Ten More ERP Trends: Open Source and Pricing Pressures

Wednesday Jan 26th 2011 by Drew Robb
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The rise of open source ERP and new startups is pressuring big vendors like Oracle and SAP.

Last month, Enterprise Apps Today wrote an article on the top ERP trends. As it turns out, there's a lot more going on in this vibrant $20 billion market than could be squeezed into one article. So here are 10 more major trends in enterprise resource planning (ERP).

 

ERP license sales decline

Forrester Research reports that the global recession sent new ERP license revenue diving by 24 percent in 2009. That's bad news for the various vendors operating in this field. But it could well hasten consolidation in the industry. And there's hope: ERP market leader SAP (NYSE: SAP) is posting its strongest sales growth in years and just announced record revenues

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Open source ERP

What factors are involved in the drop discussed above? Obviously, the economic scene has caused a general tightening of IT purse strings. But another factor could be the rise of open source ERP and other enterprise applications — which also could be attributed to the economy. One IDC survey found high usage of open source enterprise applications; 9 percent of respondents already had an open source back office application deployed while, while 7 percent of respondents were running an open source CRM application.

IDC analyst Bo Lykkegaard cites the attractiveness of no upfront license payment and a generally lower cost of ownership, although doubts remain about the level of support that can be expected.

"In an enterprise applications market in which large vendors boast a 10 percent market share, adoption rates of 9 percent and 7 percent appear very high," said Lykkegaard. "Of course, usage can mean anything from departmental use or niche use to enterprise-wide deployment. We expect the majority of users of open source enterprise applications to use commercial enterprise applications at the same time. Despite this reservation, the survey results show that open source adoption in ERP and CRM has reached a critical threshold and should now make a 'bleep' on every vendor's radar screen, particularly for those that compete in the mid-market."

 

Rising stars

In such a climate, a new star often rises, either to dominate a market or be gobbled up by one of the giants. So who could be the next big thing in ERP? Of the many open source ERP players, Forrester analyst Holger Kisker names several up and coming candidates: Openbravo, Compiere, ERP5, OpenERP and xTuple (formerly OpenMFG).

 

Pricing pressures

The rise of open source is like a Wal-Mart opening in an area — the competition better get ready for a price war. Hence the likelihood is that the big players could be forced to drop prices. Historically, Microsoft (NASDAQ: MSFT) has been willing to go this route and could possibly force the hand of some others.

"The net effect of the emergence of open source enterprise applications will be one of price pressure, in particular in the mid-sized segment,” said Lykkegaard.

 

Risky business for big ERP players

It seems then, that it's a bad time to be an established ERP player. Eric Kimberling, president of Panorama Consulting Group, pointed out that most enterprises are unwilling to spend millions on ERP, especially if that means a deployment headache and lack of obvious ROI.

"When they do go to implement, executives are going to rely on outside consultants and experts to help them manage and minimize risk," he said. "There will be less tolerance for risk and implementation cost overruns."

That will manifest in ways such as CIOs, CFOs, and IT Managers trying to do more with less as budgets remain tight. They'll have to manage limited budgets and resources while trying to manage risk at the same time, which are two conflicting priorities.

"Executives implementing ERP will be walking somewhat of a tightrope in coming years," said Kimberling.

 

ERP Trends

Change management focus

Change management is becoming popular as a way to get in control of costs — and one which will affect the ERP sector. With a renewed focus on risk management in play, change management is being looked upon by some as the best approach to mitigating and managing implementation risk.

"Due to general anxiety and concerns about implementation risk, look for a greater focus on organizational change management to help mitigate risk," said Kimberling.

 

More ERP failures coming

Despite these much-needed steps, bad news is probably unavoidable. This will show up in the form of lawsuits and project cancelations. Kimberling believes that slim IT budgets will create a conflicting pressure to cut costs in the wrong places, which will lead to a greater rate of ERP failures.

"Companies will be faster to pull the plug on troubled projects and file ERP lawsuits against their vendors if needed," he said.

 

Vendor ERP Upgrades Are Coming

Another side current of the surge of interest in open source ERP will be a shift in operating basis by the big vendors like SAP and Oracle (NASDAQ: ORCL), and tier two providers as well. On top of price cuts, they will be assailed by a fresh batch of rivals touting the latest architectures. Therefore, some of the old ERP behemoths are going to be coming in for a facelift — and sooner rather than later.

Kisker explains that over the past three decades, ERP has transitioned through several cycles to the point that it is now considered a mature market. But open source has upset the applecart and is the vanguard of a new wave of innovation. Consequently, many companies are looking for next-generation ERP solutions that have new capabilities and are easy to use and deploy.

"ERP vendors need to enhance their solutions based on new open architectures to meet increasing market requirements, secure their market position, and unlock further ERP market potential," said Kisker.

 

Light in sight

There is light at the end of the tunnel, though. Open source rivals, price cuts, lawsuits and project cancellations won't be enough to kill off the major ERP players, by any means.

"Signs in the latter half of 2010 pointed to increasing IT spending and pent-up demand for enterprise systems, which is likely to continue into 2011," said Kimberling. "This should give software vendors increased confidence to hold the line on software pricing, invest more in R&D, and provide more product enhancements. ERP vendors will get their mojo back."

 

Small business surge

It isn't the large enterprises, though, who could be the salvation of a stalled ERP market. Kimberling thinks heavy adoption at SMBs could resurrect sales and restore investor confidence.

"SMBs will look to enterprise software to provide their business foundations for growth," he said. "However, they aren't likely to have the capital funds for heavy up-front costs, so they will likely look more to SaaS ERP and CRM systems."

 

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