CEOs Turn Their Backs on ERP in Favor of On-Line, ROI Apps.

By Siobhan Kennedy

The ERP market is going through a significant transition as the traditional back office vendors are being forced to wage war against a new breed of on-line, web-centric software suppliers. And the next five years will be crucial in determining which vendors will survive. That was the conclusion of Credit Suisse First Boston analyst George Gilbert during a conference call with analysts and vendors on the state of the ERP market approaching the year 2000. According to Gilbert, ERP companies like SAP AG, PeopleSoft Corp and JD Edwards and Company are facing increasing competition from front office, customer relationship management and on-line application vendors, who are all pushing their software as alternative solutions to the old, traditional legacy ERP environments.

Until now, the slowing down of ERP application sales and the continuing squeezing of that market has largely been attributed to the impending transition to the year 2000. That companies don't want to invest in their ERP systems when they're so busy worrying about whether or not their IT infrastructure is Y2K compliant, has to date been the accepted notion. While that may have been true last year, and even at the beginning of 1999, the reality is now somewhat different. "There's been a change in customer focus to investing in strategic, return on investment web-based applications," says Gilbert, "CEOs are panicking about the internet and they perceive ERP as legacy plumbing." He likened the situation to the burning of so-called witches at the stake during the fifteenth and sixteenth century. "It's shoot first and ask questions later," he said, "that's what CEOs are doing with respect to their on-line strategies. It's 'get me on line, at whatever cost' because they're frightened of being left behind."

But rather than thinking about the two markets as separate worlds, customers should realize that both ERP and the new breed of on-line application vendors are actually converging on the same space. "We've moved from one extreme to the other, but each side needs the other. It's not that one market is suddenly going to go out of business, it's just a question of who will be more successful at bridging that gap, and the next five years will be crucial," Gilbert said.

From the ERP vendors' point of view, to be successful, they need to start adding more operational functionality - customized, vertical web-based applications for different industries - to their product suites. Part of the reason the ERP market crashed was because it took too long for the vendors to start delivering those systems, Gilbert says, adding that the market will see a return to growth once that starts happening. ERP vendors have tended to stick to their roots in administration and accounting but they're suddenly starting to realize they have to wake up and embrace the internet or they'll miss out to the ambitious e- business-talking on-line, front office and CRM vendors, he says.

The ERP vendors will approach it in different ways, the analyst said. Some, like SAP, are more likely to build their own solutions. Over the last few months, the German software house has made various moves in the on-line direction with the launch of its Enjoy SAP initiative, its range of New Dimension applications and the recent launch of its MySAP portal. But others, like JD Edwards, will choose to partner with leading front office vendors, as it has with Siebel Systems Inc and Ariba, or acquire them, as it did Numetrix for its on-line procurement product. And all the other ERP vendors are doing similar things, but the time its taking them to haul their set of clunky, back-end applications to the internet, and develop new ones, means that for the most part, they won't begin to see any meaningful contribution to revenues until the year 2000. At least then, though, they'll have the sales force and user base in place to market and distribute those applications as far and wide as possible. "They're largely selling their software through a direct sales force, they don't have the feet on the streets that the ERP vendors have," Gilbert said. But there story is nonetheless a convincing one. "It's not a panacea, but there's still great value to it, if you can compound sales guys with information remotely, that's great," he said, "but it doesn't mean they can necessarily look up into the back office systems when they need to close deals. They can't always get the configuration details, pricing and availability. They need more integration."

The no man's land between the front and back office will also create a growing opportunity for systems integrators and enterprise application integration vendors, he says, all of which will try and develop products to stitch the existing solutions together. For the customer trying to decide which avenue to pursue, Gilbert says it's likely to be a different answer for each situation. Some may want to stick with their ERP partners and wait for them to deliver full front end integration and services while others, with only small investments in ERP - a home grown general ledger system for example, may be more attracted by the fast moving front office vendors as an immediate solution to getting on-line a gaining a web presence. The path may become clearer later this year, when the ERP vendors actually begin to demonstrate their solutions, live, during user shows and conferences. "Customers are going to have to meet half way some time down the line, and they shouldn't write off the ERP group," he concludes. "But it's not yet clear how far each side will have to advance. There's certainly an advantage to building rich, front end functionality but it won't replace the back end infrastructure."