Reports by Gartner continue to show that the decline of ERP software licence revenue is ongoing. A 23% decline in 2001 was followed by a 9% drop in 2002. 2003 proved to be no better, with analysts noting at least a 7% fall, and they are not predicting any good news for ERP vendors in 2004 either.
There are several reasons for the move away from costly ERP implementations. If a company has already invested in a full ERP system, or in the core systems it requires for its operations, then by its very nature as a business, it will not make any major investments for the next three to five years at least. The European financial services sector is a prime example of this practice: the major banks in Europe invested in their core systems 15 to 20 years ago, and they are not keen to change those systems. This is despite the fact that these institutions are among the most dynamic in their business requirements worldwide. In the manufacturing sector, the lifespan of core systems can be up to 20 years or more.
Whatever industry sectors you look at, the core processes of major companies are not readily or easily changed. However, their business moves forward, and they require enhancements and the add-on of solutions that are customised to meet their evolving business needs.
Another reason for the decline in ERP investments is the economic slowdown, which has impacted Europe and the US. While there are those of the opinion that SA was not affected by this, the fact remains that we are part of the global village and there is no way we can escape the trends that affect the rest of the world. It has also become clear that an ERP system is no longer a differentiator today; rather, it confers competitive parity. Instead, companies are looking to outsource many of their evolving business requirements in a drive to make them more efficient and effective.
Vendors which remain niche, or too rigid in their offerings, will not be around for much longer.
Victoria Vaksman, MD, Tilos Business Solutions
The combination of these factors has compelled some companies to look for alternatives to ERP. While they may need enhancements to their systems, they are choosing to develop these enhancements not by replacing their core systems, but rather by adding functionality and integrating this with their existing business processes and systems. To return to the banking sector, it is clear that core banking operations have become mundane. For example, banks have no desire to invest in new systems to process cheques - they would far rather outsource their cheque processing requirements. However, they will invest heavily in customer relationship management systems, because that is where they can achieve competitive differentiation. They will strive to offer new financial products, new combinations of existing products, and new and more effective offerings to the market.
In response, ERP vendors are trying to become more flexible, and to develop offerings for the midmarket. They are also diversifying in terms of the industries they play in - witness SAP which used to focus on manufacturing, and which has moved into banking. Vendors are also becoming more flexible with their pricing models, in some cases practically giving their software away while trying to compensate through services and maintenance. ERP vendors also have to become more innovative in terms of the add-ons they provide. Vendors which remain niche, or too rigid in their offerings, will not be around for much longer.
You only have to look at the latest round of mergers and acquisitions that have taken place to see that indications are that the market is becoming too small to provide adequate space for all these vendors: PeopleSoft-JD Edwards and Epicor-Scala being two examples of recent mergers and acquisitions. The point is that add-ons support the innovation that lies at the heart of competitive organisations. Businesses that focus on the development of solutions which provide for competitive-edge rather than replacing core systems enjoy higher return on investment, and deeper inroads into their customer base. If a company is flexible enough to be able to offer new products and reconfigure its existing products, it is bound to attract more customer attention. Maintaining core systems also represents a significant cost saving for companies.
Businesses which want to look at these add-ons and at innovation for competitive-edge should look at technology that is easy to integrate with existing systems and that supports add-on functionality. At the same time, they should also seek to work with companies which will look at their existing systems, and what they actually need. Consultants worth their salt will not rush in with technology solutions first, and only later look at how they have to be modified in order to meet the needs of the business.
Technology companies must be able to offer facilitation tools for building new solutions rather than getting their clients to buy new solutions and then spend valuable time trying to customise and integrate these solutions with existing core systems. The move to innovation is never complete. If you have the right tools to support the building of new add-ons as and when they are required, you will also be able to spread your investments over time.
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