Does a shift to subscription mean better ERP?

Does a shift to subscription mean better ERP?

Summary: Is it all over for ERP? That's one analysis of Forrester's market predictions. And that's despite trade analyst obsession with all things cloud.


I've been scratching my head over Forrester's The State of ERP in 2011: Customers Have More Options in Spite of Market Consolidation report. Larry Dignan focuses on the key finding that:

The enterprise resource planning (ERP) market is heating up in 2011, but despite more on-demand offerings from SAP and Oracle’s Fusion upgrades, two-thirds of companies say they will stick with the status quo for their business applications.

There are problems with Forrester's analysis from both a buyer and seller perspective. Simply shifting from one business model (license plus maintenance to subscriptions) does not sound like any fundamental change in the market. In fact the more one reads the report, the more it sounds like 'same old, same old.' That's curious in a market where the leading vendors tout 'innovation' as their current watchword.

At one level you can argue that innovation can be defined by changes in the way buyers pay for the services they receive but to me that's more a sop for Wall Street and of limited, if any value, for Main Street. That is confirmed in how Forrester sees the overall growth in revenue. Over the next few years they believe subscriptions rise by 21.2% CAGR, maintenance grows at 5.6% CAGR, services at 1.8% CAGR while license fees drops by 0.7% CAGR. Net - net Forrester sees a meagre 3.2% CAGR growth through 2015.

If you accept my argument then Wall Street should be very worried. A total market $5 billion increment over four years doesn't come close to revenue projections SAP is putting in the market, let alone allowing for any real growth at Oracle, Microsoft, Infor and others. And all of that before we take macro economic inflation into account. Forrester's assertion that much of the subscription growth goes to Oracle and SAP does not give much hope for emerging SaaS players like NetSuite and Workday. Contrast that with NetSuite CEO Zach Nelson's statement at the recent NetSuite earnings call (PDF download):

"At the end of Q4, we felt we were hitting the tipping point in ERP as customers large and small began to move from pre-web client/server solutions to NetSuite's cloud-based offering. Our great Q1 reinforces that this mass migration from legacy Microsoft Dynamics GP/Great Plains and SAP is accelerating in 2011."

At the CRM end of the functional market, it also begs the question how moves from $2 billion to $3 billion in revenue. In Forrester's analysis, even's recent stellar rise would be implicitly crimped unless it massively expands the CRM footprint. Trade analysts are pinning their hopes on Social CRM. I think they're mostly smoking dope.

Another problem comes in Forrester's analysis of maintenance spend. It argues:

Maintenance revenues accounted for 51% of total ERP revenues in 2010 and represent a reliable, high-margin income stream for vendors. Clearly, however, the rising costs of maintenance remain a major source of customer dissatisfaction and could increase the percentage of customers not renewing their vendor maintenance contracts. Customers that question the value of maintenance service bundles are likely to consider other options, including moving to a lower-cost ERP system or moving to third-party support or self-support.

Despite Oracle's masterful ability to manage maintenance in customer accounts and SAP's ability to keep its customers paying, the threat from third parties, while minimal today is very real going forward. If anything, Forrester's analysis should sound alarm bells to everyone. If, as a buyer, I am convinced by Forrester's analysis, then where the heck do I find money for true innovation when the lion's share of my budget will be going to keeping the lights on?

In soundings I've taken among investment and trade analysts, I get the strong sense customers are thoroughly tired of being tethered to a vendor model that leads to less rather than more innovation. Not only does it constrain IT's ability to contribute to growth it effectively marginalises IT's ability to be anything more than a plumbing group. If that sounds alarmist then I only have to listen to colleagues like Frank Scavo and Vinnie Mirchandani. They believe IT departments no longer have the means to innovate for growth. It is hard to argue against that when you see business growth led technology innovation coming from outside traditional IT departments.

Does Forrester's assertion that 'a wider choice reframe app strategies' offer hope? I don't think so. If anything it represents little more than a moving of the chess pieces rather than checkmate with the emphasis upon continued cost reduction - something the incumbents are resisting today but which has to come in the future.

But over arching all these arguments I wonder whether SaaS/cloud based solutions are delivering any radical value. At least in the enterprise. Is it truly possible to innovate against Pacioli's double entry accounting mantra, HR admin/payroll or SFA? The answer is yes but it sure ain't happening in the enterprise.

In a recent conversation with Brian Richter, UK leader of Mamut, he made the observation that: "In the past we used to see innovation trickling down from enterprise vendors to the smaller shops. Nowadays we seem to be seeing things go the other way." I see that all the time. It is leading tiny vendors like FreshBooks, Xero, Liquid, KashFlow, FreeAgent, Twinfield, BrightPearl and some 50 other upstarts in the UK alone to scooping up market share from Sage. These vendors are also finding fresh markets among the 'shoe box' accounting types that are incapable of maintaining double entry. While their collective revenue is barely a fleabite in Forrester's matrix, they point the way towards much simpler methods of automating business process that is rarely seen in the enterprise. Can any of these break out into the broader market? It is possible but not in Forrester's timeframe and not without considerable capital inflow.

There is a flipside to Forrester's analysis. Are they factoring in growth among emerging markets like China, India, South America and certain of the African nations? If so then will it, as they assert, go primarily to SAP and Oracle? I have no hard evidence but in listening to Phil Fersht at Horses for Sources, I get the sense those markets will not go the traditional in-house route. Instead they are more likely to go straight to an outsourced model that depends upon cloud players offering a lower long term cost promise.

If that's the case then it can only come from either an acceptance by the current market leaders that volume replaces license and/or an as yet unseen emerging cadre of new players that can truly disrupt the ERP market. I see little appetite from SAP/Oracle/Microsoft in changing their models. Even a combined NetSuite/Workday/Plex/ simply don't command enough market mind share to (currently) take their place. Will those tiny players I reference above emerge in Forrester's timeframe? Unlikely.

Whichever way you cut Forrester's analysis it makes a depressing picture. Is it any wonder then that many of my colleagues look out upon ERP and despair of its ability to drive value? When viewed through that lens, it is hard to argue otherwise.

Topics: Software, Enterprise Software

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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  • RE: Does a shift to subscription mean better ERP?


    I haven't read the report, but certainly sounds like you are raising the right questions regarding the broader, global enterprise market. Some of these issues haven't changed since the commercialization of the web, and should have if markets were functioning properly-- end customers/CIOs and capital markets. The dysfunction runs deep.

    A few years ago we released a paper called "unleash the innovation within" that quickly became among the most popular in the enterprise, including enterprise vendors. We discuss not only our architecture, but how we came to it over a then decade of R&D, semantics and interoperability, and how it all relates to innovation. We linked to a special report by the Economist based on a global survey that I participated in that interviewed senior officers in large companies--including several of the leading brands in IT--results were not surprising for many of us, but nonetheless grim. Essentially these global companies that invest millions in ads convincing trades and media that they are great innovators (politicians as well, apparently), admitted that they had great challenges due to conflicting interests (not only cannibalism internally, but partnerships), bureaucracy, and misaligned interests between employees and the company. It need not necessarily be so, and varies tremendously between companies, but hardly a surprise to anyone but those who became drunk from their own PR.

    Business models that depend on annuities like maintenance fees, lock-in, and customer apathy create cultures that are anything but innovative--rather they have strong incentives to prevent innovation. Frankly much of the innovation in the enterprise ecosystem over the past two decades has been with preventing product innovation from becoming a threat-- kicking the can down the road just like governments.

    From my perspective ERP has become largely commoditized, even if still expensive and complex, so it's unlikely that future leaders will emerge from ERP in the enterprise (including ERP start-ups)--rather it's more likely to come from other areas that compete on competitive advantage and differentiation. Unlike finite commodities, software isn't, so protectionist tactics are temporary.

    Mark Montgomery
    Founder & CEO
  • RE: Does a shift to subscription mean better ERP?

    When the ability to change the service provider is limited for lack of data portability, subscription equals maintenance fee plus license fee distributed over time. Client remains locked in.

    Limited ability to change application provider means any potential migration to more innovative solution bears risk. And businesses avoid risk when possible.

    Maciej Janiec
  • RE: Does a shift to subscription mean better ERP?

    The most sophisticated and successful companies in the world, regardless of size, understand that certainty of being left behind by "more innovative solutions" trumps IT migration risk-- otherwise ERP and BI wouldn't exist. The different perspective on this captures the difference between an IT manager and a business manager-- and misalignment of interests, increasing numbers of which are good at both. <br><br>Recent history is full of examples -- Apple took a big risk with iPad for example, Intel with Xeon, and SAP with HANA, all of which are large global companies. On the other hand AIG, LB, and many others were quite confident that very little risk existed in following the herd with mortgage securities.<br><br>Risk is rich with complexity, requiring superior systems, high levels of motivation, and good forecasting -- separating the best from the rest.<br><br>Mark Montgomery<br>Founder & CEO<br>Kyield
  • SaaS ERP is innovative

    Very good points. However, I personally believe the change from on-premise to on-demand is innovative. Not so much from a technology perspective, but from investment, delivery and consumption perspectives. Further, the pace of software innovation accelerates for SaaS customers as providers delivery more frequent, and more meaningful upgrades as part of the normal subscription course. I don?t expect SaaS ERP to accelerate like SaaS CRM, but clearly on demand CRM has paved with way and proven the model for the more conservative back office types. I also expect the next wave of on demand ERP to mimic social CRM advances, more in terms of Enterprise 2.0 capabilities, which will further fuel the on demand growth more so than the traditional on premise.

    I also found Forrester?s report somewhat confusing, however, I do agree on a few points. First, SaaS ERP will become the highest growth sector in the ERP industry. I also agree that will be challenged to advance from $2B to $3B, but Forrester?s implication that its unlikely to grow CRM sales by such an increment is somewhat misplaced. With an on demand CRM market getting near a plateau of maturity, which will unquestionably incur pricing pressures, and also with new aggressive challengers such as Dynamics CRM and SAP Sales On Demand, Salesforce is clearly looking to diversify and find that next billion in the PaaS market (not the social/SaaS/apps market) where they?re much more likely to find it.
  • The third way

    The trouble with ERP, whether it is on-premise or in the cloud is that the package was built to suite the needs of some other business (usually the largest and most lucrative customer) and not your business. <br><br>Thus SAP is driven by what Volkswagen (for example) wants and not by what your business wants. <br><br>The whole ERP argument is that it is too complex and difficult for you to build a system that fits your business. If you are using low-level tools like COBOL or Java this is certainly true. <br><br>It is interesting the way that companies like SAP and Oracle have built their application suites to prevent you getting at the data in a flexible way - the whole trust of Fusion is that you can only do things over Oracle written functions - SAP have long pursued this approach. <br><br>However with a more flexible logic based approach (rather than procedural languages like COBOL, Java, C#) the build it yourself model becomes viable.<br><br>Of course this leads to a massive drop of revenue for software companies as the only licence money they get is for the logic based tool. This is why SAP and Oracle (and the cloud providers) are insistent that you have to march to the tune of their grindingly inflexible, application specific, built for the richest customer approach.
  • RE: Does a shift to subscription mean better ERP?

    Thank you for the insight. I am excited about Cloud ERP, yet I like to take a balanced approach.