What Is The Best Way to Execute an Enterprise Planning Resource?

The global Enterprise Planning Resource market has been seeing an average of about 10% growth year on year since 2006, and while the current global economic slowdown is bound to cause a dip in this growth pattern, it is a safe bet that the overall trend will sustain. Growth in Enterprise Planning Resource markets will almost certainly go back to 10% plus as soon as the Eurozone crisis subsides.

Like every other segment of the IT industry, the ERP solutions industry is evolving rapidly. The industry has clearly differentiated between very large enterprises and the small and medium business sectors. It is the second segment that is seeing rapid growth and the emergence of new players in the ERP business.

ERP program vendors are classified as Tier I, II or III depending on the kinds of clients they service. The three groups of ERP software companies are very distinct and the size and complexity of their solutions are also very distinct.

In general, the industry classifies a Tier I ERP vendor as one that sells extensively to the Tier I market – a market that has companies with annual revenues exceeding $1 billion. These companies are invariably multinationals with a presence in many different geographic regions.

Naturally enough, Tier I ERP products have a high cost of ownership due to their complexity and costs of implementation and support. While there have been several Tier I vendors earlier, mergers and consolidations have shrunk the list considerably. The list of Tier I ERP software companies is now very small and consists of just two entries – SAP and Oracle.

Tier II vendors sell ERP products that suite mid-sized companies that have revenues in the range of $50 million to about $1 billion. The products of Tier II vendors are specifically built to handle this market and cater to a single or multiple locations of deployment. Naturally, Tier II solutions are easier to manage and support and cost correspondingly less as well. Often, Tier II solutions are confined to a specific industry vertical. This group sees considerable competition and is comprised of about 20 well-known companies.

Tier III ERP solution providers target companies that have revenues of $10 million to $50 million. Solutions provided by these companies are simple to implement and support and have correspondingly lower cost of ownership. Many ERPs in this group are single location installations and built for a single vertical. While they are easy to manage and deploy, the risk is that a company could soon outgrow the solution and hence some kind of migration path must be kept in mind when a small but rapidly growing company selects a Tier III solution.

Another interesting development in the ERP space is the advent of cloud computing solutions. A number of users are beginning to use cloud based ERP solutions. These solutions typically provide a lower cost of ownership – initial startup costs can be lower by as much as 30% to 50% as compared to an ERP solution hosted within your own premises. This becomes even more relevant for companies with a large geographical expanse. Typically, the first movers to the cloud were the relatively smaller companies and mid-range companies were the next to consider a move to the clouds. Large companies were the most conservative in this regard.

Since ERP solutions can be very complex, smaller ERP software companies are able to experiment more easily with cloud solutions. The very large companies have all made very significant investments in their existing ERP systems and hence may not be so keen to change. Nevertheless, it is clear that the Software as a Service (SaaS) model will influence the ERP industry considerably in the future. Generally, SaaS is associated with lower costs due to following a rental model for using software and due to a ‘pay as you go’ approach. It is not clear how this will apply to ERP solutions, but the move to the cloud is indisputable. There are several concerns about the cloud, but these are also being addressed as the technology matures and finds widespread use – some of these are:

Will the SaaS model imply a standardized solution?

What happens to any earlier ERP investment?

Risks of governance, security and vendor lock in.

In spite of the relevance of these concerns, it is clear that more cloud based ERP solutions will emerge. Very recently, Larry Ellison announced that Oracle would now be embracing cloud technology. Although he did not mention cloud based ERP solutions, he did throw his weight behind the technology. Implementation sizes of cloud based ERP solutions will increase slowly and this is a space that must be watched carefully.

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