Six Signs Of The Long, Slow Decline Of ERP
September 28, 2015 Alex Woodie
For the past 20 years, the class of applications known as enterprise resource planning (ERP) has largely dominated the business software discussion. But that hegemony is now slipping due to a variety of factors, leading some to speculate that ERP’s heyday is in the past. The big question then becomes: What should companies do next?
If you work at a company of appreciable size (say $50 million in sales or more), chances are good you rely on an ERP system that doesn’t just plan (as the name suggests) but actually executes the business processes that make your business tick. Whether you are in manufacturing, retail, financial services, healthcare, education, or distribution, there have been a few big, vertically integrated applications that have risen to the top (even if they don’t call it “ERP” in every industry).
Companies identified themselves by which big integrated ERP package they ran. A CIO at a flooring distributor might say “We’re a JD Edwards World shop” while a CTO at an auto manufacturer might say “We run SAP R/3,” and heads would nod in agreement as to what that meant (while perhaps subconsciously communicating a mutual hatred of ABAP).
While ERP packages still dominate the business application market, ERP’s importance appears to be dwindling. The signs are everywhere.
1. Dropping License Revenue
The cost that companies pay for ERP software has dropped by nearly 2 percent per year since 2012, according to the research firm IBISWorld. The company says the average price that customers can expect to pay for ERP software licenses today is about $1,911 per user per year. IBISWorld says the price pressures on ERP software will continue over the next three years, resulting in a similar drop. By 2018, an annual license should be about $1,800 per user, on average
2. Migration to the Cloud
The migration to software as a service (SaaS) delivery model has contributed to the dropping ERP price, IBISWorld says. “The proliferation of SaaS as a delivery model has been the primary driver behind the price falls because it costs less to operate and has increased competitive pressure among vendors,” IBISWorld writes.
This trend reflects in the quarterly figures from big ERP vendors. Oracle‘s total on-premise software revenue (new license plus maintenance) for the quarter ended August 31 declined 4 percent, while its total cloud revenue increased 27 percent. Over the past four years, Infor revenues from software license fees has decreased annually by 3.3 percent, while its software as a service (SaaS) subscription revenue has increased by 55 percent.
In Panorama Consulting‘s latest ERP study, deployments of cloud-based ERP suites grew exponentially. The research firm says cloud-based ERP went from 4 percent in 2014 to 33 percent, according to the 2015 ERP Report.
3. Continued Cost Overruns
In many people’s minds, the phrase “ERP” is synonymous with “cost overruns.” Over the past five years, 58 percent of ERP implementations exceeded their planned budgets and 65 percent experienced schedule overruns, according to Panorama Consulting‘s 2015 ERP Report. Most ERP customers report they have achieved less than half of the measurable benefit they anticipated receiving as a result of the ERP implementation, Panorama says.
4. Fewer New Features
As ERP suites have matured, the vendors have added fewer new features to the suites. Some of this is to be expected. After all, there’s only so many ways to improve upon a general ledger (after you’ve added support for Mandarin, of course).
Some of the more innovative vendors have looked to consumer technology trends for a boost, adding features like mobile apps and collaboration capabilities inspired by social media. Infor, for example, wants to let users of its Ming.le software to track items of interest, such as customers or assets, using hashtags.
As ERP revenues decline, software vendors are less inclined to make the capital investment required to add compelling new features in the ERP suites themselves. Customers have accelerated this trend by staying on old releases longer and not taking advantage of newer releases. (The pain and expense of major upgrades, which can sometimes rival the original implementation, gives customers more incentive to avoid upgrades.) It’s not uncommon to find companies running on ERP software that is more than ten years old, and with third-party maintenance providers like Rimini Street and Spinnaker Support, they can stay there indefinitely.
5. Focus on Analytics
CIOs are shifting their attention to other IT solutions that can deliver a bigger return on investment, namely big data and analytics. The reports that have been output from business intelligence products no longer cut the mustard as companies figure out how they can harness existing data from internal applications, such as ERP systems, along with the tsunami of externally available data from sources like web and application logs, social media, mobile phones, sensors, and data aggregators.
6. Suite Deconstruction
As the air is let out of the ERP balloon, some of the former constituents of the all-in-one ERP suite are stepping up to fill the void, including specialized apps dedicated to human capital management (HCM), customer relationship management (CRM), product and inventory planning, stand-alone financials, shipping, and payments.
Gartner noted in a July 2015 report that the rise of HCM “is a major part of (and contributor to) the deconstructing ERP suite, fueled by innovative cloud solutions with more frequent updates, faster deployment and better user experience.”
Where It Leaves IBM i
The rise and fall of vertically integrated ERP suites parallels the rise and fall of the market for big symmetric multi-processor (SMP) servers, like IBM’s Power Systems. Fortune 500 companies largely ran their ERP systems on big RISC iron from IBM, Sun Microsystems, and Hewlett-Packard.
But today, the cohesiveness of that unified stack is disintegrating at all levels–from the underlying servers and databases that ERP systems run on, to the devices that display the UIs (usually GUIs, except at many IBM i shops, where the green screens will only be pulled, Heston-like, from their cold, dead hands).
X86-based systems dominate the server landscape, particularly at the hyperscale cloud providers like Amazon Web Services, Microsoft Azure, and IBM SoftLayer. Open source is seen as a competitive differentiator, RESTful APIs keep everything connected, and the term “legacy” is applied to anything more than five years old.
So where does that leave ERP software and the ERP software makers? To be sure, ERP still has a lot of momentum left. While new license revenue is not what it used to be, the software category still drags billions of dollars in maintenance revenues with it. And ERP functionality remains critical to the business plans of companies that actually make, move, and maintain physical stuff (as opposed to the high-flying Web outfits like Uber and Airbnb, which enjoy ridiculous valuations precisely because they’re so detached from the real world).
ERP software is arguably the biggest driver of sales for IBM i servers. While custom development remains strong on the platform, anecdotal evidence says packaged applications are increasingly gaining hold. As the ERP market continues its long and slow decline and disintegration, expect to see more strength emerging from point solution providers.