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Makers of ERP, CRM, and related software grapple with a maturing market.
Russ Banham, CFO IT
November 17, 2003
It doesn't get more "core" than ERP. Enterprise resource planning software is at the heart of most large companies today. It also tends to be at the heart of their IT budgets, with price tags running from hundreds of thousands to hundreds of millions of dollars.
Major ERP vendors enjoyed boom times at the end of the '90s, as Y2K fears and then the beginning of the "dot-bomb" era drove sales, and IT budgets were increased 10 percent or more per year as a matter of routine. Now ERP vendors, as well as companies that sell other comprehensive and usually expensive suites of products for customer relationship management (CRM) and supply-chain management (SCM), face a "mature" market.
But not a stagnant one. With deep pockets and massive market penetration, these firms are not content to wait for the market to rebound. Mergers, new products, and relentless marketing have characterized 2003 and will continue throughout next year.
While many other software vendors struggle to convince would-be customers to try something new, large enterprise players are more likely to win business by encouraging customers to switch. Most companies already have software that can do what ERP does; the question is, does it do it as well as a replacement system? And how much better does a new system have to be to warrant the investment?
Investing in any large-scale enterprise software is so expensive and time-consuming that many companies are loath to switch. And yet they do, for a variety of reasons. Consider The Dial Corp., where CFO and executive vice president Conrad Conrad (who prefers to be called "Rad") is not averse to making radical decisions. He's now in the midst of replacing three separate systems—ERP, CRM, and SCM—with one integrated system from SAP AG. "I wanted a seamless system that didn't involve a lot of interfaces—a word that scares me," says Conrad from the headquarters of the Scottsdale, Arizona-based $1.3 billion consumer-products company.
Dial's previous IT architecture—a $20 million Oracle ERP installation, a CRM application from Siebel Systems, and SCM software from Manugistics—worked adequately, Conrad says. But he was fed up with the ongoing costs of maintaining and integrating the systems. "Interfaces cost money in terms of maintenance and upgrades," he explains. "Once you update one system, you have to go through the same effort to take care of everything else. I was looking for an across-the-board solution that would require very low maintenance and incur less expense."
Simplicity doesn't come cheap: Dial is spending $35 million for the SAP system and will take 18 months to implement what Conrad calls "the whole kit and caboodle"—that is, modules that address everything from the factory floor to customer service. Dial hopes such an approach will solve a dilemma it faced when it confronted, as one of many examples, trade promotions. "In the old world," says senior vice president and CIO Evon Jones, "it was difficult to line up our consumer consumption data, which is in our order-to-cash system, with our trade-promotions data, which is part of our CRM system. We had to build a bridge between these two systems so we could apply the appropriate promotional incentive to the right order."
Jones soon learned one bridge was not enough. So Dial built more. But then "one vendor would announce an upgrade and we'd have to rebuild all the bridges. It got to be very expensive," Jones says. The Dial team and Conrad decided it was better to burn bridges than build them, because "we're a balance-sheet-focused company that loves cash flow. The better we can maintain our inventories and receivables, the happier I am. I'd rather be investing the cash than borrowing," Conrad says.
The Road Ahead
As other CFOs scrutinize their IT architectures in 2004, they'll face the same choice between so-called best-of-breed applications (aka "point solutions") that usually must be integrated with back-office systems and broad suites of software from a single vendor that are essentially preintegrated. No doubt that integration is costly and time-consuming, but many customers say that superior functionality of specialized software products is worth the effort. It's an old debate, one that has often sent best-of-breed software companies scrambling to add products or partners in order to present a more-integrated face to customers.
Absent a massive sales driver such as Y2K, ERP vendors such as SAP, PeopleSoft, and Oracle will continue to stress the advantages of integrated systems. Siebel says it will focus on new ways to make it easier and less expensive for companies to integrate its CRM wares with other vendors' systems. Toward that end, it continues to enhance its Universal Application Network (UAN), a standards-based architecture intended to help customers simplify the integration of various packaged applications.
Analysts suggest that Siebel has "rededicated" itself to CRM. Some see it as an effort to co-exist with ERP players, but according to Jeff Scheel, the company's CRM vice president and general manager, UAN and related standards will "make the argument that customers should buy applications from a single vendor obsolete."
Regardless of how vendors slug it out, experts say customers should devote a portion of 2004 to the kind of self-assessment most ignored when Y2K and the rise of E-business prompted a software buying spree.
"A 'business-application portfolio in a box' does not exist," says Elizabeth Roche of Meta Group, a Stamford, Connecticut-based technology-research firm, adding that "no single vendor can provide everything an enterprise business ecosystem needs." At best, she says, "developing a company's business-application portfolio is like creating a patchwork quilt comprising numerous large-footprint applications [like ERP and CRM], more focused best-of-breed applications, and software developed in-house. All of this is then connected—or not."
Mark Cotteleer, an analyst at Cutter Consortium, adds, "There will always be a new technology that emerges that must be connected to what already exists." His advice to CFOs: "Get your IT guys under the engine to see how the 'integrated software' is integrated. You may find out you're better off, cost-wise, integrating these systems on your own. Or you may find that you're getting exactly what you need."
Convergence will be a dominant theme in 2004, with vendors that have historically sold to large enterprises reaching down to midmarket customers even as vendors that have done well in that sector try to win big accounts. Many players will offer their software as a hosted service or newer hybrid approach in which customers buy some software functionality outright but pay for other capabilities in a hosted model.