Although any discussion around ERP systems will usually include mention of big players like SAP, Oracle, PeopleSoft, Microsoft and Lawson, it may come as a surprise to many readers that none of these ‘name brand’ vendors are actually dominant in the industry. For unlike the operating system, web browser or web server businesses (which for the most part are dominated by one or two companies), in the ERP sector, from the upper end of small business through to enterprise sized organisations, there is no one company with a market share greater than 4%.

Horizontal or vertical?
“In the NZ market alone,” says Microsoft Business Solutions’ Paul Muckleston, “there are over 110 unique vendor ERP financial applications. That’s not 110 resellers – that’s 110 discreet separate applications. For a market the size of NZ that’s an astonishing number.” Move out into the global market says Muckleston and there are another 15,000 applications to choose from.

So why so many? The answer centres around the question of whether an ERP solution is a ‘vertical’ or a ‘horizontal’ product. In very simple terms a horizontal ERP solution is a completely integrated suite that includes a module for every business process a typical company would undertake – procurement, accounts, manufacturing, sales, human resources, distribution, marketing and CRM for example. By their very nature these suites are designed as generic fits for any business – as Oracle’s David Rainbow explains. “Basically what we say is ‘this is a typical procurement to payment process’. So we say to clients – analyse what you do and then decide ‘would this work for us?’ and most of the times it does.” It’s in this horizontal integrated space that most well-known ERP vendors operate. Their software is designed to manage 85% to 95% of the processes of any normal business – with a little tweaking to get a 100% fit.

A vertical product, on the other hand, is a specialist offering. For example it may be designed for a dental surgery, or a car sales yard, or a hairdressing chain or a pizza franchise. Vertical products are typically designed to meet the specific needs of one particular industry, and this is why no individual company dominates the global ERP sector – for years software developers have been picking themselves a niche and designing applications to fit. In New Zealand this is brought into even sharper focus, as the makeup of the New Zealand business community differs from that in other territories. “In the US and other mature markets,” says Exonet’s

Blair Scott, “what we would describe as ‘big business’ makes up about half the market – with SMEs (small to medium enterprises) making up the other half. In New Zealand, however, SMEs make up about 90% of our businesses.”

A focus on SMEs
So what does this mean for the local ERP sector? During the ’80s and ’90s it didn’t mean much, as the big brand ERP companies concentrated on implementing their multimillion dollar systems into New Zealand’s top 200 enterprises. For the most part these were huge, complex integration jobs (one vendor described the process as “torturous”), and in dollar terms, the financial commitment was well out of reach of smaller clients. At the same time the local SME market was well served by regional or industry specific software developers. Fast forward to the 2000’s, however, and things have changed significantly. For a start, there’s no longer much opportunity at the top end. “Most of the big deals are done,” says Lawson’s Dougie Beck. “That territory has been hunted well. There might be a few woolly mammoths still roaming around, but not enough to sustain a whole industry.”

Step down a notch however and the opportunities in the SME sector are fairly limitless. And it’s this new market reality that will shape the way the ERP sector evolves over the next few years.

The big brand, big complexity ERP vendors have set their sights on the mid market – and consolidation of that sector is sure to follow. “I can’t think of any other mature market in any industry that’s been around as long as ERP,” says Muckleston, “where no one has greater than 4% market share.

So the market globally is ripe for consolidations.” It’s a new way of thinking for the ERP vendors, but as Beck observes, they’re quickly getting their heads around it. “The technology that’s been developed does fit the needs of a medium-sized enterprise,” he says. “We just have to be able to deliver it more cheaply and more effectively because there aren’t multimillion dollar budgets in that market. So you become much more attuned to delivering solutions that add value” (for a guide to the likely ERP value proposition, check the sidebar).

At Greentree, however, CEO Peter Dickinson says his company has specialised in the mid-market for 20 years, and he suggests Tier 1 vendors may have a lot to learn about the sector. “Because those vendors are large companies in their own right, they presume that mid-size companies are less sophisticated, less demanding and therefore either require less functionality or can easily change their operations to fit the software. In fact, the opposite is true - mid-size companies by necessity tend to be nimble, fast-moving and need systems with the same attributes. The only ingredient usually missing in a SME is the massive business volumes, and therefore the revenues, to sustain expensive solutions.”

The decision making process
So how is the shift in the focus of many vendors to the mid-tier market likely to play out? To answer that question it’s probably best to evaluate the business models of existing vendors – to decide which vendor implementation model will best fit your organisation. In general there are two implementation models (and hybrids of them) for both vertical and horizontal solutions.

Vendor sells the ERP system and does the implementation
The big plus of this type of scenario, says Lawson’s Beck, centres around ownership of the process. “When implementation projects come under pressure, it’s usually because there isn’t a clear point of responsibility. If you’re using multiple vendors (when opting for a range of ‘best of breed’ solutions as opposed to an integrated suite, for example) everybody blames everybody else for problems and there’s not one clear point of accountability. As a one stop shop, we’re not going to blame anybody else. We take responsibility and we’re accountable.”

Third party sells and implements vendor ERP solution
According to Microsoft’s Muckleston, this scenario is popular for customers who are looking for an ERP implementer that has a closer cultural fit with their business. “If you go with a smaller implementation partner, while they may be offering a product from a big brand company, they might only have 10 or so clients. So in that case you make up 10% of their business and they’re going to be very committed to you. Medium sized businesses like dealing with medium sized businesses. Small businesses like dealing with small businesses. So this partner reseller model enables businesses to find the right cultural fit.”

So having decided on an implementation model, a business needs to decide whether they will opt for a horizontal solution, or an industry specific vertical solution – or a little of both. And it’s while making this decision that the evolving ERP market gets really interesting. SMEs don’t want integration hassles say the horizontal vendors, and to avoid that they should buy an integrated suite. To this end the horizontal vendors have spent years establishing what standard business processes are common across all businesses – and have built these into their suites as ‘modules’ – accounts, manufacturing, procurement, CRM and so on. For the most part they say 85% to 95% of a businesses processes can be managed with an out-of-the-box offering – with the other 10% or so being addressed with a little final customisation.

Best of breed or an integrated suite?
But for some businesses, no amount of module tweaking will give them the solution they require – and they want to opt for a ‘best of breed’ solution for one aspect of their business. CRM is a good case in point. So does this mean a horizontal integrated suite is no longer an option? Not at all, say most vendors. “We can integrate with best of breed,” says Exonet’s Blair Scott. “So for CRM that would be only one part of the process to satisfy a specific niche requirement – and there is still the rest of the business to run. So although we try to fit clients 100%, if we can only fi t them 90% we’ll go out and find that last 10% and integrate it. As everything is designed to industry standards these days it’s not that much of an issue.”

One business that has opted for a best of breed approach is Auckland based medical and scientific consumables importers Bio Strategy. Managing director Graeme Thompson says his company installed the Exonet financials package, but always knew that the Exonet CRM solution would not be adequate. “Because we have a sales force on the road,” he says, “we wanted a CRM system that was more configurable than the standard Exonet module in areas like call planning. We also wanted a CRM solution that was web configured so our reps could access it while on the road.”

Despite the fact that integration of a best of breed CRM (or other module) solution is possible, some vendors caution that it’s not a preferred option. “There’s still a question of integration versus non-integration, says Beck.

“For example if the rest of your suite is updated you’ll probably have to integrate it with your specialist CRM module again. And vice-versa when your CRM module updates.” Muckleston continues the theme. “Businesses have to resist the temptation to overly customise,” he says, “because it becomes harder and harder to take advantage of vendor upgrades and people can get stuck in this vicious cycle of constantly having to reintegrate their specialist module.”

Back at Bio Strategy, Thompson says that while he accepts this may be a problem, it all depends on how the CRM module is integrated in the first place. “In our case the CRM module pulls its data from an SQL database. So any data input into other modules goes into the SQL database, and is available for the CRM system from there. So I suppose it’s about the degree of integration with the other modules – and in our case that only extends to a shared SQL database.”

The last word on the topic goes to Greentree’s Dickinson – who says the best of breed strategy is really a Tier 1 concept, and isn’t appropriate for mid-market organisations. “The mid-market cannot contemplate the costs or complexities around the purchase, building, and maintenance of the interface software,” he says, “nor the management of the various vendors. Longer term the one integrated product strategy is likely to get better and better. New functionality will be released by the vendor that can be easily implemented. With best of breed the likelihood is that the systems will become more difficult and expensive to interface. Over time the different vendors are likely to take different directions, introduce new innovations but with potentially non-compatible architectures or even worse, languish behind technology changes.”

Having your cake (and eating it too)

The way 60% - 70% of that business runs is no different to any other business. And yet developers in that niche are spending 60% - 70% of their time writing some pretty undifferentiated functionality.

It’s only the 30% on top that’s tailored to a specific market that they make their money from. So what we’ve decided to do is license our software to them so they can concentrate on their vertical niche and just build that on top of our base software.

Their development costs will be a lot lower and they can even brand it as their own product.” Muckleston says these specialist developers probably account for 50% of the entire ERP sector, and he’s confident the licensing strategy will strike a chord with them. “Basically it will be a nobrainer for them,” he says. “They can license our intellectual property and take full advantage of Microsoft’s research and development resource that they could never afford themselves. I think it’s probably going to be the biggest change in the industry as we move forward.”

March 2004

Big brand ERP vendors say they'll adjust to meet the needs of SME's