Sunday, July 26, 2015

 
A Disturbance in the ERP Force

 
An Enterprise Resource Planning (ERP) system is a business process management software used to integrate all facets of a company’s operations.1 It is an enterprise application designed for large organizations and requires significant amounts of investment. A typical ERP implementation costs between $10 million and $17 million and takes about 18 to 20 months to complete. Hence, only big corporations can afford an ERP system such as SAP or Oracle, both of which have a market share of 24% and 12% respectively.2  If you’re an SME (small and medium-sized enterprise), owning an ERP is something you need to support your growing business but cannot afford due to its high cost and huge infrastructure required.

Then came cloud computing and all the benefits it has to offer. ERP SaaS or software as a service became a poor man’s ERP allowing SMEs to afford an ERP without the huge price tag. A new set of smaller companies, such as NetSuite and Workday, challenged the ERP giants with their cloud-based SaaS solutions offering their customers much lower price and shorter time to implement. They serve a hidden market need for the SMEs, which SAP and Oracle never bothered to serve. While the SaaS solutions do not match the incumbents’ products in terms of functionality and performance, their lower price points allowed more customers to afford their systems. In time, this granted the cloud players a bigger market share and allowed them to innovate easier and faster with cloud technologies. Starting in 2012, the cloud players have been the fastest-growing ERP vendors worldwide, offering rapid development and delivery, quick scalability, and elastic pricing and resource allocation models unlike the incumbent ERP providers.3 PriceWaterhouseCoopers predicted that investments in ERP SaaS solutions will more than double by 2016 while investments in traditional ERP systems offered by SAP and Oracle will decline over 30%.4

Sensing a great disturbance in the ERP market, SAP responded by offering its SaaS solution when it relaunched its Business ByDesign in 2010. By targeting SMEs, the 43-year old industry leader expected to have 10,000 SaaS customers by the end of 2010 but only had 1,100 customers in 2013.5 Since 2010, it also spent more than $12 billion acquiring cloud computing companies in the hopes of gaining a foothold in the rapidly growing cloud-based ERP market.6 It even offered enhancements to its current ERP products such as the in-memory database (HANA) designed to reduce database query times.  HANA, however, is a sustaining technology rather than a disruptive technology. It makes SAP products better but does not offer growth opportunities.

I think SAP, Oracle, and other companies offering traditional ERP systems face a big dilemma. If their current customers use cloud-based ERPs, they will not pay their high-priced ERPs and will then be forced to change their sales models. But such changes will be too disruptive that their share prices might be affected. Thus, the more success they gain in offering their SaaS solutions, the worse their current business models become. It’s the classic innovator’s dilemma. The new entrants, on the other hand, continue to serve customers not served by the current ERP market. In time, the performance of their cloud-based ERP will grow faster than what their users need to the point that it exceeds the industry leaders’ technologies. Only time will tell when the new entrants will displace the incumbents out of the ERP market.

 

Sources:
[1] http://www.webopedia.com/TERM/E/ERP.html
[2] http://www.forbes.com/sites/louiscolumbus/2014/05/12/gartners-erp-market-share-update-shows-the-future-of-cloud-erp-is-now/
[3] http://www.forbes.com/sites/louiscolumbus/2014/05/12/gartners-erp-market-share-update-shows-the-future-of-cloud-erp-is-now/
[4] http://www.forbes.com/sites/louiscolumbus/2015/01/27/five-catalysts-accelerating-cloud-erp-growth-in-2015/
[5] http://www.computerworld.com/article/2486418/cloud-computing/sap-business-bydesign-will-live-on--exec-says.html
[6] http://www.bloomberg.com/bw/articles/2013-08-01/sap-invades-silicon-valley-via-acquisitions

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.