No simple revival

The market for "core" ERP software is expected to reach an important turning point this year: it should stop shrinking. After holding back on IT spending during the recent economic downturn, companies are expected to increase ERP-related spending this year.

The basic value of core ERP is still there, say experts, and ERP vendors now offer extended applications they can sell to users of their core systems, or to new users. Growth will involve these extensions, but the underlying question is, can these applications help solve pressing business issues such as globalization, outsourcing, compliance, and leaner, more demand-driven supply chain models?

"ERP gives a company its master customer, supplier, and inventory transaction base so it knows what has happened in the company, and to some extent, what is happening," says Bill Swanton, a VP with Boston-based analyst firm AMR Research. "Core ERP has value, but most companies don't need more software that lets them create a whole lot of new transactions. They need software that helps them make better decisions."

Users often see ERP in the same light: a necessary foundation for applications that address performance management, adaptive supply chain practices, compliance, and other issues. "You must have a basic infrastructure in place before you can get to these next steps," says Joe Sura, VP of IT with NVIDIA, a Santa Clara, Calif.-based manufacturer of graphics and communications microprocessors.

NVIDIA has deployed software from ERP vendor SAP that goes well beyond basic ERP to include management of an outsourced supply chain. In light of this, Sura sees SAP as a "strategic partner" helping NVIDIA "integrate all key business processes under one roof." To grow, ERP vendors will have to win over many more manufacturers looking for such partnerships.

According to AMR, the market for core ERP decreased by 1 percent in 2003, after a 2-percent drop in 2002, but should grow 4 percent in 2004. AMR is more optimistic about ERP vendors' broader market, which includes extended enterprise applications in areas like product life-cycle, customer, and supply chain management. It sees this broader market increasing about 6 percent this year, and growing at a similar clip through 2008.

AMR calls today's ERP market a "suite" market, and one that's consolidating around fewer vendors with large installed customer bases. These customer bases bring vendors increasingly substantial maintenance income, and also are strong prospects for extended solutions.

"We recognize the value of our installed based," says Dick Cook, CEO of ERP vendor MAPICS. "They present an incredible fertile opportunity into which to sell extended applications."

ERP vendors still see opportunities to sell core ERP—especially to small and midmarket companies, and emerging markets such as China. Another opportunity, says Cook, will come from upper-midmarket companies consolidating around one ERP system. "We've seen a few of those deals happen, and they are substantial in size," he says.

At the same time, says Cook, manufacturers are looking for more than core ERP. "Companies want applications that help make decisions about their businesses," he says. "Manufacturers have a tremendous amount of data, but not a tremendous amount of information."

MAPICS recently expanded its alliance with business intelligence software vendor Cognos to offer pre-built analytics for MAPICS' ERP systems. Cook also sees reporting tools and ERP data as helpful for Sarbanes-Oxley compliance. Many upper-midmarket manufacturers are public, says Cook, and even private ones "have strategies that might involve sale to a public entity, so they still need to conform to best practices."

Michael Hallén, president and CEO of ERP vendor IFS, also views Sarbanes-Oxley as a driver for corporate performance management solutions. "Compliance is necessary, but you should also be in better control of your company," he says.

Hallén says enterprise software has shifted to a roles-based view of information that makes use of portals. "In general, users aren't happy with the experience of using ERP today," he says. "Improving the systems will take more than simplifying keystrokes. The true value will come from the quality of information users actually are getting from the systems."

The ERP moniker doesn't do justice to what suite vendors offer today, Hallén says. "We supply users with a business operating system that helps them manage their three key life cycles—assets, products, and customers," he says. "We add to this corporate performance management, and focus on specific industry segments."

Many see the market headed toward solutions that align operations around true customer demand. Pam Lopker, president and chairman of ERP vendor QAD, says QAD is seeing growth from extended applications for lean manufacturing and supplier management. "If you think about it, it's all about creating pull through the supply chain," says Lopker.

In the vertical markets QAD targets, says Lopker, the goal is to move from weekly or daily sharing of inventory and schedule information with partners, to hourly information sharing. Lopker calls this a "one-hour node" approach to supply chain communication. "Internet trade exchanges drew interest because the hope was everyone could share information through an exchange, but the truth is, a one-hour node concept works fine for a lean supply chain," says Lopker.

Brian Angle, a VP with ERP vendor CMS Manufacturing Systems, says CMS focuses on ERP for "supply chain-intensive" manufacturers. Functionally, he says, this means the system needs integrated electronic data interchange (EDI) and bar-code functionality to support hourly, or even minute-by-minute, communications.

"We're replacing competitors because we have a single-source, integrated solution for managing tight supply chain relationships," Angle says. "Users need functions like EDI and bar coding without having to go to third parties or through modifications."

AMR's Swanton says ERP vendors are only partially able to fulfill AMR's Demand-Driven Supply Network (DDSN) concept, in which supply chain information flows to serve the downstream source of demand. Generally, says Swanton, ERP data has too much latency, and the systems suffer from a heritage of forecasting and other "push" techniques when it comes to meeting DDSN needs.

On the other hand, says Swanton, suite vendors are beginning to offer solutions in areas like sales & operations (S&OP) planning, and are getting better at tapping into external sources of demand information such as point-of-sale information. As Swanton sums up the direction, "A lot of the growth in enterprise applications will come from applications that are content-oriented, not transaction-oriented."

Lean manufacturing—which seeks to level production to meet actual demand using techniques such as kanban—is another major driver in the ERP market today. While the market for lean systems includes specialist vendors, ERP vendors also sell lean and "flow" manufacturing solutions.

"Lean seeks to eliminate waste and non-value-added activity, but those same principles can be applied to inventory management and collaboration far from the factory," says Nadeem Syed, a VP with ERP vendor Oracle Corp., which has offered a flow solution for several years now.

According to Syed, applications for S&OP and advanced planning can move a company toward a demand-driven model, pairing advanced planning and S&OP with flow, with output from the planning tools becoming input to the flow solution. "You could use advanced planning for accurate order promising, or to decide where to build something, but use flow for the actual execution," he says.

ERP vendor SAP also sees lean manufacturing as extending into the supply chain management domain. "Today, lean is not just concerned with my factory, but with multiple factories owned by multiple partners—with all of them supplying parts and assemblies to each other," says Sudipta Bhattacharya, a SAP VP. "In this environment, the conditions in which lean traditionally worked well—low demand variability and close supply proximity—go out the window."

To compensate, says Bhattacharya, better software for analyzing demand variability is needed, including S&OP, and Six Sigma tools. SAP also believes a closer tie to plant intelligence is necessary.

Interest in lean is worldwide, says QAD's Lopker, but U.S.-based operations especially need to watch costs. "We see a two-prong trend, where much production is moving to low-cost wage areas, while there also is a strong interest in using technology to reduce costs for operations that remain in North America," she adds.

Either way, vendors like QAD stand to benefit. According to Lopker, QAD's sales in China grew approximately 100 percent in 2003.

The need to integrate extended applications with back-end ERP data and Web services is moving suite vendors toward what is known as a service-oriented architecture, or SOA (pronounced "soah"). It's a significant technology shift from the days when ERP modules were tightly integrated under one relational database, says Byron Miller, a principal analyst with Cambridge, Mass.-based analyst firm Forrester Research.

"SOAs allow for smaller, more nimble application components," says Miller. "Especially in manufacturing, where there is a lot of outsourcing and contract manufacturing, SOAs support quicker integration between companies. You get a high level of flexibility and lower overall integration costs."

Under SOAs, applications act as services accessible via messaging and Web services technology, regardless of the underlying database. Smaller ERP vendors, says Miller, are evolving toward SOAs based on technology from platform vendors like Microsoft or IBM. A couple of the largest ERP vendors, says Miller—most notably SAP—are building SOAs of their own.

ERP vendor SSA Global is basing its middleware strategy on IBM's WebSphere middleware, says Graeme Cooksley, a SSA Global executive VP. At the same time, the acquisitive vendor is bringing its various product lines forward around three component-based suites. ERP LN, says Cooksley, will be the vendor's open systems suite supporting UNIX, Windows, and Linux server platforms. ERP LX will be the path forward for the vendor's iSeries-based systems. SSA FM is a common financials suite capable of running on all key platforms.

QAD's Lopker believes suite vendors will combine SOA and relational database technology for the next 10 years. She sees most enterprise software vendors moving toward SOAs, while in the meantime building "finer-grained" application programming interfaces that make it easier for disparate systems to share supply chain data.

It may take until the second half of the decade before most enterprise suites extensively leverage SOAs, says Miller, but vendors will get there, pressured by users demanding lower integration costs, and a need to fuse acquired product sets around common components and a supporting architecture. "Both users and vendors need SOAs," he says. "It gets the market close to the plug-and-play vision it has long been after."