Life in the old dog yet
Much like Mark Twain when he said that rumours of his death had been greatly exaggerated, enterprise resource planning (ERP) vendors are indignant that anyone would imagine that demand for their solutions has died.Much of the large corporate market is saturated, and the multi-million dollar deals that characterised the ERP market in the nineties have fallen off. In response, the emphasis of most major players has shifted away from selling expensive core applications (such as financials, HR, manufacturing, or distribution) to add-on modules such as supply chain management and enterprise portals.“There are many doomsayers who would advise that ERP is dead. Nothing could be further from the truth, as our sales pipeline and order book shows,” says Mike Evans, MD of JD Edwards SA.Banking on new marketsWhile AMR Research says the core ERP market will show only modest growth from a projected $20.6 billion in 2003 to $21.6 billion in 2004, the market researcher projects healthier growth in complementary applications that the likes of SAP, PeopleSoft and Oracle also sell. And new opportunities for ERP abound in untapped vertical markets such as government and financial services, as well as in the burgeoning mid-market.“A remarkable trend over the last few years has been for organisations which typically fall outside the scope of ERP systems to implement discrete modules of ERP suites, in order to gain some of their benefits,” explains Evans. “For example, many banks, which are in themselves not ERP candidates, have chosen to implement the financial modules of ERP suites so as to gain overall control of their financial operations.“Such an approach can lead to rapid processing, tight integration with their core systems, ease and speed of reporting, an enhanced view of the business, and risk containment. This approach is not possible with older ERP products which have an all-or-nothing philosophy, typified by hard-wired best practices and rigid implementation rules,” he says.Wynand Wolmarans of Atos KPMG Consulting, says that there are strong growth opportunities in the public sector for ERP vendors. Recent SAP deals at SARS and Cape Town Unicity (together worth around R500 million in services, software licences and hardware) have given the local ERP market a major shot in the arm, and provide only a small inkling of the potential the major integrators and software suppliers see in the public sector.“If the public sector goes for ERP, it could be an even bigger market than the private sector,” says Wolmarans, who believes that government could find strong uses for ERP in handling some of its challenges such as the management of its huge workforce or combating shrinkage of medical supplies and pharmaceuticals at hospitals.Gunning for the middle tierMuch of the real action is in the mid-market, however. Definitions of small to medium businesses vary between ERP vendors and between countries (a South African “top 100” company may be a medium-sized business by US standards), but it`s not unusual to look at companies with up to 1 000 potential ERP users as the mid-market.Paul Whalley, MD of IFS South Africa, says that this segment is the fast-growing part of the ERP market. He cites research from the ARC Group that shows that the second tier market accounted for 41 percent of the total ERP market in 2002 and will continue to grow its share of the market by a compound annual growth rate of 6.3 percent.It`s little wonder that most of the top tier players badly want a piece of the action. Oracle and PeopleSoft are both interested in this market, but 800-pound gorillas SAP and Microsoft (see separate story) are the ones to watch.“The mid-market is of interest to us. It`s an area where we feel there is a perception that our products are unaffordable that we need to address,” says Michelle Beetar, director for services and commercial industries at Oracle SA. “However, it will never be the low-end of the SME market for Oracle – it`s an area where no one vendor dominates.”Meanwhile, PeopleSoft`s desire to move into the mid-market is one of the reasons why it considers JD Edwards, which is a strong player in the middle tier of the manufacturing market, a good match.SAP`s latest foray into the mid-market is its Business One product, which is meant to be faster to implement and less hardware intensive than its enterprise suite.Explains SAP Africa`s GM for cross-industry solutions, Simon Carpenter: “It`s a ‘what-you-see-is-what-you-get` environment that addresses the pricing needs of a small business. The product is a good fit for companies with up to 250 users, with an entry point of somewhere between five and 50 users. We`re looking at the sophisticated middle market with this product.”This isn`t the first time SAP has tried to crack the mid-market. Its previous attempts have been only moderately successful, and sceptics doubt its ability to scale its applications down to the price range of smaller companies and put together a suitable go-to-market and services model to reach such customers.Says Whalley: “Yes, the larger tier one ERP suppliers are responding by re-architecting their solutions for this segment, but they are still coming in at a cost premium. When ROI is king, that`s a tremendous differential to recoup, bearing in mind that ‘light` tier one solutions offer essentially the same functionality, or even less, than second-tier solutions.”Picking up the paceBut SAP has come a long way in the past few years, says Dave Vink, an executive director at systems integrator CS Holdings. “It doesn`t cost multiples of five or six times the price of the software to implement SAP any more.”In addition, notes Leon Tromp, alliances manager at the local office of EDS, the use of an application service provision model to serve up plain-vanilla applications could help the major ERP vendors to reach mid-market customers.Consolidation in the mid-market has accelerated in recent years, and is likely to pick up pace as players band together to stave off the threat posed by Microsoft and SAP. Some analysts say they wouldn`t be too surprised to see Microsoft following its Great Plains and Navision deals with yet another acquisition.While this process will leave customers with less choice, that may not be a bad thing in the congested mid-market where dozens of specialised players cater to the needs of a highly niched and price-sensitive customer-base.Ashley Ellington, the divisional manager for Africa at Sage Enterprise Solutions, takes a sanguine view of consolidation: “Rather than alienating potential customers by forcing them to deal with large conglomerates, it adds an element of flexibility to the solutions that can be implemented.“Good discounts, high service levels and closer relationships with the systems integrators that implement the solutions are just some of the benefits.”UK-based Sage Enterprise, the leader in the mid-market by most estimates, is one of the key players driving consolidation in its sphere. Its growth-by-acquisition strategy has seen the company acquire the Concert Group in France in January, Timberline in the US in July, and it also has an offer on the table to buy South African vendor Softline.Even as consolidation of the market continues, a handful of companies are carving out niches for themselves in vertical markets where customers have specialised needs.Aiming at SAPRecent news that Baan was sold for $135 million to an investment group consisting of Cerberus Capital Management and General Atlantic Partners was overshadowed by the acquisition of JD Edwards by PeopleSoft and Oracle`s subsequent hostile bid for PeopleSoft. But the Baan transaction positioned it as the fourth biggest ERP player and a force to be reckoned with in the middle tier of the manufacturing vertical market.“Baan/SSA will go back to being a niche player, but it will be a significant niche,” says Jane Thomson, MD of EOH subsidiary Softworx. Similarly, Sweden-based IFS has grown into one of the top ten ERP vendors in the world while keeping a close focus on three major vertical markets: engineering, telecoms and manufacturing.Nonetheless, PeopleSoft/JD Edwards, Oracle and SAP between them control around 70 percent of the ERP market, according to the Yankee Group. With a 36 percent share of the market, SAP is the runaway leader.Challenging SAP is the underlying reason for PeopleSoft`s acquisition of JD Edwards and Oracle`s bid for PeopleSoft. For its part, SAP is viewing the activity among the other vendors with glee.“There`s a window of opportunity for us since companies usually become inwardly focused after a merger. It offers us an opportunity to consolidate our leadership position,” says SAP`s Carpenter. It remains to be seen whether the middle class can hold its own against the multi-billion dollar titans of enterprise software. Microsoft muscles inIt prefers to play down the possibility that its strategy could bring it into conflict with the likes of Siebel, SAP and Oracle, but a collision between Redmond and the giants of enterprise software is inevitable.By Microsoft`s standards, its Business Solutions division, with a few hundred million dollars in annual sales, is a fledgling business. But the software giant has identified it, along with initiatives such as the XBox gaming console, as one of the engines of its growth for the next decade.In just over two years, Microsoft has combined some of its own products with those of Great Plains and Navision (acquired for a combined value of around $2.5 billion) to create an imposing portfolio in the Business Solutions division that covers the ERP, CRM and supply chain management markets.From Great Plains, Microsoft added the GPS Dynamics and eEnterprise ERM suites, as well as the Solomon ERM suite and FRx financial analytic applications, to its product range.Navision, meanwhile, bolstered the arsenal by contributing the Navision Attain and Financials suites, as well as the Axapta product range, which it inherited from a prior acquisition of Damgaard.Also in the mix are the bCentral small business portal and Microsoft CRM, products that the software giant built from scratch.The products are broadly complementary since Great Plains offerings are designed to be used off-the-shelf in a non-international operating context, while Navision`s products are better suited to rich customisation and multi-national operating environments.Slow integrationNonetheless, Microsoft`s move into the business applications space has been dogged by market confusion about the positioning of the major product lines it inherited with its acquisitions.But the products will not be merged into a single stream until 2012 to ensure that users can buy any product in the family with peace of mind, says Stephen Green, group manager of Microsoft Business Solutions SA.In the interim, Microsoft is working on a common XML and EDI-based web services layer, the Microsoft Business Network, for the major Business Solutions product. This will in time replace some of the unique middleware in each of the products and thus allow them to behave more like members of the same product family.Microsoft Business Solution is also working on integrating the products more tightly with other Microsoft assets including the SharePoint portal, BizTalk process orchestration engine, Office productivity suite and Microsoft Commerce Server. The solutions already use the Microsoft operating system and SQL Server database.Graham van Zijl, MD of Microsoft Gold Partner nVisionIT, says that Microsoft can be expected to make further inroads into the local ERP market now that it is finally focusing its resources on its Business Solutions division and creating the necessary integration between its core back-end solutions and the Business Solutions portfolio.Another priority, at least in South Africa, is to train and certify the company`s network of business partners in the applications space, says Green. Many of Microsoft`s partners are not up to speed with all the Business Solutions offerings, and some resellers fear the market could be flooded with under-skilled competitors.“Microsoft needs to ensure it appoints partners who are sustainable. The solutions your partners install is a reflection of how good your products are,” says Rob Hawley, CEO of Microsoft business partner SIS, who welcomes Microsoft`s drive to certify and train local business partners.Worthy adversaries?Apart from the strong revenue potential Microsoft sees in the business applications arena, sales of the Business Solutions products will help to drive sales of other Microsoft products including its e-mail and web server software, operating systems, office suites, databases, portal products and development tools. Bundling these products into a solution where the parts all work well together will make Microsoft an attractive supplier to mid-range customers.Microsoft`s move into the enterprise applications arena can be expected to catalyse a huge shakeout of the market. In line with its traditional strategy, Microsoft is competing aggressively on cost, which could start a price war and erode the margins of smaller mid-range companies as well as those of the top-tier suppliers such as Oracle, PeopleSoft and SAP.The first to be affected will be low-end and mid-range players such as Accpac and Sage. The fragmented and segmented mid-market has been ripe for consolidation for some time, and Microsoft`s entry will no doubt spur defensive mergers and acquisitions among many of the players.Green insists that Microsoft will not position itself to compete with SAP and Oracle in the high-end market where deals are typically worth millions of dollars and involve complex software customisations.Simon Carpenter, GM of SAP Africa`s cross-industry solutions, agrees: “Microsoft is still an extremely strategic business partner of ours. I don`t foresee we will bump heads too much.”How big is big?Nonetheless, Redmond does have an ominously broad definition of a mid-market organisation: any business with up to $1 billion in revenues or up to 1 000 ERP users.The upper end of that market is SAP territory, especially in a small economy such as South Africa, and the German giant also hopes to push into the middle tier of global market to make up for falling sales in the saturated Global 2000 market. Given Microsoft`s strengths as a supplier of software to SMEs, it is likely to give SAP the fight of its life in the mid-market.But the potential for conflict doesn`t end there. Says Green: “There`s been huge acceptance of our products among top tier organisations. For example, large companies with SAP at the corporate level are deploying Navision or Axapta at the branch office.”Of course, we`ve seen this story play out before and, like last time, it will probably unfold over five years or more. Remember, Microsoft started its infiltration of the enterprise data centre with its operating systems and databases by taking over the departmental servers... Give us a foot in the door!To have local roots is a liability rather than advantage in the South African enterprise resource planning market, complain the country`s software development firms.South African developers of enterprise software, evidently feeling the pinch of a slowdown in IT spending, have lashed out at the government and private sector for giving the bulk of their business to international software vendors while paying lip service to the Proudly South African campaign.Their complaint is not that their products lose out in fair competition with alternatives from SAP, Microsoft or Oracle, but that South African developers are often passed over in the first place.The slowing of the market for enterprise applications, together with a concerted push into the mid-market by the international top-tier vendors, has given companies such as Emsoft and ACS even more reason to resent the global giants.“The corporate market is getting saturated, and now [SAP and the others] want to play in our space,” says Gilbert Parsons, MD of Emsoft. “But people in the top end of the market will not buy South African products.”“We`ve become a Proudly South African company, and we would like to believe that would get us a foot in the door. However, many local companies don`t seem to feel that South African products are good enough,” agrees Mike Stefanski, MD of ACS, the developer of the ACS-Embrace applications suite.Rands across the oceanParsons is particularly incensed that government bodies such as the Cape Town Unicity have rejected locally developed products in favour of expensive international software.Cape Town`s budget for its project is more R300 million for hardware, software licensing and consulting and other services, although some sources say it is running way over budget. “Is there really that much value sitting in SAP for the Unicity?” asks Parsons, and repeats the oft-heard complaint that contracts awarded to the likes of Accenture and SAP simply result in outflow of money from the domestic economy.The Cape Town Unicity did its homework before it committed itself to SAP as its product of choice, including extensive consultation with analysts such as Gartner as it whittled down the list of potential services and software vendors.It has publicised details, but Parsons remains unconvinced. “In a typical SAP implementation, the customer`s IT staff triple and quadruple, and those that benefit the most are the consultants hired to put the software in place,” he says.Local developers claim that their products cost up three or four times less to licence and implement than offerings from the likes of Oracle, SAP and PeopleSoft. Many give their customers access to the source code of their products and are able to tailor their software to meet the needs of South African customers at a low cost because the product developers reside in the country.Besides these business reasons, they`re also hoping to capitalise on the sort of patriotic feelings the Proudly South African campaign is meant to stir. So why are they battling to sell to software locally?The more cynical observers suggest that they`re unable to offer technology buyers trips overseas on reference site visits, or the opportunity to sex up their CVs with experience in implementing an internationally known ERP system.But the truth is more mundane than that. As John Olsson, sales and marketing director at Ability Solutions, points out, it isn`t just South African application developers that are battling to win new business - it`s everyone in the enterprise applications market.Betting on the big guysIn addition, software companies that developed in the years that South Africa was isolated from the rest of the world have needed to adjust to the changes in the market since the multinationals established formal presence in the country.“Do you bet on company X with 20 developers in South Africa, or on Microsoft with 1 700 developers?” asks Stephen Green of Microsoft Business Solutions. Green`s words, as biased as they may be, resonate with many CIOs.“We were previously a privately owned company, and in the event of unforeseen circumstances, we`ll be able to support and run our business as an independent entity again. Besides, we supply our source code to all our customers,” counters Stefanski, whose company forms part of the beleaguered Global Technology group.“American companies are going through more turmoil than anyone else,” says Parsons, referring to the ongoing PeopleSoft, JD Edwards and Oracle saga. “Many South African products are as feature-rich as offerings from PeopleSoft, but they don`t have the American dream behind them.”
01 September 2003
Much like Mark Twain when he said that rumours of his death had been greatly exaggerated, enterprise resource planning (ERP) vendors are indignant that anyone would imagine that demand for their solutions has died.
“There are many doomsayers who would advise that ERP is dead. Nothing could be further from the truth, as our sales pipeline and order book shows,” says Mike Evans, MD of JD Edwards SA.
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