By all accounts the ERP market is flat or in decline. In the current economy attention is focussed on cash conservation and survival. As such ERP renewal is well down the agenda or is not even on the list of priorities. In fact a number of ERP vendors have reported an increase in maintenance revenues as organisations batten down the hatches and ensure they their current solution is updated for recent releases and is guaranteed to be supported and maintained. Maximising value from existing investments appears to be the order of the day with few businesses prepared to entertain the inevitable disruption of swapping software vendors. Gary Simon, FSN’s managing editor reports.
Perversely, inaction is relatively good news for software vendors. Provided they have sufficient critical mass they can coast through the recession without having to worry too much about customer attrition. On the other hand sitting on one’s thumbs is hardly a recipe for growth. The more savvy will be developing add-on products and services coupled with attractive financing options to extend their customer footprint. But realistically what choices do customers have to extend the capability of their existing investments?
The answer is that it depends! The high end of the ERP market is not known for its flexibility. Big ticket ERP is notorious for lengthy implementation timescales, high costs and consultancy fees. But change is a feature of both growing and contracting economies. Despite the recession, business activity has not ground to a halt even if not all of it is productive or earnings accretive. ERP solutions have to cope with restructuring, cost cutting, refinancing and divestments just as much as the mergers and acquisitions which were the norm in better times.
In good times the prospect of replacing ERP systems is less budget constrained and daunting. Now companies have to make do with what they've got and some will be disappointed with the responsiveness to change of their global ERP 'investments' – unless of course they are prepared to shell out large sums of cash on consultants and developers to reconfigure their systems and tweak their processes.
The problem is that when most companies evaluate ERP suppliers the emphasis is on the initial outlay – i.e. what it costs to purchase licences and implement. As many are learning to their chagrin, few organisations consider the cost of business change and the knock on effect this has on maintainability and costs.
But it's not all bad news. The major ERP vendors such as SAP and Oracle have through acquisition merged their offerings with performance management vendors (BusinessObjects and Hyperion respectively) to deliver a one stop shop for budgeting, planning, forecasting, reporting and financial consolidation. These performance management applications are likely to play a pivotal role in responding to a recession and, theoretically there is a clear benefit in sourcing them from the same vendor. So if the main thrust of change is to achieve more transparent and accurate reporting, then there may be tools which can be bolted on with limited disruption.
But what if the change is more fundamental, say more operationally motivated than strategically driven. Adding on extra functionality to meet a new business need can often be beyond the scope of existing software parameters and require changes to source code which is when the real problems start. As many businesses know to their cost, source code changes become a millstone around the neck when they want to take advantage of general upgrades.
Vendors such as CODA and Agresso are quick to point out that monolithic ERP solutions are difficult to change and regardless of the attractiveness of add-on applications such as budgeting, the underlying inflexibility of large scale ERP is likely to act as a brake on progress.
Now part of the same organisation Agresso and CODA point to a different architecture which promotes more inbuilt flexibility either by allowing changes to be made more easily on the fly or by providing superior integration capabilities that allow other applications (both internal or external) to be grafted onto the core ERP capability. In both cases they claim the tools are simple enough to reduce reliance on outside consultants and of course the costs involved.
But their positioning goes beyond a hunch. Research carried out earlier this year in conjunction with CFO Research Services looked specifically at the costs of modifying ERP systems in companies with annual turnover in the range of $100m to $1billion. The study found that a typical company in the survey spent an average of more than $1.2m each year to maintain, modify and update its ERP system. Over half of the 157 respondents to the survey estimated that internal costs (salaries for IT, finance, user training, project management) alone are between $100,000 and $500,000. Add in external costs (IT vendors, contractors) related to ERP modifications and annual maintenance and the total weighted average annual cost of serving ERP comes to a hefty $1.24m. So companies are faced with Hobson’s choice. Grin and bear the cost of their costly ERP systems or jump ship to Agresso and CODA style products which, by design, may offer more shelter from the harsh winds of change.
But there may be a third way – the 'Software as a Service' model, effectively hosted applications for rent 'on demand' over the web could offer a solution for companies that want to ditch costly ERP systems, IT departments and upgrades in order to focus on their businesses. It has been a long time coming but the ERP vendors are waking up to the inevitable drift towards hosted software. Oracle's Larry Ellison, last week acknowledged the significance of so called 'cloud computing' and most vendors (CODA included) offer both cloud and on-premises versions of their software. For a long time, the market has believed that hosted solutions are for small enterprises and business start-ups, but there are signs of growing interest in the mid-market. SAP for example is re-launching its Business By Design hosted solutions and new SaaS entrants are increasingly eschewing SMEs in favour of mid-market companies. Xledger a SaaS company started by Jarle Sky formerly one of Agresso's original developers is targeting specifically that segment. The ERP world it seems has come full circle.
