It's all about the architecture
Dramatic computing shifts will reveal newfound business processes
By Dave Caruso, principal, David Caruso & Associates -- Manufacturing Business Technology, 7/1/2006 6:00:00 AM
It must be a sign of the times. Recently, a large manufacturer asked me to help design an IT organization that could effectively address future needs. The executive explained that while they were very good at operating the systems, they didn't have a structure in place to recognize opportunities and deal with the possibilities of what was happening in the software markets—especially at the ERP-backbone level.
This demonstrates how much the IT function is impacted—and how complicated sorting out strategy is in the face of a turbulent software market. Its global nature, consolidation and massive footprints, shifts in pricing models and software as a service, daunting ERP upgrades, and looming Microsoft Vista upgrades all keep IT shops guessing.
Following the money
All told, manufacturers do see benefit from their technology investments. And it shows up in their spending plans. According to Boston-based AMR Research, manufacturers' 2006 spending plans show a budget increase of 3.7 percent, bringing the average manufacturing IT budget to about 3.5 percent of revenue.
ERP will be the primary beneficiary of that increase: 71 percent of companies surveyed will increase ERP spending in the next year, with an average increase of nearly 15 percent. And there's plenty of room to grow: On average, only 15 percent of total employees are licensed to use their companies' ERP systems today.
The implication of those numbers isn't lost on the big ERP vendors, which want an even bigger chunk of this money. This is the driver behind the acquisition juggernaut we have witnessed over the last couple of years. To put it in perspective, the top five vendors—SAP, Oracle, Microsoft, Sage, and now Infor—will account for approximately 85 percent of total 2006 ERP market share. This compares with the top five having 71 percent in 2004, and just 59 percent in 1997.
Despite consolidation, the enterprise applications market showed very healthy performance in 2005, and is expected to again next year. Nearly every vendor reports strong results of late with SAP, Oracle, Microsoft, and Infor all showing the kind of license-revenue growth that indicates a high percentage of new customer transactions.
Moreover, the midmarket remains strong. While smaller companies may have been the hardest hit during the post-Internet bubble, it would also appear that their quick shutdown of spending actually set them up to lead this round of spending. A full 20 percent of those with less than 500 employees are now planning to evaluate ERP for the first time.
We've all heard the speculation about pent-up demand for ERP software in the small and midsize business (SMB) market, due largely to lots of homegrown, cobbled-together systems that did not effectively address the e-business models of the SMBs' upstream OEM customers. And it does appear that a significant number of companies are now moving to replace their older systems. According to AMR data, more than one-third of companies under $500M in annual revenue are engaged in new ERP implementations, as compared to one-fifth of companies $500M or above.
Pointing out the big ERP vendors in this discussion was not accidental. Having achieved its goal of becoming the nexus of IT strategy for manufacturers, the ERP market now acts like a very mature industry consolidating down to a small number of big players.
The impact of consolidation is difficult to miss. In 2005, ERP spending represented 36 percent of total application spending—up from 27 percent just three years ago.
Careful what you ask for
One standard practice the past several years is to consolidate technology platforms, and partner with a limited number of strategic global providers.
While the aftermath of the Internet bubble proved unfortunate, it was, without doubt, an explosively creative period in the software markets—especially in CRM, supply chain, and product life-cycle management (PLM). If a small number of players deliver all of our software, how do we know if this is the extent of possibility, or innovation?
After years of focus on the growth of application footprints and vertical market coverage, the application vendors are investing (and hyping) a significant technology transition phase: service-oriented-architectures (SOA). What SOA holds in store for manufacturers is the promise that they will finally be able to finally open up the apps for easier integration, the creation of composite apps, and an improved level of business process management—and who knows, maybe even stimulate a creative Web services development gold rush.
It's hoped that SOA will stimulate new applications coming to market due to simplified integration and reduced cost, while also minimizing a key impediment to buying third-party add-ons. This is necessary because users want the flexibility to create solutions for their specific needs by bolting new business process capabilities—either from the incumbent ERP vendor or from an innovative third party—onto existing ERP instances. This is especially true in the supply chain area, where even within vertical industries no two supply chains are exactly alike.
All that said, it's not yet clear that ERP buyers will begin insisting on SOA, or for that matter, initiate upgrades just to open up their systems. Interestingly enough, at the large enterprise level there seems to be a "wait & see" attitude, not questioning SOA, but holding out until real benefits can be quantified.
Another interesting point is that many manufacturing and plant-level IT staffers believe they already have been building composite apps for some time now, and are quite comfortable with their integration tools and strategies.
SOA should have a positive effect on the SMB market as well. In fact, a likely initial use of SOA among large enterprises will be extending external-facing applications to smaller partners that gain a more cost-effective means of working with large OEM customers. Standardized cross-industry business processes and services that reduce an entire value chain's cost structure may create a very powerful network effect that might be the biggest benefit of all.
If nothing else, SOA will be a space in which there will be some interesting market jockeying. It is starting to shape up as a bit of a platform decision, with the incumbent heavyweights battling for preeminence in the third-party ecosystem. SAP has set up a $125M investment fund in third parties that standardize on the SAP NetWeaver platform. In the end let's hope the battle is about innovating cost-effective business processes that change the productivity of the manufacturing corporation.
About time
The architecture changes aren't just happening underneath the covers. One of the most exciting changes is happening right before our eyes: wedding the desktop tools to the enterprise applications. This means providing context to enterprise-apps users via the tools they are already so familiar with. In particular, Microsoft Excel is by far the most used application in the business world, and it's about time it is made an inherent part of the business application and processes.
Over the years I have witnessed far too many mediocre ERP implementations, yet not due to the lack of capability or data—it was just that the systems were so hard to use.
This is about rethinking the role of the desktop and the user interface in enterprise applications. This is not about data exchange between tools. We are talking about exposing the right tool in the context of what users are trying to do. Think of the possibilities if Excel and Outlook Calendar are automatically invoked, populated, and emailed about the company as a result of merely doing one's job.
The anchor efforts of this began with the Mendocino—now Duet—project between SAP and Microsoft. Fortunately, this isn't just a Microsoft and SAP initiative. Other companies see the need and the potential impact it could have on sales. Cleverly, Lawson Software has reached outside of the software industry to work with the design consulting firm, frog design, to challenge current thinking on user interfaces. More than anything else, these efforts could change the perception of the enterprise software market forever.
Portal presence
Moving beyond being merely a Web site with privileged access, the portal will become a virtual point of presence, accessible from whatever interface, system, device, or application is natural to a user's role, geography, or needs. This will be the nexus for all the devices we have come to consider as part of our daily existence—cell phones, PDAs, PCs—perhaps even video.
Today we are aware of presence as a busy signal, or a symbol that shows online availability in an IM client. Soon a more sophisticated, more pervasive presence capability will allow you to manage other organizations' and individuals' access to you—by constituency, communication channel, application, and location. This means that customer, suppliers, and employees alike will be able to go to one location and interact in whatever means is available and understand your availability.
Consider the implications this could have on business processes, such as speeding the introduction of an innovative product in a highly competitive market.
The year 2006 is shaping up as the entry point to a dramatic shift in computing. Yes, it is very early, but the developments referenced here are just being evidenced. Among them are profound improvements that could set the stage for another great upswing in productivity over the next five to 10 years. Web services, pervasive devices, composite applications enabled through SOA, and powerful analytics will combine to recreate value chain-level business processes as the answer to some fascinating next-wave problems—complexity, virtualization, and global synchronization. I, for one, cannot wait to see such come to fruition in manufacturing.
