ERP: Going After the Little Guy

Small businesses have traditionally resisted big ERP. Will an expanded ERP model finally convince them to climb on board?

ERP is changing. In fact, many people believe what has come to be known as ERP has evolved and expanded to such a degree that it is not actually Enterprise Resource Planning at all, but – well – something else. If only somebody could figure out what to call it.

"Eventually, I think a new definition and a new acronym is going to emerge," says P.J. Jakovljevic.
“Eventually, I think a new definition and new acronym is going to emerge,” says P.J. Jakovljevic, senior research analyst, ERP market, for TechnologyEvaluation.com, a Boston-based research firm. “But I can’t say I’m exactly sure what that’s going to be. Somehow, I’m under the impression that it is impossible to encapsulate this concept in three words.”

Bill Meinhardt, AS/400 ERP and SCM Marketing Segment Manager for IBM, says he sees a growing trend developing among vendors, who are expanding their solutions to a point where they cannot be confined to the term “ERP”. He believes the trend has developed from vendors’ attempts to catch up with a changing market that, if not addressed, might stand a chance of leaving them behind.

“A lot of ERP vendors were caught off guard from as early as late 1998 with how fast people were gonna implement the Internet in their business, or e-business, if you want to call it that,” he says. “That’s the direction our business is going. That’s the direction our whole division is going and the whole future of the AS/400... to the point where I’d like to get the name of my division changed, to something like Enterprise Application Solutions.”

In an analysis of the ERP market Jakovljevic compiled in January, he offered evidence that the market which had enjoyed better than 50 percent growth at various times throughout the 1990s began experiencing a gradual slow-down leading up to Y2K, from which it still has not recovered.

Among the biggest problems facing ERP vendors is the challenge of reaching the small and mid-sized business segment, where, with the apparent saturation of the market for Fortune 1000 ERP installations, vendors are rapidly directing their attention. But to date, that market has proven less than responsive.

“The historical growth in sales of ERP applications has come from large, Fortune 1000 multinational corporations,” Jakovljevic wrote. “This market has been highly penetrated, and new, large-scale back-office implementations in the Fortune 1000 customer base have all but stalled. The relatively untapped Small-to-Medium Enterprises (SME) market has been cautious about starting new projects.”

This focus on a new market segment is, at least in part, what is driving the evolution of ERP. But in both changes to their products and a search for new customers, it remains to be seen whether these new strategies are likely to get vendors back on track to the path of rapid growth they experienced through the course of the 90s. More importantly, it is still a matter of question whether such changes will finally bring much sought-after SMBs onto the ERP bandwagon.

The Roots of Change

“ ‘99 was a terrible year for ERP, no doubt about it,” Meinhardt says.

There is strong evidence for the argument that last year’s downturn was at least in part a result of Y2K, and according to Meinhardt, the first quarter of 2000 has brought some recovery. However, that does not explain away an estimated drop in the ERP market growth rate, which, according to David Cahn, research director at Boston-based AMR Research, “used to be in the high teens to low 20s, now it’s around 5 percent”

One of the reasons may be the need to pursue new technology.

“[ISVs’] ERP revenues are starting to slow down and they had to go elsewhere to find the new market,” Cahn says. “They’ve all either acquired or started developing on their own SCM and e-business.”

With the Internet now seen as a critical business tool for enterprises of all sizes and industries, many vendors have come to regard ERP as more than just MRP, financials and accounting. ISVs are reacting to this new reality by adding capability for better communication with business partners and customers by taking advantage of the Internet.

“All the vendors have recognized that their traditional ERP sales are slowing, and we’ve seen actually two major trends developing,” Cahn explains. “First, we see them starting to develop these products for CRM, supply chain, business – really more toward ERM (Enterprise Resources Management). Then the second thing is we’re starting to see some companies develop almost portal strategies. These would, for instance, allow you to provide a Windows-based front-end and allow you to connect with your back-office without consolidating on one platform.”

Meinhardt compares the new, developing approach to ERP to the evolution from MRP to ERP in the late 80s an early 90s. The new iterations of ERP do not mean the old functions have become obsolete, or even that they have changed significantly. Rather, he says, what is different about ERP today is that it is responding to demands for added capability – specifically those governing supply chain relationships, online order processing and other issues raised by the Internet economy. The traditional ERP functions, however—manufacturing, financials, distribution—still have to remain in place.

“You have to have that capability – just as when ERP first came on the scene, instead of having your MRP, your accounting, your financials on separate systems, the pitch was that they should be consolidated and integrated,” Cahn says. “Here, you’re adding function, but really you’re still always talking about the traditional concepts of ERP. Sophisticated customers expect that that’s going to be there. The growth in the market is coming in these added features.

“ERP, in its traditional sense, is almost being looked at as an infrastructure or backbone system. You can then leverage that backbone to build some of those other applications like SCM, CRM,” Cahn adds.

However, even for ISVs who are taking an innovative approach to new technology, a major stumbling block for more sustained growth of the ERP market is the wall of resistance put up by SMBs. And for those businesses, charging ahead with new technology may not be an enticement. In fact, it could have just the opposite effect.

What SMBs Want

John Guest, CIO of Paradyne Corp., a $225 million manufacturer of broadband and narrowband network access products in Largo, Fla., says his company turned to a J.D. Edwards ERP solution to improve data management and communications within the company.

“Like many companies today, we had all these disparate systems, where we had an application for financials and that was running on one platform, then we had sales and distribution running on one platform and we had our manufacturing MRP system running on a different platform,” Guest says. “And what we found was in order to get a view of transactions during the day, the only way we could do it was to have people sit down and physically collate and interpolate all the data from those different systems. It wasn’t efficient, it wasn’t time-effective, and it really was costly.”

For Guest, the most important factor in choosing the right ERP solution wasn’t having a lot of bells and whistles, it was service. So before settling on a package, Guest flew to Denver to meet with J.D. Edwards’ senior management, to gauge what kind of relationship they have with their customers. He recommends that any business looking to implement ERP should take a similar step during their selection process.

“My intent was to understand the ongoing relationship,” he says. “Being that the package is running our core business processes, I wanted to know how they saw their role in supporting their customers. It’s critical that you spend some time with the vendor to make sure they have a commitment to support you.”

Of course, it was important that the vendor offer a support system in the event problems with the system developed. However, particularly with regard to implementation, it was equally important to Guest that the software provider would help Paradyne train its employees to become familiar enough with the system to make calls to the provider’s help desk rare.

“J.D. Edwards spent a lot of time developing an implementation process – I did not see that from the other vendors. Other vendors talked about finding consultants,” Guest says.“I wanted to do the implementation with my own resources, and I wanted to have the skill set and expertise in house with my own staff. I think that’s bad business practice to pay somebody to do the work for you and then have to continue paying them every time you want to upgrade or you have a problem.”

The primary consideration for Bob Beecy, senior director of planning and customer requirements for Dan River Inc., was to find an ERP solution that could fit the specific needs of his industry. Dan River, based in Danville, Va., is a $625 million manufacturer of apparel fabrics for clothing and home fashions used in a variety of items ranging from Liz Claiborne apparel to Teletubbies sheets and pillowcases.

Beecy says he knew from experience that he could not expect to get good results from a huge ERP package vendor, which might work well with what Beecy calls “widget manufacturing”, but not with a process-oriented industry like apparel. While his company’s need for materials management is limited compared to other kinds of manufacturers, organization of other parts of the manufacturing process is highly complex. Their ERP system had to be able to account for smaller differences within products lines, for features such as size or color.

“That would be just maddening if you had to describe all that with a separate assigned part number,” Beecy said. “The reason we chose Datatex is that it was a rifle shot at the apparel industry, in that it really integrated the production side and the bills and materials side. And we didn’t find any solution that did it as elegantly as they did.”

The idea that an ERP solution should offer extensive Internet functionality, or even accounting and financials, did not factor into Beecy’s selection process. In fact, he says, the fact that Datatex did not offer those features was one of its greatest benefits, as far as Dan River was concerned.

“To select a manufacturing package on its HR facilities would be suicide. To me, the core of ERP goes back to MRP II,” Beecy says. “A lot of ERP vendors tried to convince people that it had to be one type of software. And nobody’s good at everything. So I think what people are moving toward is a best-of-breed approach. You go out and get the pieces you need and you make them talk to each other.”

Much of the resistance to ERP on the part of smaller businesses comes from the horror stories put out by some companies of implementation processes that seemed never-ending and massive budget-busting expenses. For Dan River, the key to avoiding this and ending up with a successful implementation, says Beecy, was choosing a solution which was targeted to the industry and which required little to no customization in-house. Many have gone that route, he argues – trying to make a huge umbrella package fit their specific needs – and most have failed, with damaging consequences.

"In some industries, they swear by them. In our industry we swear at them."
“Companies have gone out of business after spending $20 million trying to do that with the big guys,” Beecy said. “In some industries, they swear by them. In our industry we swear at them. When you spend tens of millions of dollars on a system that doesn’t work, it’s a crying shame. ... Form a good, strong transactional background and fill in where you need to with best of breed. It’s not always convenient to have to interface your applications, but it’s not fatal. That’s not always true the other way around.”

Bringing SMBs on Board

Guest and Beecy both say, rather than choosing a packaged that supported their existing system, they brought in an AS/400 specifically to run the ERP solutions they had selected. As Beecy and Guest suggested, the ERP package itself is the most important factor, and that package includes the platform. Managers are often willing even to bring a brand new, unfamiliar platform into their shop, if that system has proven to be particularly suitable for their businesses and for ERP.

Meinhardt, of IBM’s AS/400 division, sees this as an important means of bringing new customers to the platform.

“I think we find in general that customers are looking to buy a solution rather than a hardware platform, and because we do have such a wide variety of ERP vendors, we often do get recommended for that,” Meinhardt says

Finding a solution targeted for your businesses is still central to the ERP selection process. Increasingly important, however, is the additional ability to add functionality to a basic ERP package down the line.

Jakovljevic sees the factors Beecy cited as key for the biggest ERP vendors like Oracle, SAP and PeopleSoft, if they want to attract smaller businesses. Availability of more granular, componentized products, he says, let businesses decide how much they can handle at one time for a successful implementation. Also, vertical industry-focused products provide some reassurance for companies with small IT departments that they will not have to face a massive customization project. Recognizing these advantages, he says, has allowed smaller mid-market vendors to become quite successful even during the time that major players have struggled.

“The reason is exactly knowing what the needs of the mid-markets are, a very sharp vertical focus and more granular implementation,” Jakovljevic says. “So far the big vendors are not so successful – although they all claim they are putting out these ‘ERP lite’ solutions. But people in the field are still telling us the big guys aren’t making it in the market.”

However, because of the opportunities the new, expanded ERP offers, Jakovljevic also questions whether the biggest vendors will continue to pursue smaller businesses the way they might have in the past. With a huge installed base, Oracle, SAP and their peers are in a position of advantage to offer their customers new solutions like SCM and CRM in order to continue to expand their reach and their profits. At the same time, smaller vendors are poised for a downturn, he argues, because their customer base is less interested in bringing in new technology.

“I think a harder time is coming for the mid-market vendors. The 40 or 50 of them – who can say how many ERP vendors there really are?” Jakovljevic says. “They don’t have a huge existing customer base. So they are all forced to fight for that small piece of cake. In order for all of these ERP vendors to survive in the new economy, they’re going to have to offer these new capabilities to their customers. And they don’t really have the resources of the big guys to sit around and wait for their customers to decide they need e-commerce.”

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