees, while the mid-market consists of those companies with between 50 and 1,000 employees. ERP -Size Providers While a few of the major ERP vendors, such as Baan, JD Edwards, and PeopleSoft, have changed or developed products to meet the growing mid-market demand, there are several smaller vendors that provide mid to small-size company applications exclusively. Ross Systems Inc. for example, provides ERP and integrated e-business solutions for food, beverage, chemicals, biotech/pharmaceutical, natural resources including paper and metals manufacturers to more than 3,000 mid-market businesses worldwide. Datacom International, another ERP vendor, provides datastor 2.0 to mid-size manufacturers through an Application Service Provider (ASP) model or as an in house Intranet system. Datacom develops, deploys and supports Web-based applications and services that are specifically designed to enable small to mid-size manufacturers to leverage the Internet to most efficiently conduct all aspects of their business. The table in appendix A, reproduced from the capterra.com website, lists several additional ERP vendors and their target markets. Forces Driving -Market Enterprises to Implement ERP Forces currently driving mid-size companies to implement ERP solutions include competitive pressures, customer relationship issues, a need for improved standardization, and the availability of new technology. Medium and small firms are currently facing competitive pressures from both peers and Fortune 1000 organizations alike. Implementation of ERP allows smaller companies to better 2
compete on a level footing with competitors of any size. This is especially true when attempting to vie for customers and market share against larger companies that already utilize ERP. Since many mid-sized companies eventually become large ones, a properly implemented and scalable ERP system can assist an organization in realizing its growth potential. As mid-size companies begin to recognize supply chain management and Customer Relationship Management (CRM) issues, ERP is becoming more important as a tool to help integrate and manage information needs across the enterprise. Ian Sadler, president of Shenango Industries states, "we need to know where we are at any point in time, both as a business in general and with each specific customer job... and ERP provides that capability. (Modern Materials Handling, January 2000). ERP can help speed the delivery of products to customers and can supply real-time information. Sadler goes on to say that the systems help companies manage finance, manufacturing, the supply chain, and information technology. They can also automate an entire enterprise from beginning to end." (Modern Materials Handling, January 2000) -sized companies benefit from ERP systems in much the same way as their large-size counterparts. However, many of the benefits derived from implementing an ERP system are somewhat immeasurable in terms of dollars. Sadler, measures the value of ERP s by stating, With good data, we can make good decisions. Good decisions allow us to serve our customers better. Learning how to serve them even better keeps them coming back (Modern Materials Handling, January 2000). ERP allows an organization to make better decisions through tying together all of the various business processes utilizing data from across the company. This can result in streamlined ordering and forecasting, Just-in-Time (JIT) inventory capabilities, quicker product 3
deliveries, and fewer billing and accounting errors. In addition, ERP systems can collect both product and customer-related data for the entire order cycle, from order entry to shipping and invoicing. At the time of order entry, a real-time requirement can be made available to the inventory planner and master scheduler to maximize lead-time for the order. The system also maintains and processes back orders and partial shipments. As a result, it is possible that companies might eventually see reduced IS, product and operations costs. Another area in which mid-sized companies can benefit is through lower training costs. Since ERP systems typically operate off of the same platform, and have standardized, easy to operate user-interfaces, employees will have to undergo less training than they would have if numerous legacy systems were installed. Employing ERP systems can create greater customer satisfaction resulting in an expanding client base. As current and potential customers see greater efficiency and effectiveness in meeting their product and service needs, it is likely that the business will attract accounts away from competitors and, as Sadler mentions, keep them coming back. Improvements in product and service quality, and a move towards standardization are two strong factors motivating mid-market companies to welcome ERP. The Year 2000 issue and a widespread adoption of ISO quality standards have encouraged companies to undertake the process reengineering required by ERP and to infuse uniformity to business processes. Forces Driving ERP Vendors to Market ERP to -Size Enterprises As the ERP market for large organizations is nearing saturation, the mid-size enterprise market is large and growing. A study conducted by PeopleSoft found that the ERP market for North American companies with revenues greater than or equal to 500 million dollars is decreasing by 12% per year. Conversely, the ERP market for mid-level companies is expected 4
to grow by nearly 50% per year. Similarly, AMR Research reported that the ERP market for billion dollar plus companies had declined by 14% in 1998, while the market for smaller organizations is expected to grow at an annual rate of 32% through 2003. One of the most significant factors motivating ERP vendors to market to mid-size companies lies in the simple fact that there are far more mid-size companies in existence than large companies. Some analysts estimate the number of mid-size companies to be between 30,000 and 70,000. With these figures in mind, marketing exclusively to the Fortune 1000 appears to be an extremely limiting strategy. Vendors such as Massachusetts-based Marcam predict that up to 90% of the market in the next few years will come from mid-size enterprises. The current downturn in the US economy has caused additional concern for ERP vendors. Larger organizations are watching their budgets much more closely now than they were in the past. This has made them reluctant to expand, replace or enhance their current systems. Issues that Inhibited -Sized Enterprises from Implementing ERP in the Past The primary factors hindering mid-size companies from implementing ERP in the past have been the high costs associated with the establishment and maintenance of the system and the lack of flexibility and customization. While these factors have not been totally eradicated, they have been significantly diminished due in large part to advancements in technology and competitive pressures. Often more budget conscious than their larger counterparts, mid-size companies have fewer resources to expend on large IT projects, and they expect immediate returns. Traditional ERP systems failed on both of these accounts. Previously offered ERP solutions suffered from high implementation and maintenance costs and rarely produced rapid return on investment. In 5
some instances, organizations suffered great losses after adopting ERP. The enormous complexity of implementing the system combined with the costly investments required in monetary, staff and time resources put ERP out of the reach of most mid-size companies. The contrast in the way ERP has been viewed by large and mid-size firms is illustrated below in a quote taken from Modern Materials Handing magazine: At the Fortune 1000 companies, ERP was typically viewed as a must-have that did not require traditional justification and return on investment reviews. And according to the research firm Meta Group, "ERP projects typically cost users more than they pay back in measurable financial result." That is not acceptable to most mid-market companies. "To properly launch the (ERP) project, all involved should understand that this is not a computer project, it is a business decision," points out Dick Kuiper, president of software consultant and integrator Expert Buying Systems. (Modern Materials Handing, January 2000) Lack of flexibility was also a significant factor limiting the mid-level ERP market. Vendors, ardently trying to market solutions for Fortune 1000 companies did not design systems with mid-market organizations in mind. Unlike high-volume producers of homogeneous products, many medium sized manufactures produce small batches of a variety of products at different times throughout the year. Smaller organizations were dissuaded by the rigidity inherent in traditional ERP offerings and found that the systems were not a good fit for their specialized information needs. Small firms were also fearful that, once implemented, ERP systems would not be able to keep pace with the changing nature of their organizations. This quote, taken from the journal Food Processing, illuminates part of the gap between what mid-market organizations want and what traditional ERP vendors have offered in the past. "They want to show benefits within six months and full payback in 18 to 24 months. Similarly, a contributor to the Financial Times website (ft.com) states that, they are concerned that an installed ERP system could soon become a liability, by failing to keep up with changing business 6
needs there is little way of them knowing how much it will cost to run and maintain the ERP system, once installed. With limited cash-flows, this unpredictability can be a major headache." ERP Selection Criteria Influencing -Size Enterprises to Deploy ERP A number of selection criteria are important to mid-size companies in facilitating a move towards ERP. Among these, not surprisingly, are cost and flexibility. In addition, mid-market enterprises are concerned with user-friendliness, scalability, support, training and the assurance that they are receiving the best fit with their existing business processes. Research has found that best fit with business procedures is the most important selection criteria among those listed above. Other selection criteria include many vendor-centric issues. -market organizations are concerned that certain suppliers may not be around in five or ten years to support their investment. In Europe, functions and features of ERP products are more important than the vendor s position in the market. Time and compatibility issues are also important factors in the selection of an ERP system. -market enterprises are concerned with the rapidity of installation of ERP and want to ensure that the new system will integrate with existing and future applications. Changes Necessary for Vendors to Successful Capture -Market Demand A number of added features and alterations to existing systems are required for traditional ERP vendors to meet the demands of the mid-size market. Vendors must acknowledge the need for, and begin offering, ERP that will facilitate globalization and e-commerce activities for smaller organizations. Price points for ERP must fall below the 1 million dollar mark. Improvements in scalability and customization are highly desired by mid-size companies. Correspondingly, systems must become more modular to allow small organizations to pay for 7
only those services they need. Reductions must be made in the amount of time and the level of difficulty involved in implementing systems. Finally, deploying systems over the World Wide Web from vendor-operated data centers will facilitate the improved flexibility in cost and features necessary to attract this large and growing market. Emerging Services and Technologies that are Facilitating Growth in -Market ERP Recent innovations in technology and services are facilitating the deployment of ERP in mid-size firms. The most significant of these developments involve vendor-managed, centralized ERP delivered over the Internet. These services, known as hosting, are fullfeatured ERP systems delivered on-line via Application Service Providers (ASP). Dispensing with the high cost of installing and maintaining a local ERP system, hosting services make use of ERP software that resides on vendor-based systems. ERP applications are installed and maintained on vendor servers and data is located at local, regional, or vendoroperated data centers. Data and information are transmitted via the Internet using Virtual Private Networks (VPN) or through leased telecommunications services. Users interact with the system by means of user-friendly web interfaces. The dramatically reduced IT infrastructure and personnel costs are a key selling point for ERP vendors seeking market share among smaller enterprises. Vendors offering Hosting/ASP deployed ERP include Oracle, SAP, PeopleSoft, IFS, Kewill, Siebel Systems, Baan, Datacom and others. Oracle currently leads its peers in webbased ERP deployment. Suppliers of web-deployed ERP offer modular services on a per month fee basis depending on number and type of users. Monthly Prices range in the hundreds of dollars per user rather than the thousands. Implementation times have also been significantly diminished by the advent of hosting. 8
Hosting has made possible a new concept called pay-by-the-drink ERP. In this arrangement, ERP services are offered as modules. -size and small organizations are required to purchase only those applications that they deem necessary for their business needs. They are not obligated to pay for features that they don t use. This further reduces the monthly pricing of ERP and puts it into the reach of smaller firms that would not have considered ERP in the past. Summary and Conclusions A significant shift has taken place in the ERP market. Suppliers that have traditionally marketed enterprise-wide information technology solutions to Fortune 1000 firms have redirected their focus towards mid-size enterprises. This report has endeavored to describe factors influencing this dramatic shift in the ERP market. In the study and analysis of this subject, both ERP vendors and customers have been profiled. Many of the historical roadblocks hindering mid-market ERP implementation, as well as some of the evolving opportunities for future development, have been explored. Selection criteria, important to ERP development in mid-size organizations, has been identified and presented. Finally, developing technologies and services have been introduced which have potential to improve mid-size ERP market-share and encourage smaller and smaller enterprises to embrace ERP as a planning tool facilitating information management across the entire value chain. 9
Bibliography Datacom Announces Release of Next-Generation DataSTOR 2.0: Offers small to mid- size manufacturers powerful, Web-based ERP. 2001. Business Editors & Technology Writers (May 29). ERP Comes to the -Market: -level players look for fast results, scaleability and singlevendor solutions. 1999. Food Processing 60 (June): 116-119. Forger, Gary. 2000. ERP Goes -Market. Modern Materials Handling 55 (Jan 31): 65. Gallagher, Dan. 2001. PeopleSoft goes after mid-size market (http://eastbay.bcentral.com/eastbay/stories/2001/08/27/story2.html). J.D. Edwards Outlines Strategy to Lead -Sized Enterprises Into The Collaborative Commerce Era. 2001. Focus (June 11). Johnson, Ian. 1999. Stockner sizes up ERP mid-market: Interview with Rene Stockner, Navision Software VP of sales and marketing. Computer Dealer News 15 (August 20): 24. asco Gold Corp - Datacom Announces Release of Next-Generation DataSTOR 2.0: Offers small to mid-size manufacturers powerful, Web-based ERP. 2001. Market News Publishing (May 29): 10. Moran, Nuala. ASP Outsourcing: Application Service Providers Claim they can Cut (http://specials.ft.com/ln/ftsurveys/industry/scd7be.htm). Costs. Neff, Jack. 2001. ERP Redirects Focus To -Market : With larger accounts saturated vendors appeal to smaller enterprises. Computing Canada 27 (March 16): 1. Perereira, Pedro. 1998. Vendors Refocus To Sustain Sales Growth: Channel Takes ERP To size Market. Computer Reseller News (Nov. 9): 286. Petersen, Scott and Lee Pender. 1999. Oracle Takes to the Net in Application Hosting Bid. PC Week 16 (May 17): 1. Saunders, John. 1998. ERP -Market Still up for Grabs. Computing Canada 24 (Dec. 21): 17 Tackla, Michelle. 1999. ERP in -Size Companies. MetlFax 43 (Sept): 10. Technology/Web Reviews: JD Edwards Targets -Market. 2001. Accountancy Age (June): 9. 10
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Appendix A Table 1 ERP Vendors and their Target Markets. (capterra.com) Navision - Navision Manufacturing Notes: MRP Functionality. Abacus Data Systems ADAMS Notes: BRAIN International - Brain AS Notes: (MMS) Merchandise Management System and (PPC) Production Planning and Control. BRAIN International XPPS Notes: Geac - SmartStream Financials Notes: Project costing and commitment accounting. Icode - Everest Enterprise Notes: Designed for the global market. Contains: Accounting (GL, AR, AP, Bank Reconciliation, Billing, Budgets, Job Costing), Purchasing, US Payroll, Sales, Inventory Control, Return Authorizations, CRM, Reporting, Globalization, Manufacturing, and Distributed DB, Wireless, and Web Access options. Infinium Software - Infinium Financial Management Notes: Includes project accounting and currency management. ASP offered also. Intentia International - Movex Enterprise Resource Planning Notes: Includes MRP, Projects, and Manufacturing modules. MAPICS XA Notes: Financials, Supply Chain, Manufacturing, Materials and Procurement, Engineering, Customer Service, and BI. Open Systems - Traverse Client/Server Notes: For mid -size companies using a Microsoft platform. Modules include: GL, AP, AR, Bank Reconciliation, Fixed Assets, Inventory, Purchase Order, Sales Order, Payroll, Project Costing, Point of Sales, Job Cost, Bill of Materials, Manufacturing, and Financial Analyst. Ramco Systems - Ramco Process Manufacturing Notes: Specifically for process industries. Ramco Systems - Ramco Discrete Manufacturing Notes: Specifically for discrete manufactures. Ross Systems - irenaissance.erp Notes: Integrated with SCM for process manufactures, healthcare, and public sector. Scala Business Solutions - Scala Global Series 12
Scala Business Solutions - Scala Global Series Notes: Manufacturing, Logistics, Service, and Financials components. SCT ADAGE Notes: Manufacturing and distribution. SSA - BPCS Configurable Enterprise Financials Notes: Integrated with SCM for the industrial sector. Visibilty - Financials Notes: Specifically for (ETO) Engineering - to - order manufacturing. Visibilty - Manufacturing and Materials Notes: Specifically for (ETO) Engineering - to - order manufacturing. Baan - ibaan ERP - Large Notes: Comprehensive but flexible suite of applications designed to meet dynamic financial management and reporting requirements. Automates financial back-office processes and provides rapid access to high-quality financial information. Consists of the following components: Financials, Central Invoicing, Cost Management, and Project Accounting. GLOVIA International Financials Notes: - Large Industrial & Financial Systems - IFS Financials Notes: - Large J.D. Edwards - OneWorld ERP Notes: - Large Sage Software - Sage Enterprise Suite - Large Notes: Integrated series of applications covering all areas of enterprise e -business, including accounting(gl, AP, AR, Cash Management, Fixed Assets, Financial Reporting, Web Reporting, Multi-currency, Allocations, Advanced Budgeting and Planning), distribution, manufacturing, human resources, payroll, financial reporting and electronic commerce. Walker Interactive Systems Tamaris Notes: Revenue management, financial management, and procurement. - Large 13