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:

4. Web- and E-commerce Enablement of ERP Systems
   
   
5. Intensified Market Merger & Acquisition Activity
   
   
6. 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

1. 
   

The ERP Market Trends covered in this note are:

4. Web- and E-commerce Enablement of ERP Systems
5. Intensified Market Merger & Acquistion Activity
6. 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.

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• 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

Types of Classes: Public versus Private

Once the organization has decided to move forward with training, it has a fundamental decision to make. Where will the class be held?

Organizations that want to build internal expertise in new applications have two choices: They can either send their employees to public or private training classes. Public classes typically take place at vendors' offices or at vendor-approved locations. These classes cost in the neighborhood of $500 per day per student. Many organizations in different stages of an implementation send users to public classes to learn how their systems work in a generic sense. In other words, a payroll manager should not go to a public class intent on learning how to set up and process payroll at her company, although she should walk away with more than a few ideas from the class. Because payroll personnel from other organizations attend public courses, the instructor will discuss the payroll application in general terms.

For public classes, clients travel to vendor sites, sometimes incurring significant travel costs. To the extent that client end users are out of the office, they should be able to focus exclusively on the class and the applications being taught. From a technical perspective, vendors should have sufficient computer terminals and training data areas. In other words, clients need no organizational IT involvement to attend a public class, nor do they necessarily need to bring laptops with the applications already on them.

Private classes are very different than public ones, both in terms of costs and content. For one, it's not uncommon for a vendor to charge upwards of $3,000 or more per day for a customized class at the client's site, because vendors know that client end users will not have to incur travel costs. Thus, from a strict cost standpoint, a private class with more than six people will probably be cost-effective for the organization. As for content, instructors will typically customize agendas specifically for each client. In a private payroll class, for example, the payroll manager can ask many specific questions related to her company's payroll setup and processing.

While, it may be less expensive for clients to host private classes in which trainers come to them, understand that employees attending private classes are in the office. Crises or emergencies can take them away from the class, reducing overall learning. Also, from a technical perspective, the trainer is not going to bring laptops configured with the software and training data areas. Consequently, the amount of IT involvement is much greater than that of a public class. The organization that brings in an instructor at $3,000 per day should ensure well before trainer's arrival that its hardware and software are "up to snuff". Nothing inhibits a class and frustrates all concerned more than "buggy" software and the lack of a proper training data area. The last thing that a client's management wants from a public class is a disaffected end user base.

Outside of a formal class (whether public or private), independent learning has become more populate. Recent advents such as web-based training (WBT) have become increasingly popular. While the cost savings are obvious and the convenience factor is high, remember that employees at their desks are often distracted by daily calls, e-mails, and old-fashioned door knocking. Consequently, the cost of a public course can sometimes be justified by the additional learning that tends to take place in an isolated environment.

Opportunities and Benefits

Organizations with tight budgets may not need to reduce headcount at present. There is a fundamental tension between lean staffing levels and organizational bench strength. Lack of widespread end user application and technical knowledge is dangerous in the event that a key employee decides to walk. Yes, even in these economic times some employees voluntarily leave their jobs for whatever reason.

To this end, organizations should consider expanding employee training, not cutting back. Whether employees are being cross-trained in different functions or learning new technologies altogether, the benefits of training can more than offset their costs. First and foremost, training mitigates the risk of key employee turnover. Second, the mid- or long-term savings of training may more than pay for itself. Two super users with substantial skills and a global perspective may be able to do the work of three or four limited end users, especially if they are skilled in different automation methods. Finally, while hardly tantamount to reassuring nervous employees about their employment futures, training can send a strong message to attendees: the organization wants you to develop your skills. And the message becomes "despite current economic challenges, we are committed to growing our employees' skills and abilities." This attitude may reduce the likelihood of voluntary employee attrition.

Growing Organization Risks

While understandable and often imperative for the continued survival of an organization, the aforementioned cutbacks promote a vicious cycle of increased organizational risk:

* Organizations reduce or eliminate formal training and informal opportunities for users to learn how to better utilize enterprise systems.
* This solidifies many users' bad habits and suboptimal processing methods.
* At the same time, organizations trim staff, resulting in more work among fewer employees. This means even less time for cross-pollination where employees are trained in multiple jobs.

Organizational risk is compounded if key employees leave the organization and, as is often the case, user documentation is lacking. For example, incumbents may scramble to figure out how Alex ran regular interfaces, Neil matched invoices, Julian filed tax reports with the government, and Nancy created database backups. If Alex, Neil, Julian, and Nancy are no longer with their organizations, then they are, in all likelihood, unable or unwilling to assist their former employers in the event that their help is needed.

Often, the best case scenario is that jobs performed by ex-employees are partially understood by their replacements. Nonetheless, this may very well result in increased risk of error, financial irregularities, expensive engagements with external consultants, or some other highly undesirable outcome. In the extreme, a single employee's departure may result in a missed payroll, an eventual government audit, or security breaches.

Breaking with Tradition

Traditionally, the next phase of the project would involve issuing a request for proposal (RFP), in which you would draw up a list of high-level requirements and submit it to a large list of HRMS software vendors. After reviewing your requirements, interested vendors would notify you if they were interested in competing for your business.

This approach is time-consuming because you have to wait for vendors to complete their reviews of your requirements and contact you with their intentions. The next step would be to draft a request for information (RFI) to send to those vendors that chose to compete. The RFI should describe your requirements in more detail, list your project goals and objectives, provide a high-level project timeline, and request background on the vendor (including information about its proposed solution, the technical architecture employed, implementation approach and methodology, hosting options or partners, references, testimonials, and pricing strategies).

I recommend skipping the RFP, and start contacting the three or four short-listed vendors that you feel may have the best solution for your needs (based on your research). Your goal is to determine their willingness to conduct a scripted demonstration (versus a canned sales demo). This requires the vendor to “script” (prepare with detail) the demo according to your specific needs and scenarios.

Once you have the vendors' commitments, you can then send them a detailed RFI, and schedule the scripted demos. By skipping the RFP process, you can reduce the project timeline by as much as a month.

Preparation: First Things First

So … you're either in the market for your company's first human resources management system (HRMS), or you're ready to move up to a more sophisticated system, and you're struggling with whether to bring in the consultants or tackle the evaluation process by yourself. Can you do it yourself? The answer is yes, and maybe. It all depends on whether or not you can commit the time and resources to doing it right.

Be prepared for a fairly time-consuming process, ranging from at least three to nine months or more. You'll also need to recognize that it will require a considerable outlay of capital and staff resources to bring the project to fruition. Your company will have to live with your decision for the next eight to ten years or more, so you want to make sure that you do it right—the first time.

For starters, it will be extremely helpful to begin with a clean slate and an open mind. The less biased you are regarding a specific software vendor or application (either “for” or “against”), the easier it will be to make an objective evaluation and decision. In the last five years or so, vendors, software applications, and hosting options have undergone significant changes. Making a decision based solely on past experiences (good or bad) may be a disservice to your organization. Try to remain unbiased throughout the evaluation process. Whether you use a consulting firm to help you in your quest, or decide to strike out on your own, following a rock-solid methodology is the key to success.

User-Needs Assessment

The process begins with a user-needs assessment (UNA) to develop a wish list of features and functionality you expect the new system to deliver. In this phase, brainstorming sessions with each group of functional and technical users are scheduled to discover what they like about the current system, what they dislike about the current system, and what they are looking for in a new system.

There are various ways to build this information. Some people use questionnaires and surveys to collect this information, and some use the tools that software evaluation companies like Technology Evaluation Centers (TEC) offers to help organizations build their requirements. In addition to these tools, the interactive nature of face-to-face meetings with small groups of users allows useful information to be exchanged to help the decision process along. Some users may know exactly what they want out of a new system, while others may have difficulty envisioning their future needs. You'll have to facilitate the discussions and prod the users by asking such questions as “What are you doing manually today that would save you time if it were automated?”

While you're conducting these sessions, be sure to ask how new features and functionality will affect efficiency and productivity. This information will help you later when you prepare a cost-benefit analysis to justify the expense of the new software.

Next, take a look at some of the software vendors present in the marketplace. In the mid-market, there are no less than 20 vendors that could be considered “players” (prominent in the industry), and there are many more that are trying to enter this market. There is no way that you can evaluate all of them in depth, but there are some shortcuts that you can use to narrow down the choices.
One option available is to see what the analysts have to say about the major players in the HRMS software arena. Gartner's Magic Quadrant for HRMS, Forrester's Wave, or TEC's eBestMatch™ are all effective decision support systems offered by software evaluation organizations that can help you evaluate different vendors.

Another option is to attend conferences, such as those held by the Society for Human Resource Management (SHRM) and the International Association for Human Resource Information Management (IHRIM). These conferences usually have an exhibit hall, and the major HRMS vendors will each have a booth and product specialists on hand to discuss their offerings and to provide demos of their solutions. Often they will arrange a vendor shoot-out, where each vendor demos its solution to the assembled attendees, and the attendees decide for themselves which offers the best solution.

You can also use the Internet to research the vendors, but beware: this could turn out to be the equivalent of looking for a needle in a haystack. On the day I wrote this article, I did an Internet search on “HRMS software vendors,” and it returned 728,000 hits. You are going to either have to narrow your search, or be prepared to do a lot of surfing.

One other way is to do some sleuthing and try to find out what your competition is using. There are several vendors that have carved out a niche in the marketplace, and that have specialized solutions tailored to specific market verticals (such as health care, professional services, manufacturing, etc.)—a case of “birds of a feather …” This research should allow you to narrow your choices down to a handful of promising vendors. Call each one to request a copy of its company's current product information, and see if it has an online demo to provide a high-level familiarity of its products. This should help you come up with a shortlist of perhaps three or four prospective vendors.