Is ERP Still a Four-letter Word?

How Open Source Communities Are Revolutionizing ERP

xTuple CEO Ned Lilly
xTuple CEO Ned Lilly
By Ned Lilly

Is ERP still a four-letter word? While the larger players in the supply chain market understand the benefits of enterprise resource planning software, many smaller companies continue to recoil from the complexity and expense they have long associated with a full-fledged enterprise platform. For many years, "real ERP" seemed like overkill for most companies — and the benefits promised by spiffy sales people seemed far from certain.

But this perception is changing quickly as even the smallest companies are adapting to a more mobile, global, integrated marketplace in order to survive — and even thrive — in this difficult economic climate. To meet these challenges, communities of software developers are responding with more affordable solutions to old-school ERP, and new, exciting approaches for engineering and delivering them.

We are currently in the midst of a period of significant disruption for the ERP marketplace. The rise of open source software, in particular, is bringing a revolution in business capabilities to companies of all sizes, while adding to what already looked like mortal challenges for the business models of old-line vendors.

Open Source Driving More Than Cost Savings

Proprietary ERP software vendors used to be king. But following in the footsteps of infrastructure tools such as the Linux operating system, databases and Web servers, a new generation of open source application vendors saw an opportunity and made their move. Open source solutions are gaining popularity among both large and small enterprises while traditional solutions maintain an increasingly tenuous hold on incumbent customers.

Some have dubbed 2009 as the "Year of Open Source," with new solutions in nearly every domain debuting each day. The economic downturn has created huge demand for solutions with lower entry costs, accelerating the consideration of open source solutions in companies of all sizes. Eighty-five percent of the companies surveyed in a 2008 report by the Gartner Group reported they were using open source software in their organization — an increase of nearly 25 percent since 2005. A December 2008 Forrester Consulting study commissioned by Bull found that the primary motivation to adopt open source enterprise solutions has thus far been cost savings (56 percent).

However, the conversation is now expanding beyond basic dollars and cents to focus on some of the other core benefits of open source software — namely, flexibility, control and a greater ability to tailor software to meet a company's unique business requirements. While CIOs and CFOs alike have long understood the potential for cost savings, the operational argument for open source is at least as strong as the financial one. Here's why.

Community-driven Development Trumping Proprietary Product Roadmaps

A primary reason that open source is succeeding even in products as complex as ERP is the power of real community-driven product development. Before open source, large software makers, with quarterly timelines and shareholder pressures top of mind, followed the model of infrequent, large-scale updates to already hulking platforms. (Of course, software maintenance costs would reliably rise every year, regardless of the frequency or quality of product updates.) The changes that did come were as likely to be influenced by the software company's commercial objectives as by actual customer requests for product enhancement. By contrast, today's open source ERP products are driven wholly by real-world challenges and actual user requirements.

This is, to a great degree, attributable to the market power gathered by a large community of highly skilled and experienced users — many of whom may have little to no commercial relationship with the vendor. Initial claims by proprietary vendors that open source solutions lacked support or documentation have been blown away by the sheer depth of the communities that surround many open source products. This depth sets a high bar for commercial product developers — to create additional value over what's freely available. The good ones do. But the benefits go beyond support into development and extend into the way that software is created and maintained.

Today's open source community members not only can request enhancements but can also enact meaningful changes to the product themselves independently. This can be as simple as fixing a bug that a larger vendor might not ever bother to address, or as involved as creating wholly new functionality. Open source "best practices" call for a robust, public discussion of any proposed enhancements, and shared learning from the successes and failures of other products in the past. Once the change is written, this real-world innovation is shared across the community of users, quickly making available even the smallest enhancement for the entire user group.

This is a fundamental business process improvement — arguably akin to the supply chain improvements of the Japanese automakers — and it is having profound long-term effects on the companies that are exposed to it.

This community approach to collaboration is even moving beyond software to be applied within corporate cultures. The same Forrester study found that 42 percent of respondents said they are working to better collaborate and share intelligence within their businesses, creating a "corporate open source community" of sorts.

Traditional Solutions Hedging Bets, Playing Catch-up

In the face of this game-changing competition, and with IT decision makers and financial managers alike looking for more bang for their buck, some proprietary ERP vendors have raced to make changes in order to try to stay competitive with lower-cost options.

Proprietary vendors looking to stem customer defections have put forward various approaches to ERP that provide greater flexibility and relinquish more control over the product to the users. One notable company in the space has acquired and integrated dozens of legacy products in ERP, customer relationship management (CRM), enterprise asset management (EAM), and other related fields. The company recently launched a program aimed at giving customers lower-risk options to upgrade to one of the company's more current products. It's largely a banking program akin to GMAC (uncomplicated by any hard assets), but give them credit for trying.

Other vendors are experimenting with various implementations of software-as—a-service (SaaS), hosted/managed services or cloud computing — which certainly reduce the upfront cost investment of traditional perpetual licenses. But it's still too early to draw definitive conclusions about whether SaaS really gives users more control, or whether it just changes the nature of their dependency on the vendor.

But overall, it's fair to say that these software makers are feeling pressure to release new, simplified, lower-cost options that allow managers more control over their ERP platforms, including deployment options. In fact, all the major open source ERP products can be deployed as SaaS solutions, and often are.

Bruce Richardson, chief research officer at AMR Research, notes: "[Proprietary] ERP vendors don't seem to be getting the big picture regarding SaaS. Like the Big Three domestic automakers, the largest ERP vendors will have to embrace and develop a hybrid strategy. In this case, it means supporting multiple deployment options."

Further, these larger vendors that have been "swallowing up" smaller vendors in attempts to gain market share must contend with an additional objection. Users see a significant risk working with a platform or application that has been recently acquired. Customers are unsure how long the acquiring companies will support and continue to enhance these applications. And they're concerned about compatibility issues across multiple platforms. In many cases, if they're starting anew anyway, open source looks like the option with the least potential for vendor lock-in.

Macro … and Micro

One area that's drawing increasing attention from open source and traditional vendors alike is the capabilities required to contend with globalization. For example, ERP platforms must enhance managers' abilities to face the specter of dealing with multiple and global supply chains — challenges involving currency, language, tariffs, documentation requirements and the like. As the supply chain continues to globalize, managers will also see more mandates for interoperability, open standards and disintermediation of expensive, proprietary middlemen (such as traditional EDI suppliers).

ERP platforms must also serve a larger role in not only reporting status but also in informing and spreading actionable operational intelligence to organizational decision makers.

"Today's supply chains need to be bi-directional, with every link supporting the flow of not only goods but information as well," says Joe Sullivan, regional director for Canada with Tompkins Associates. That means real-time data exchange between suppliers, customers and other trading partners must be made available on multiple platforms, devices and interfaces to existing tools and solutions up and down the supply chain.

It also argues strongly for a more rapid and affordable means to add needed functionality to existing ERP implementations without a wholesale "rip and replace." A growing number of vendors are following the lead of the Apple iPhone "App Store," where customers can purchase and experiment with niche functionality in a modular, "widgetized" way.

As an example, my company, xTuple, recently announced the debut of the xChange, an online marketplace of add-ons and extensions to xTuple ERP, such as a point-of-sale (POS) package, business intelligence dashboards and next-generation EDI tools. The xChange provides users with a convenient way to share and discover solutions ranging from third-party Web site connectors to handy "snap-in" tools that enhance the xTuple applications.

Development at Open Source Speed

The effect of community-driven development clearly goes well beyond the cost savings that first attracted organizations to open source technologies. It has delivered not only a better understanding of user needs but has even sped the development of solutions to meet them.

What's more, the community-driven approach has raised expectations among even the customers of proprietary applications — they too are demanding that new capabilities be more customizable and that enhancements come faster than ever before. In all, open source communities will continue to play a key role as companies of all sizes seek to refine their ability to share data in real time, while working with an increasingly global supply chain.

Given the momentum being gathered through community-driven development, it's clear that going forward, organizations that rely solely on proprietary software suites will be left far behind.

About the Author: Ned Lilly is the president and CEO of xTuple, a provider of open source enterprise resource planning software. Lilly co-founded xTuple, originally called OpenMFG, in October 2001 with the aim of bringing the worlds of open source and ERP together to solve the unmet needs of small to midsized manufacturers. More information at www.xtuple.com.

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