The idea behind enterprise resource planning (ERP) is to provide the business with a single product that provides software to support the main business functions in a company. The major products such as SAP and Oracle claim to encompass the best ways to run business processes. But since they cater for large complex businesses, such systems are often too sophisticated for smaller organisations , that may not have the same requirements in terms of scale and complexity of business operations.
Businesses that choose mid-market ERP tend to have limited IT resources but require a flexible product. George Lawrie, principal analyst at Forrester Research, says there are two reasons SAP has not really taken off in a big way in the mi-market. “It needs a channel to sell to smaller businesses and SMEs question the ease of implementing it.”
SAP and Oracle may be great for providing enterprises with industry-standard business processes,
but standardisation erodes the unique selling point in smaller businesses.
As such, the major ERP products, from the likes of SAP and Oracle, are not always a good fit in smaller organisations. Lawrie points out that customising these systems can be prohibitive. He says, “SMEs are worried by the high maintenance fees and complex implementations associated with major ERP software.”
This is why a market has grown for ERP aimed at SMEs. “Mid-market ERP tends to offer vertical specialisation,” says Lawrie.
If SAP and Oracle are not be the best fit, how should a medium-sized business choose an ERP system? Companies must tread carefully when selecting a mid-market ERP. A company with an ERP product that works in a UK business may not offer the product abroad.
Even companies that are strong internationally, may not offer the same product in every region, warns Gartner analyst Christian Hesterman. For instance, he says, "Lawson S3 is primarily used in the US public education and healthcare sectors, while the N3 product is focused on food, textiles and beverage businesses in the rest of the world."
Hesterman says the product should be good enough in most areas, but businesses will need the flexibility to adapt it. The alternative to having the flexibility to customise an ERP system is a product suite that has been specifically tailored for an industry sector.
Microsoft Dynamics AX is one example of such a product that Gartner has identified. Hesterman says, "Microsoft has a clear strategy to let the channel [resellers] build in functionality, then buy back the functionality and integrate it into the core product." This approach has put the AX product at the top of Gartner's Magic Quadrant for mid-market ERP.
ERP in the cloud
Suppliers such as Salesforce.com have made it possible to put customer relationship management (CRM) systems in the cloud, but core enterprise resource planning (ERP) has so far remained untouched. If IT departments can make considerable savings switching from in-house systems to cloud-based software-as-a-service (SaaS), why stop at CRM? Businesses should consider using the cloud for ERP.
Andrew Vize, who as propositions director runs Computacenter's CIO panels, says, "The efficiency of services from Google and Amazon is superb. They offer the lowest power costs and are five to 10 times cheaper than traditional small datacentres."
It makes sense for an IT director, but the major ERP suppliers have been reluctant to move to cloud computing. SAP has been touting its Business ByDesign SaaS suite for smaller companies.
Meanwhile, Oracle offers its middleware and database products on Amazon Elastic Compute Cloud (Amazon EC2), but does not recommend putting E-Business Suite ERP software in the cloud.
Oracle states in a blog post, "Since Amazon EC2 uses a virtualisation engine that is not supported by Oracle and has not been certified with E-Business Suite, this environment is not supported for production usage of E-Business Suite. Using Amazon EC2 for hosting E-Business Suite may be suitable for non-production instances, such as demonstrations, test environments and development environments."
In fact, it is far from clear how the major ERP suppliers will charge for cloud-based ERP. The significant ongoing revenue they receive from annual software maintenance from on-premise applications makes it harder for established ERP companies to offer considerably cheaper software licensed on a monthly subscription basis.
However, smaller software companies are making cloud ERP float.
Cloud computing company NetSuite has unveiled workflow management software, SuiteFlow, which enables users of cloud computing business suites to automate and streamline complex business processes. NetSuite says SuiteFlow allows businesses to customise workflows to support the way they need to work.
Companies can use SuiteFlow to develop and deploy new business processes. NetSuite says it can be used to support processes such as contract renewal workflows with tasks, reminders and customer notifications, sales processes that include mandatory data entry, follow-up tasks and rep notifications, and customer support processes, including inactivity reminders, escalations and service level agreement (SLA) enforcement.
Lawson Software, which has mainly focused on traditional ERP, has moved into the cloud by offering its core Enterprise Management Systems and Talent Management suite on Amazon EC2 infrastructure. The products will be included in the Lawson External Cloud Services offering, which is part of the company's Cloud Services portfolio.
Lawson's cloud ERP service is targeted at mid-sized companies and organisations looking for a more affordable, flexible and agile deployment option for full-function enterprise software.
"We are making it easier for our customers to license, use, keep current and even pay for Lawson full-function enterprise software. This should be great news for CFOs and CIOs who worry about lengthy and complex on-premise installations, the cost and inefficiency of their datacentres, the best way to allocate IT staff, and the complexity and difficulty of maintaining software versions and upgrades," says Jeff Comport, senior vice-president of product management at Lawson Software.
Similarly, open source ERP provider Compiere, which is used by companies such as Specsavers, has developed a version of its product that works on Amazon Web Services in the cloud.
Some experts believe it is unlikely ERP will move wholesale into the cloud. The major ERP systems tend to be architected as large homogenous IT systems, which may not be such a good fit for delivery via the internet cloud. Licensing major ERP systems to deploy via the cloud is still immature. Instead, niche software companies are likely to build cloud-based services that do many of the functions of ERP.
"We will have much more specialist systems that do a slice of ERP," predicts David Bradshaw, IDC research manager for software and services in Europe
Cloud-based ERP could be the way forward for small- and mid-sized companies. Both Oracle and SAP offer products aimed at smaller businesses such as JD Edwards from Oracle and SAP Business ByDesign. These may have a better fit with certain organisations, But implementing on-premise traditional mid-market ERP systems will be the most likely approach businesses take until cloud computing has matured.
The role of SaaS and open source in mid-market ERP
Gartner sees an increasing availability of software-as-a-service (SaaS) ERP systems, and, unlike in large enterprises, where SaaS ERP use is limited, SaaS ERP is playing an increasingly important role in both back- and front-office applications for mid-market companies. Cost reductions in implementation and operation are one of the important drivers for SaaS ERP, and SaaS offerings avoid the need for upfront capital expenditures because they can be funded as an operational expense. However, when analysing the total cost of ownership of SaaS ERP over five years, Gartner finds that SaaS is not necessarily less expensive than on-premises ERP.
NetSuite is the largest example for a SaaS-based ERP suite. It offers a broad range of application modules, including financials and accounting, purchasing, payroll, order management, inventory control, and employee management, as well as built-in integration with its CRM and e-commerce capabilities on the same platform. Gartner has spoken to customers that expressed a high level of satisfaction with NetSuite's offerings.
Open source has been used extensively in infrastructure components, but it has a limited impact on ERP at this point. In the past two years, however, some new open-source software ERP suppliers have emerged with a focus on leveraging open source software to reduce the total cost of ownership of business applications, and to enable customisations that would be difficult to achieve without access to source code. Although we have doubts as to whether open source software business models actually confer these advantages on open source software ERP, these early stage offerings are nonetheless promising and should be evaluated. Examples for open source software ERP suites include Compiere and Openbravo.
Although increasing in importance, none of the SaaS or open source ERP solutions met the inclusion criteria for this Magic Quadrant, because of their number of sales or product focus. Gartner's ERP Magic Quadrant criteria do not explicitly exclude SaaS or open source packages. The analyst firm is actively tracking their progress and expects their inclusion in future versions of its Magic Quadrant.
This is an excerpt from "The Gartner Magic Quadrant for mid-market ERP"
This was first published in April 2010