ERP Continues Slow Recovery: PeopleSoft Gets Aggressive, Oracle Remains Cautious

Companies do intend to resume spending on ERP systems, this much is clear. But most of the software vendors have yet to see any real market resurgence. The leading ERP firms are still struggling to find new customer business, and their results over the past six months have been quite uneven. Just in the last two weeks we have seen Oracle post disappointing application revenue and very conservative guidance, while PeopleSoft’s management is predicting substantial improvements in license and total revenue. SAP, the industry leader, has declined to give guidance, but it has seen sharp declines in license revenue in the first two quarters of 2003.

AMR Research’s ERP Spending Survey and our System Selection metrics show an increase in the number of companies intending to purchase new ERP systems or upgrade their existing one. This is the first increase in planned ERP spending in more than three years, but its near-term effect on vendors may be more psychological than financial.

The Bottom Line: Customer requirements, regulatory compliance, and internal efficiency are major reasons for projects to either replace aging MRP II systems or enhance and consolidate “first-generation” ERP deployments, making ERP system improvements a high priority or even necessary in many companies’ budgeting and planning processes. However, how they buy has changed dramatically.

What It Means: Companies are taking much longer to evaluate systems, and contract negotiations are often painful and slow. Many buyers want to evaluate the entire product suite while buying licenses and services in relatively small increments to support a multiphase project.

Most ERP vendors remain highly dependent on their current customers, and their product, sales, and marketing strategies are biased toward maximizing installed base revenue. Consider the recent news from Oracle and PeopleSoft:

• Oracle--New licenses comprised less than 20% of revenue in fiscal Q1 application results. Oracle has aimed a substantial part of its application sales force and its marketing message on selling upgrades and add-on products to its existing customers, and much of the development activity seems to be devoted to creating extensions rather than addressing new markets.
• PeopleSoft--Posting a surprisingly good fiscal Q2 is also deriving most of its revenue from current customers as reflected at this week’s Connect Conference. PeopleSoft attracted nearly 10,000 customers to the annual meeting, and the management team repeatedly thanked them for their support, especially during the Oracle takeover crisis. PeopleSoft unveiled mostly product extensions and improved support aimed at customers rather than new prospects. The two major initiatives at the conference were Total Ownership Experience, which is intended to improve all aspects of the application lifecycle, and news that within 60 to 90 days a number of J.D. Edwards products would be offered to PeopleSoft customers while several PeopleSoft products would be available to J.D. Edwards customers.

Recommendations: This is an excellent time to be buying a new ERP system or expanding an existing one. Most of the systems combine comprehensive functionality, updated technology, and greatly improved product quality and usability. The application vendors are hungry for your business, which generally results in better response times and a considerable amount of flexibility on pricing and terms. Many of the professional services firms are also suffering from overcapacity, and that often means that clients can get the A-Team at more attractive rates.

Companies that have ERP systems in place should be considering consolidation, upgrades, extended deployment, and add-on products. Many organizations have a window of opportunity open to improve their business processes and supporting applications. This slow period, before the economy fully recovers, is an ideal time to capitalize on the availability of internal and external resources and the current buyer’s market for applications.

Conclusion: AMR Research’s analysis indicates that the ERP market has started to recover, but we are likely to see one or two more quarters of instability before we see consistent revenue growth among the market leaders. While buyers are concerned about the market consolidation, it does not seem to be stopping the evaluation projects. It is, however, making vendor size and financial viability a much more important selection criterion.

AMR Research originally published this article on 22 September 2003.