Enterprise Resources Planning (ERP) Market - Dismal 1999, the New Millennium to bring Relief (for Some)

Integrated enterprise resource planning (ERP) software solutions have become synonymous with competitive advantage, particularly throughout the 1990's. ERP systems replace "islands of information" with a single, packaged software solution that integrates all traditional enterprise management functions like financials, human resources, and manufacturing & logistics (See Market Information Sidebar for more details). We also believe that having an ERP system is a prerequisite in most business environments to fully take advantage of the latest business information processing trends, such as e-Business and customer relationship management (CRM).

One could distinguish the following two segments within the ERP market:

1. Corporate ERP solutions are primarily focused on the consolidated data management, financial and human resources needs of large Fortune 1000 companies. It evolved from accounting and contract management systems in the early 1980s. Human resources and more comprehensive financial planning and control systems were added in the 1990s. Leading vendors of these solutions are SAP, Oracle, and PeopleSoft.
   
   

2. Plant/Operations ERP solutions are primarily focused on the specific needs of mid-range manufacturing plants and distribution sites or the operations level of global companies. This ERP market segment's roots are in the control automation market of the 1960s and 1970s and the manufacturing planning software market of the 1980s. This evolved into the ERP of the 1990s. Leading vendors of these ERP solutions include SAP, Oracle, PeopleSoft, J.D. Edwards, Baan, JBA (now a division of Geac Software Corp.), Intentia International, SSA, Lawson Software, QAD, IFS AB, Symix Systems, MAPICS, Navision, and a number of smaller niche ERP players.

In 80's and 90's, businesses have been subject to increasing global competition, resulting in a pressure to lower production costs, improve product performance and quality, increase responsiveness to customers and shorten product development and delivery cycles. Furthermore, globalization has greatly increased the scope and complexity of multinational manufacturing organizations. Therefore, companies have long been urged to develop or purchase and implement software applications to automate their business processes, leverage their transnational data stores in order to make more informed decisions, and ultimately, decrease operating costs. Companies realized the need to be able to react rapidly to change due to increasing competition, deregulation, globalization, and mergers & acquisition activity.

During the second half of the 1990s, the market for ERP systems has experienced strong growth rates in excess of 50% per year, from US$ 5.7B in 1995 to US$ 16.6B in 1998 [Source: AMR Research]. Some of the key drivers, in addition to the above mentioned underlining reasons, were:

• The transition from custom-designed legacy software (software developed by or for a specific customer) to the implementation of standard systems that can be applied across different types of industries. This was particularly true for the largest companies, who previously thought that they had the resources to develop business solutions under their own steam.
  
  

• In addition to the transition to standard systems, ERP systems have been extended to support an increasing number of business processes in integrated solutions like engineering, customer support, sales support, human resources, etc.
  
  

• The customer base has also expanded from mainly manufacturing, trade, and distribution to the public and financial sectors, transportation, infrastructure, defense, federal and local governments, utilities, etc.
  
  

• In the past three years, Year 2000 (Y2K) and the adoption of the Euro currency have been important driving forces in the development of the market. As a matter of fact, resolving the Y2K problem has, in many instances, led to the installation of a new ERP system.

The worsening plight of most ERP vendors, caused by the market slowdown, which started in the fourth quarter of 1998, continued in full force throughout 1999. During the last 12 months, the 20 largest ERP vendors achieved an estimated average growth of 25% [Source TEC; this figure should not be confused with the absolute ERP market revenue annual growth], which is much less compared to the equivalent growth of over 40% a year earlier. Particularly affected was the license revenue, which is expected to decline more than 10% in 1999 compared to 1998 (See Table 1). The market was dramatically less profitable than in 1998 (down 27.3%), measured in the total raw $ net income (See Table 1).

Table 1
ERP Market Financial Data	1997	1998	1999 (est.)	2000 (est.)
Total Revenue	11.0	16.6	18.5-19.5	25.0-27.0
Total revenue growth of the market	43%	40%	12%-16%	30%-38%
Average Licenses Revenue/Total Revenue Ratio	56.2%	48.2%	39.0%	35%-40%
Total license revenue growth	43%	20%	-10%	10%-20%
Net income growth over previous years	74.9%	-28.3%	-27.3%	5%-25%
Average R&D Investment/License Revenue Ratio	22.0%	28.5%	32.4%	30%-35%
Average R&D Investment/Total Revenue Ratio	12.4%	13.7%	12.6%	13%-15%

We believe that the continued ERP market slowdown in 1999 was primarily attributable to the following factors:

* The historical growth in sales of ERP applications has come from large, Fortune 1000 multinational corporations. This market has been highly penetrated, and new, large-scale back-office implementations in the F1000 customer base have all but stalled.

* Continued focus of companies on Year 2000 (Y2K) remediation brought the purchases of new ERP systems in 1999 to a significant standstill.

* The relatively untapped Small-to-Medium Enterprises (SME) market has been cautious about starting new projects due to the bad publicity of a large number of unsuccessful ERP implementations in the past. This fear has been additionally aggravated by the need to integrate disparate systems, given that currently no single vendor can offer a complete end-to-end solution (from supplier to end customer).

* The technology paradigm shift from Client/Server to the Internet created uncertainty about investing in the traditional Client/Server technology, which is still prevalent among leading ERP players.

* The economic recession in markets outside North America, particularly in Asia.

The market size for 1999, with the 4th quarter yet to be reported, is estimated at $18.5B-$19.5B (12%-16% growth over 1998), with sales expected to top $55B-60B by 2003, for a CAGR of 28%-32%. The market appears to be consolidating. The top 6 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software Corporation (See TEC's News Analysis article: "Geac and JBA Join Forces to Form New ERP Giant" October 6, 1999), J.D. Edwards & Company, and Baan Co., account for ~70% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify. Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side (See Market Winners, Market Challengers, and Market Losers). We believe that this will become more accentuated, with customers becoming more vendor viability wary. We expect larger ERP vendors to swallow up their smaller brethren, both in ERP and related markets, such as the recent IFS AB acquisition of Effective Management Systems, Inc., the manufacturing execution systems (MES) vendor, and MAPICS' acquisition of Pivotpoint, the vendor of extended ERP for mid-market companies. We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc. with its acquisition of Marcam Solutions.

ERP systems have earned the general perception of being exorbitantly expensive to license and implement, and vendors have recently been trying to change that infamous image with new pricing options in order to keep users' costs down. Users typically pay an up-front per-user (either concurrent or named) license fee and an annual maintenance charge to use ERP systems (typically 12%-20% of the license fee). The per-seat price for ERP varies greatly depending on the number of users, the number of modules to be deployed and what "bells and whistles" are added, and whether the company belongs to the high-end Tier 1 (Fortune 500) or the SME (Tier 2 and 3) market segment. The per-user price range has been from $2,000 to $8,000 (typically higher values for larger companies), with the continual price decline trend owing to fierce competition and the reduced or postponed demand for software. Many vendors offer per-month per-user rental or outsourcing deals as an alternative to traditional up-front licenses. Fixed price, preinstalled, pre-configured ERP is also available and is particularly attractive for the lower-end of market.

Sales cycles vary from months to years depending on the company size, its organizational structure (single or multi-site, international or not), and the functional scope of the project. While the selection phase of software acquisitions will increasingly gain critical importance (due to customers' increased awareness of possibly fatal consequences from selecting a wrong software), the pressure for faster decision-making will mount both from vendors (who want shorter and less fluctuating sales cycles) and users (in order to stay ahead of their competitors). As a rule, every $1 of ERP software sales drives on average another $3-$6 of additional hardware, third party integration and consulting, and resellers revenue, although in some cases additional costs can reach $10-15 for each dollar spent on software.

During the last two years, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), business intelligence, and e-Business. While most traditional ERP software enables the integration and management of critical data within enterprises, companies have increasingly recognized the need to deploy more advanced software systems that manage the global supply chain by enhancing the flow of information to and from customers, suppliers and other business partners outside the enterprise. More recently, the availability and use of the Internet has created a demand for software that operates across the Internet and intranets. This global logistics concept merged with new constraint-based optimization solutions called advanced planning systems (APS) and specialized warehouse management software, resulting in SCM (See TEC's Technology Research Note: "Advanced Planning and Scheduling: A Critical Part of Customer Fulfillment" December 10th, 1999 ). The major ERP players already have offerings or strategies addressing this important need (See TEC's Technology Research Notes: "The Essential Supply Chain" September 16th, 1999, and "SAP APO - Will It Fill the Gap" September 2nd, 1999).

Another important area of functional expansion is in the front office/customer relationship management (CRM) arena. Customers are demanding applications and tools that allow them to link back-office ERP systems with front-office CRM systems. They are also demanding enhanced capabilities for e-Business, especially business-to-business (B2B) and business-to-customer (B2C) electronic commerce. The leading ERP vendors have begun to discern the opportunity these products present and the benefit potential for organizations implementing them. CRM has gone from a vast field of point solutions to suites of customer care applications covering sales force automation, field service, telesales, call center, marketing automation, etc. ERP vendors have explored various routes to penetrate the CRM and e-Commerce markets, such as developing in-house products (SAP, with its telesales module and mySAP.com portal), acquiring point specialists to augment their offering (Oracle through its acquisitions of Versatility for call center, Tinoway for field service, and Concentra for product configurator module), merging full suites (Baan with its acquisition of Aurum in 1997, and PeopleSoft with its acquisition of Vantive in 1999), and partnering with CRM and e-Commerce leaders (J.D. Edwards with Siebel and Ariba, and SAP with Recognition Systems Group for its market campaigns module).

* The historical growth in sales of ERP applications has come from large, Fortune 1000 multinational corporations. This market has been highly penetrated, and new, large-scale back-office implementations in the F1000 customer base have all but stalled.

* Continued focus of companies on Year 2000 (Y2K) remediation brought the purchases of new ERP systems in 1999 to a significant standstill.

* The relatively untapped Small-to-Medium Enterprises (SME) market has been cautious about starting new projects due to the bad publicity of a large number of unsuccessful ERP implementations in the past. This fear has been additionally aggravated by the need to integrate disparate systems, given that currently no single vendor can offer a complete end-to-end solution (from supplier to end customer).

* The technology paradigm shift from Client/Server to the Internet created uncertainty about investing in the traditional Client/Server technology, which is still prevalent among leading ERP players.

* The economic recession in markets outside North America, particularly in Asia.

The market size for 1999, with the 4th quarter yet to be reported, is estimated at $18.5B-$19.5B (12%-16% growth over 1998), with sales expected to top $55B-60B by 2003, for a CAGR of 28%-32%. The market appears to be consolidating. The top 6 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software Corporation (See TEC's News Analysis article: "Geac and JBA Join Forces to Form New ERP Giant" October 6, 1999), J.D. Edwards & Company, and Baan Co., account for ~70% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify. Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side (See Market Winners, Market Challengers, and Market Losers). We believe that this will become more accentuated, with customers becoming more vendor viability wary. We expect larger ERP vendors to swallow up their smaller brethren, both in ERP and related markets, such as the recent IFS AB acquisition of Effective Management Systems, Inc., the manufacturing execution systems (MES) vendor, and MAPICS' acquisition of Pivotpoint, the vendor of extended ERP for mid-market companies. We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc. with its acquisition of Marcam Solutions.

ERP systems have earned the general perception of being exorbitantly expensive to license and implement, and vendors have recently been trying to change that infamous image with new pricing options in order to keep users' costs down. Users typically pay an up-front per-user (either concurrent or named) license fee and an annual maintenance charge to use ERP systems (typically 12%-20% of the license fee). The per-seat price for ERP varies greatly depending on the number of users, the number of modules to be deployed and what "bells and whistles" are added, and whether the company belongs to the high-end Tier 1 (Fortune 500) or the SME (Tier 2 and 3) market segment. The per-user price range has been from $2,000 to $8,000 (typically higher values for larger companies), with the continual price decline trend owing to fierce competition and the reduced or postponed demand for software. Many vendors offer per-month per-user rental or outsourcing deals as an alternative to traditional up-front licenses. Fixed price, preinstalled, pre-configured ERP is also available and is particularly attractive for the lower-end of market.

Sales cycles vary from months to years depending on the company size, its organizational structure (single or multi-site, international or not), and the functional scope of the project. While the selection phase of software acquisitions will increasingly gain critical importance (due to customers' increased awareness of possibly fatal consequences from selecting a wrong software), the pressure for faster decision-making will mount both from vendors (who want shorter and less fluctuating sales cycles) and users (in order to stay ahead of their competitors). As a rule, every $1 of ERP software sales drives on average another $3-$6 of additional hardware, third party integration and consulting, and resellers revenue, although in some cases additional costs can reach $10-15 for each dollar spent on software.

During the last two years, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), business intelligence, and e-Business. While most traditional ERP software enables the integration and management of critical data within enterprises, companies have increasingly recognized the need to deploy more advanced software systems that manage the global supply chain by enhancing the flow of information to and from customers, suppliers and other business partners outside the enterprise. More recently, the availability and use of the Internet has created a demand for software that operates across the Internet and intranets. This global logistics concept merged with new constraint-based optimization solutions called advanced planning systems (APS) and specialized warehouse management software, resulting in SCM (See TEC's Technology Research Note: "Advanced Planning and Scheduling: A Critical Part of Customer Fulfillment" December 10th, 1999 ). The major ERP players already have offerings or strategies addressing this important need (See TEC's Technology Research Notes: "The Essential Supply Chain" September 16th, 1999, and "SAP APO - Will It Fill the Gap" September 2nd, 1999).

Another important area of functional expansion is in the front office/customer relationship management (CRM) arena. Customers are demanding applications and tools that allow them to link back-office ERP systems with front-office CRM systems. They are also demanding enhanced capabilities for e-Business, especially business-to-business (B2B) and business-to-customer (B2C) electronic commerce. The leading ERP vendors have begun to discern the opportunity these products present and the benefit potential for organizations implementing them. CRM has gone from a vast field of point solutions to suites of customer care applications covering sales force automation, field service, telesales, call center, marketing automation, etc. ERP vendors have explored various routes to penetrate the CRM and e-Commerce markets, such as developing in-house products (SAP, with its telesales module and mySAP.com portal), acquiring point specialists to augment their offering (Oracle through its acquisitions of Versatility for call center, Tinoway for field service, and Concentra for product configurator module), merging full suites (Baan with its acquisition of Aurum in 1997, and PeopleSoft with its acquisition of Vantive in 1999), and partnering with CRM and e-Commerce leaders (J.D. Edwards with Siebel and Ariba, and SAP with Recognition Systems Group for its market campaigns module).
We generally believe that, in the long run, market winners will be those vendors with an established large customer base and with huge financial and human resources that would make them more responsive to any future challenges such as sudden market trends and/or technology paradigm shifts. Rated according to this metric, the current market leaders, SAP, Oracle, PeopleSoft, J.D. Edwards, and Baan would be seen as long-term market winners. However, we would like to make a clear distinction between SAP and Oracle, as undisputed winners on one side, and the latter three as winners/challengers on the other side, owing to their substantially lower market share and dismal results in 1999.

* SAP is the current market share leader (~32%) after taking global markets by storm with the release of its flagship R/3 client/server product at the beginning of the 1990s.

Strengths: Commanding market position and brand recognition, very sound financial situation, functional breadth of the core R/3 product, attractiveness of mySAP.com portal for its existing large customer base.

Challenges: Lengthy and costly implementations in the past, a complex and rigid product, slower total revenue growth in 1999 (~12%) with an ~5% decline in licenses revenue and an ~23% decline in net income, delayed delivery of CRM and SCM modules.

For more details, see TEC's note on SAP: "SAP AG - ERP Leader with a 'New Dimension'" September 1st, 1999.

* Oracle fortified its position as 2nd largest ERP vendor during 1999 by increasing its ERP market share (up to ~14%) after being the only large vendor to achieve significant growth in both total revenue (~24%), license revenue (~16%) and net income (~59%).

Strengths: Corporate viability, solid reputation of horizontal applications for functionality and scalability, technology infrastructure ownership, strong international professional services, early Internet architecture adoption and entry to CRM market.

Challenges: Product integration issues, delayed delivery of CRM and SCM modules, divided management attention on a wide range of initiatives, inefficient sales execution.

For more details, see TEC's note on Oracle: "Oracle Co. - Internet Paradigm Boosts Applications Growth" September 1st, 1999.

* PeopleSoft retained its position as 3rd largest ERP vendor, despite sharply sliding license revenue (down ~43%), mostly flat total revenues, the first non-profitable fiscal year, and management upheavals during 1999.

Strengths: Large and loyal HRMS and financial module customer base, corporate viability and culture, user-friendly user interface and development tools (modification feasibility), strong vertical focus for certain non-manufacturing industries.

Challenges: Product integration of acquired Vantive CRM product, market perception of its manufacturing product weakness, no significant number of full ERP reference sites, floundering Internet strategy throughout 1999, low brand awareness outside North American market.

For more details, see TEC's note on PeopleSoft: "PeopleSoft - Are Business Intelligence and e-Commerce Enough?" September 1st, 1999.

* J.D. Edwards lost its 4th largest ERP vendor position owing to Geac's acquisition of JBA International. Fiscal 1999 was the least successful year in the company's history of public trading, with a dismal total revenue growth (~1%), declined license revenue (down ~19%), and the hefty loss of ~$39M.

Strengths: A well-established leading global position in the mid-market, advanced cross-platform migration strategy, OneWorld's architecture that promotes flexibility and ongoing post-implementation system agility, well-developed affiliate channel.

Challenges: Product integration of acquired Numetrix and Premisys SCM products, bland marketing efforts in the past, OneWorld initial product functionality glitches, lack of own CRM and e-Commerce products and need to rely on a number of partnering agreements.

For more details, see TEC's note on J.D. Edwards: "J.D. Edwards - Creating OneWorld of Mid-sized ERP Users" September 1st, 1999.

*

Baan continued its descent on the ERP ladder by dropping to the 6th largest ERP vendor position owing to Geac's acquisition of JBA International. Fiscal 1999 was less disastrous compared to 1998, however still very bleak, with continued declining both license revenue (down ~46%) and total revenues (down ~15%), another non-profitable fiscal year, with significant management upheavals.

Strengths: Discrete manufacturing and project industries functionality, DEM SE concept of rapid implementation and easy reconfiguration, product scalability, potential for offering extended ERP 'one-stop shop' capability.

Challenges: Product complexity, unproven integration of its confederacy of disparate products, prolonged poor financial performance, affiliate channel shake-out, regaining market confidence in the US market.

For more details, see TEC's note on Baan: "Baan Company N.V. - Is the Worst Over?" September 1st, 1999.
While there are a number of successful smaller vendors with exciting product offerings and stellar results in 1999 (e.g. Symix Systems, Great Plains Software, Navision, Fourth Shift Corporation, to name but a few), we will limit our list of market challengers to the four vendors described bellow. They are either already ranked high on the ERP ladder or have exhibited steady growth and expansion in recent years. In addition, they possess attractive product portfolios and innovative technology foundations.

* Geac has snatched the 5th largest ERP vendor position owing to its acquisition of JBA International. Geac is also the largest Canadian software company.

Strengths: Strong history of growth, cross-platform and scalable products, potential for serving a wide range of industries, strong global coverage.

Challenges: Merger growing pains, integration issues and discontinuation of redundant products, lack of a CRM product within the product portfolio, no significant number of full ERP reference sites.

For more details, see TEC's note on JBA International: "JBA: Will it Remain '@ctive Enterprise'?" November 1st, 1999, and News Analysis article: "Geac Metamorphosises JBA Into Gear, but Cuts 20% of Staff" November 17th, 1999. A more detailed TEC's note on Geac Software Corporation is currently in the works and is expected to be published in a due course.

* Intentia is expected to occupy the 7th largest ERP vendor position owing to its revenue growth of ~20% in 1999, while languishing SSA suffered a revenue decrease of ~25% during the same period. Fiscal 1999 was however a challenging year, with declining license revenue (down ~14%) and an expected non-profitable fiscal year.

Strengths: Versatile product functionality (both for discrete and process manufacturing), tight vertical focus, strong track record, corporate culture and viability, heavy R&D investment.

Challenges: Low brand awareness outside the European market, non-uniform global availability of some modules (HR/Payroll, Transportation), dubious future attractiveness of its fully Java-written product due to performance.

For more details, see TEC's note on Intentia: "Intentia: Java Evolution From AS/400" October 1st, 1999.

* Lawson Software is entrenched in the 9th largest ERP vendor position owing to its revenue growth of ~35% in 1999, reaching $270 million in revenues. The company is currently the largest privately held ERP vendor.

Strengths: Innovative product technology (early Web-enablement, interconnectivity, and very intuitive user interface), tight vertical focus, solid track record and viability, heavy R&D investment, cross-platform and open-database product, very high customer retention rate (96%).

Challenges: Low brand awareness outside of the North American market, non-support for manufacturing applications, late development of CRM modules, dubious future attractiveness of its immunity to financial statements disclosure to more conservative CFOs.

A more detailed TEC's note on Lawson Software is currently in the works and will be published in a due course.

* Industrial & Financial Systems, IFS is expected to occupy the 10th largest ERP vendor position within the next 18 moths owing to its revenue growth of 96% in 1998, and expected growth of over 60% in 1999. Fiscal 1999 is however expected to be non-profitable, due to a number of recent acquisitions and worldwide expansion costs.

Strengths: Product technology (component and interconnectivity), expanded ERP product breath, strong track record and current status as the fastest-growing ERP vendor, corporate culture and viability.

Challenges: Maintaining management effectiveness while growing very fast, low brand awareness outside of the European market, integration of recently acquired products, narrow choice of database (only Oracle).

For more details, see TEC's note on IFS: "Industrial & Financial Systems, IFS AB: Thriving on Product Flexibility and Incremental Deployability" January 3rd, 2000.
We predict that more than 50% of current ERP vendors will not survive until 2004 (65% probability). About half of these will transform into system integrators, while either relegating their product to a niche 'bolt-on'or legacy status. The remaining half will be acquired, and those will be vendors with poor financial performance and undervalued market capitalization but with a large customer base and a deep focus and expertise in a certain industry. The following two vendors are case in the point.

* System Software Associates, SSA continued its free fall on the ERP ladder by dropping to the 8th largest ERP vendor position owing to its prolonged dire situation. Fiscal 1999 was a somewhat less disastrous year compared to 1998, however still very dramatic, with continued declining in both license revenue (down ~51%) and total revenues (down ~25%), another hefty loss of $88.2M, and management upheavals.

Strengths: BPCS functionality breath and industry focus, large customer base and international presence, fast implementations and low total cost of ownership (TCO), cross-platform product.

Challenges: Dire financial situation, BPCS 6.0 quality and performance glitches, installed-base dissatisfaction due to migration glitches, lack of own expanded ERP modules.

For more details, see TEC's note on SSA: "SSA: Evolving Into Systems Integrator To Survive" November 1st, 1999.

* Marcam Solutions continued to struggle in the 1st half of 1999 until being acquired by Wonderware, the factory automation division of Invensys Plc., a global electronics and engineering company with headquarters in London, UK for the price less than a half of its annual revenue ($60 million).

Strengths: Protean, PRISM, and Avantis niche functionality and plant-level features, product flexibility and ongoing post-implementation system agility, tight process manufacturing focus, cross-platform product.

Challenges: Poor financial performance, dubious ERP strategy, confinement to process manufacturing, weak financial and distribution modules, lack of expanded ERP modules.

For more details, see TEC's note on Marcam Solutions: "Marcam Solutions: Shifting its Focus to MES" December 13th, 1999.
We believe that growth rates above 40% will be hard to sustain, however growth will remain the word associated with the ERP market in the 2000's. As mentioned earlier, the market size for 2003 is expected to top $55B-60B [Source: TEC]. In addition to the growth created by the fact that many companies have not yet solved their basic ERP needs, particularly in non-manufacturing sectors, we believe that the following factors will further drive this growth:

* The great number of companies who were reticent in making their strategic ERP investments before 2000 and resolution of Y2K, will have to make that investment in the foreseeable future in order to meet competitive pressures.

*

The emergence of Internet-based system solutions during the next 3 years will lead to a faster flow of information between all members of the logistics chain. Demands on quality, customer-focus and faster deliveries are intensifying at an increasing pace. This will require extensive change and a need for new enhanced ERP systems. The future of ERP lies in improving the supply chain and fostering better collaboration across multiple enterprises. Some ERP vendors have already started creating virtual trading communities consisting of their large existing users and their trading partners, whereby ERP vendors provide all the necessary 'plumbing' work.

* The enhanced functionality offered by ERP vendors will increase the number of end users within the current customer base. Currently, ERP is used by less than 20% of a company's employees, on average. We predict that number to double within the next 3 years (70% probability)..

* The emergence of e-Commerce has as a consequence the rapid increase in the number of new 'dotcom' companies. These companies have the same need for business systems as other trading companies with respect to human resources management, financial management, order management, warehousing and distribution, etc. Moreover, e-commerce will create new paradigms for business that will fuel a new wave of business process re-engineering, and therefore more ERP software sales.

* Some geographic markets outside North America and Western Europe have not been significantly penetrated by ERP systems thus far, and we expect further vendors' expansion there in the future.

* Many sectors, such as telecommunications, utilities and the public sector, are now exposed to increased competition due to deregulation and increased globalization, and are turning to deployment of ERP software in order to remain competitive.

We believe that, within the next two years, ERP will be redefined as a platform for enabling e-business globally. Originally focused on automating internal processes of an enterprise, ERP systems will include customer and supplier-centric processes as well. The conclusive evidence of this redefinition is the move of all major ERP players into CRM and SCM applications. ERP software suites will become universal business applications that will encompass front-office, business intelligence, and e-commerce/supply chain management, and ERP will no longer be the acronym sufficient enough to cover it, so we would like to suggest a new acronym - iERP, meaning inter(net)-enterprise resource planning.
While the concept of best-of-breed will not go away, users will increasingly look for one strategic vendor to fulfill the majority of their business application needs. This is particularly true for the lower end of the market. This trend, bundled with strong vendor competition, will drive increased merger & acquisition activity in the entire business applications market. Smaller ERP vendors and best-of breed CRM or SCM vendors will acquire new functionality and merge to protect themselves. We predict that more than 50% of current ERP vendors will not survive until 2004 (65% probability). About half of these will transform into system integrators, while either relegating their product to a niche 'bolt-on'or legacy status. The remaining half will be acquired. The most likely acquisition candidates will be those vendors with poor financial performance and undervalued market capitalization but with a large customer base and a deep focus and expertise in a certain industry. This should not necessarily be a bad thing for current users of those products. The acquirer will either continue product development and support of the acquired product (40% probability) or offer a relatively attractive migration path to its product (35% probability). However, there is a 25% probability that the acquirer is only interested in milking the maintenance revenue without ongoing product support. These users may find themselves left in the lurch with a legacy product. In addition, we predict some unconventional acquisitions, such as the acquisition of ERP vendors by best-of-breed CRM or SCM vendors, with a view to offer a more comprehensive solution. We believe that, within the next two years, Siebel Systems and i2 Technologies will have to resort to acquiring an ERP vendor (60% probability).

As a result of the above described activities, we predict that within the next three years, over 65% of the license revenue of the SCM market and over 50% of the license revenue of the CRM market will come from current ERP vendors (70% probability). Currently, these figures are estimated to be less than 10%. Furthermore, ongoing merger & acquisitions as well as the need to develop new product features will increase R&D investments in the future, measured as a percentage of total revenue (See Table 1).

Despite the user preference for a single, 'one-stop shop' vendor, componentized software products, interoperability standards and Internet technology will lead to fewer large-scale projects and an ongoing stream of smaller ones. This will force third-party system integrators and consulting companies toward fixed-price, fixed-time implementations. Moreover, vendors will increasingly attempt to conduct system integrating and consulting work themselves, which will further decrease the industry average license revenue/total revenue ratio (See Table 1).
We believe that vendors that are best positioned to survive fierce competition will have to exhibit certain core competencies. Competitive costs (low and flexible software license pricing and implementation costs) and outstanding global service (proven fast implementations and customer loyalty) will remain important requirements for success, particularly in the lower end of the market. However, focus will be the key factor for survival. Vendors that will survive the next three years will have focused their business and product on particular industries, preferably those with a current low penetration (federal government, insurance, healthcare, transportation), instead of a more generic, horizontal approach. Winning ERP products will demonstrate deep industry functionality and tight integration with best-of-bread 'bolt-on' products in a particular vertical. Seamless interfaces to other vendors' products will be a matter of course (to achieve real-time collaboration among business partners' disparate systems, as well as to more easily penetrate a competitor's client base with their 'bolt-on' components), as well as growing partnerships with renowned system integrators, consulting companies, and application service providers (ASP).

Buyers will increasingly realize that architecture plays a key role in how quickly vendors can implement, maintain, expand/customize, and integrate their products. An adaptable architecture is the least common denominator for a flexible ERP system. Although a component-based architecture is not an explicit requirement for ERP flexibility, component-based applications generally provide greater flexibility than their monolithic counterparts. Further prerequisites for flexibility will be abstraction of technical complexity (manifested via the use of intuitive tools, aids, or wizards that guide user through a set of steps to achieve a desired end result) and an intuitive, easy-to-use user interface.

Global financial capabilities (including support for the Euro), advanced planning and scheduling (APS), product configurators, supply chain management (SCM), customer relationship management (CRM), e-Commerce, business intelligence (BI), and component (object-oriented) architecture will remain the order winners for the next 2 years. After that period of time, we believe these functional and technological features will be demoted into commodities (order qualifiers), whereas the vendors' financial viability, their service & support capability, and their strategy for improving their products and services over time will become winning criteria.

The large players (i.e. the Big Six) have inherent advantages and incentives to develop needed competencies: their installed base, their market clout, and their ability to commit resources to development. To separate themselves from the rest of the pack, they will either (1) have to use those internal resources to develop their own extended products and capabilities, as SAP has done, or (2) have to buy/use someone else's superior technology/product, which was the route generally pursued by other large vendors.

Small vendors should either (1) try to develop the above mentioned required competencies and build up as much market share as possible, either under their own steam or by means of mergers & acquisitions, thereby strengthening their position, or (2) align themselves with a major vendor.

Users' need to understand their business requirements and critical business processes can never be overemphasized. Not knowing their present business state of affairs as well as their strategic intent and direction will disqualify any future ERP system implementation from being a success. Is the customer a multinational corporation that requires sophisticated methods of dealing with multinational currency? Is the customer a very large corporation that will have to provide for a significant scalability and multi-byte character strings (MBCS)? Answers to these questions and a myriad of similar ones should help users create a long list of vendors to include in an ERP package selection. Precedence should be given to vendors with a proven vertical focus on the user's industry. Another frequently forgotten, but important aspect in software selections is detail. Selections that fail to consider requirements at a sufficient level of detail inevitably produce costly surprises during subsequent implementation.

Users should also be aware of consolidation in the ERP market, and corporate viability should play a prominent role in every selection process. Virtually all software selection teams appreciate the importance of product functionality and product technology requirements in making the right decision. Too often, however, these are the only criteria that play a role in the decision-making process. Other often overlooked factors can determine the eventual success or failure of a new system, including vendor corporate strategy, global service and support capabilities, financial viability, and, of course, cost.

We strongly advise users to exercise their prerogative of "scripted scenario" software demonstrations, in order to further distinguish between the vendors who made the short list. "Scripted scenarios" are detailed sequences of business activities that need to be supported by the software. Vendors present these business scenarios on their live products - tailored to the way the organization does business as defined in the scenarios. These scenarios allow the organization to see how the live product operates in their specific environment, according to the critical business processes outlined by the selection team. In addition, the users gain an understanding of the extent to which the vendor would be able to modify the software to accommodate the users' special needs.

After receiving the final proposal from each of the vendors included in the negotiation stage, users are advised to perform sensitivity analysis to determine the ultimate vendor of choice. This analysis should not be based strictly on price, but also a head-to-head comparison of the functional and technical capabilities of the products, quality of initial implementation and ongoing service and support quality, the vendors' relative financial stability, and their strategy for improving their products and services over time. These factors ultimately lead to the appropriate vendor choice. At this point, users may want to put into action any counter-proposal or negotiation steps, which may include a combination of the following: a request to lower initial software costs, inclusion of free consulting or training resources, reducing the scope of the services offered, a decrease in maintenance fees, negotiating the license fee per module, negotiate discounted license fees for casual users, provision for future incorporation of "extended ERP" components by bundling them into the contract now at negotiated license fees, etc. 'Bolt-ons' should be selected only from official business partners of the primary ERP vendor, after making sure that partnership is not a mere marketing pitch.

Last but not least, users should ensure that their critical requirements are unequivocally spelled out in a contract with a selected ERP vendor. Future clients are also advised to request the vendor's written commitment to promised functionality, length of implementation, and seamless future upgrades, particularly for recently released products and products whose release date is due in the near future.