The ERP Market 2001 And Beyond - Aging Gracefully With The 'New Kids On The Block'

Enterprise resource planning (ERP) integrated software solutions have become synonymous with competitiveness, particularly throughout the 1990's. ERP systems replace "islands of information" with a single, packaged software solution that integrates all traditional enterprise management functions (transactions) like financials, human resources/payroll, and manufacturing & logistics (See Essential ERP - Its Functional Scope for more details). We also believe that having an ERP system is a prerequisite in most business environments to fully take advantage of the latest business information processing trends, such as collaborative e-Business and customer relationship management (CRM).

For a list of the major ERP vendors and their market share, see Figure 1.

Figure 1.

This is Part One of a five-part article. This part is an overview of the ERP market and how ERP is expanding to included SCM, CRM, and e-procurement. Part Two will discuss the vendors' reaction to market changes. Part Three will briefly analyze some of the major ERP vendors. Part Four will contain market predictions. Part Five will contain recommendations for the vendors and users. Part Five will also contain links to the preceding parts.

One could distinguish the following two segments within the ERP market:

* Corporate ERP solutions are primarily focused on the consolidated data management, financial and human resources needs of large Fortune 1000 companies. It evolved from accounting and contract management systems in the early 1980s. Human resources and more comprehensive financial planning and analytical systems were added in the 1990s. Leading vendors of these solutions are SAP, Oracle, and PeopleSoft, although J.D. Edwards, Baan, GEAC, Lawson Software and Infinium Software can fit the bill in some instances.

* Plant/Operations ERP solutions are primarily focused on the specific needs of small and mid-range manufacturing plants and distribution sites or the operations level of global companies. This ERP market segment's roots are in the control automation market of the 1960s and 1970s and the manufacturing requirements (MRP) planning software market of the 1980s. This evolved into the ERP of the 1990s (see The Essential ERP - Its Genesis & Future, for more details). Leading vendors of these ERP solutions include SAP, Oracle, PeopleSoft, J.D. Edwards, Baan (now a division of Invensys), GEAC Software Corporation, SCT Corporation, Intentia, Microsoft Great Plains, Lawson Software, QAD, IFS, SSA Global Technologies, InterBiz (division of Computer Associates), Epicor, Frontstep (formerly Symix Systems), MAPICS, Navision, Infinium Software, American Software, Sage, Ross Systems, Fourth Shift (now part of AremisSoft), Made2Manage Systems, Lilly Software, ROI Systems, Macola Software (now a division of Exact), Syspro, Scala, Ramco Systems, Pronto, and several dozens more of smaller or niche ERP players.

In the 80's and 90's, businesses were subject to increased global competition, resulting in a pressure to lower production costs, improve product performance and quality, increase responsiveness to customers and shorten product development and delivery cycles. Furthermore, globalization greatly increased the scope and complexity of multinational manufacturing organizations. Therefore, companies have long been urged to develop or purchase and implement software applications to automate their business processes, leverage their transnational data stores in order to make more informed decisions, and ultimately, decrease operating costs. Companies realized the need to be able to react rapidly to change due to increasing competition, deregulation, globalization, and mergers & acquisition activity.

During the second half of the 1990s, the market for ERP systems experienced strong growth rates in excess of 50% per year, from US$ 5.7B in 1995 to US$ 16.6B in 1998 [Source: AMR Research]. Some of the key drivers, in addition to the above-mentioned underlining reasons, were:

* The transition from custom-designed legacy software (software developed by or for a specific customer) to the implementation of standard systems that can be applied across different types of industries. This was particularly true for the largest companies, who previously thought that they had the resources to develop business solutions under their own steam.

* In addition to the transition to standard systems, ERP systems have been extended to support an increasing number of business processes in integrated solutions like engineering, customer support, sales support, human resources, etc.

* The customer base has also expanded from mainly manufacturing, trade, and distribution to the public and financial sectors, transportation, infrastructure, defense, federal and local governments, utilities, etc.

* In the past three years, Year 2000 (Y2K) and the adoption of the Euro currency have been important driving forces in the development of the market. As a matter of fact, resolving the Y2K problem has, in many instances, led to the installation of a new ERP system.

ERP vendors, however, experienced mixed fortunes towards the end of this period. The worsening plight of many ERP vendors is mostly attributable to the Y2K-problem, which caused a market slowdown that started in the fourth quarter of 1998 and continued in full force throughout 1999 and 2000. Indications of it winding down finally surfaced late in 2000. Particularly affected was license revenue, and the market (with some honorable exceptions) was dramatically less profitable during 1999 and 2000 than in 1998, measured in the total raw $ net income (See Table 1).

Table 1.

ERP Market Financial Data	1997	1998	1999	2000	2001(est)
Total Revenue ($ billion)	11.0	16.6	18.6	19.9	20.5-22.5
Total revenue growth of the market	43%	40%	12%	7%	3%-13%
Average Licenses Revenue/Total Revenue Ratio	56%	48%	39%	37%	31%-38%
Total license revenue growth	43%	20%	-10%	14%	15%-16%
Net income growth over previous year	75%	-28%	-27%	77%	10%-30%
Average R&D Investment/Total Revenue Ratio	12%	14%	13%	15%	14%-17%

[Source: TEC]

We believe that the continued ERP market slowdown during 1999/2000 was in part attributable to the following factors:

• The historical growth in sales of ERP applications came from large, Fortune 1000 multinational corporations. This market is now highly penetrated (over 70%), and new, large-scale back-office implementations in the F1000 customer base had all but stalled.
  
  
• The relatively untapped Small-to-Medium Enterprises (SME) market has been cautious about starting new projects due to the bad publicity caused by a large number of unsuccessful ERP implementations in the past. This fear has been additionally aggravated by the need to integrate disparate systems, given that currently no single vendor can offer a complete end-to-end solution (from supplier to end customer), despite some ERP vendors' marketing rhetoric.
  
  
• The ongoing technology paradigm shift from Client/Server to the Internet created uncertainty about investing in traditional Client/Server technologies, which are still present (however in an obfuscated manner) among leading ERP players' offerings.
  
  
• Continued focus of companies on Year 2000 (Y2K) remediation brought the purchases of new ERP systems in 1999 to a significant standstill.