Thursday, March 04, 2010

There’s No Pop Left In Big Bang

I have the opportunity to hear from lots of people in the ERP business: customers, ERP software vendors, service providers, consultants…the list goes on. All interesting people with interesting views on marketplace trends. Many of them are continually asking the same question: “When do you think the ERP implementation market is coming back?” My own answer: “It’s not; it’s flattened out; we’re into the long tail at the end of the market.” Now before you all call me a heretic or start watering the lawn with your tears of frustration from my lack of optimism, let explain myself.

First, keep in mind where the real money is for ERP vendors and 3rd-party implementation consultants: huge big-bang rollouts. The larger and more complex the initial implementation footprint, the higher the cost. The ERP software vendors have figured this out and switched their business models to emphasize cash flow from maintenance revenues that provide profit margins fatter than a redneck trapped in a bratwurst factory (But we’ll stick with the big bang subject here…maintenance margins rate a special post).

So with those two ideas in mind, consider the present growth in the ERP market for new implementations…which really drove the ERP market for years, mostly through big-bang rollouts. Most of the organizations that want and can really afford the big ERP packages (SAP, Oracle EBS, PeopleSoft, etc.) already have one installed. SME customers can’t really afford the classic ERP system. So there’s really not a whole lot happening in terms of growth of the market. No big bang stuff coming from here. – the market is already oversold.

But what about upgrades, you ask? Well, applications upgrades are pretty typically activities that are under tight budgets and tighter schedules: no decent margins here. But there’s an even bigger elephant in the room that prevents most upgrades from becoming big bangs. With most ERP customers spending upwards of 60 percent of their operational IT budgets on maintenance (including those sizeable maintenance fees to the ERP vendors), most customers are loath to spend their precious dollars on applications upgrades every two to three years (incidentally, this is right around the time a customer starts to break even from the last upgrade). Rather than paying for upgrades, many customers are simply outsourcing the functionality previously provided by their in-house ERP systems: SaaS, Business Process Outsourcing, On Demand, whatever…it all comes down to following the money and, under current conditions, outsourcing is cheaper than maintaining and upgrading.

Oracle in particular seems to understand that big bang is dead – that’s the whole drive behind the “pillars” concept in Peoplesoft and Fusion Apps that has been ported over to other Oracle Apps Unlimited products. Customers can upgrade incrementally, which lowers the cost of upgrading. Incremental releases also provide more flexibility and “learning as you go” opportunities than big bang, so it’s probably a much better approach – big bang is really hard to pull off successfully. The bad news is that incremental upgrading will likely lead to a rise in maintenance costs due to the increased integration complexity, at least until customers drive the market to a more sustainable cost model for ERP maintenance.

The bottom line is that, for the vendors and service providers, big bang projects drove the market to the soaring heights we all remember. But now, ERP big bang is dead. And the strength of the ERP implementation market has gone with it. It’s not the lousy economy as much as it as that the market as matured – and there ain’t no coming back from that. If you make your living with big bang ERP implementations, stop hanging onto a shriveled market…long past time to find a new gig! Like an old firecracker, there’s no pop left in big bang.


Aksam Dar said...

Very nice article indeed... What do you think what would be the strategy of big bang customers after they are sick of heavy upgrade costs? Would they go for the same ERP using cloud computing or Saas etc.. Or is there any chance that they start considering migration to open source to keep their data physically in their own control?

fteter said...

@Aksam Dar: I think ERP customers are already looking for answers. Note the user revolt SAP encountered last year when attempting to raise their support fees. Rimini Street, a 3rd party provider, is successful enough that Oracle has sued to protect their own support revenue and earnings. I also think that both SaaS and open-source have a role to should become especially appealing to small and medium-size enterprises that just can't afford to continue carry the financial burden of annual support fees exceeding 20% of license costs.