As alternatives to monolithic, on-premises enterprise resource planning (ERP) and enterprise applications continue to mature, CIOs and application leaders must take action to address the fast-approaching reality of "legacy ERP," according to a report by IT research firm Gartner.
The report said the ERP suite is being deconstructed into postmodern ERP that will result in a more federated, loosely coupled ERP environment with much of the functionality sourced as cloud services or through business process outsource specialists.
In addition, the concept of a single ERP suite that meets all of an enterprise's needs is obsolete and has been replaced by a hybrid ERP approach that combines cloud point solutions with a smaller core of on-premises ERP function, such as financials and manufacturing. Gartner predicted that hybrid ERP environments will be the norm within five years.
"The need for agility and responsiveness has led highly customized ERP implementations to an impasse, creating a subset of legacy ERP installations that must be dealt with constructively," Andy Kyte, vice president and Gartner Fellow, said in a statement. "Early ERP adopters, particularly large enterprises in energy, manufacturing and distribution industries, are paying the penalty of a decade or more of excessive customization. Businesses looking to improve administration today can take advantage of lower costs, better functional fit and process flexibility offered by blending cloud applications with on-premises applications in what we now refer to as 'postmodern ERP."
While Gartner expects that most organizations will shift from monolithic ERP to a hybrid approach within five years, the adoption of cloud services for some components of functionality does not guarantee a reduction in the total cost of ownership (TCO). On the contrary, there is the potential of actually increasing the TCO, the report warned.
By 2018, at least 30 percent of service-centric companies will move the majority of their ERP applications to the cloud, and by 2017, 70 percent of organizations adopting hybrid ERP will fail to improve cost-benefit outcomes unless their cloud applications provide differentiating functionality.
"You should never assume that adopting cloud applications will magically provide value; it's essential to link business objectives to your ERP strategy to ensure value is realized, whether adopting on-premises or cloud applications," Carol Hardcastle, research vice president at Gartner, said in a statement. "By hybridizing solutions there is greater risk of fragmenting the business case and therefore diluting the value where the sum of the parts is less than the whole. However, there is also the risk of taking a less strategic approach—placing more focus on implementation at speed rather than long-term delivery of value."