Business Accent

Competition intensifies for the SMB ERP customer

Users benefit as vendors reduce enterprise complexity and deliver integration

Over the next three to five years, the most dynamic and innovative growth area in enterprise applications will be users in the small and mid-market. With unique requirements that demand full capabilities without complexity, SMB customers seek practical solutions with quick return on investment (ROI). Vendors, incumbents, and challengers alike, have responded to these demands with significant product and channel investments. The result is improvement across the spectrum of industry-specific and last-mile capabilities, usability, rapid implementation, Microsoft Office integration, and mobile solution support. Forrester recommends that users select a vendor based on business requirements, architectural flexibility, and Total Economic Impact (TEI).

Complex business requirements challenge SMBs

Despite their size of 1,000 employees or less, the requirements of SMBs have been more difficult to meet than those of enterprises. Although both share the same level of business complexity, the former lack the IT resources of larger organizations. SMB business process and applications professionals remain challenged to address business requirements through legacy ERP systems that:

Lack out-of-the-box vertical requirements: Deployments often require expensive and extensive vertical customizations. Solutions that work for manufacturing processes often fails to do so for service-based processes and vice versa. Users often end up with customized solutions that are neither upgradeable nor extensible. SMBs face challenges in supporting global business operations, related compliance issues, and localization preferences by industry.

Remain disconnected from other applications: Integration remains a significant challenge as SMBs seek to leverage existing investments in other applications. Rigid APIs, lack of interoperability standards, and nonexistent Web services increase the cost and complexity of the solution. When changes are made to the system, each integration point requires extensive and manual testing.

Discourage collaboration across new stakeholders: Existing systems were designed to support internal users in back-office functions. These functions often remain siloed. Suppliers, partners, customers, and front-office-facing employees do not have access to the system, and cannot update, modify, or create new information, products, and requests. Stakeholders lack access to basic information about tools such as ad hoc reporting and order status tracking.

Cannot keep up with a changing workforce: Most SMBs run on legacy environments that require memorization of shortcuts and codes in a “green-screen” environment. Existing applications impose a training burden given a younger, more transient workforce accustomed to “point-and-click” environments.

Constrain business process flexibility: SMBs originally purchased ERP systems to take advantage of best practices provided out of the box. As these processes became commoditized, users sought differentiation, but the rigidity of the systems impeded easy creation of new processes by existing users, instead requiring expensive customizations.

Ignore the spirit of a perpetual license: Perpetual licenses remain taxed with the cost of applying maintenance and periodic upgrades that often approach the scale of a reimplementation. Maintenance fees of 18 to 25 percent over 10 years of ownership are equivalent to two to three times the purchase costs of original licenses. In addition, lack of third-party maintenance options and “lock-in” keep many enterprise-class solutions out of reach for SMBs.

Pragmatic modernization drives SMB ERP optimism

Despite their challenges, SMBs continue to look to packaged applications to tackle myriad complex business requirements. Recent Forrester surveys reveal that SMBs are:

Justifying new or additional application investment: Based on Forrester Business Technographics data, 83 percent of SMBs believe that application software improves the efficiency of core operations and business processes, and 80 percent of SMBs believe that software improves workforce productivity. Additionally, 75 percent believe that software improves the quality of products and services (see Figure 1). Driven by the need to upgrade and maintain software, SMBs around the world plan to budget 10 percent more for new software projects in 2007 over 2006 (see Figure 2).

Driving software investments with business needs: SMBs mostly rely on peers and not vendor hype for purchasing information, with industry-specific case studies and word-of-mouth success influencing shortlists. By a large margin, software that supports an industry-specific process leads application purchases for first-time purchase, major upgrades, and minor upgrades. Additionally, SMBs want to make the most of existing investments. Sixty-three percent of surveyed users prioritize improving integration between applications as the top initiative for 2007.

Maintaining a “wait-and-see” approach to software-as-a-service (SaaS): SMBs continue to prefer on-premise delivery versus SaaS; fully 60 percent of SMBs are not at all interested in SaaS due to concerns about integration, security, total cost, performance, and lack of customization. Although these concerns represent largely unsubstantiated perceptions, most SMBs remain comfortable adopting a “wait-and-see” approach (see Figure 3). The 10 percent that adopt SaaS deployment options look to NetSuite and Everest Software for end-to-end suites, Taleo and SuccessFactors for strategic HR, and Intacct and Intuit for financial accounting. Forrester expects adoption to improve exponentially in the next two to three years as larger vendors such as SAP via A1S and Microsoft and its partners via the Services Provider License Agreement (SPLA) evangelize their SaaS ERP offerings.

Heightened competition delivers benefits without enterprise complexity

As SMBs continue to seek full functionality without the complexity, heightened vendor competition will, over time, improve out-of-the-box and SaaS ERP offerings. Key vendor trends in SMB ERP improvements include:

Improved usability: Products like Microsoft’s Dynamics offering lead the way with significant role-based user experience improvements. Microsoft has designed its software to support more than 60 roles, and Microsoft as a whole conducts more than 1,000 usability tests every year. SaaS vendors like Workday apply rich Internet applications (RIAs) that integrate established Web 2.0 solutions such as Skype and LinkedIn into workflows and business processes. Recent versions of Oracle apps incorporated the PeopleSoft Project Swan interface, Lawson rolled out new UI for M3 and S3, Infor delivered an XP look and feel for Infor ERP Visual, and even SAP has made role-based navigation improvements via its new All-in-One product. Usability and user experience investments will improve training effectiveness and productivity. It will reduce overall costs of staffing and support.

Integration via SOA and middleware standardization: Vendors continue to adopt middleware platforms such as BEA’s WebLogic, IBM’s WebSphere, Microsoft’s Visual Studio .NET, Oracle’s Fusion Middleware, and SAP’s NetWeaver (see Figure 4). For example, Epicor’s Service Connect offering delivers business process management (BPM) as business logic without code via a “Visio-like” tool for controlling workflows and business processes. Other vendors like Lawson on the “Blue Stack” can leverage Tivoli Enterprise Access Manager for single sign-on. Overall business benefits include the ability to adapt systems to business processes (not vice versa), deliver richer and relevant analytics, and connect additional stakeholders (e.g., customers, suppliers, partners, and employees) to the core ERP. Technology benefits include the eradication of customizations via configuration, reduction of integration costs via adoption of open standards, and improvements in interoperability and support for best-of-breed solutions and composite applications.

Microsoft Office integration: Integration with Microsoft Office shifts from being a novelty to a mission-critical requirement. To date, vendors such as Epicor, IFS, Microsoft, SAP, and The Sage Group have demonstrated the levels of integration. Primary drivers include Microsoft Outlook integration for time management and resource scheduling, Microsoft Excel for financials and planning, and Microsoft Word for content management. Microsoft has also released Office Business Applications (OBA), which provides office document integration with business logic, data, and services that integrate back to packaged applications. Adoption of integrated Office functions not only reduces “swivel chair” integration among disparate enterprise and desktop applications, but could also improve knowledge worker productivity via a proven user interface.

Rapid implementation methodologies: Realizing that SMBs cannot endure the long implementation cycles of enterprise ERP deployments, vendors continue to focus on quick deployment methodologies. Most vendors, including Agresso, Lawson, Microsoft, and Oracle, incorporate best practice methodologies in their systems integration offerings. Other solutions like SAP’s All-in-One product optimize implementation for industry-specific deployments. This means that SMBs should receive immediate benefits from improved ROI and deployment quality.

More vendor professional services offerings: Today, Oracle and SAP provide business process outsourcing (BPO) directly or via partners.

Expanded solution-centric ecosystems: SMB ERP vendors remain engaged in a fierce battle to design solutions for an increasing number of ever-narrowing market segments, industry verticals, and process categories.

The article has been authored by R Ray Wang, Principal Analyst-Enterprise Applications & Strategy with Sharyn C. Leaver, Paul D. Hamerman and Meghan Donnelly.
Ray analyzes trends in ERP for the enterprise and mid-market. He provides strategy and guidance to many global and Indian CIOs and can be reached at: rwang@forrester.com

The conclusion of this article will appear in our next issue dated October 15th.