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Cloud ERP: Rise of the industry cloud

There is a new variable in the build or buy debate, and it’s all about the way cloud-based services connect internal and external business processes

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In the past, IT leaders selected enterprise resource planning (ERP) packages to power business processes. Often, the way these systems were developed was fragile, which meant organisations needed to adapt the way they operated to run the software effectively.

Since these packages were generally used by the largest of global enterprises, some argued that ERP packaged up world-class business processes into enterprise applications. In those organisations not in a position to transform and adapt how they ran processes to match the ERP system, IT leaders faced the prospect of managing point-to-point integration between different IT systems and creating custom code to adapt the ERP to match an existing business process.

The reality is that ERP never really matched exactly what organisations needed. There was always a need to integrate existing systems and plug gaps using specific off-the-shelf products or bespoke software to provide the required functionality.

Cloud adoption driven by enterprise SaaS

Software as a service (SaaS) and the growth of cloud computing in the enterprise has provided the IT industry with an alternative vision of how to deliver the software needed to power business processes. The success of Salesforce encouraged traditional ERP providers to acquire SaaS capabilities and provide their own cloud offerings.

SaaS goes hand-in-hand with cloud-native software architectures and microservices, offering a best-of-breed approach to building out enterprise systems as an alternative to buying all functionality from a single ERP provider.

This present its own challenges, however, with IT departments needing to integrate best-of-breed cloud applications with other enterprise systems to provide the functionality the business requires.

A survey of 330 CIOs and decision-makers in the UK, carried out for Fujitsu by third-party research agency Vitreous World in September 2021, found that 73% believe cloud technology has created more complexity. The survey also found that 70% of CIOs think cloud technologies mean they have less control.

This is creating huge leadership anxiety, so much so that 60% of senior technology leaders are now fearful for their own future in the workplace as they lack the competencies needed to control current systems.

The role of industry-specific clouds

Nevertheless, the idea of a cloud-based approach, combining internal and external systems from various business partners, is starting to gain momentum.

In 2020, McKinsey discussed why industrial organisations struggle with the make-up of enterprise IT, which has often been built over a number of years through acquisitions that require complex integrations or manual steps. This can lead to overly complex systems, which in turn limit transparency and slow processes for strategy, finance, pricing and other functions.

According to the authors of the McKinsey paper, Making the cloud pay: How industrial companies can accelerate impact from the cloud, using the cloud to solve such business challenges has not been easy. “Many cloud migrations have failed because they did not first simplify the IT landscape and establish data governance. Further, extra costs have often threatened financial success,” they warn.

The paper’s authors also note that most companies fail to see that the cloud’s real value lies beyond IT. “The cloud, digital channels, and data and analytics can improve everything industrial companies do, from running the business to developing, delivering, selling and servicing products,” they write. “Our experience with clients suggests that cloud-enabled operations can unlock more than $1tn in shareholder value for industrial companies – half from revenue growth and half from margin expansion.”

What has emerged in recent years is the concept of an industry cloud. Rather than relying on a single, highly integrated ERP system, the industry cloud encourages collaboration and partnerships to enable an ecosystem of pre-integrated systems where individual components are developed to provide very specific vertical applications.

In Forrester’s The rise of industry cloud solutions report, analysts predict that industry clouds will be the preferred way to purchase enterprise systems within five years.

The analyst firm defines modern industry clouds as a way to provide industry-specific experiences that connect processes and data from the front and back office. They comprise industry-specific components, plus add-ons that deliver what Forrester calls “last-mile capabilities”, and offer artificial intelligence (AI) models, datasets and connectors built by the IT provider and its partners.

More adaptable and functional

Enterprise software providers, such as Salesforce, Oracle, SAP Microsoft and Infor, among others, have positioned their SaaS products for the industry cloud. In general, these clouds offer a platform that provides a set of core functionalities and uses partners to deliver functionality aligned to specific vertical industries.

An automotive IT ecosystem

Volkswagen Group has worked with Amazon Web Services (AWS) and Siemens to develop an industrial platform that it hopes will improve the productivity of its plants by 30%.

The collaboration combines Volkswagen’s expertise in production with artificial intelligence (AI) from AWS and Siemens’ integration of production systems. Volkswagen has defined 30 applications, focusing on areas including preventive maintenance and reduction of reworking through AI.

In the long term, Volkswagen is aiming for an open marketplace for industrial applications, which it hopes will operate along similar lines to an app store for mobile phones.

Describing the vision for the platform, Nihar Patel, executive vice-president of new business development at Volkswagen AG, says: “On that kind of platform, everyone involved would be able to swap, acquire and use each other’s applications. It would be a place open to all companies in principle – from suppliers, through technology partners, to other car manufacturers.” 

In February 2021, Volkswagen IT manager Roy Sauer gave a presentation on the extent of its industry cloud across the companies in Volkswagen. One of the examples he discussed is how Porsche uses computer vision to automate the quality control of certification signs and labels, leading to faster production times and quality. Another is how Volkswagen Commercial Vehicles connects data from assembly lines to the cloud to identify bottlenecks in production.

Sauer described a digital production platform, which provides foundational platform services – spanning the public cloud to the edge – that integrate and process data from machines and production systems on the shop floor in a federated data layer, and provides a set of standardised interfaces for software applications.

Looking at what makes industry clouds different from existing clouds, Gartner analyst Gregor Petri says that by using composability, industry clouds can offer more adaptability than today’s SaaS applications and more business functionality than today’s infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) clouds.

“Industry clouds are a step towards ‘whole products’, or a cloud that addresses ‘everything required to assure that the target customers can fulfil their compelling reason to buy’ or realise their desired outcomes,” he says.

Carmaker Volkswagen is one of a number of industrial firms building out an industry cloud, in collaboration with partners and plant machinery manufacturers (see box above). To succeed, Volkswagen’s industry cloud needs to link industrial equipment manufacturers, industrial software providers and systems integrators to provide what the company sees as an open industry for all partners to collaborate.

But selecting an industry cloud today is by no means clear cut. “Many industry clouds are nascent, with lighter-weight and incomplete capabilities,” warn the Forrester analysts. “Plus, they can be more expensive out of the box and often require specialised resources to install, manage, upgrade and service.”

Forrester notes that current industry clouds are “inherently complex”, as they draw on capabilities from a broad horizontal software portfolio and are not built from the ground up for a particular industry.

For instance, analysts said Microsoft Cloud for Healthcare combines capabilities from Microsoft Teams; Microsoft Power Platform, which includes business intelligence, apps and automation; Microsoft Dynamics for marketing, service, customer insights, digital messaging and resource scheduling; and Microsoft Azure for bots, application programming interfaces (APIs) and healthcare AI.

It is not just the Microsoft cloud. According to Forrester, Oracle’s Digital Experience for Communications combines capabilities from Oracle’s customer experience suite for sales, billing and omnichannel commerce.

Looking at the maturity of industry clouds, Forrester found that many products did not support the full breadth of role-based experiences. “They also provide generic workflows with fewer options for customisation, automation and support for custom fields that may not align to the needs of every company within an industry,” the report notes.

Forrester also points out that third-party partner programmes to support industry cloud are still nascent, and development communities and connectors are often less developed. 

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