After a down period, ERP innovation is back. And it's being led by a couple of industry giants: SAP and Microsoft.
The frenzied consolidation that gripped the enterprise resource planning (ERP) market in recent years is by no means complete, but as customers demand better usability and flexibility, and easier access to their data, the light of innovation has once again begun to shine, according to a recent Forrester Research study.
"Consolidation does make innovation difficult," said Paul Hamerman, vice president of enterprise applications at Cambridge, Mass.-based Forrester, "because [companies] that have absorbed a lot of ERP vendors over the past couple years [have to] go through a lot of product rationalization, salesforce rationalization [and] overhead rationalization. So it does tend to distract companies from building software."
With their less aggressive acquisition strategies in the ERP space than such companies as Oracle and Alpharetta, Ga.-based Infor, Microsoft and SAP are innovation leaders among the larger ERP vendors, Hamerman said.
Microsoft made some notable buys in years past, including Great Plains, but has not been extremely active in the acquisitions market since then.
Instead, the company has worked on enhancing its solutions, especially on the usability front. For example, Microsoft has come up with good designs around roles and business processes in its ERP applications, designs that have solid integration with MS Office, according to Hamerman.
"Traditionally, applications have been designed for administrative workers because so much of the data-entry activities were centralized," he said. "What Microsoft is doing now is designing the business applications for a wide variety of users -- because the applications need to be used by the process owners on the front lines and not back-office people."
Likewise, SAP's "tuck-in" acquisition strategy has helped fuel its ability to innovate. SAP has made large investments in Virsa Systems, Outlooksoft and other companies to "tuck in" to holes in its offerings, but these buys are relatively small compared with some of the multi-billion-dollar moves of Redwood Shores, Calif.-based Oracle.
SAP has been integrating these complementary purchases with its overall suite of products, Hamerman explained, so the overall strategy has been more focused on product development than on acquisition.
Where Microsoft's focus has been on usability enhancements, SAP's improvements have centered more on configuration. A1S, SAP's Software as a Service ERP offering for the small and midsized business market -- due out later this year -- draws attention particularly for its configurability, Hamerman said.
"What SAP has done is create a whole UI [user interface] around the setup -- around the configuration layer -- which is pretty innovative in that the application is being designed for rapid configuration rather than customization," he said. "It has a pretty in-depth configuration layer where the customer can go through and set it up for the business processes that they want to execute."
This increase in innovation, along with continued midmarket and vertical specialization, plays a big part in Forrester's projection that the ERP market will grow at 7% per year through 2011, from this year's level of $30 billion.
"We're seeing a market that grew a lot in the late 1990s, stagnated and plodded along for a few years, and now is back on the upswing," Hamerman said. "Newer technologies that are coming into play, and much-needed improvements in usability and business intelligence capabilities, are going to put some new life into the market."
Despite this innovation, Forrester doesn't expect to see the major ERP vendors stealing a lot of business from one another in replacement deals. The reason, according to Hamerman, is that these implementations are major investments, and switching a large ERP installation from one vendor to another is a costly and rather painful process.
One exception to that general rule may be companies that run mixed environments of SAP and Oracle. In such environments, Forrester does expect to see some standardizing toward one vendor.
What does this mean for SAP users?
In the study, Forrester recommends that SAP ERP users "stabilize today while preparing for the future."
"Customers of big ERP vendors like SAP need to think about upgrades and about consolidating their SAP environment where they have multiple versions and instances of the software running," Hamerman explained. "Companies need to look at getting a stable environment in place and also lowering overall operating costs."
Upgrading can give customers more flexibility -- as newer software versions take advantage of SOA (service-oriented architecture) to make integration easier -- and also more process-oriented features, according to Hamerman, who thinks SAP's Enhancement Package strategy will be valuable.
"Enhancement Packs make it so customers don't have to go through any major upgrade for several years, but they can adopt pieces of functionality," he said. "This is a strategy Oracle's been doing for a couple years, but it's new to SAP."