ERP to Rebound - Slightly

ARC: Suppliers will focus on ROI case for tier-two, -three organizations

Dedham, MA  January 8, 2002  The flagging market for industrial enterprise resource planning (ERP) solutions will rebound over the next five years, reaching $9.5 billion by 2006 as ERP suppliers focus on return on investment to attract tier-two and -three customers, according to a new study from technology consultancy ARC Advisory Group.

ERP-related software and services had their heyday in the late 1990s when companies were scrambling to update systems on the eve of the Y2K rollover. But after hitting approximately $15 billion in 1999, the market suffered a sharp downturn with the advent of the new millennium, falling to $9 billion in 2001, ARC calculated.

"The ERP market growth in manufacturing industries of the late 90's was fueled by the Y2K issue facing the larger tier-one manufacturers (revenues in excess of $1 billion), and with the passing of Y2K and the saturation of tier one, the market from ERP software license revenue has been in a nose dive that starts to recover in the latter half of 2002," predicted Steve Clouther, an ERP analyst at ARC and the author of the new ERP Software & Services Global Outlook market study.

"Over the past two years, the revenues from the ERP-related services, especially maintenance, has kept many of the suppliers afloat," Clouther continued. "The concept of the extended enterprise and e-collaboration, coupled with fast-track implementations in tier two, will be key elements in the recovery."

In 2001, ERP services accounted for 65 percent of the total ERP revenues to the discrete and process industries, according to the study. Of the service revenues, maintenance represented the lion's share, at 42 percent, and for many suppliers it was in the 60 to 70 percent range. Many of the larger ERP suppliers started breaking out maintenance as a separate line item in their financial reporting, and some suppliers have attempted to classify the maintenance service revenues with product revenues. "The ever-growing installed user base and ever-changing technologies and architectures will continue to make maintenance a very vital element of the future revenues," said Clouther.

The saturation of tier-one companies and the downturn of the global economies affected all of the ERP suppliers around the world, signifying the end of the blockbuster ERP implementations based on large enterprise-wide license agreements packaged with a wide range of business process re-engineering contracts and implementation and integration services. Those scenarios are a thing of the past, ARC asserts, and the market is now dependent on smaller, but more numerous contracts with second- and third-tier companies.

Meanwhile, new technologies are making it easier for the ERP suppliers to make inroads with cost-conscious companies in the lower tiers. Return on investment is critical for the tier-two and -three manufacturers, providing the business justification for companies to implement ERP systems. Today's ERP solutions now have solid business knowledge management functionality utilizing online analytical processing (OLAP) technologies to provide the tools that make it easier to track and model business parameters associated with ROI.

In addition, ERP solutions are addressing the extended enterprise and e-collaboration, whereby the integrated solution brings the back-office together with the front-office in order to deliver value-added products and services the full length of the value-chain, spanning customers, suppliers, manufacturers, distributors and financial institutions.

Finally, companies can use supplier-provided industry solutions maps to plan out the business processes within their organizations. The maps present a complete business solution for an industry in a process-oriented way and are designed for use as a tool to help visualize, plan and implement a coherent, integrated and comprehensive information technology solution within a company. Industry solutions maps and fast-track implementations contribute to the ROI  there is less room for change but at the same time, less room for error.