Inside the Lifecycle of ERP – What’s Changing Now

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Licensing a new ERP solution is akin to moving to a new home. It’s rarely fun. It is expensive, time-consuming and full of potential risk. Either task helps you understand:

  • How much clutter you’ve accumulated.
  • Who your true friends are.
  • Your real motivation for going through all this.
  • Just how expensive this process is.
  • And, why you’d like to never do it again.

I should know – my wife and getting ready to pull up stakes and head to parts elsewhere.

In the ERP world, even the big boys in the ERP space (think Oracle, SAP, and Infor) have discovered the cloud. Everything that Plex, NetSuite, Workday, Rootstock and others have been pointing out about cloud ERP for years must have been true after all. But, let’s remember that vendors want customers to make these big shifts to cloud ERP but how and when would that really happen?

Companies replace ERP products when they:

  • Experience material growth or contraction (organically or inorganically).
  • Find their ERP solution’s growing maintenance expense just too pricey to continue with.
  • Undertake a new corporate strategy (e.g., move to shared services).
  • Need to replace the hardware or systems software that the old solution is using.
  • Find their old ERP product is no longer being supported or enhanced.
  • And about 17 other reasons

The first-time ERP buyer is often a bit of a different animal. These firms often possess pathetic excuses for business software. Their initial application software is often a kludge of spreadsheets, manual workarounds and maybe a starter accounting system. The thinking is that these entrepreneurs want to make sure their company actually takes off before incurring big, grown-up ERP software and the expenses that accompany it.

Austin, Texas-based Software Advice, a company that connects software buyers with vendors, recently surveyed hundreds of ERP buyers. Among the study’s numerous findings, they noticed that 44% of respondents rely on “disparate systems to execute ERP processes”. This correlates well with the large number of buyers who are looking for improved integration as a major driver behind their new ERP solution (see graphic below). In essence, this data point illustrates the continuing attraction and market power behind ever-larger ERP suites. Businesses might like a few best-of-breed applications to solve some deep vertical industry function but they will often seek a larger suite of integrated applications for more generalized back-office (and some front-office) processes.

Image courtesy of Software Advice and used with their permission
Image courtesy of Software Advice and used with their permission

Another notable observation from this one study question concern the large number of ERP software buyers not having supported applications (24%). The large number of firms with unsupported software is troubling.

Customers with unsupported applications may fall into two camps:

  • Customers who are substantially behind in applying application maintenance. This is usually a conscious decision on the part of the customer. Either the customer:
    • saw no significant business value in upgrading the application
    • could not afford the cost of the upgrades
    • was not entitled to vendor upgrades (i.e., they went off maintenance)
    • could not risk potential downtime to the business should an upgrade go awry
  • Customers who possess orphaned or zombie applications that may still function but whose licensor is no longer in business or no longer supporting the product.

This issue may become less and less relevant in the future as more companies acquire multi-tenant cloud ERP solutions. With these products, the software vendor maintains the application code not the customer.

Another group of buyers in the Software Advice study are experiencing growing pains (27%). Growth, organic or inorganic, is often a significant driver of new ERP sales. The chart below shows the different kinds and deployments of software as a company grows.
erpvsbizevol

The growth trajectory above has been true for some time. However, change is afoot.

Now, ERP software buyers at most points in their growth maturity curve now face more choices. Newer solutions can be deployed in several methods, some new and some quite old-school:

  • On-premises
  • Outsourced
  • Private Cloud
  • Hosted, Single-tenant
  • Multi-tenant cloud

The on-premises ERP market is shrinking due to inroads by cloud and other deployment options. On-premises ERP may remain the deployment method of choice for the 50-100 largest firms in the world but it is losing ground to newer solutions, many of which were designed for a cloud/mobile/big data world. Cloud based products are particularly popular in the SMB space.

Multi-tenant cloud ERP solutions (e.g., Plex) are gaining traction predominately because they permit IT shops to work on more strategic activities and projects instead of getting bogged down on expensive, low value-added maintenance, patching and upgrading tasks.

While this space was hot for SMB firms, there have been some significant gains into the large divisions of global firms. Some multi-billion firms are now deploying these new solutions as divisional, plant and headquarter solutions. The reason this is taking hold now is that the quality and functional completeness of core financial and other modules have improved to a great extent. These improved solutions now are global-class products for even some of the largest firms in the world.

Single-tenant, hosted ERP solutions were often the result of ported-over on-premises products. The products were single-tenant as the vendors involved did not want to re-write the code to support multi-tenancy. So, outside of utilizing scalable hardware managed/owned by a third party hosting firm, the task of maintaining the applications still falls to the customer. This deployment method may be cloud-friendly, but it isn’t likely to be the long-term market leader.

Outsourced solutions may be in jeopardy if outsourcers cannot offer modernized cloud solutions soon. For those outsourcers that rely on solutions from traditional on-premises vendors, this could be a painful time. When their customers shift to newer ERP products, how can the outsourcer compete? While some enterprising outsourcers are attempting to act as MSPs (managed service providers) for some ERP cloud solutions, they may need to deepen their portfolio of industry-specific add-on applications to remain market-relevant.

erpevolovertime

Newer ERP solutions also possess other capabilities, too. In-memory database technology is appearing in many solutions even those from long-term, established ERP providers. In-memory databases permit newer solutions to mix big data, internet of things data and transaction data into more insightful analytics. Moreover, these in-memory tools can dramatically reduce processing and reporting times while even mitigating the need for interim data stores like sub-ledgers.

Assessment:

The market for ERP software is still a strong one. However, the wants/needs of buyers (like the technology itself) are shifting. Smart vendors anticipate (not just react to) these changes and so capture the greatest possible market share.

Buyers are getting more demanding. They want more from vendors and outsourcers. The biggest want to see better economics from these solutions and the providers that implement them. Time will tell if buyers can and will get this anytime soon.

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Brian Sommer

Brian Sommer

Brian is a ZDNet & Diginomica contributor and renowned accounting software expert. Prior to his current role at Vital Analysis, Brian served as a senior partner at Accenture. Brian has sold, designed and implemented massive financial and HR solutions around the world and has been active on the industry speaking circuit on most every continent. Brian has written extensively on business value and ROI for prestigious publications like Optimize and the Wall Street Journal Europe.
Brian Sommer

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