The worldwide recession that has battered so many markets has not spared the market for ERP software -- but that...
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might be good news for ERP buyers, according to Paul Hamerman, analyst with Cambridge, Mass.-based Forrester Research.
"Soft market conditions mean fewer deals for vendors and better deals for buyers of ERP applications," Hamerman wrote in a recent report on the state of the ERP market.
The overall market for ERP software will see a 24% decline in license revenues this year, Forrester predicts. In the first six months of this year, SAP itself saw a decline of 39% in license revenues compared with 2008. Yet demand is still there. A 2008 survey by Forrester found that more than two-thirds of respondents are actively investing in ERP software.
"A company has to manage the ERP total cost of ownership whether there's a recession or not," Hamerman said. "What the recession has caused is some cost-cutting strategies that are a little more severe."
For example, some companies have elected not to renew their maintenance contracts, turning instead to third-party vendors like Rimini Street. Oracle's lawsuit against former SAP subsidiary TomorrowNow and SAP's own decision to replace its low-cost maintenance option with more expensive Enterprise Support have helped to throw a spotlight on the issue. Maintenance is one area where ERP vendors have not seen revenue fall off and have even seen some growth, according to the report. "This is not a bad thing for ERP vendors, as long as they can maintain maintenance subscription renewals at rates exceeding 95%," Hamerman wrote.
Where else is ERP spending going?
Some companies are turning to ERP hosting services as they look to save on staffing and establish predictable costs, according to Hamerman. Others are consolidating multiple systems for efficiency and standardization, but those are typically long-term, multi-year projects. There are some efforts to upgrade, he said, but those are mostly due to end-of-life support on systems like SAP R/3 4.6c and 4.7.
Although software as a service (SaaS) is an immaterial fraction of the overall market (2%), it is catching the interest of ERP buyers, and Forrester predicts that it will become a material factor within the next two to three years. It's not just the delivery model either; the subscription-based pricing is also attractive to many buyers.
"My sense is that the business model needs to change in application software," Hamerman said. "SAP is well aware that the license revenue model with non-recurring services needs to evolve to a model that's much more locked in around long-term contracts and recurring revenue streams."
In its last earnings call, SAP indicated that it is already working with some of its larger customer to spread out payments over multiple years rather than forcing customers to pay the big upfront fees traditionally associated with enterprise software.
Oracle and SAP remain far and away the market leaders in ERP, with global revenues of $7.8 billion and $17 billion respectively, accounting for about 56% of the market.
Forrester predicts that, moving forward, ERP vendors like SAP will increase their focus on industry-specific markets and acquire smaller vendors to help fill in those vertical and functional gaps. Also, innovation will focus around the user experience, business process flexibility, embedded business intelligence and Web 2.0 features.
SAP and other ERP customers should be prepared to challenge vendors to make their deployments more successful, according to Forrester, asking for such things as business intelligence capabilities delivered as enhancements rather than add-on modules and more industry-specific functionality.
As the market recovers, buyers will maintain leverage over vendors and implementation providers, Hamerman said. Customers that have put off projects will need to re-evaluate them as they emerge from the recession.
"What happens with ERP," he said, "is that there's some deferred investment that over time creates pent-up demand."
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