FSN: Have ERP businesses grown too big?

Have ERP businesses grown too big?

19th November 2007
By any measure the world's leading software houses are enormous organisations. In their formative days growth was fuelled by good product, market reputation and customer service alone, but in recent years, organic growth and founding principles have given way to large scale acquisitions fuelled by the booming global economy and liquid capital markets. As in all industries scale confers a number of advantages particularly when aligned with profitable growth. But the pursuit of growth also has a downside. The question is has the industry achieved an appropriate balance between customers' needs and the demands of investors? Gary Simon , FSN's managing editor explores the issues.

It is only natural that the burgeoning growth of global manufacturing enterprises has led to the parallel development of global service industries. After all, the world's largest companies want to be served in local geographies around the world by the service businesses they have come to know and trust. Software houses are just one example of support businesses, along with large accounting firms, law firms and financial institutions that have had to acquire global reach in order to maintain their relationships with large customers.

Global expansion accompanied by profitable growth gives organisations ‘permission' to accomplish many goals whilst still satisfying the needs of investors and other stakeholders including customers. Scale, for example, allows software houses to invest in research and development, to keep product moving and to take advantage of developments in operating systems, databases and communications technology to name but a few. In the fullness of time, the advantages of these flow back to customers in the form of, amongst other things, upgrades which promise a better ‘user experience', productivity improvements, speed and efficiency.

The benefits of scale can also flow through to better user education and multilingual product support around the globe and because the costs are spread over thousands of customers the improvements are usually affordable for most customers.

But is this brand expansion in the software industry, particularly around ERP software different from brand expansion in other industries? Consumer brands tend to be more homogeneous around the globe. Luxury brands such as fashion goods and motor cars are fairly consistent in every instance or country in which they appear. For airlines also, the ‘products' have a common look and feel across the routes that they serve. Even service industries such as large accounting firms manage to establish reasonably common brand image, methodologies, people competencies, training and products.

However, the software industry has become much more multi-threaded. Take for example any of the recent clutch of acquisitions and beneath the re-branding that inevitable follows such transactions lay a plethora of different products with different technical origins, user interface, design and approach. Papering over the cracks with newly invented brands cannot mask these distinct differences.

When large software houses in ERP market such as SAP, Oracle, Microsoft and Infor proclaim tens of thousands of customers or boast dominance in a particular class of business software the impression they may seek to cultivate is one of uniformity. But peel away the veneer of a single brand and underneath is a hotch potch of product and legacy systems.

With the pace of acquisitions apparently accelerating the product portfolios have expanded and diversified. ERP vendors are unrecognisable from the entities they were just a couple of years ago and similarly the business intelligence market as it was has been decimated with many of the key players folding into the ERP market.

Nevertheless it would be misleading to suggest that all of the acquisitions have been about scale. Clearly the juxtaposition of business intelligence and ERP technology creates formidable capability if the product sets can be truly merged. The trouble is that the pace of change has been so ferocious and broadly based that the leading ERP companies have created serious product overlaps. This in turn has fuelled doubts about migration strategies, convergence and product roadmaps.

In the quest for scale have customers been forgotten? Unquestionably acquisitions of the scale of recent transactions for example, Oracle/Hyperion and SAP/Business Objects create organisational and product uncertainty as the newly merged entities grapple with different cultures, structures and technologies. It should also be remembered that in both examples, the acquired companies were only a few months earlier acquirers themselves. For example, barely had the dust settled on Business Object's acquisition of Cartesis and ALG than it was snapped up by SAP – and the ink had barely dried on SAP's acquisition of OutlookSoft. Oracle for its part, still digesting Hyperion, is making a play for BEA Systems.

Understandably customers become nervous in the face of all this change – principally because there is a major difference between the software industry and other sectors. The ERP industry has spent years persuading companies that it can make a real difference to the way in which customers operate, make decisions and compete. Many companies have bought into the partnering concept and have deployed widely ERP software that is now deeply engrained in their business processes. This high degree of reliance on a supplier is in marked contrast to other sectors where customers have the freedom to change horses at a moment's notice, from one fleet car to another or perhaps one airline to another.

Software houses therefore have a special relationship with customers – an enduring partnership that can and possibly should last for years. However, convoluted, uncertain and constantly changing product road maps threaten to undermine customer confidence as they struggle to make strategic IT investments without any product certainty.

Furthermore, whilst vendors are usually at pains to stress that they will continue to support acquired products they are often less voluble about committing to future development. Against this backcloth who can blame customers for digging in their heels and waiting. But that's hardly helpful to customers facing re-structuring issues of their own and needing to make strategic moves with the aid of appropriate software.

Then there is still the question of scale. Have ERP vendors just become too large? Although the question is apparently straightforward the answer is less easy. Existing customers are to all intents and purposes stuck. With so much of the industry in a state of flux there is a danger of jumping out of the frying pan and straight into the fire. The key measure of confidence will be the rate at which new customers join these software monoliths, i.e. net new customers rather than new licence revenue (the industry's preferred measure) from new and existing customers. It is only when growth is seen in these quarters that the ERP industry and market watchers will know if the pursuit of growth has worked or the industry has simply become too big and unwieldy for its own good and the customers it purports to serve.

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