Brian Sommer is one of the best people I know. Apart from possessing a laser sharp mind, Brian is ruthlessly honest, scrupulously fair yet always courteous. From his biog: He was the longest running (10 years) and most senior director of Andersen Consulting’s (now Accenture’s) global Software Intelligence unit – a position that required him to pick the best possible software solutions for hundreds of clients globally. His recent post: ERP Challenges provides what I believe to be the most succinct and accurate assessment of where we are in the ERP market. Brian has kindly given me permission to reproduce:
A Perspective on ERP – Not a Rosy Landscape
There’s been a lot of commentary re: SAP’s earnings miss and the disappointment Wall Street had on the numbers. David Dobrin and I had a great conversation a few weeks ago speculating where SAP would land on its numbers. David was doing what a lot of Wall Street analysts do by calling a number of primary research sources to ascertain market movements.
I shared with David some research I had recently completed on the top 3700 firms globally and their ERP choices. What I found was quite interesting and, somewhat unsurprising.
- ERP, as a market sector, is maturing in a way akin to the manner that the office automation space consolidated in the late 1980s/early 1990s. SAP and Oracle are getting customers because buyers are migrating to the ever fewer set of consolidated vendors and away from low market share, declining or flat-line vendors. More specifically, buyers are moving to the industry leaders because markets tend to standardization. Smaller ERP vendors and niche application providers will start to fell some real squeezing soon.
- Traditional high-end ERP competitors are not attracting buyers who possess many of the characteristics of Geoffrey Moore’s left-half chasm categories: Early Adopters, Innovators and Early Majority. No, these buyers want something newer, cooler, riskier than ERP or even SOA-versions of the same old ERP. These buyers see ERP as being upside-down on the cost/benefit curve. The incremental costs of ERP upgrades or installs dwarfs the incremental value derived. As a result, smart buyers are looking at alternatives like BPO and hosted solutions. A growing portion of the ERP marketplace is moving away from traditional solutions. Think about Michael Porter’s Five Competitive Forces model now. ERP’s traditional competitors are facing some powerful competition now from substitute products (e.g., BPO), new entrants (e.g., China/India) and customer driven solutions (e.g., open source). The battle today has less to do with traditional competition and more with new sources of competition.
- Who is buying ERP today? Late Majority and Laggard buyers. These folks wait until the dust settles before plunking down some coin. They don’t want competitive advantage as competitive parity is fine with them. They will not pay much though. When you know you’re not getting competitive advantage, you won’t pay a premium price. This type of buyer is hard on a vendor’s margins. They put downward pressure on prices and they drive up sales costs. Let’s watch margins of traditional vendors in 2007-2008 and see what happens.
- When I looked at PeopleSoft customers and their G. Moore classifications, I noticed a large number of them were Early Adopters, Innovators and Early Majority buyers. That’s probably spot on as these companies wanted something new, fresh and different. They were willing to accept a higher degree of risk and bet on a smaller application suite/vendor.
What does all this mean?
For my money, I’d say the following is quite likely:
- ORCL and SAP will continue to add customers to their install base at the expense of other vendors and each other. The cost of sales and margins achieved on subsequent deals will probably be tighter than in recent years.
- ORCL and SAP will outperform peer firms both on growth and financial metrics. But, remember, this is a flat, mature space.
- The ERP-SOA story lines emanating from traditional ERP vendors are maybe interesting to IT types but won’t wash with operational and top executives. I can absolutely attest to a couple of top business leaders I know who don’t have any clue what SOA is or what it’s good for. Until ERP vendors bring some innovative, additional capabilities with their re-worked solutions, don’t expect any big sales pops. Buyers don’t need an ERP with SOA powers, they need a SOA solution with some killer new capabilities. This is a huge point that ERP vendors won’t acknowledge yet.
- BPO vendors will continue to take market share away from ERP vendors. Because their solutions have the potential to be implemented in weeks (versus years), are not capital intensive and can be effortlessly upgraded by someone other than the user, it’s a slam-dunk for buyers to go this route.
- Mid-Market and hosted ERP solutions still have runway left. Companies like NetSuite and Agresso should do well for some time.
Where we don’t need to focus
- I don’t believe all the speculation on management changes at SAP is really worthwhile. It’s tangential to the real, structural problems facing the space. For the same reason, I really don’t need to read about Larry Ellison’s latest behavior or interest in investing in restaurants.
- We don’t need to focus on the timetable for SOA releases. We need to hold vendors accountable for innovation. SOA is a platform – it is not an innovation. We need to rethink what application software should do (e.g., focus on something else besides accounting events) and not how the data is moved around in the system.
- We don’t need to focus on top line revenues of ERP vendors. We need to focus on their margins.
- We don’t need to ask about ERP defections from one vendor to another. We need to be asking why another big firm abandoned their ERP solution and went with a BPO (or hosted) offering by a third party (e.g., Accenture).
- We don’t need to hear about platforms anymore. We need to hear about results.
- And you, you don’t need to hear anymore from me. What do you think?
For a quick read, see SAP faces Challenges, eWeek 1/22/2007
Technorati Tags: ERP, Oracle, SAP, SAP_NetWeaver
