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Despite flat IT spending, the juggernaut that is ERP shows few signs of slowing down.
Scott Leibs, CFO Magazine
February 1, 2003
Brilliant as a descriptor of national unity, e pluribus unum isn't a bad rallying cry for IT strategy either. From the many databases and complex software systems that run large companies, every CFO would love to extract one complete, reliable, and timely view of operations extending from the factory floor to the bottom line.
Yet technological unity has proved to be, if anything, even more elusive than the political kind. Most companies rely on a huge number of software systems, either by choice (a given product is deemed a must-have regardless of its fit with existing infrastructure), circumstance (mergers have resulted in a company reliant on a host of competing products), or mismanagement (various divisions have made independent buying decisions with scant regard to overall strategy).
The resultant multitude often seems less like a rainbow coalition than an unruly mob, a situation that enterprise resource planning (ERP) software vendors continue to capitalize upon. Their pitch? Given that most software applications need to interact with other applications — not to mention underlying systems such as databases, the Internet, and an expanding array of "middleware" — integration has to be a top priority for IT departments. And what better way to tie applications together than to buy as many of them as possible from the same company, thus enjoying out-of-the-box integration?
The appeal of that argument is a major reason why IDC analyst Dennis Byron predicts that despite the current economy, spending for ERP software will increase by 6 percent this year, slightly outpacing growth in the overall software market. That's a far cry from the boom times of the late 1990s, when Y2K and E-commerce drove massive investment in ERP. But, declining stock prices aside, ERP vendors have proved resilient to a subsequent bust. Their customer relationship management (CRM) software has provided one lifeline, and beyond that they have proved adept at offering a continually expanding array of other products.
That array, says Jim Morlan, CFO of Viewsonic Corp., explains why his company's investment in ERP software accounts for "the lion's share of our total IT budget." What's more, even though he believes his company, a $1 billion manufacturer of CRT monitors, LCD displays, and related products, must "make IT leaner," he sees little problem with relying on his ERP vendor (Oracle Corp.) for the majority of his company's software needs. "We want to rope everything together," says Morlan, "so ERP becomes the Golden Fleece of corporate data."
Some CFOs might argue that "fleece" is all too apt a word for software that can run to more than $100 million and often take years to implement. Yet ERP is as integral to corporate life as the computers it runs on, and most analysts expect it to become more so as software makers continually extend ERP far beyond the factory-oriented "resource planning" role for which it was originally designed.
Financial to the Core
In fact, while ERP began as rudimentary industrial automation software, it now provides not only the core financial functionality that most large corporations depend on but also an increasing number of ancillary financial applications. John Van Decker, senior program director at consulting firm Meta Group Inc., says one key trend for ERP in 2003 will be to "fill gaps in the financial value chain" by adding modules that address everything from credit decisioning to collections to electronic bill presentment and payment. "Financial applications are back in vogue," says Van Decker, propelled by government mandates to speed reporting and corporate anxiety over accuracy and transparency. "Companies are all asking, 'Is what I know correct?' and they're willing to invest in software that helps them drill down and understand performance."
Byron of IDC agrees, and adds that during the next few years "profit management automation" (PMA), which combines profit planning, activity-based costing, and treasury and audit management into an integrated suite, will become a major growth area within the ERP universe. "PMA will give controllers and treasurers the same sort of control over capital that traditional ERP provides regarding transactional data," he says, but cautions that the trend is in its infancy and won't mature until 2005.
Nearer term, helping customers do more with the vast stores of transactional data they already have will be a priority for most ERP vendors. Steve Miranda, vice president of applications development at Oracle, points to his company's new "Daily Business Intelligence" as one example. This portal-based interface gives employees in finance, human resources, sales, and other functions the ability to drill down into data and analyze it in real time.
Scores of software companies that specialize in business intelligence (BI), data warehousing, and related areas do the same, essentially making a nice living by making ERP data more accessible. But Miranda argues that bolting a separate product onto ERP is expensive and cumbersome, and that customers would welcome the chance to use ERP tools to access and analyze ERP data. And not surprisingly, analysts expect most ERP vendors to take BI much more seriously in 2003.
"The pendulum is swinging away from so-called best-of-breed solutions," says Bruce Myers, vice president at Cap Gemini Ernst & Young and leader of its ERP service line in the Americas. The allure is not only the aforementioned push toward integration and standardization, but also the fact that ERP vendors are investing in research and development and offering good deals as well. SAP America is so convinced that integration is key that it just launched a global initiative around the idea, after years of downplaying suites in favor of selling modules on their individual merits.
Best Forms of Flattery
Those specialized competitors, however, are not standing idly by. Instead, this year, companies that offer "point" solutions that tap into ERP — usually winning sales by offering software that does its job better than the corresponding ERP modules, or pioneering niches that ERP vendors ignore — are increasingly adding another trick to their bags: competing against ERP vendors by, to some degree, mimicking them. In BI, for example, Hyperion, Cognos, and others are championing "performance management" suites that integrate a range of financial modules that address reporting, forecasting, and related functions. And in labor management, Kronos Inc. has broadened its midmarket offerings to address HR needs beyond its core focus on timekeeping and scheduling software. "We'd be naïve not to keep an eye on ERP vendors," says Michael DiPietro, vice president of product and industry marketing at Kronos, "because they have been moving into the labor-management space."
Their biggest competitive advantage over ERP systems, argue the specialized vendors, remains their focus. Indeed, while an integrated, out-of-the-box approach has enormous appeal to customers, the more functionality that's crammed into said box the harder it can be to unpack. Ben Gaucherin, chief technology officer at Sapient Corp., says his firm has intensified its consulting practice around ERP largely due to customers' need to make the software easier to use and faster to roll out. The company's eLabs acquisition, which focused on optimal Web-site designs during the dot-com days, now tackles the usability issues posed by complex back-end software. And as companies look to rearchitect their technology infrastructures to achieve better alignment between business and IT, decisions about how to maximize ERP investments come to the fore.
Gaucherin even disputes the conventional wisdom that customers value simplified integration above all else. "We see clients that are rejecting the modules offered by ERP vendors in favor of specialized software or nothing at all. Some companies simply want to scale back." And DiPietro goes so far as to contend that customers themselves have backed off from the perception that ERP vendors can meet all their needs, and are now "more realistic about what [ERP vendors] can and can't do."
Don't tell that to Viewsonic CFO Morlan. His company spent four years planning and 18 months implementing a "single instance" of its ERP software, both to save money and to provide a solid underpinning for its E-commerce efforts. "We were all over the world but not really 'global,' " he says. The company wanted to connect the various constituents of its supply chain and also do more-sophisticated data analysis. To do that, he says, it needed to invest heavily in ERP. But Morlan says he was savvy in his investment — by moving to the newest version of Oracle and relying on the vendor for more consulting help, he was able to cut internal ERP staff by half. Moreover, while ERP accounts for a larger percentage of his IT budget than in years past, his overall IT expense has been declining.
That cost relationship poses a challenge for ERP vendors, which tout customer savings for marketing purposes. Some vendors, including Oracle, have answered that challenge by adopting new and more-flexible licensing models, something customers are sure to exploit in 2003 — one more reason most analysts see little threat to ERP's dominance. "ERP will be here for a long, long time to come," says Cap Gemini Ernst & Young's Myers. IDC's Byron agrees. "There's a lot of M&A going on, particularly in the midmarket," he says. "The push is on to acquire critical mass, and it's driven by customer demands for a smaller number of reliable, broadly focused companies."
Scott Leibs is a senior editor at CFO.