ERP Market Grew Solidly in 2004, AMR Research Says

by Alex Woodie

The market for ERP software grew a surprising 14 percent in 2004 to become a $23.6 billion business, AMR Research said last week in a report detailing the health of the ERP software market and predicting its state over the next four years. The good times won't continue through 2005, as service-oriented architecture (SOA) technology becomes a disruptive force and the market's overall growth rate drops to 3 percent. But decent growth should return for 2006 and beyond, the Boston research firm predicts.

AMR's report, titled "Market Analytix Report: Enterprise Resource Planning, 2004-2009," puts hard figures to events that industry observers have been watching for several years, namely that consolidation is changing the competitive face of the market. But it also brings up some interesting points that maybe aren't as obvious, and may identify future market winners.

AMR's numbers confirm the effects of ERP vendor amalgamation. In 1999, the five biggest ERP vendors--SAP, PeopleSoft, Oracle, Baan, and J.D. Edwards--accounted for 59 percent of the market. In 2004, the five biggest ERP vendors--SAP, Oracle (which bought PeopleSoft and J.D. Edwards), Sage Group, Microsoft's Business Solutions group, and SSA Global (which bought Baan)--accounted for 72 percent of the revenues.

Leading the pack over the past couple years has been SAP, which grew its revenues from about $8 billion in 2003 to about $9.4 billion last year. That amounts to a 17 percent increase in revenue, which outpaces the market as a whole. If you examine software license revenues, SAP's take increased by 20 percent from 2003 to 2004. SAP's situation is unique because it grew its business without making any major acquisitions. It also benefited from Oracle's protracted takeover of rival PeopleSoft and the J.D. Edwards assets.

When it's all said and done, SAP owned 40 percent of the market for ERP software in 2004, says AMR, which predicts SAP will own 43 percent of the market by the end of 2005. To do this, SAP must grow revenues 11 percent this year to about $10.4 billion.

Much of SAP's growth will come at the expense of Oracle, according to AMR's figures. In 2003, before the acquisition by Oracle, PeopleSoft was the second largest ERP vendor with 13 percent of the market, and Oracle was a close third with about 12 percent of the market. In 2004, the combined market share of those two vendors dropped two percentage points to 22 percent, and in 2005, the combined Oracle-PeopleSoft will drop three more points to 19 percent of the market, according to AMR, which says SAP will finish 2005 with more than twice the revenue and market share of Oracle.

However, one has to wonder if things will be nearly as bad for Oracle as AMR thinks. The research firm predicted in December that 65 percent of J.D. Edwards shops would stop paying Oracle maintenance fees following the PeopleSoft acquisition if Oracle raised its rates. Six months later, third-party maintenance companies say they are doing a brisk business, but nothing near the defection rate postulated by AMR. A defection rate of 25 percent is more reasonable, some third-party providers say.

While Oracle and SAP go at each other's throat for the top 60 percent of the market, there's still plenty of room for smaller ERP companies to grow revenues. AMR sees MBS and Sage Group, both of which write ERP that runs exclusively on the Windows platform, doing quite well in 2005--much better, in fact, than the market as a whole, which isn't surprising considering the overall growth of Windows' market share.

Sage, which is based in England and is stronger in Europe, has quietly assembled a solid suite of ERP software using a strategy combining organic sales growth and acquisitions. From 2003 to 2004, the company grew revenues by 38 percent, from $900 million to about $1.2 billion, to claim 5 percent of the worldwide ERP market. AMR sees Sage growing revenues 11 percent this year to about $1.4 billion, and growing its market share to 6 percent.

MBS, meanwhile, grew revenues a solid 13 percent last year, from $683 million to $775 million, to claim 3 percent of the market. AMR sees the ERP division of the world's largest software company growing revenues by 15 percent in 2005, to $891 million, which would give it a 4 percent share. Together, Sage and MBS will command 10 percent of the market. If Sage ever relented and agreed to sell its technological assets, its huge channel, and its 22,000 customer contracts to Microsoft, it would be the creation of a Windows-based ERP juggernaut that could have a very large impact on the market, especially as Windows continue to gain server market share.

Rounding out the bottom five of AMR's top 10 list are a bunch of midrange ERP vendors that have strong ties to IBM, as well as IBM's iSeries server. This list, in descending order by 2004 revenues, contains SSA Global ($685 million), Geac ($445 million), Intentia ($388 million), Infor Global Solutions ($375 million), and Lawson Software ($357 million).

AMR doesn't expect much in 2005 from this crowd, which in 2004 shared 11 percent of the market. Aside from the 5 percent revenue growth AMR predicts for Intentia (which is in the process of merging with Lawson), and the 5 percent revenue growth from Infor (which has been active with mergers and acquisitions of companies such as MAPICS, Lilly Software, Daly.commerce, Brain, Incodev, Aperum, NxTrend, and Varial in recent years), AMR gave goose eggs to Geac and Lawson in the 2005 revenue forecast category. AMR predicts SSA Global will grow by 2 percent this year, a far cry from the acquisition-fueled 46-percent growth figure it earned last year.

While the ERP sector's growth in 2004 was somewhat of a surprise to AMR's analysts, the group concluded that fully one-third of that stellar 14 percent growth figure was due to global currency fluctuations, which saw the Euro and the British Pound out-muscling the weak U.S. Dollar. Still, 9 or 10 percent growth is not bad. And while AMR predicts that growth will slow tremendously to about 3 percent this year, the firm says spending should pick up again from 2006 through 2009, when the sector will see a 6 to 7 percent compound annual growth rate.

One factor that will take some air out of ERP's bubble this year is the growing relevance of SOAs and the disruptive influence it will have on the ERP market, AMR says. SOAs "look like they may have the same kind of disruptive effect that the shift from mainframe computers to mini-computers had in the 1980s or the emergence of client-server systems had in the early 1990s," AMR says in its report. The firm says few other vendors will be able to match SAP's SOA strategy, which calls for all of the German ERP giant's applications to be moved to SOA by 2007.

In other areas, AMR sees the continuation of the movement away from "big-bang" implementations toward a more tactical and piecemeal approach. "This, along with widespread discounting by desperate vendors, has led to much smaller average deal sizes," the firm says in its 48-page report. ERP companies continue to focus much of their sales efforts on small (less than $50 million) and mid size ($50 million to $1 billion) companies, but nobody has effectively penetrated the small business market yet, AMR says. Consolidation and replacement of aging ERP systems will be major factors driving sales of new ERP licenses at mid size and large companies, AMR finds, as many mid size companies are still using applications developed in the 1980s "that are technologically obsolete and do not support current and emerging business practices," AMR says.

As far as operating systems go, Windows and Unix grew the fastest, and accounted for 90 percent of the ERP implementations last year, AMR says. The value of ERP systems implemented on Windows grew by 26 percent from 2003 to 2004, from $2.5 billion to $3.1 billion, giving Windows a 43 percent share of the ERP market. Unix ERP implementations grew by 13 percent last year, from about $3 billion in 2003 to about $3.4 billion in 2004, giving Unix a 47 percent share of the market (one percent less than in 2003). IBM's iSeries lost 2 percentage points of ERP market share in 2004, from 7 percent to 5 percent, as iSeries ERP implementations declined from $429 million in 2003 to $382 million last year, according to AMR. Mainframes from IBM and others lost one percent of market share, and Linux has yet to make a major impact, AMR says.

In terms of databases, Oracle dominated ERP implementations last year, accounting for 60 percent of the market in 2004, and 15 percent year-to-year growth, AMR found. Microsoft's SQL Server was a distant second, with 23 percent of the market, and 25 percent year-to-year growth. IBM's DB2 was third with 7 percent, and a 6 percent year-to-year decline in revenue. Interestingly, the Sybase and Informix databases, while together accounting for only 4 percent of the ERP market, posted year-over-year revenue gains of 18 percent and 19 percent, AMR says.