Customers expect deeper industry expertise from their ERP software providers to gain a more integrated application environment and end-to-end process automation. The alternative? Many companies combine, by choice or necessity, custom-built applications and customised industry packages to supplement the core ERP. This environment leads to many moving parts, disparate usability, and integration challenges.
The industry evolution of ERP is playing out in three primary ways:
- ERP mega-suppliers add vertical depth and breadth. Both SAP and Oracle have invested heavily in industry solutions, each touting capabilities in more than 20 vertical categories. Indeed, their commitment to industries has driven many acquisitions, particularly for Oracle. SAP generally prefers to build industry functionality natively within its suite, but it has made several vertical acquisitions as well to accelerate time-to-market. Both also make use of services extensively to add vertical flavour, including partners. As these two titans battle one another for the prime larger enterprise accounts, they have polarised to some extent. Oracle focuses more on services, government, telecom, and utilities, while SAP is strong in capital-intensive manufacturing, including oil & gas and chemicals. Nevertheless, these suppliers continue to battle one another vigorously in most industries, including retail, government, manufacturing, and banking. More industry-specific acquisitions are likely.
- Second-tier ERP providers exploit seams in the defence. Mid-size suppliers have found more success in providing deeper and more granular industry-specific functionality than the mega-suppliers, and in exploiting white spaces, as well. Lawson, for example, has successfully targeted industries such as healthcare, food, and fashion. Other software houses (eg Microsoft, Epicor and Sage) may choose to go further downmarket to elude the mega-suppliers in targeted industries, often relying on partners to add the last mile of specialisation.
- Specialists focus on fewer or even single verticals. Industry-specific suppliers may not be considered within the scope of the ERP market when they serve a single industry or do not provide the core accounting functionality that is at the heart of ERP systems. Nevertheless, these specialised plays are often compelling to customers and may also attract the attention of ERP suppliers looking to partner or acquire. Specialist firms offering comprehensive suites to particular verticals include Deltek (project-based businesses), Blackbaud (not-for-profits), Mincom (mining and asset-intensive businesses), QAD (manufacturing), and IBS (distribution). CGI Group gives ERP suppliers stiff competition in government, including US federal as well as state and local governments. Specialists solidly dominate the lucrative healthcare market, particularly patient systems. Notable players include Cerner, Eclipsys, Epic Systems, McKesson, and Siemens.
As long-term observers of software markets, Forrester is confident that acquisitions will continue in enterprise applications. In fact, it is inevitable. The leading acquirers have been Oracle, Infor, and Sage. Microsoft has been inactive since its acquisitions of Great Plains Software and Navision several years ago, but it certainly has the financial strength to shake up the market.
|Buyer's guide to the ERP market|
The effects of the economic downturn have left several ERP suppliers with substantially lower market capitalisations, making them easier targets for acquirers. In addition, strategic acquisitions build pathways into new markets. Looking forward, the reasons why ERP suppliers may acquire or be acquired include:
- To boost profitable recurring revenues. Revenues from maintenance are a profitable and reliable stream, now accounting for half of the market's revenue. Oracle and Infor have made this play multiple times, acquiring mature companies with strong customer bases. As the market evolves, software as a service (SaaS) subscription revenue is likely to become increasingly attractive as a recurring stream, putting targets on SaaS pure-plays such as NetSuite and Intacct.
- To eliminate competitors. Though relatively rare, this aggressive acquisition play has been done. Despite a landmark antitrust case that brought close government scrutiny, Oracle prevailed in its hostile takeover of PeopleSoft and continues to support and enhance this successful ERP product.
- To establish a foothold in new markets (eg industry, customer size or geography). Going forward, the most frequent and likely acquisition scenario by ERP suppliers will be to expand into new markets. Besides vertical acquisitions, previously discussed, suppliers also seek to penetrate new size segments and geographies. Oracle, for example, can't go too far downmarket with its ERP products that were designed for mid-size and large companies and could conceivably acquire solutions for small and medium-sized businesses with revenues less than $50m. Geographic plays are also potentially attractive in markets that are served extensively by local players, including China (with the likes of Kingdee International Software Group and UFIDA Software) and Latin America (eg TOTVS).
- To complement platforms and services. While Oracle and Microsoft benefit from selling platform and technology products to applications customers, it is conceivable that IBM may also see a benefit in acquiring ERP assets, not only for its software and platform businesses, but also for its immense services businesses. Forrester cannot rule out other major IT services providers or hardware firms acquiring applications firms, especially with recent diversification moves by Dell, HP, and Xerox.
- To find technology gems. Undercapitalised software firms with valuable intellectual property (IP) may be attractive to astute acquirers that understand the value of the technology. These acquisitions would typically be smaller, but more strategic if the technology assets can be strengthened and marketed to a broader audience. In today's ERP market, well-architected SaaS solutions would be attractive, as well as those with compelling usability and process flexibility.
SaaS avoids upgrade challenges
Virtually all on-premise ERP suppliers have a strategy to deliver a SaaS offering, if they do not already have one in play. SAP, for example, offers Business ByDesign, which is still in a ramp-up mode. Oracle is considering a SaaS option with Fusion. Epicor has indicated that its Epicor 9 platform is SaaS-ready. Fujitsu's Glovia has a SaaS ERP offering called GS Innovate. More are in the works.
Forrester's survey data indicates that the classic objections to SaaS - security, cost ownership and integration - are much less of an issue than in prior years. A problem for ERP, however, is the relatively limited availability of SaaS ERP solutions, compared with more accepted customer relationship and human resource management applications. Pure-play SaaS ERP suppliers include Intacct, NetSuite and Workday, although these firms have not yet created a full breadth of ERP application offerings.
|Forrester's SaaS maturity model|
Upgrades, we believe, are the central tipping point leading to more interest in SaaS. Under the SaaS model, the application is managed by the supplier, which will provide software updates to all customers on the same schedule. In essence, all the customers are running the same version of the software, whether or not they decide to activate the updates. The updates generally occur on a much more frequent basis than on-premise software, avoiding the upgrade lag that is so common in ERP.
Another challenge for SaaS ERP is extensibility. Because of the complexity and breadth of ERP, SaaS applications must progress from multi-tenant, configurable applications to SaaS platforms that will enable customers to extend the applications for specific needs without breaking the updating model. Current SaaS applications are only at stage three on Forrester's five-stage SaaS maturity model.
This is an excerpt from "The State of ERP 2009: market forces drive specialisation, consolidation, and innovation" by Paul Hamerman, vice-president and principal analyst at Forrester Research serving business process professionals. To find out more, visit the Forrester website.
This was first published in April 2010