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Next Generation ERP - a New LEF Research Initiative

The market for Enterprise Resource Planning (ERP) systems is one of the more unusual segments of today’s information technology business. The typical IT industry pattern is that as the market for a new technology expands, it tends to become standardized. Competition emerges, prices fall, and the product eventually becomes a commodity, a service, or even an open source option. We have seen this cycle with servers, operating systems, CRM and many other hardware and software marketplaces. Identifying and anticipating these lifecycle changes is a major area of LEF research.

Next Generation ERP

The market for ERP megaprojects (those over $200 million) continues to rise, and the demand for ERP expertise is as strong as ever.

The story with ERP thus far has been quite different. Certainly, the market has grown impressively. Today, almost every large firm – especially in Europe and North America – is a major ERP customer, as the software (mostly from SAP or Oracle) is widely seen as an indispensable tool for controlling large global businesses. The market for ERP megaprojects (those over $200 million) continues to rise, and the demand for ERP expertise is as strong as ever.

But the rest of the cycle hasn’t really kicked in. Yes, there has been competition and supplier consolidation (a form of standardization), but prices haven’t fallen, installations have not been commoditized, ERP as-a-Service offerings remain modest, and open source alternatives are used primarily in smaller businesses. The result is that large firms continue to spend a great deal of money establishing and maintaining their ERP environments. Few multi-billion-dollar IT marketplaces have been so stable for so long.

This situation raises two main questions:

  • Do ERP systems really have to cost so much money? Many executives inside and outside IT are still shocked at the high price tags, constant schedule overruns, and hard-to-calculate ROI. The issue is less about the value of ERP than whether there are less costly options.

  • Will the cycle of commoditization kick in, and if so, how and when? Software-as-a-Service firms are clearly succeeding in moving into new markets faster than ERP vendors can evolve, but they are still mostly picking around the edges.

Because client interest in these questions is high, we have launched a new area of research headed by Warren Burns, who has joined us recently in Australia after many years as Head of Innovation at Unilever. Our initial thinking and overall research direction are described in more detail below.

Why is ERP different?

To understand why ERP has not yet followed the traditional industry pattern, we need to understand how it actually works in large organizations today.

The core functions of an ERP system are relatively similar across the market – finance, HR, CRM, supply chain, etc – all with many parts. In each of these areas, vendor offerings come with a standard set of logic, which is customized to match the business process defined by the customer.

The customized logic, tables and data inputs/outputs interact via thousands (or even tens of thousands) of transaction codes that can be assigned variables to determine how the user can control them – for example, making them read-only. There is also the ability to add structural authorizations to make the codes behave differently depending on where the user sits in the business. Finally, the transaction codes are grouped into roles; these roles are then divvied up into parcels called composite roles that can be assigned to users. Composite roles can then be linked to a master role but also modified for individual users.

This is where we start to see why ERP projects are some of the most expensive IT projects in the world. The level of complexity involved in giving this amount of flexibility is massively time consuming to set up and maintain. It is now common for large ERP projects to exceed US$100 million and take five years or more to complete. This is for a set of technology that often seems like a basic cost of doing business.

Specialized skills

The complex nature of ERP also makes change extremely difficult. Individuals spend entire careers implementing ERP systems, but often only have deep expertise in a handful of modules of which there are many dozens. Recruitment firms looking for ERP talent spout a raft of acronyms that make little sense to anyone outside the industry. To quote a recent advertisement on an Australian career website: “Looking for dynamic leader with FI/CO, BI, SD, XI and MDM experience to start immediately.”

The fact that it is unlikely that any single person would actually have the above combination of skills shows that even the ERP industry itself is struggling with its jargon. This complexity also explains why so much ERP work has migrated to consulting firms, who can leverage their expertise. Removing at least some of this complexity is an essential requirement for the standardization/commoditization cycle.

Possible evolutionary paths

We should never forget that the reason ERP systems have become so ubiquitous is because they are necessary. No Fortune 500 sized business can operate the way it did in the pre-ERP era: the labour cost of paper accounting and supply chain processes would eclipse today’s ERP budgets; the loss of speed would result in a lack of competitiveness; the loss of control would worry investors.

We do not challenge the necessity of ERP, but we do ask what is next? Are we headed toward ERP-as-a-Service, a revolution in business process management software, a disruptive market entry from another industry, or mostly just the evolution of current ERP vendor offerings? Our research will track these alternatives as they evolve, and each is briefly described below. One thing is sure: many firms would be very interested in a simpler, lower-cost alternative that sufficiently meets their back-office needs.

Disruptive scenarios

The most obvious potential source of disruption is today’s Web 2.0 industry, and there are already a number of browser-based ERP-as-a-Service offerings, including those from Salesforce and Workday. Perhaps the most innovative comes from Openbravo, which has taken the additional step of making its software open source. All three of these firms have had success in small and medium enterprises but have yet to become significant ERP players in large organizations.

Future ERP disruption might also stem from the realization that the cost of developing one’s own software has fallen so much that buying expensive vendor software and then doing extensive customization doesn’t always make sense. Given the customization that takes place during most ERP projects, it’s not completely far-fetched to suggest that some large ERP installations could be custom-built on a flexible modern platform more cheaply and easily.

The first example we know of was the 2009 Japan Post project undertaken by Appirio. This large-scale consumer-facing project shares many characteristics of an ERP deployment but was custom-built on the Force.com platform. It delivered considerable savings in an implementation time that would have been unthinkable prior to the availability of Platform-as-a-Service offerings.

The PaaS concept also mitigates many of the traditional risks of custom application development. The structure provided by the platform gives rigour to the development process by providing a secure and stable framework. The main benefit from this approach is the ability to develop truly custom processes that provide competitive advantage to the fullest extent possible. Examples are the Coca-Cola RED (Right Execution Daily) and LoS (Look of Success) processes.

Finally, the most disruptive (and thus far least developed) possibility is a shift in industry boundaries. Consider the mainstays of financial ERP, Procure to Pay (P2P) and Order to Cash (OTC). Both processes have characteristics similar to those that financial services firms have mastered for monetary transactions; so perhaps in addition to clearing payments, financial services firms might some day also clear invoices. This isn’t such a stretch when you consider the value this would add to the relationship between an enterprise and its financial partner. The idea of running cost and profit centres as bank accounts is an analogy that the consultants have long used to describe ERP financial processes to business stakeholders; this would just be the next step.

Evolutionary approaches

In recent years, SAP and Oracle have made a series of acquisitions and product improvements to expand their presence beyond traditional ERP.

Of course, the major ERP players aren’t standing still. In recent years, SAP and Oracle have made a series of acquisitions and product improvements to expand their presence beyond traditional ERP. Both firms now have broad offerings in areas such as business intelligence, visualization, risk management, workflow management and Big Data.

Similarly, these firms are working to make their systems more real-time and user-friendly. We still interact with some ERP processes the way we used to interact with DOS and Unix. For example, if you want to maintain a currency transaction table in SAP you type OB08. Should a user really be expected to remember such things in order to make a process work? Future ERP systems will certainly be more visual and browser-based, with much better mobile and tablet support.

Another evolutionary approach is suggested by the work of Cordys, the latest venture of ERP pioneer and serial innovator Jan Baan. Here, the idea is to push the ERP system into the background and deploy a different platform that can call services from ERP when needed, and then blend those services with other internal and external systems before presenting them to the user. This approach was covered in our recent plug-and-play research conducted by Kirt Mead.

Research directions

Keeping abreast of these issues requires someone with deep ERP expertise, which is why we are delighted that Warren has joined us. Over the next few months he will be investigating such issues as:

  • How current ERP offerings will evolve

  • How businesses are measuring the value that ERP represents

  • What innovative practices in ERP implementation and operation are emerging

  • How the ERP landscape will look in 2017

  • How ERP budgets will look in 2017

  • How cloud computing will change the delivery of ERP

  • What effect open source will have on ERP

  • How the ERP user interfaces will change

  • How mobile devices will affect the way we design ERP processes

  • At what point ERP spending becomes poor value

  • What ERP is worth to a business.

We encourage interested clients to participate in this important research project.

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AUTHORS

David Moschella
Research Fellow
David Moschella, based in the United States, is a Research Fellow for Leading Edge Forum.  David's focus is on industry disruptions, machine intelligence and related business model strategies.  David was previously Global Research Director of the programme. David’s key areas of expertise include globalization, industry restructuring, disruptive technologies, and the co-evolution of business and IT.  He is the author of multiple research reports, including Disrupting the Professions through Machine Learning and Digital Trust, 2016 Study Tour Report: Applying Machine Intelligence, There is Now a Formula for Machine Intelligence Innovation,  Embracing 'the Matrix' and the Machine Intelligence Era and The Myths and Realities of Digital Disruption. An author and columnist, David’s second book, Customer-Driven IT, How Users Are Shaping Technology Industry Growth, was published in 2003 by Harvard Business School Press.  The book predicted the shift from a supplier-driven to today’s customer-led IT environment.  His 1997 book, Waves of Power, assessed global competition within the IT supplier community.  He has written some 200 columns for Computerworld, the IT Industry’s leading publication on Enterprise IT, and has presented at countless industry events all around the world. David previously spent 15 years with International Data Corporation, where he was IDC’s main spokesperson on global IT industry trends and was responsible for its worldwide technology, industry and market forecasts.    

CATEGORIES

21st Century
Adaptive Execution
Assets/Capabilities
Identity/Strategy
Proactive, Haptic Sensing
Reimagining the Portfolio
Value Centric Leadership

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