Saturday, March 27, 2010

IFS Continues Its Reinvention Through Pruning Part One

Divestitures of non-core products and services, which have apparently worked well for vendors like Epicor Software Corporation or Ross Systems (see Way to Go, Ross Systems! and Latest Development on Epicor's Trying the Divestiture Tack), seem to be getting accepted by others too. Recently, Industrial and Financial Systems (IFS) (XSSE: IFS), a Swedish extended enterprise applications supplier with sales in 45 countries, over $330 million (USD) in revenues in 2003, and more than 350,000 users worldwide, announced the following:

* In early January that, following the agreement with Uniativa Ltda, which acquired the entire business and 100 percent of the stock in Industrial and Financial Systems do Brasil Ltda on December 31, 2004, partners will be solely responsible for the sale and distribution of IFS Applications in Brazil. In line with its strategy of operating to a greater extent via partners, IFS had previously transferred a substantial part of its business in Latin America to distributors. According to the vendor, within the near future, partners will hence operate all IFS' business in Latin America, while the vendor pledges to continue to fully support its 100 customers in the region. Moreover, it will provide its partners with localization support, methodology, tools, and specialists from its global industry teams. Otherwise, the transactions will have a negligible effect on IFS' cash flow and earnings.

* In mid December, IFS Sverige AB, IFS' Swedish subsidiary, announced that it has sold its payroll software to Personec, and the two companies have entered into a collaboration agreement. Personec, the largest supplier of human resource (HR) management and payroll administration software, consulting services, and outsourcing services in the Nordic region, is jointly owned by TietoEnator and Nordic Capital, and has more than 800 experts in Finland, Sweden, Norway, and Denmark, and 15,000 in the private and public sectors. The aim of the collaboration is to enable IFS and Personec to offer new and existing customers a better product. To that end, Personec will acquire the right of ownership of IFS' payroll software for the Swedish market and will assume responsibility for product development, consulting services, and support, while IFS Sverige will continue to sell the payroll component as part of IFS Applications.

* In November, IFS announced it would collaborate with Bentley Systems, Inc. (www.bentley.com), one of the world's leading providers of software for the lifecycle of the world's infrastructure, which offers a comprehensive portfolio for the building, plant, civil, and geospatial vertical markets like architecture, engineering, construction (AEC) and operations, and with 2003 revenues reaching $260 million (USD). Bentley, which has its headquarters in the US, will thereby acquire IFS' esoteric computer-aided design (CAD) applications for process, electrical, piping, and instrumentation design. As part of the acquisition, Bentley pledges to assume responsibility for IFS' maintenance and support services for more than 100 accounts, primarily in Sweden and Norway, which employ IFS' CAD applications. The agreement with Bentley is expected to have a positive impact on IFS' earnings totaling approximately 6 million SKr (approximately $800,000 USD) in 2004 and 2005.

This is Part One of a three-part note.

Part Two will present background information and cover challenges and response.

Part Three will discuss the market impact and make user recommendations.

Collaboration With Personec

The vendors believe the collaboration means that IFS customers, approximately 120, who are using IFS' payroll software will be given access to additional competence and a broader product offering for payroll and HR management. Most of these customers use the payroll component as part of a comprehensive enterprise application planning (ERP) solution from IFS, and IFS' annual revenue in the area has been approximately 40 million SKr (approximately $5.3 million USD). In connection with the acquisition, 45 of IFS staff will transfer to Personec.

As indicated earlier on, Personec has a leading position in HR management in the Nordic region, with approximately 27 percent of all employees in the region receiving their salaries via the company's payroll software. The acquisition of IFS' payroll component for the Swedish market is part of Personec's strategy of strong growth in the Nordic market, part of which includes collaborating with ERP vendors. The vendor believes the acquisition will increase its market share in the Nordic region to 29 percent. Further, according to the vendor, HR management and payroll management are extremely culture-specific, given that legislation, collective agreements, regulations, and traditions vary greatly between different countries and are in a constant state of change, which makes it too complex for any software company to conduct its own development. Therefore, this is a significant step in Personec's strategy of achieving growth by partnering with ERP vendors and offering expertise in payroll management.

The collaboration with Personec is expected to have a positive effect of 25 million SKr (approximately $3.3 million USD) on IFS earnings and of 42 million SKr ($5.6 million) on cash flow during 2004, while capitalized development expenditure totaling 18 million SKr (approximately $2.4 million) for IFS' payroll component has been written down in connection with the sale. The additional purchase price, based on sales, will reportedly be paid during 2005 and 2006.

Collaboration With Bentley Systems

Users of IFS' CAD applications operate mainly in the pulp & paper and power generation industries. The CAD applications are integrated with IFS Applications, which the users employ mainly for asset maintenance and spare parts logistics. IFS users will reportedly be offered the opportunity to change their existing CAD systems to solutions from Bentley while retaining the tight integration with IFS Applications. The agreement with IFS will provide Bentley with a large Swedish user base in these industries as a complement to its existing users in the region, among which is the Swedish National Rail Administration.

For IFS, on the other hand, the agreement means that it will collaborate with Bentley worldwide to market and sell IFS Applications to asset-intensive companies. With more than 22,000 accounts, Bentley has a strong market position in the design, engineering, construction, operation, service, and maintenance of capital-intensive operations, which include, among others, process plants and utilities, as well as water and waste treatment plants, railways, and airports. Because IFS also prioritizes these segments, the companies believe that they complement each other and can combine to offer users a more comprehensive solution.

On its side, Bentley recently launched the "You Deserve Better" upgrade program and Web site for potential disgruntled AutoCAD users facing forced retirement of their AutoCAD 2000i and AutoCAD LT 2000i software products by Bentley's archrival Autodesk (for more info on Autodesk, see Autodesk to Bring Microsoft Business Solutions Closer to PLM). As to benefit from its nemesis' predicament, Bentley has devised a survey on its Web site, and will use the survey responses to tailor its upgrade program, which will supposedly include special program pricing and services, to the needs of these AutoCAD users.

The upgrade program's product offerings are based on Bentley products including MicroStation-based product functionality, native support of DWG (a file extension for AutoCAD Drawing Database and Drafix Drawings), DGN (a file extension for MicroStation Graphics) and portable document file (PDF) file formats, and upgrade services. For example, PDF Composer lets users fairly easily package all of their AEC drawings, including MicroStation and AutoCAD files, into a single PDF document, whereby the interactive PDFs make it possible to quickly navigate through an AEC project using hyperlinks, bookmarks, and pages to access information.

After January 15, 2005, Autodesk reportedly states on its Web site that it will no longer sell upgrades or cross-grades from any AutoCAD 2000i-based products or Autodesk Inventor Series 6. Additionally, Autodesk will no longer provide technical support, apart from existing maintenance patches that are downloadable from www.autodesk.com.

On the IFS' side, on December 30, the vendor announced that structural changes, including cost containment actions, and divestments and changes in international subsidiaries and operations, are expected to charge IFS earnings with 98 million SKr (approximately $13 million), net, for the fourth quarter of 2004. Namely, provisions and write-downs are expected to amount to 130 million SKr (approximately $17.3 million), while the positive effects, primarily resulting from divesting payroll applications and CAD software for the Swedish market, will amount to 32 million SKr (approximately $4.3 million).

Market Impact and User Recommendations

Recently, Industrial and Financial Systems (IFS) (XSSE: IFS), a Swedish extended enterprise applications supplier with sales in 45 countries, over $330 million (USD) in revenues in 2003, and with more than 350,000 users worldwide, announced the following:

* In early January, following the agreement with Uniativa Ltda, which acquired the entire business and 100 percent of the stock in Industrial and Financial Systems do Brasil Ltda on December 31, 2004, that partners will be solely responsible for the sale and distribution of IFS Applications in Brazil.

* In mid December, IFS Sverige AB, IFS' Swedish subsidiary, announced that it sold its payroll software to Personec, and the two companies have entered into a collaboration agreement.

* In November, IFS announced it would collaborate with Bentley Systems, Inc. (www.bentley.com). Bentley, which has its headquarters in the US, will thereby acquire IFS' esoteric computer-aided design (CAD) applications for process, electrical, piping, and instrumentation design. As part of the acquisition, Bentley pledges to assume responsibility for IFS' maintenance and support services for more than 100 accounts, primarily in Sweden and Norway, which employ IFS' CAD applications. The agreement with Bentley is expected to have a positive impact on IFS' earnings totaling approximately 6 million SAK (approximately $800,000) in 2004 and 2005.

Further, the deals with Bentley and Personec, which are also in tune with the above inclination to leverage partners discussed in Part Two, would not be the first of a sort for IFS. Namely, the vendor initially expanded into the customer relationship management (CRM) arena by acquiring former Israel-based CRM vendor Exactium for its product configuration module in the late 1990s. The subsequent sell-off move to Pivotal in 2000 (see What is IFS Up To in the CRM Arena?!) represented IFS tacitly conceding that it had gone beyond its means with its too ambitious product scope and geographic expansion at the time.

Also in the late 1990s, IFS purchased a US-based enterprise resource management (ERP) vendor Effective Management Systems (EMS), hoping to convert its customer base from the maturing Time-Critical Manufacturing (TCM) product to its own enterprise applications, and consequently gain a quick US beachhead. However, customer satisfaction with TCM was very high and, therefore, customer loyalty made it difficult to move customers off TCM. With the majority of the TCM customers reluctant to transition, IFS then heavy-heartedly agreed to sell the TCM product line in November 2001. Thus, the current WorkWise organization was formed comprised of former EMS staff and has since been focused solely on the TCM product line and its customer base (for more information, see A User Centric WorkWise Customer Conference).

With the CAD and payroll applications too, after careful soul searching, IFS' management decided to stay focused on its core competencies, instead of extending painstaking efforts to develop peripheral applications for a small fraction of customers in Scandinavia, where the payback would be highly unlikely. By selling these applications, IFS may not only control potential damage but also "kill two birds with one stone" by 1) leveraging Bentley's and Personec's commitment to a true partnership and product integration to boost both parties' license sales, while streamlining its own operations; and 2) obtaining some equity, however little, as to improve its balance sheet.

For instance, although a differentiating trait might have been tempting (i.e., no other ERP vendor would ever have native CAD applications for piping design or so), the IFS' CAD customer base was too small for the vendor to justify developing own CAD applications in the long term, and it did not have enough specialists outside the Nordic region to effectively sell and support CAD applications globally. This would be possibly the best proof that IFS is getting rid of its erstwhile "not invented here" attitude.

Although through the IFS Plant Design set of CAD modules, once data is entered into the common database, it immediately becomes available to the other IFS Applications modules (whereby, e.g., as a result, information can be recycled, remain consistent and updated, and never has to be entered twice; also, the CAD modules provide designers with a drawing tool for process and instrumentation design, while predefined forms and convenient look-up functionality are further examples of features that benefit all design disciplines), the product has nonetheless had more of a distracting effect to IFS. Not to mention the confusion to prospective customers who could be intrigued by the CAD modules, but who could not exactly understand its functions and relations to other extended-ERP modules, only to hear from the IFS' staffers not to even consider it unless they are from the pulp and paper vertical in Scandinavia or so.

This is Part Three of a three-part note.

Part One presented the event summary.

Part Two covered IFS background information and discussed challenges and response.

Adjusting to a Mature Market

The above analysis of IFS' change of mindset brings us to the fact that the enterprise software is now a mature market where the grow-at-all-costs strategies of the ebullient 1990s simply do not work any longer. Namely, the stock market of the 1990s saw brand new accounts as a key metric when valuing application software companies, which drove these to a business model designed to win new accounts that were seen as the primary source of revenue by most. For both the investor and vendor, this "new accounts at all cost" was the right business model.

But times have drastically changed, as the market penetration is so high that only a few new account opportunities exist. Moreover, economic uncertainty has tightened the purse strings of most prospective user companies so that selling new systems is much more difficult. Therefore, more successful application vendors of late are focusing on their install base as their primary source of revenue while cutting cost to provide profitability. Many, like Bentley and Personec, are even vying for existing dissatisfied customers of competitors. The result is a drastic change in their business model. Namely, the old business model of "new accounts at all cost" must now morph in to a "love the customer" model, whereby the strategic goal remains focusing more resources on servicing existing customers than on attracting new ones. These have typically been made with three objectives in mind:

1) align the organizational structure with current characteristics of the market (i.e., produce a more tightly focused target market and results-based new account sales and marketing operations; and maintain emphasis solely in sensible product and services development while protecting existing technology investment);

2) improve stability of operations and the staying power of company (i.e., achieve profitable growth, financial strength, access to capital, and operational excellence; and maintain consistent profitability, and positive cash flow as a result), and

3) increase the focus on adding value primarily to existing customers (i.e. institute redefined product management and development priorities; focus on enriching software ownership experience rather than software buying experience; and continue with vertical and niche product enhancements, albeit with focus on quality rather than speed, product performance and stability, depth of functionality, and customer needs).

Nevertheless, many vendors are still focused and spending most of their resources on acquiring new customers instead of delivering real value to the customers they already have. As a result, the overall software industry has very low levels of customer satisfaction and financial performance. Nonetheless, most vendors will tout that they are both new account and customer oriented, and some might have struck this balance. But, the vast majority have still been worshipping at the former Wall Street ideal of new accounts for so long that the reality is, they still have a mostly "new accounts" business model. In this culture, sales, marketing, support and implementation teams are oriented towards selling and installing new accounts, whereas in a "love thy customer" culture, the same departments are required but the skill sets and attitudes can be very different.

Therefore, any willing vendor's change of the skill sets and attitudes is by no means easy; these two different strategies each require a different mentality. Further, if unsuccessful, the existing customer will likely suffer the consequences of less experienced, less knowledgeable people. For instance, in a "new accounts" culture, the majority of service personnel are trained and equipped to install new accounts, whereby they are very good at taking a customer from nothing (green-field) to being implemented. In an "existing customer" culture, however, the service personnel work to enhance the value of the software already installed. While some of the skills and knowledge are the same, the enhancing objective requires greater experience, and knowledge and people skills.

The identical (or similar at least) people issue exists within the vendor's sales team, and particularly within the support department. Namely, when a new account initially implements, the support staffers get lots of relatively easy calls for help. Once installed, the quantity of calls drops but the difficulty of the question increases. Thus, of all departments, software support may be the one that most needs in-depth product knowledge.

Business practices must change too, since installed customers are more interested in services than products. Installed customers have excellent knowledge of the pluses and minuses of being a customer and expect to interact with the vendor in a way that enhances the pluses and fixes the minuses. Therefore, they often want more flexibility, such as even an indefinite support of older releases (see Support for Old Releases-Good for the User but Is It Good for the Vendor?) and a plethora of options or "a la carte" support services.

In this down economy, one must also realize that in the enterprise applications business, people are an enormous cost. If the vendor wants to reduce expenses, one apparent way is to cut headcount, but it really muddles the management of two conflicting objectives—to change the mix of skill sets and the need to reduce headcount.

If one is to judge IFS by a number of its recent new account wins, increasingly through recently recruited resellers (some of which are former J.D. Edwards' defectors), it appears that IFS is still driven by new accounts. That remains an expensive business model, with an uncertain payback in the near term, whereby exploiting the existing install base of over 3,500 customers worldwide could have a more profound effect on both IFS' top and bottom line. That is to say, satisfied customers tend to be more amenable to many additional ways for the vendor to add value (which translates into new license and service and support revenues) to the customer in an effort to maintain the long-term relationship, such as enhancements, extensions, refresh or upgrade services, etc.

One could be reminded of SSA Global, Infor Global Solutions, MAPICS, Epicor, Sage/Best Software, Geac, etc., where the strategy of taking a deep breath and reflecting upon how to proactively better serve existing customers, and gradually building upon that with a combined organic growth and growth via acquisitions, seems to be a recipe for success these days. The enterprise applications market is indisputably a mature and fairly saturated field, and all players must accordingly adjust their investment strategies from those of the emerging and growing market in the 1990s. That means painstakingly finding a perfect balance between cultivating the install base versus the zeal for hitching brand new customers.

Success Keys for Proposal Automation

Writing proposals is about as much fun as having your teeth drilled. And reading them isn't a whole lot better. So why do customers ask for them?

One motivation is that the customer wants to compare offers from various vendors to make sure they buy the highest value solution based on your differentiators and value proposition. At a simpler level, they may just want to compare prices, clarify complex information, and gather information so that the "decision team" can review it. And let's face it, sometimes they just want to slow down the sales process and they figure that asking for a proposal will keep the sales rep busy for a few weeks.

Whatever the customer's motivation, the fact is that proposal writing has become a common requirement for closing business throughout the entire business world. Today, people who sell everything from waste collection services to complex information technology have to create client-centered, persuasive proposals.

What's the best solution, you may ask? Proposal automation software. By using proposal automation software, you create consistent, winning proposals in minutes.

Success Keys for Proposal Automation

If you're thinking about automating your proposal process, here are ten critical success keys that result in successful implementations. If you're not thinking about it ... well, maybe you should.

1. Must have an easy, intuitive user interface

Software that's hard to use becomes "shelfware." Nobody wants to use a tool that makes the job harder. And most sales people won't read the manual, either. So it has to be really easy to use. Software with different interfaces for different functions, such as document building, content editing, administration, and so on, is neither intuitive nor easy. Research indicates that a wizard-like design works best.

2. Must have at least a 7:1 value ratio

Barton Goldenberg, president of ISM, Inc., a customer relationship management (CRM) consulting firm, claims that as many as 50 percent of implementation failures are directly attributable to user resistance. Why would a user resist using new technology? Because there's not enough value. Goldenberg suggests that a sales person has to get back seven times more value than the effort put into using a tool, or that user will never use the tool again. A proposal automation system has to deliver an immediate return on investment (ROI) in terms of increased wins and time savings so that the rep will return to it with enthusiasm.

3. Must draw on the sales person's strength—knowledge of the client

Sales people understand their deals. If they have any experience at all, they know to uncover the customer's needs and determine what the customer's goals are. Great. Let the sales person use that knowledge to build a better proposal. Make it easy for them to put their customer insights into the executive summary and cover letter.

4. Must minimize the sales person's weakness—writing skills

Most sales people don't enjoy writing and a lot of them don't do it very well. A good proposal automation tool should eliminate as much writing as possible. Even in a proposal center, minimizing the labor-intensive task of searching and retrieving reusable content so that proposal specialists can spend more time editing and positioning the content will deliver a big win.

5. Must incorporate sound sales and marketing methodology in the proposal itself

Garbage in, garbage out. We've all heard that clich. It's certainly true with proposal automation software. If your current content is weak, automating the process just enables you to produce weak proposals a lot faster. A system that incorporates best practices or that links with your sales process will deliver better results.

6. Must produce a persuasive, customized proposal

Slamming together big chunks of boilerplate creates a generic, self-centered proposal. Some proposal automation systems have a chunk of text labeled "executive summary." Hello?! How can one executive summary fit every proposal? That's only possible if the executive summary focuses exclusively on us and our products, not the customers and their needs.

7. Must be easy to update and maintain

Hey, life goes on. Things change. That includes your business. So you need a proposal automation system that's easy to update and configure without using outside programming language, like Visual Basic. If it's hard to maintain, you probably won't do it, and that means within a few months you won't be using it, either.

8. Must facilitate team collaboration

On larger opportunities, especially when there's an request for proposal (RFP) involved, you need to work as a team. That means everybody pitching in, answering the questions, and contributing, all at the same time. (Can you think of any successful basketball, football, soccer, or baseball team that only send one player into the game at a time?) If the proposal automation system doesn't allow people to work together, it's not a tool, it's a toy.

9. Must integrate with a variety of applications you already own

Your proposal system should work with your standard word processing and presentation software, such as Microsoft Word and PowerPoint, and not require anything proprietary. It should also connect to your existing CRM system to retrieve the customer information and write a record of the proposal back to the history.

10. Must be configurable and scalable for enterprise use

You need a proposal automation system that can support your current sales and proposal methodology. It needs to be easily configurable to adapt to your business. It needs to support and manage security permissions for large groups of users. And it needs to be easily accessible via your corporate intranet.

How To Write a Winning Proposal

In today's economy, sales people have to write more proposals, and better proposals, than ever before. As the industry has become more competitive and complex, customers have become both more confused and more demanding. As a result, they are likely to listen to a presentation, nod their heads, and mutter those dreaded words, "Sounds good! Why don't you put that in writing for me?"

Why Do Customers Want Proposals?

Writing proposals is about as much fun as having your teeth drilled. And reading them isn't a whole lot better. So why do customers ask for them?

One motivation is that the customer wants to compare offers from various vendors to make sure they buy the highest value solution based on your differentiators and value proposition. At a simpler level, they may just want to compare prices, clarify complex information, and gather information so that the "decision team" can review it. And let's face it, sometimes they just want to slow down the sales process and they figure that asking for a proposal will keep the sales rep busy for a few weeks.

Whatever the customer's motivation, the fact is that proposal writing has become a common requirement for closing business throughout the entire business world. Today, people who sell everything from garbage collection services to complex information technology have to create client-centered, persuasive proposals.

What Goes into a Winning Proposal?

Your objective in writing a proposal is to provide your client with enough information—persuasively presented information—to prove your case and motivate the client to buy your services or applications. That sounds pretty straightforward.

So why do the vast majority of proposals start out with the vendor's company history? Does the author believe there is something so fundamentally compelling about their origins that clients will immediately be persuaded to buy?

And why do a huge number of proposals focus entirely on the vendor's products and services, but never mention how those products and services will help the client solve a business problem or close an important gap? Does the proposal writer believe that facts alone are enough to motivate a prospect to say "yes"?

Winning proposals must be client centered, not company- or product-centered. Most people buy because they're looking for solutions to pressing problems, additional resources to close gaps, or the means to cope with difficult issues. What this means is that a proposal is not a price quote, a bill of materials, or a project plan.

Each of those elements may be part of a proposal, but they are not sufficient to make a persuasive, client-centered case.

In our experience, there are four categories of content that proposals must contain to maximize your chance of winning:

1. Evidence that you understand the client's business problem or need
People view major buying decisions with anxiety. The bigger the decision, the greater the anxiety. They know that even a well-intentioned vendor may end up wasting their time or their money or both. One way to reduce their anxiety and minimize their perception of the risk of moving forward with you is to demonstrate that you clearly understand their problems, issues, needs, opportunities, objectives, or values. Whatever is driving the client's interest, you must show that you understand it and have based your solution on it.

2. A recommendation for a specific approach, program, system design, or application that will solve the problem and produce positive business results
It may surprise you to learn that most proposals contain no recommendation at all. What they contain instead are descriptions of products or services. What's the difference? A recommendation explicitly links the features of a product or service to the client's needs and shows how the client will obtain positive results. And it contains language that unmistakably shows that the vendor believes in this solution: "We recommend" or "We urge you to implement"

3. A compelling reason for the client to choose your recommendation over any others
This is your value proposition. Remember that you may write a proposal that is completely compliant with the customer's requirements, that recommends the right solution, that even offers the lowest price, and still lose. Why? Because a competitor made a stronger case that their approach offered a higher return on investment, lower total cost of ownership (TCO), faster payback, or some similar measure of value that matters to the customer.

NOTE: Most proposals don't contain any value proposition at all. They contain pricing, but no estimation of the rate of return the client will get from choosing you. Failing to address the client's needs and failing to present a compelling value proposition are the most serious mistakes you can make in writing a proposal.

4. Evidence of your ability to deliver on time and on budget
Most proposals are pretty good in this area. You want to show the substantiating evidence that helps answer the question, "Can they really do this?" Good evidence includes case studies, references, testimonials, and resumes of key personnel. You may also include project plans, management plans, company expertise, and other forms of evidence (white papers, awards, third-party recognition). Avoid throwing in everything. Keep the evidence focused on the areas the customer cares about.

These are the essentials. Every scrap of data, every figure, every paragraph in your proposal must contribute toward providing one or more of them, because they directly address the three key factors on which every proposal is evaluated:

1. Responsiveness: Are we getting what we need?
2. Competence: Can they really do it?
3. Value: Is this the smartest way to spend our money?

Some Tips for Maximizing Your Win Ratio

If you follow the basic structure outlined above—first summarizing the client's needs, then showing their potential for gain or improvement, third recommending your solution, and finally substantiating that you can do the job—you will see an increase in your win ratio.

But there are two other principles that can push it even higher. In fact, one way to remember these is to recall that there are two "Ps" in successful proposal writing:

Monday, March 22, 2010

Essential ERP - Its Functional Scope

The comprehensive definition of enterprise resource planning (ERP) software is a set of applications that automate finance and human resources departments and help manufacturers handle jobs such as order processing and production scheduling.

ERP began as a term used to describe a sophisticated and integrated software system used for manufacturing. In its simplest sense, ERP systems create interactive environments designed to help companies manage and analyze the business processes associated with manufacturing goods, such as inventory control, order taking, accounting, and much more. Although this basic definition still holds true for ERP systems, today its definition is expanding.

Savvy ERP users, increasing customer expectations, changes in manufacturing requirements, and technology's relentless pursuit of innovation are just some of the forces reshaping the definition of ERP. In today's dynamic and turbulent business environment, there is a strong need for organizations to become globally competitive. The survival guide to competitiveness is to be closer to the customer and deliver value-added product and services in the shortest possible time. This, in turn, demands integration of the business processes of an enterprise, which is the stronghold of ERP.

ERP Functional Scope

Today's leading ERP systems group all traditional company management functions (finance, sales, manufacturing, human resources) and include, with varying degrees of acceptance and skill, many solutions that were formerly considered peripheral (product data management (PDM), warehouse management, manufacturing execution system (MES), reporting, etc.). While during the last two years the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), business intelligence/data warehousing, and e-Business, the scope of this document is limited to the traditional ERP realms of finance, materials planning, and human resources.

The Three Major Functional areas of ERP are as follows:

  • Manufacturing & Logistics

  • Finance & Accounting

  • Human Resources & Payroll.

Manufacturing & Logistics

This encompasses a group of applications for planning production, taking orders, and delivering products to the customer. Some of its most common modules and their high-level functions are:

Operations (Production) planning - Performs capacity planning and creates a daily production schedule for a company's manufacturing plants. It involves forecasting, production scheduling and material planning, etc.

Engineering - Provides the ability to integrate at the engineering level to ensure accurate updated product information. It involves bills of materials & routings creation, engineering change management, etc.

Shop floor control - Provides control and tracking of the status of production orders in the plant. It involves production orders dispatching, capacity planning, resource allocation, production tracking & reporting, waste/reject tracking, etc.

Procurement management - Controls purchasing of raw materials needed to build products. Manages inventory stocks. It involves creating purchase orders/contracts, supplier tracking, goods receipt & payment, etc.

Order entry and processing - Automates the data entry process of customer orders and keeps track of the status of orders. It involves order entry, order tracing and status reporting, pricing, invoicing, etc.

Sales, marketing, and after sales - Provides a basic functionality for lead tracking, customer information, quote processing, commissions & rebates, etc.

Warehouse (Inventory) management - Maintains records of warehoused goods and processes movement of products through warehouses.

Distribution (Transportation) management - Arranges, schedules, and monitors delivery of products to customers via trucks, trains, and other transport means. It involves transportation planning and execution, loading and shipping documentation, etc.

Project management - Monitors costs and work schedules on a project-by-project basis. It usually includes the following sub-modules: project control, project analyzer, project budgeting, project timekeeping, project billings, contract management, and workflow communicator.

Plant maintenance - Sets plans and oversees upkeep of internal facilities. It enables the control of every aspect of both routine and unscheduled equipment maintenance so as to provide uninterrupted work order process.

Customer service management - Administers installed-base service agreements and checks contracts and warranties when customers call for help.

The MRP systems of the late 1960s consisted of only two primary software modules: material requirements planning (MRP) and (infinite) capacity requirements planning (CRP). Over the next three decades and three generations of software, more functionality (including more on-line capability) were incorporated, so that an average ERP package today exhibits at least the following functionality for manufacturing: order entry, forecasting, distribution requirements planning (DRP), inventory management, master production scheduling (MPS), materials requirements planning (MRP), capacity requirements planning (CRP), shop floor control, purchasing, and cost accounting.

A number of additional capabilities have already been incorporated by some vendors and will continue to be added in response to growing user sophistication and needs for the following functionality, to name but a few:

  • Schedule group technology (GT)-based shop floor cells or flexible manufacturing systems (FMS)

  • Perform finite capacity planning

  • Perform both forward and backward scheduling

  • Provide an integrated preventive maintenance (PM) capability

  • Perform true probability-based simulation

  • Perform true optimization capability with linear programming

  • Provide more graphically used and intuitive reporting capabilities

  • Utilize expert system knowledge (AI)

  • Provide extended supply chain management

In addition to the core functions, integrated industry-specific applications can add significant functionality and value. As an example, in the apparel industry, the ability to configure products and produce an accurate bill of material based on a multidimensional, user-defined matrix greatly simplifies the complexity of order entry and production. Also critical for this industry is the ability to handle flexible pricing structures and customization of packaging products, and shipping options.

Finance & Accounting

This encompasses modules for bookkeeping and making sure the accounts are paid and/or received on time. Some of its most common modules and their high-level functions are:

General ledger - Keeps centralized charts of accounts and corporate financial balances. It supports all aspects of the business accounting process. In this module, financial accounting transactions are posted, processed, summarized, and reported. It also maintains a complete audit trail of transactions.

Accounts receivable - Tracks payments due to a company from its customers. It contains tools to control and expedite the receipt of money from the entry of a sales order to posting payments received.

Accounts payable - Schedules bill payments to suppliers and distributors, and keeps accurate information about owed money, due dates, and available discounts. It provides functionality and integration to other areas such as customer service, purchasing, inventory, and manufacturing control.

Fixed assets - Manages depreciation and other costs associated with tangible assets such as buildings, property, and equipment.

Cash management - Involves the capability of the system to record cash charges or deposits, recording of cash payments and receipts, cash projection reporting, calculation of expected cash uses/sources, current cash availability, etc.

Budgeting - Involves budgetary controls, budget accounting, budget development, and budget allocation.

Treasury management - Monitors and analyzes cash holdings, financial deals, and investment risks.

Cost control - Analyzes corporate costs related to overhead, products, and manufacturing orders. It provides a variety of costing approaches such as standard, FIFO, LIFO, average, target, and activity-based costing (ABC).

Financial consolidation - Enables individual business units to view their financial information, while parent companies can roll up all business subsidiaries and view the consolidated information.

The scope of ERP financial functionality has been increasingly going beyond traditional transactional business functions by enabling organizations to deliver real-time performance analysis directly on the desktops of CFOs, CEOs, and business managers.

Major ERP vendors are shifting focus from routine users' transaction requirements to the overall organization's business imperatives, thereby helping lines-of-business become more knowledgeable and proactive. Instead of requiring a collection of processes, the system should appear to each user as a vast source of information. Accounting is seen as a cornerstone of continuous business improvement strategies. Its ability to effectively deliver management information across business functions determines the company's business efficiency and competitiveness. In addition, accounting systems increasingly begin to consider external business partners (customers and suppliers), which requires offering access to key information and enabling interaction directly via the Internet.

Leading ERP systems offer a broader accounting functionality scope, including financial reporting, analysis, and budgeting capabilities, as well as other functions traditionally covered by niche players (e.g., project management, management consolidation, treasury management). Furthermore, leading systems increasingly leverage OLAP technology, which embeds business information warehouse tools. These enable users to aggregate and analyze information from multiple sources (other than accounting modules) and have access to a rich set of predefined performance indicators and strategic applications such as strategic planning/forecasting and balanced scorecard.

Vendors are enriching budgeting and reporting functions with more flexibility, integrated decision support tools, and interfaces with decision support system (DSS) packages, like Cognos and Business Objects. Multinational capabilities (Euro compliance, increased support of multinational requirements, etc.) remain top functional criteria.

Finally, new functionality brought by workflow, document management, and Web capabilities enables organizations to improve communications with non-accounting staff and casual users, thereby increasing the overall profitability of corporate accounting operations.

Human Resources & Payroll

This encompasses applications for handling personnel-related tasks for corporate managers and individual employees. Some of its most common modules and their high-level functions are:

Human resources administration - Automates personnel management processes including recruitment, business travel, and vacation allotments.

Payroll - Handles accounting and preparation of checks related to employee salaries, wages, and bonuses.

Benefits - Administers a diverse range of benefit plans including health and medical, life and supplemental life insurance, accidental death and dismemberment (AD&D), disability plans, flexible benefits, 401(k) plans, profit sharing plans, stock plans, retirement plans, and leave plans such as vacation and sick leave accruals.

Self-service HR - Lets workers change their personal information and benefit allocations online without having to send forms to human resources.

Analyzing the workforce and strategically managing the company's human capital has become the latest focus of human resource management systems (HRMS). Integrated business information warehouses enable multidimensional analysis on information aggregated from internal and external resources (e.g., salary survey), performance indicators (e.g., turnover) and views on strategic HR information with powerful drill-down features.

Leading ERP packages deliver key HR information to managers' desktops such as turnover, competencies gap analysis, compensation analysis, headcount and cost analysis (actual vs. budgeted). Manager Web self-service applications enable business line managers to access selected reports, performance indicators, graphs, etc., as well as view information on their employees, complete and transmit a job requisition form, report on interviews with applicants, follow up on upcoming performance appraisals, etc.

On the other hand, providing employees with Web self-service access to their HR information (e.g., address, dependents, benefits, payroll information, education, etc.) and to corporate HR information (e.g., job openings, training enrollment) enables companies to significantly increase the efficiency and responsiveness of their HR department and improve the overall quality of human resources management within the organization.

Rationale for using ERP

Consequently, the three major reasons why companies undertake deployment of ERP applications are:

To integrate financial data - As the CEO tries to understand the company's overall performance, he/she may find many different versions of the truth. Finance may have its own set of revenue numbers, while sales has another version, and the different business units may each have their own versions of how much they contributed to revenues. ERP creates a single version of the truth that cannot be questioned because everyone is accessing the same repository of data.

To standardize manufacturing processes - Manufacturing companies-especially those with an appetite for mergers and acquisitions-often find that multiple business units across the company make the same part using different methods and computer systems. Standardizing those processes and using a single, integrated computer system can save time, increase productivity, and optimize headcount.

To standardize HR information - Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employee time and communicating with them about benefits and services. ERP can resolve that problem.

How does an ERP system make it happen? The essence of it is in the fundamental premise that the whole is always greater than the sum of its parts. The traditional legacy application systems, which organizations generally employed in the past, treat each transaction separately. They are built around strong boundaries of distinct enterprise functions that a specific application is meant to cater for. ERP, on the other hand stops treating these transactions separately as stand-alone activities and considers them to be the part of the inter-linked processes that make up the entire business.

Almost all typical application systems are nothing but data manipulation tools. They store date, process it, and present it in the appropriate form whenever requested by the user. In this process, the only problem is that there is no link between the application systems being used by different departments. An ERP system bridges those gaps by using an integrated database system. There are hundreds of data tables, which store data generated as a result of a diverse transaction, but they are not confined to any departmental or functional boundaries. Rather, they are integrated to be used by multiple users, for multiple purposes, and at multiple places.

The more comprehensive list of reasons for deploying an ERP system is given in Table 1.

Table 1. Why companies purchase ERP?
Strategic Reasons
Enabling (Tactical) Goals
Technical Reasons
Enable New Business Strategies Reduce Cost/Improve Productivity Standardize System/Platform
Enable Globalization Increase Flexibility Improve Quality & Visibility of Information
Enable Growth Strategies Integrate Business Processes Enhance Technology Infrastructure
Extend Supply/Demand Chain Integrate Acquisitions Provide Y2K Compliance
Increase Customer Responsiveness Standardize Business Processes
Improve Specific Business Processes/Performances

Essential ERP – Current Market Trends – Part I

The growth of ERP has been a direct result of the fierce global competition, short product life cycles, highly distributed operations, and information-driven management that characterize today's business environment. The vast majority of companies have always hoped to purchase an information system as a product, not as a collection of technologies, components, and services. Leading ERP vendors have been successful so far because they have been attempting to build such a product.

A typical ERP system today offers broad functional coverage; vertical industry extensions; a robust technical architecture; training, documentation, implementation and process design tools; product enhancements; global support and an extensive list of software, services, and technology partners. While it is not a system-in-a-box yet, the gap between its desired and actual features is becoming smaller every day.

The worsening plight of most ERP vendors, caused by the market slowdown, which started in the fourth quarter of 1998, continued in full force throughout 1999. Particularly affected was license revenue, which declined more than 10% in 1999 compared to 1998. The market was dramatically less profitable than in 1998 (down 27.3%), measured in the total raw $ net income (Source TEC). We believe that the continued ERP market slowdown in 1999 was in part attributable to the following factors:

  • The historical growth in sales of ERP applications has come from large, Fortune 1000 multinational corporations. This market has been highly penetrated (over 60%), and new, large-scale back-office implementations in the F1000 customer base have all but stalled.

  • The relatively untapped Small-to-Medium Enterprises (SME) market has been cautious about starting new projects due to the bad publicity caused by a large number of unsuccessful ERP implementations in the past. This fear has been additionally aggravated by the need to integrate disparate systems, given that currently no single vendor can offer a complete end-to-end solution (from supplier to end customer).

  • The technology paradigm shift from Client/Server to the Internet created uncertainty about investing in traditional Client/Server technologies, which are still prevalent among leading ERP players.

Consequently, we believe that the following trends in the ERP market are the direct consequence of vendors' attempts to 1) resolve current ERP functional and/or technological deficiencies, and/or 2) expand software sales both within their existing and potential customer bases, particularly in the lower-end of the market.

About This Note: This Technology Note covering the current marketing trends for ERP is presented in two parts.

The ERP Market Trends covered in this note are:

  1. ERP Functional Scope Expansion

  2. Sharper Vertical Focus

  3. Flexibility Enabled by Adaptable Architecture The ERP Market

Trends that will be covered in Part II of this note are:

  1. Web- and E-commerce Enablement of ERP Systems

  2. Intensified Market Merger & Acquisition Activity

  3. Advent of Application Hosting Services.

1) ERP Functional Scope Expansion

While ERP packages excel at combining financial control with multi-plant manufacturing & distribution coordination, they generally lack extended supply chain planning and flexible execution functionalities that can enable one business process today but change rapidly to handle tomorrow's new models. They are also often found lacking when it comes to delivering special financial features such as robust budgeting or international consolidation.

Nevertheless, ERP's main functional weakness is in its planning function - master production scheduling (MPS) and manufacturing resource planning (MRP) modules that decide how and when to respond to customer demand with available resources. These modules are generally insufficient to support a real-world supply chain because they only deliver the following:

  • Business transactions without much responsiveness

  • Production focus without understanding demand

  • Control without intelligence (decision support system)

From the flexibility point of view, the vast majority of ERP products have been designed to operate in an over-the-wall fashion. Such stovepipe logistics cannot adequately react to dynamic changes in customer demand. Moreover, at each handoff between applications, increased uncertainty leads to overstocked inventories, longer wait time and slower response. In the Internet-driven, dynamic trade environment, the following things increasingly happen:

  • Services eclipse products - Companies use services such as vendor-managed inventory and direct store delivery that require on-the-fly business process change.

  • Demand drives production - Companies are moving to make-to-order and late-assembly manufacturing strategies.

  • Price matches market conditions - Businesses reduce inventory to maximize profits in commodity or supply-driven markets.

The key to dynamic trade is agility, which is where traditional ERP packages have stumbled in the past. Early ERP adopters discovered to their dismay that implementing these systems was only the first step toward creating a competitive information technology infrastructure. They and new users alike are now looking for significantly more comprehensive functionality - from advanced planning and scheduling (APS), to sales force automation (SFA) and customer relationship management (CRM), to business intelligence (BI) and e-commerce tools - and demanding that they be integrated into their ERP backbone. Users' visions of ERP are evolving from tactical to strategic, and users are no longer willing to choose between integration and function. ERP users who have gone live in the past three years have been making purchases of extended ERP products (bolt-ons) to provide tangible ROI for their multi-million-dollar investment.

Consequently, during the last three years, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), product data management (PDM), manufacturing executions systems (MES), business intelligence/data warehousing, and e-business. The major ERP vendors have been busy developing, acquiring, or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning, and human resources.

We believe that, within the next two years, ERP will be redefined as a platform for enabling e-business globally. Originally focused on automating internal processes of an enterprise, ERP systems will include customer and supplier-centric processes as well. The conclusive evidence of this redefinition is the move of all major ERP players into CRM and SCM applications. As a result of this trend, we predict that within the next three years, over 65% of the license revenue of the SCM market and over 50% of the license revenue of the CRM market will come from current ERP vendors (70% probability). Currently, these figures are estimated to be less than 10%.

Global financial capabilities (including support for the Euro), advanced planning and scheduling (APS), product configurations via the Web, supply chain management (SCM), customer relationship management (CRM), e-commerce, business intelligence (BI), and component-based (object-oriented) architecture will remain the order winners for the next two years. After that period of time, we believe these functional and technological features will be demoted into commodities (order qualifiers).

2) Sharper Vertical Focus

While competitive costs (low and flexible software license pricing and implementation costs) and outstanding global service (proven fast implementations and customer loyalty) will remain important requirements for success, particularly in the lower end of the market, vertical focus will be the key factor for survival.

Vendors that will survive the next three years will have focused their business and product on particular industries, preferably those with a current low penetration (See Table 1), instead of a more generic, horizontal approach. Winning ERP products will demonstrate deep industry functionality and tight integration with best-of-breed 'bolt-on' products in a particular vertical.

Table 1 - ERP software implementation percentiles (Source: Computer Economics, June 1999)

Industry Sector
No Activity
Researching,
Piloting,
or Implementing
ERP
ERP Already in Place
Composite for All Sectors
47
34
19
Manufacturing
24
35
41
Distribution
50
32
18
Banking & Finance
39
48
13
Insurance
65
27
8
Healthcare
65
26
10
Trade Services
51
37
12
Professional Services
48
26
26
Utilities
50
35
15
Transportation
57
33
10
State & Local Government
63
25
13
Federal Government
76
20
4

Verticalization can be seen as part of a larger effort by ERP vendors to ease the implementation of their products. By now, almost everyone in the IT industry has heard horror stories of ERP implementations that took two or three years and cost tens of millions of dollars. That happens, in part, because the ERP packages usually arrive needing to be configured for the business and the industry entirely from scratch.

By configuring parts of the package in advance for a given industry and circumventing functions not required in that industry, vendors can shorten and ease the implementation process. The pre-configuration may be based on the size of the company, the specific hardware, or the vertical market. Rapid implementation tools and industry-specific templates add value to the ERP investment by streamlining the process-modeling phase for fast implementation and time to return on investment. In fact, software implementation time reduction is a key element of success in any enterprise-wide technology project.

Users have increasingly looked for an ERP system designed for a specific business. Software that combines industry-specific functionality with the flexibility to accommodate each company's unique processes goes a long way toward improving the functional fit and the speed of implementation. This pragmatic approach helps companies close the gap between system performance expectations and final results achieved.

Another advantage lies in the fact that industry-specific, global enterprise solutions based on open architecture and proven technology standards facilitate faster integration of companies being acquired as part of a corporate growth strategy. Typically, as companies grow and want to compete globally, multi-language and multi-currency functionality become increasingly important.

In addition to core ERP functions, integrated industry-specific applications can add significant value. Vertical focus indicates that software contains industry-specific features and that ERP vendors have certain industry expertise.

For example, in mill industries such as pulp and paper, converting, and steel manufacturing, an enterprise solution must be based on product attributes and customer specifications being active throughout the production, inventory, and order fulfillment flow. These systems also must have an integral view of the plant floor for tracking work center level costs, quality of work in progress, customer order status, and roll/product movements. Integrated trim management and rough-cut capacity planning are crucial elements for mill industry enterprise solutions in order to connect production activities to customer order fulfillment. Integrated advanced planning and scheduling (APS) and maintenance planning further optimize throughput, reduce costs, and eliminate the need for redundant systems or custom interfaces being developed between applications. In the food and beverage industry, as another example, one challenge is to provide rapid, timely information flow through global food and beverage manufacturing and distribution enterprises. Integration between ERP and process control systems or manufacturing execution systems (MES) is also of a great importance. Because of the volatile nature of the business, with consumer tastes and government regulations constantly changing, the enterprise system must also accommodate rapid product development, efficient replenishment, accurate forecasting, and customer quality demands.

Finally, in implementing an industry-specific application, it is important to ensure that the application provider's implementation team includes members with in-depth knowledge and experience in that industry. Vendors geared toward certain industries should have solid integration skills or strong relationships with systems integrators that have industry-related expertise. This should significantly streamline implementation time by eliminating a lengthy vendor or integrator learning curve.

3) Flexibility Enabled by Adaptable Architecture

The rapid pace of global business today places a unique set of challenges on companies looking to improve and automate their operations, and at the same time, remain poised to adapt quickly to change. With increased competition, deregulation, globalization, and mergers & acquisition activity, buyers will increasingly realize that architecture plays a key role in how quickly vendors can implement, maintain, expand/customize, and integrate their products.

The product architecture is going to do much more than simply provide the functionality, the user interface, and the platform support. It is going to determine whether a product is going to endure, whether it will scale to a large number of users, and whether it will be able to incorporate emerging technologies, all in order to accommodate increasing user requirements.

An adaptable architecture is the least common denominator for a flexible ERP system. Although a component-based architecture is not an explicit requirement for ERP flexibility, component-based applications generally provide greater flexibility than their monolithic counterparts. Further prerequisites for flexibility will be the abstraction of technical complexity (manifested via the use of intuitive tools, aids, or wizards that guide user through a set of steps to achieve a desired end result) and an intuitive, easy-to-use user interface.

Componentization refers to the act of breaking up large, monolithic ERP systems into individual modules or components that would work together. It is the practical embodiment of object-oriented programming (OOP). Object-oriented software design and programming were developed to enhance software maintainability and to simplify the creation of advanced GUIs (Graphical User Interfaces).

Object orientation means that design, linkages, etc., use objects as their basic building blocks, which is a radical departure from traditional 'procedural' design and coding methodologies. An object class is a combination of data and processing logic. The data for a class may correspond to a relational database table, but this is not necessarily the case. The processing logic comes in methods, which are similar to subroutines or procedures. By maintaining processing logic with the associated data, programmers have an easier time finding reusable pieces. Therefore, object-oriented systems can be significantly smaller and easier to maintain than classical procedural code in which procedures and data are separated.

Essential ERP – Current Market Trends – Part II

The growth of ERP has been a direct result of the fierce global competition, short product life cycles, highly distributed operations, and information-driven management that characterize today's business environment. The vast majority of companies have always hoped to purchase an information system as a product, not as a collection of technologies, components and services. Leading ERP vendors have been successful so far because they have been attempting to build such a product.

A typical ERP system today offers broad functional coverage; vertical industry extensions; a robust technical architecture; training, documentation, implementation and process design tools; product enhancements; global support and an extensive list of software, services, and technology partners. While it is not a system-in-a-box yet, the gap between its desired and actual features is becoming smaller every day.

Pressures on ERP vendors (discussed in the TEC Technology Note Essential ERP - Current Market Trends - Part I) lead us to believe that the following trends in the ERP market are the direct consequence of vendors' attempts to 1) resolve current ERP functional and/or technological deficiencies, and/or 2) expand software sales both within their existing and potential customer bases, particularly in the lower-end of the market.

About This Note

The ERP Market Trends covered in the TEC Technology Note Essential ERP - Current Market Trends - Part I are:

  1. ERP Functional Scope Expansion
  2. Sharper Vertical Focus
  3. Flexibility Enabled by Adaptable Architecture


The ERP Market Trends covered in this note are:

  1. Web- and E-commerce Enablement of ERP Systems
  2. Intensified Market Merger & Acquistion Activity
  3. Advent of Application Hosting Services

4) Web- and E-commerce Enablement of ERP Systems

Indisputably, one of the most significant trends in the ERP market today is the advent of e-business. No industry remains unaffected by the changes created by the explosive development of the Internet. As the reality of enabling seamless web-based collaboration between companies and their customers and suppliers becomes more of a reality each day, ERP applications are poised to play a pivotal role.

The concept of e-commerce is not really new to ERP: electronic data interchange (EDI) and electronic funds transfer (EFT) have been a part of ERP applications in varying forms for years, and are now in the process of being redefined (and given a makeover at the same time) to embrace the Internet and Web. The focus of EDI, EFT, and e-commerce in general is on transactions, which is something that traditional ERP applications excel at handling.

While extending these transactions beyond the corporate walls to the world of the Web poses its own set of challenges - namely, maintaining transaction integrity and security - the real challenge for ERP is enabling intelligent collaboration between companies and their customers and suppliers. This is the notion of e-business, of which e-commerce and its transactional focus play a role. Traditional ERP applications have so far proven inadequate in this new world of e-business because their primary focus has been on automating internal processes and coordinating transactions, not on enabling external collaboration between a business and its constituents. However, this is rapidly changing as the notion of extended ERP takes hold. Extended ERP takes a different view of the world, and has been promoted by most of the major ERP vendors in the form of two emerging application areas:

  • Supply chain applications - The focus here is on extending the production planning, scheduling, and delivery execution processes to a company's suppliers and trading partners. While there are transactional components to supply chain, the primary focus to date has been on business-to-business (B2B) planning and collaboration. Business-to-business procurement can also fall in this category, yet the focus is often on procuring non-production related goods from suppliers.




  • Customer management applications - These applications focus on extending sales, marketing, and customer service/support beyond corporate boundaries to the customer doorstep. There are transactional components here as well, as in the case of Web storefronts and unassisted sales. The broader picture includes Web-based self-service, promotions and one-to-one marketing, and content delivery.
Extending ERP to the Internet stems from the intent of many IT organizations not to reinvent the wheel in their scramble to create e-commerce applications. By extending the existing ERP system to support e-commerce, organizations not only leverage their investment in the ERP solution, but can also speed the development of their e-commerce capabilities.

However, as mentioned earlier, ERP systems have proven difficult to change and extend. Barricaded behind complex, proprietary APIs and based on complex, nearly indecipherable relational database schemas, ERP systems do not readily take to e-commerce. Nevertheless, IT managers are finding an increasing set of options for not only extending these systems to support the Web and e-commerce but for other key activities, such as decision support.

Underlying the new options are ongoing initiatives to break ERP systems into separate components (componentization), open up the core databases and proprietary application interfaces, and provide tools for customization.

Leading ERP vendors have been trying to oblige users' demand for e-commerce capabilities in their ERP solutions. SAP revealed a slew of Web and e-commerce solutions at its last SAPPhire conference in 1999. Since then, SAP introduced mySAP.com, a suite of e-commerce components for SAP. Oracle has numerous initiatives, including one that will allow its ERP, CRM, and e-commerce solutions to share the same database. Baan and J.D. Edwards have both rolled out some e-commerce modules. Finally, Peoplesoft's newest version includes a number of e-commerce capabilities, including support for online procurement and eStore, PeopleSoft's online sales and customer management solution. Lawson Software, Epicor Software, Infinium Software, Great Plains Software, Symix Systems, and American Software are the mid-market ERP vendors with similar initiatives, to name but a few.

The first stage in the ERP's conquest of the Web is to allow browser access through support for HTTP, HTML, and Java. This stage has almost been completed by a majority of ERP vendors. The next stage, which has just begun, is to extend the ERP applications themselves to the Web, where they can be accessed and run by outside partners and customers. These Web-based applications are hybrid in form, bringing together proprietary legacy elements, either host-centric or client/server, with thin client interfaces.

In order for traditional ERP systems to be Internet ready, they will have to be:

  1. Fully browser enabled
  2. Redesigned to be available to all corporate users, not just the special few
  3. Redesigned to be available to customers and suppliers
  4. Redesigned to use new data interchange language, most likely extensible markup language (XML), rather than proprietary protocols
With an Internet-only ERP system in place, client-side software upgrades become unnecessary. Browser-based applications significantly simplify the training, and tying together far-flung locations of an enterprise becomes simpler too.

Enterprise portals on intranets leverage this architecture's value in aligning intranet workplace resources more closely with business objectives. Leading ERP vendors have also made moves to adopt web portal strategies.

The basic goal is to create a virtual workplace and marketplace for ERP users, where the ERP applications, other disparate back-end systems, and external content and services (catalogs, directories, travel services, benefits administration, etc.) can be seamlessly and transparently accessed by users via the Web. By personalizing, profiling, and presenting its information, business applications and inter-organizational interfaces in the context of roles and work processes, an enterprise portal provides a thin-client link to work-based resources within the enterprise.

While the concept of an ERP portal is an interesting one, we identified the following challenges for vendors pursuing this route:

  • Integration - the success of a portal is predicated on how well it ties together internal and external transactions, content, and services.
  • Effective partnering - ERP vendors face a whole slew of potential new partners, many of which are not traditional technology companies.
  • Pricing and, more importantly, an ERP portals' business model are still very obscure.
  • Nevertheless, with these Web initiatives, ERP vendors are falling into line with what their customers actually want and need. We believe that, within the next four years, over 40% of Fortune 1000 Companies will manage their own enterprise portals to enable effective use of personalized decision content, to provide role-based access to internal business applications and workflow, and to facilitate B2B e-commerce integration (70% probability).

5) Intensified Market Merger & Acquisition Activity

    The ERP market appears to be consolidating. The top 6 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software, J.D. Edwards & Company, and Baan Co., account for over 65% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify.

    Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side (for more information see the TEC Market Note on ERP published in January 2000). We believe that this will become more accentuated, with customers becoming more vendor viability wary.

    We expect larger ERP vendors to swallow up their smaller brethren, both in ERP and related markets, such as the recent IFS AB acquisition of Effective Management Systems, Inc., the manufacturing execution systems (MES) vendor, MAPICS' acquisition of Pivotpoint, the vendor of extended ERP for mid-market companies, and Symix' acquisition of Profit Soutions, the eCRM vendor.

    We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc. with its acquisition of Marcam Solutions.

    Intensified M&A activity also stems from the fact that while the concept of best-of-breed will not go away. Users will increasingly look for one strategic vendor to fulfill the majority of their business application needs. This is particularly true for the lower end of the market and for the companies operating highly centralized organizations with a conservative bent. This trend, bundled with strong vendor competition, will drive increased merger & acquisition activity in the entire business applications market.

    Smaller ERP vendors and best-of breed CRM or SCM vendors will acquire new functionality and merge to protect themselves. We predict that more than 50% of current ERP vendors will not survive until 2004 (65% probability). About half of these will transform into system integrators, while either relegating their product to a niche 'bolt-on' or legacy status. The remaining half will be acquired.

    The most likely acquisition candidates will be those vendors with poor financial performance and undervalued market capitalization but with a large customer base and a deep focus and expertise in a certain industry. This should not necessarily be a bad thing for current users of those products. The acquirer will either continue product development and support of the acquired product (40% probability) or offer a relatively attractive migration path to its product (35% probability). However, there is a 25% probability that the acquirer is only interested in milking the maintenance revenue without ongoing product support. These users may find themselves left in the lurch with a legacy product.

    In addition, we predict some unconventional acquisitions, such as the acquisition of ERP vendors by best-of-breed CRM or SCM vendors, with a view to offer a more comprehensive solution. We believe that, within the next two years, Siebel Systems and i2 Technologies will have to resort to acquiring an ERP vendor (60% probability). Furthermore, ongoing merger & acquisitions as well as the need to develop new product features will increase R&D investments in the future, measured as a percentage of total revenue.

    The large players (i.e., the Big Six) have inherent advantages and incentives to develop or acquire needed competencies: their installed base, their market clout, and their ability to commit resources to development. To separate themselves from the rest of the pack, they will either (1) have to use those internal resources to develop their own extended products and capabilities, as SAP has done, or (2) have to buy/use someone else's superior technology/product, which was the route generally pursued by other large vendors.

    Small vendors should either (1) try to develop the above mentioned required competencies and build up as much market share as possible, either under their own steam or by means of mergers & acquisitions, thereby strengthening their position, or (2) align themselves with a major vendor.

6) Advent of Application Hosting Services

    Application Service Providers (ASPs) have arisen on the Internet in response to such ERP woes as support expenses, misbehaving application, and server downtime. Assuming an organization ports all application functionality to an ASP, the only real concern for internal IT individuals would be ensuring a rich and stable connection to the Internet.

    ASPs use a "Thin Client" configuration, which means that any hosted application accessed by an end user, such as e-mail or word-processing application, is transmitted to the desktop via a series of streaming screenshots, thereby minimizing the need for excessive bandwidth and software installations on the client machine.

    The downside is the long-term cost of "leasing" the service. One of the primary benefits of outsourcing is the initial negation of "up-front" costs associated with the implementation of a production system. However, after certain period of time, the outsourced system will cost more than an "in-house" production system. An analogy may be made to a group of 3 college roommates who need a big-screen television to watch football. Each roommate pays $20 per month for 3 years, totaling $2160 when the television could have initially been purchased for $1200. The appeal is immediate gratification coupled with reduced initial financial pains.

    The main challenge facing most ASPs is how to drive down long-term costs while accumulating a solid revenue stream. One of the cost inhibitors for ASPs is the amount of dedicated bandwidth they must maintain to support thousands of users. Another challenge facing ASPs is Service Level Agreements (SLA); if for some reason the ASP loses Internet connectivity, customers will lose connectivity to outsourced production systems, which negatively impact their internal SLAs.

    The key to an ASPs success will lie in the targeted marketplace. Those ASPs targeting large organizations will most likely fail (probability 75%) or scale back their profit margin in order to gain business. Those ASPs who can successfully market to small-to-midsize enterprises (SMEs) and emerging '.com' companies while providing good technical support coupled with frequent software and hardware upgrades will experience good success. We believe that, within the next three years, application hosting will be the dominant delivery model for packaged delivery for SMEs (70% probability).

    Outsourcing Advantages:

  • Predictable, fixed cost for a customer
  • Reduced setup and configuration time, and greater operational simplicity
  • All upgrades applied to ASP servers. No need for client or desktop upgrades.
  • Limited funds required for initial startup Reduced need for internal IT support
  • ERP package maintenance performed automatically by external experts