For ERP Insight - Look Broader Than On-Demand, SOA and Other Flavor Du Jour Items
I’ve had some interesting and charged discussions with several ERP industry watchers regarding SaaS (Software as a Service), SOA and other interesting developments within the space. While there is no denying the passion many feel towards these newer/modified solutions and the revolution these can bring to the back office and the front office, I think we need to keep perspective on this issue.
Software as a Service/subscription/on-demand solutions represent just a business model change in the software industry. Since most of these solutions still have the same functionality as traditional ERP solutions, then there is no real innovation improvement within the product. Let's be abundantly clear on that point. When I rent a car at Avis, Dollar, Budget or Hertz, it's still a car. In fact, it may be the same make and model car that I own and left at the airport earlier that day. The car has not fundamentally changed. How I pay for this vehicle has.
Don't get me wrong, I do believe that on-demand solutions bring a host of benefits to their customers. The most significant improvements though have to do with the reduction in the cost of ownership and cost of change for those subscribing to these products. For example, many IT shops cannot afford the staff or time to apply maintenance upgrades to their ERP, office application software and other products. An on-demand solution takes that burden off of internal IT groups. As one very well respected CIO friend of mine told me in 2005: "If I could buy all of my software as on-demand, I would".
On-demand has the potential to free tens of thousands of IT professionals globally. With this freed up time, smart employers could use these individuals to develop more innovative solutions for their firms instead of repairing and maintaining the very tactical solutions they licensed from third parties.
Let's look at the ERP marketplace in total (see graphic below). I chose to use Michael Porter's Five Competitive Forces model to explain the space.
In the middle of his model Porter denotes traditional competitors. Today, the traditional ERP competitors include the likes of SAP, Oracle, CODA, Lawson, Sage, Epicor, Microsoft and dozens more. What these firms all possess is a large customer base rooted in the license model and products that have been with us for a decade or more. When one looks at the marketing efforts of many of the traditional competitors, they are all screaming from the rooftops about how their new middleware or infrastructure is better than their competitors. But make no mistake, few of these ever discuss anything involving new functionality. Yes, some are starting to get some traction in marketing their on-demand solutions as a new economic model for their firm. However, traditional competitors continue to fight with other traditional competitors in fairly boring, traditional ways.
There are many new entrants coming into the ERP space. These include Linux-based ERP solutions. These firms are offering similar functionality to traditional products albeit on lower-cost Linux platforms. Other new entrants are coming from countries like China and India. Whether these solutions are being developed by new VC-funded startups or through the development efforts of the rapidly growing and very large systems integrators and outsourcers based in those countries, new products are making their way to the marketplace. These also represent lower-cost solutions for prospective buyers but they don’t necessary produce new functionality.
Substitute offerings are also becoming available. I believe that business process outsourcing (BPO) solutions from vendors like Accenture and GenPact are finding attractive niches of innovative and early adopter prospects. These prospects are willing to forgo existing or traditional ERP solutions because they cost way too much to implement or upgrade and take too long to realize any benefits. When a BPO provider can move a back-office function from third or fourth quartile performance levels to first-quarter performance in less than 90 days, how can any major firm resist such an attractive sales message?
On-demand solutions are originating from both traditional competitors and new entrants. Firms like NetSuite have grown mightily in the last few years because they have been able to produce a solution for a specific niche market that is very hungry for a pay-as-you-go product.
But let's not forget buyers and suppliers. While I have many doubts as to whether or many firms will ever choose to build their own back office solutions from scratch again, some might. But it's the supplier's (i.e., systems integrators) that will begin to take more of their destiny in their own hands. Many ERP software companies have turned to services as their major revenue growth engine in the last decade. As a result, they have seriously squeezed the systems integration practices of many large integrators. If you were a top executive at a major systems integrator, wouldn't you be thinking of ways to enter into the application marketplace just to protect your own installation and upgrade business? Some of these firms are entering the ERP space by building out significant BPO practices.
Haven't you ever noticed it to be interesting that BPO providers never advertise the origins of the application software within their product mix? That's because they've correctly determined that BPO customers don't care who makes the underlying technology. They only care that someone else is providing all the integration and maintenance. That's not good news for traditional ERP vendors.
So what does all this mean for buyers of technology? Competition usually forces more innovation and better value for the consumer. And, we're definitely seeing a host of new competition emerging in this space. A recent report I completed on Workday has been requested by record number of people from this blog site. This just shows the untapped pain in the marketplace for businesses seeking new solutions, with a new value proposition and, most certainly, with new, not rehashed, functionality.
Buyers also need to decide whether they still need to bring in an ERP solution in-house. This question about on-demand may become a moot point in the future as it may make little economic sense for businesses to continue with licensed products in just a few years time. The IT industry has seen huge cycles where companies have resorted to time-share agreements in the 1960s to the early 1980s, then change to in-house custom systems, change again to behind the firewall server-based solutions to remote distributed solutions and back again to a time-share approach vis-à-vis on-demand. But, if there's one thing businesses consistently demand is that the business must get value for shareholders and value for capital spent. Until someone comes up with a value proposition better than that delivered by on-demand, then on-demand solutions will win in the marketplace long term.
Makers of ERP technology must become more aware of their surroundings. The competition is not just about traditional competitors or on-demand solutions. It's about delivering better value to customers. Customers want to see some real innovation. BPO is attractive because it delivers huge amounts of value and rapid process improvements. On-demand solutions, while capable of fast implementations, may in some cases also deliver significant process improvements. ERP vendors though would be hard-pressed to assert such claims.
In summary, on-demand is nothing more than a means to end. It is a way for vendors to enhance the value proposition of their solution to prospective software users. It is not a destination though. It is a business model change that must also be accompanied by some very fresh and strong new functional and business innovation if the vendor is to have any long-term success in the marketplace. Buyers of ERP solutions, please hold vendors accountable for improving the quality, velocity and magnitude of the value they deliver to you. If they can't demonstrate speedy improvements, business (not just architectural) innovations, new and better processes and enhanced business capabilities, then see them for what they are: a harbinger of systems of old. Putting the on-demand marketing label on an antiquated system is nothing more than putting sheep's clothing over a wolf. It will come back to bite you. So buyers, please don't just buy any on-demand solution. Buy an on-demand solution with real value potential.
