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April 12, 1999

ERP's Fight For Life

The once-powerful vendors try to adjust to a changing, shrinking market

By Tom Stein

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h, how the mighty have fallen. After years of double- and even triple-figure growth, the enterprise resource planning market is in the middle of a painful slowdown. Companies such as Baan, Oracle, PeopleSoft, and SAP are reeling from faltering sales, management turnover, and the apparent inability to crack such emerging markets as customer-relationship management and supply-chain management. All this raises the question: Is this the end of the line for ERP as we know it, or is 1999 just a transition year that will allow the leading vendors to catch their collective breath before conquering the new millennium?

The troubles plaguing the ERP market leaders are well documented. Companies once spent millions of dollars on ERP applications to replace outmoded financial, manufacturing, and human-resources systems. But that buying wave has fizzled due to market saturation and the fact that many companies are allocating IT budgets to fixing the year 2000 problem, rather than spending on new software projects. Other companies implemented ERP packages to solve their Y2K problems--a motivation that is no longer relevant for new customers, given the implementation time required for major ERP projects.

As a result, revenue growth so far this year has been flat, and the prices of all ERP stocks have fallen (see chart). "I used to be a rock star," laments one financial analyst who covers the ERP industry. "Now I'm a roadie."

The slowdown isn't having an effect on IT buyers so much as it is being shaped by them--businesses aren't buying the all-in-one strategy pushed by the vendors. "We need to do integration based on what we want, not what the vendor wants," says PG&E Corp. CIO John Keast.

Still, the vendors are desperately trying to overcome their problems by expanding their product suites into new and potentially lucrative areas, such as sales-force automation and E-business. Oracle, for example, is quietly building its own supply-chain management application, which it plans to introduce at its user-group conference next week, according to several sources. Oracle hopes the supply-chain applications--aimed at midmarket manufacturers--will drive ERP sales because companies may be more inclined to buy its manufacturing offering if Oracle has a supply-chain offering, too. The product is also being billed as cheaper and simpler than i2 Technologies' software.

Vertical Markets
The vendors are also trying to penetrate more industries, such as financial services and consumer packaged goods, by developing unique features and functions for vertical markets. Each vendor is stronger in a different area: SAP has a presence among chemical companies, for instance, while PeopleSoft is well-known in higher education. Moreover, ERP vendors are forming partnerships with resellers and outsourcers to move beyond major corporations and target small and midsize companies.

But so far, nearly all these efforts have come up short. Industry leader SAP, for instance, is projecting a serious shortfall in sales and profits for the first quarter of 1999. Exacerbating the problem for SAP are delays in the release of its highly anticipated front-office software for sales automation, as well as lower-than-expected sales for its new supply-chain offering. "The front-office products are hobbling out later this year, but with less functionality than we had looked for," said Chuck Phillips, an analyst at Morgan Stanley Dean Witter, in a recent report, noting SAP needs to work on opportunity management, field service, and mobile-sales capabilities. "The supply-chain products are also off to a slow start with feature deficiencies that give customers a reason to procrastinate and let the product mature," he said.

Juicemaker Mott's North America Inc. in Stamford, Conn., was one of the first to purchase SAP's supply-chain module, called Advance Planning and Optimization. Catherine Riordan, director of business solutions at Mott's, says there were glitches with the product due to an inability to pass data between APO and SAP's core R/3 applications--a big problem, considering one of the product's key selling points is easy integration with other SAP apps. Now, she says, "we are over that hump and the rollout is going well."

But the company is not as pleased with SAP's approach to vertical markets. Mott's is part of SAP's consumer packaged goods industry group. Riordan says that SAP came out with some baseline consumer packaged goods functionality in 1996, but since then there has been limited improvement. "The biggest thing for consumer packaged goods companies is trade promotion management to help us track and spend our promotion dollars most effectively," Riordan says. "That's something we're still waiting for."

Stay Focused
The message from some users and industry analysts is that ERP vendors may be losing their focus as they try to be all things to all people. PG&E's Keast wonders if vendors are forging into new markets such as E-commerce and sales automation as a knee-jerk reaction to declining sales or whether, as the vendors say, customers are really clamoring for such products to be bundled with ERP.

"I think there is a critical mass of features that ERP has to cover," says Keast, who is running SAP financials and plans to implement the human-resources module at the San Francisco energy company. "I'm concerned that these vendors are moving in too many directions and are losing their ability to manage it all." Instead of spending millions on a host of new products, Keast says, SAP should improve its integration with third-party products and make its core applications--financials, human resources, and manufacturing--easier to use.

Steve Cooper, director of strategic IT at Corning Inc., which is using PeopleSoft for HR, financials, and manufacturing, agrees that ERP vendors may be "spreading themselves too thin." He says PeopleSoft's recent decision to add business-intelligence applications and create a new business portal for the Internet are intriguing, but he would like to see more focus on the thing that concerns him most--the vendor's relatively immature manufacturing and supply-chain applications, which were released only two years ago.

"There was some talk of PeopleSoft abandoning manufacturing, but they have quelled that rumor," Cooper says, referring to analysts' fears that PeopleSoft was putting all its resources into new initiatives such as business intelligence, leaving manufacturing to suffer. "Still, we'd love to see improvement in the overall quality of the manufacturing software, as well as additional functionality, especially around the area of demand planning."

Indeed, the vendor began its life with human-resources apps, then moved into financials, and, last, manufacturing. So while J.D. Edwards, Oracle, and SAP had a fully integrated suite from the start, PeopleSoft has been playing catch-up. "PeopleSoft doesn't have a best-in-class integrated product suite," says Harry Tse, an analyst at the Yankee Group. "As a result, it has had a tough time selling additional applications to its HR customers."