Parties in the ERP market place

An organisation that intends to implement ERP will meet three parties in the ERP market place: sotware
suppliers, implementation partners and application service providers. In this chapter, the role of each of
these parties will be explained. For each party, products and contributions are presented, as well as the
main developments in their part of the market place.

ERP software suppliers

Hundreds of companies claim they can ofer ERP systems [ERP, 2014]. The market is however dominated
by a limited number of sotware suppliers that have large market shares. hese sotware suppliers provide
systems that comply with the characteristics of ERP: they realise data integration and ofer support for
best practice processes.

Before an ERP system can be ofered in the market place, thousands of sotware developers have spent
their programming hours during a number of years on designing and building the system [K & K, 2006].
ERP suppliers normally ofer their customers a licence agreement, that is a right to install and use the ERP
sotware. he licence agreement is usually valid for an agreed number of users, computers, locations or
legal entities. he licence is mostly purchased for an indeinite period of time. In addition to the licence
agreement, the customer usually signs a maintenance agreement, in which the licence for new versions
of the system is included. In new versions, ERP suppliers incorporate technological innovations, changes
in legislation, new functionality and error corrections. A maintenance contract is in fact indispensible,
as the ERP systems looses its value when new versions cannot be made available to the users.

Originally, licences were acquired for the ERP system as a whole. In recent years, the ERP sotware
suppliers have split their systems into modules for which separate licences can or must be purchased. As
an example: a manufacturing company could decide to buy licences for the manufacturing and financial
modules for all its employees, while it purchases licences for the payroll module for its employees of the
human resources department only.

In below give picture a top ten of ERP suppliers is presented. In the graph the revenue per company is depicted,
in billions of US dollars. In those cases where the name of the supplier does not equal the name of the
ERP system it supplies, the name of the system is used. In the graph, revenues for 2002, 2007 and 2012
are given. he information is assembled from annual reports. For two of the companies, namely Oracle
and Microsot, ERP is not the only source of revenue, as they also ofer other products and services.
For the other companies, ERP is their only or by far their largest source of revenue. he ERP revenue
comprises licence revenues for all suppliers, and revenues from ERP services for some of them.

The igure reveals the main competitive trends in the market. firstly, it shows that SAP is by far the
largest ERP supplier. In 2002 this German company realised a 7.7 billion US$ revenue; in 2007 this
revenue was almost doubled, and in 2012 almost tripled. SAP is not only growing in absolute revenue,
it also absorbs most of the growth of the total market. In 2002 the company’s market share was 56%, in
2012 this market share had grown to 69%.

A second trend in the market is consolidation of suppliers. In 2002, Peoplesot, Oracle and JD Edwards
were top ive players in the market. In the years thereAfter, a ierce acquisition battle was fought between
these three American suppliers. Peoplesot first acquired JD Edwards, and Oracle subsequently acquired
Peoplesot [Oracle, 2006]. he three companies now all operate within the Oracle conglomerate. Despite
the large acquisitions, Oracle has not been able to seriously challenge the number one position of SAP:
the combined company realises less ERP revenues in 2012 than the individual companies did in 2002.

Not only Oracle has acquired other ERP suppliers in the years between 2002 and 2012. he smaller players
in the market experienced decreasing revenues and lack of proitability during those years, which made
them vulnerable for takeovers. he Dutch pride Baan was sold three times between 2005 and 2012, first
to Invensys [Invensys, 2003], then to SSA Global [SSA Global, 2005], which consequently was acquired
by Infor [SSA Global, 2006]. In 2005 the Swedish Intentia, owner of the ERP system called Movex, had
to allow inancing and far-reaching inluence of a venture capitalist After a series of loss-making years.
After this, the company was acquired by Lawson Sotware [Lawson, 2006], which was in its turn acquired
by Infor in 2011 [Infor, 2013]. Until 2005, Geac was an independent Canadian company that supplied
the ERP system JBA and was listed in the US. In 2005, the company was also acquired by Infor [Cowley,
2005]. After these series of acquisitions, Infor now ofers a variety of ERP systems, such as Baan, Movex,
Lawson and JBA. In 2012, the company realised a 2.7 billion US$ revenue and became number two in the
market. he only smaller company that was not afected by the series of acquisitions was the American
ERP supplier QAD, with its product MFG-Pro.

A third trend in the market is the saturation of the market for ERP in larger organisations, that has
forced suppliers to focus on other market segments. ERP supplier Sage is an English company that targets
the small and medium-sized enterprises (or: SME) segment in the market. he company is successful
in this segment, and both its revenue and its proit have grown signiicantly over the past ten years.
Microsot entered the SME market segment in 2001, using the large proits it realised in other markets
for investments in ERP. Initially, Microsot did not succeed in setting up a proitable business. In 2002
the company realised a revenue of 308 million US$ in its ERP business, and a loss that was almost as
large, namely 301 million US$. In 2003 the company realised a revenue of 567 million US$ and a loss
of 309 million US$, in 2004 the revenue was 667 million US$ and the loss amounted to 255 million
US$. In the years After 2004, it is hard to follow what happens, as Microsot changed its organisational
structure and the company no longer reports transparently about its ERP revenue and proitability. In
Figure 3.1, the revenue for the company’s total business segment is presented for 2007 and 2012; ERP
constitutes only a small portion of this revenue.

Competition in the ERP market is ierce. An example of this can be found in above picture. Via its subsidiary
TomorrowNow SAP ofered maintenance contracts for the ERP systems supplied by Oracle. Customers
of JD Edwards, Peoplesot or the Oracle-owned CRM application Siebel can buy their maintenance
contracts for a fee that is iteen percent lower than the fee they have to pay when they deal directly with
Oracle [TomorrowNow, 2007a]. When a customer agreed a maintenance contract with TomorrowNow,
SAP gained access to the Oracle sotware and documentation through the customer’s licence. his gave
Oracle occasion for accusing SAP of computer intrusion and copyright infringement and for taking
its competitor to court [Volkskrant, 2007]. After the lost court case SAP decided in 2008 to cease the
TomorrowNow operations [TomorrowNow, 2009]. Oracle claimed damages of 1.3 billion US$ [FD, 2010],
of which SAP agreed to pay 20 million After several court cases[US-DOJ, 2011].

One of the reasons for the ierce competition in the market is the fact that each of the suppliers ofer
mature and complete ERP systems. Despite this, diferences do exist in the various oferings. Ffirstly, the
licence fees can vary. Exact prices depend very much on the speciic situation of the customer, but in
general the smaller suppliers are cheaper than the larger ones. Diferences also exist in the breadth of the
best practices that the ERP system supports. Some suppliers have reined best practices in manufacturing,
while others excel in support for human resource management processes.

In recent years, some suppliers target speciic market segments or industries. hey try to expand their
position in the SME segment, or aim for speciic industries. With so-called industry solutions they try
to dominate industries like automotive, textiles or government.

In recent years, some suppliers target speciic market segments or industries. hey try to expand their
position in the SME segment, or aim for speciic industries. With so-called industry solutions they try
to dominate industries like automotive, textiles or government.
In the forty years of its existence, ERP has become a great commercial success. housands of companies
decided to purchase an ERP system. By implementing an ERP system they want to improve the
management and operations of their business.

It is of course well possible to improve organisational processes without a computer systems. Best practices
can also be implemented without the support of computer systems like ERP. However, data integration
these days does not make sense without the support of computer systems. Data integration becomes more
ad more important, not only between customers and suppliers, but also with other parties in the supply
chain, such as service providers, distributors and regulatory authorities. Data integration can also mean
competitive advantages, if large amounts of data are integrated intelligently. Organisations therefore do
not really have a choice, they will have to develop an approach for data integration.

One of the approaches is the implementation of an ERP system available on the market, but this is not
the only way to realise data integration and implement best practices. Organisations can also build their
own ERP system, and traditionally many organisations have done this. However, this is a very labourintensive
approach, and there will not be many organisations that can aford to employ the large teams
of sotware developers that are required for this approach.

It is also possible that an organisation has such unique processes that a best practice approach would
destroy a competitive advantage. For companies that beat their competitors with their sophisticated
manufacturing processes, using the best practices of ERP may not be a wise decision. For such companies
ERP is not the obvious solution. Building a tailor-made solution, integration of a specialised module
into a standardised ERP system, or procurement of a specialised application may make more sense.

For those organisations that do decide to buy a commercially available ERP system, it is essential to build
a good relationship with the ERP supplier. he relationship will last several years: the implementation
horizon of an ERP system is at least one to three years, After which the maintenance phase will follow.
his maintenance phase will normally last at least ive years. Once the ERP system of a speciic supplier
has been implemented, a vendor lock in has been created. Because of the long implementation horizon
it is not possible to change ERP supplier overnight [SAP 2000]. Once the decision to implement ERP
has been taken, a diligent ERP supplier selection process is therefore strongly recommended.

Implementation partners

After the procurement of licences for an ERP system normally its implementation, that is the preparation
of its operational use, follows. Both a completely new ERP system and a new version of an already
operational system require implementation. ERP systems are large and complex, and in the organisation
that plans to implement ERP the required knowledge and experience is not always available. In that case
the organisation can hire the support of implementation partners, consultancy firms on the market that
have specialised in ERP implementations.

Implementation partners ofer various services related to ERP. In the first place, they can advise on the
best practices that the organisation can implement to improve its processes. Ater this, implementation
partners can model these best practices in the ERP system. hree ways of modelling exist: coniguration,
localisation, or adaptation. Coniguration is setting parameters in the ERP system to suitable values. hese
parameters can be very simple; an example of a simple parameter is the number of days between the
expiration of the due date of an invoice and the creation of a reminder. hey can also be very complex:
the coniguration of several screens and functions of the ERP system can lead to hundreds of diferent
user proiles.

Localisation is changing the system to comply with requirements for a certain geographical or legal area.
An example of a localisation that is almost always required is the lay out of invoices. Local legislation
oten requires that an invoice contains certain mandatory information, like in he Netherlands the
complete name of the legal entity sending out the invoice, or in the United Kingdom the company
number. An example of a localisation that is not mandatory but oten desirable, is adding a company
logo to a purchase order or an invoice.

Adaptation is extending the functionality of the ERP system by programming. Adaptation can be the
only solution when the ERP system does not adequately support the requirements of essential processes.
However, adaption has the downside that it complicates the implementation of a new version of the ERP
system, as the programs will not automatically be compatible with the new ERP version and may have
to be rewritten.

In addition to advising on selection of best practices and modelling, implementation partners can also
provide the training for the future users of the ERP system. Lastly, they can build the interfaces between
the ERP system and other applications, and support the data migration from the existing information
systems to the ERP system.

Several contractual forms exist for implementation services. One of the extreme forms is time-material.
In this contractual form the principal, that is the company that wants to implement ERP, hires ERP
implementation consultants for an agreed hourly rate supplemented with reimbursement of travel and
other expenses. he implementation partner provides its services on the basis of best efort and has no
incentive to inalise the implementation as quickly as possible. he risk of exceeding the implementation
budget or going beyond the planned implementation time lies completely with the principal.

The other extreme contractual form, which puts the risk completely at the side of the implementation
partner, is the fixed-price-fixed-date contract. he implementation partner agrees to inalise the
implementation before a certain date and for an agreed ixed sum. his contractual form has one
important downside: in order to be efective, the exact outcome of the implementation has to be speciied
in advance and agreed contractually, which for an ERP implementation is complex.

Mixed contractual forms, such as a time-material scoping study followed by a ixed-price implementation,
are becoming more and more popular. Another form that is gaining popularity is the bonus-malus
contract. In this type of contract, a target date and a target budget are agreed between the principal and
the implementation partner. If the implementation is carried out cheaper or faster, the implementation
partner can claim a bonus. If on the other hand the implementation becomes more expensive than the
target budget or is delivered late, the principal can claim a malus. In this way, the risks of a deviation
from planned costs and delivery date are shared between principal and implementation partner, and
both parties have an incentive to inalise the implementation on time and within budget.

Several categories of implementation partners exist. Ffirstly, some ERP suppliers ofer implementation
services in addition to their licences; Intentia used to do this for Movex, Oracle does this for Oracle
Ffinancials, and SAP has experimented with this. Secondly, the large consultancy irms that employ
thousands of management consultants oten have their practices for implementation services for one or
several ERP systems. Examples of these companies are Accenture and IBM Business Consultants. hirdly,
there are smaller consultancy companies that have between ten and one hundred consultants specialised
in implementation services for one speciic ERP supplier. Examples of these companies in Europe are
Magnum Management Consultants, who are specialised in SAP, and Quistor, who are specialised in JD
Edwards. Finally, there are many one-man’s businesses who implement ERP systems, sometimes directly
for companies that are implementing ERP, but more oten as subcontractors for one of the larger parties.

At first sight, the organisation’s external auditor is a promising candidate for ERP implementation
services. he auditor knows the organisation well and the implementation can be an obvious extension
to the portfolio of services already ofered. However, because of the increasing stringency of auditor’s
independence rules, most auditors will not be willing to carry out an ERP implementation for customers
where they also do the financial audit.

Implementation partners difer in both quality and price. The price depends on the breadth of the
required services. For international ERP implementations it may be relevant that the implementation
consultants use a uniform implementation approach and at the same time make sure the implementation
is compliant with local requirements. Parties than can manage these world-wide implementations are
not the cheapest in the market. For large implementations, sizeable teams of consultants are required
that are only available at the large consultancy irms. Parties that can manage large implementations
generally also have higher fees.

The quality of the services oten depends more on the experience and knowledge of the individual
consultant than on the company by which this person is employed. If there is a good it between an
individual implementation consultant and the implementing organisation, it may be worthwhile to close
a longer term contract.

Organisations can also choose to implement ERP themselves, without the support of an implementation
partner. his approach is viable only when employees themselves are highly familiar with ERP
implementations in general and the selected ERP system in particular. It is also an option to carry out
a irst implementation with extensive implementation partner support, and implement later versions or
additional modules with own staf. It is also possible to have own employees carry out the implementation
while an external implementation partner is available on call.

For companies that contract an ERP partner it is very important to have crystal-clear conditions. he
costs of the implementation partner constitute ity to ninety percent of the total ERP implementation
costs. hese costs are also hard to control, and ERP implementation costs oten exceed budgeted amounts.
[Stefanou, 2001, De Koning, 2004]. Moreover, the quality of the implementation partner has a large impact
on the success of the implementation project. It is therefore important to make a well-considered choice
for a speciic implementation partner, based on costs, continuity, personal it and quality.

Application service providers

Ater the implementation the operational ERP system has to be kept up and running, to enable
the employees of the organisation that has implemented ERP to use the system in their daily work.
Companies on the market that ofer services to keep ERP systems up and running are called application
service providers (or: ASP’s). ASP’s provide organisations with available and reliable ERP systems for a
predetermined group of users. Availability is oten measured as a percentage. An example of a required
availability could be: the ERP system has to be up and running during 99.99 percent of the time during
oice hours, measured over ity-two weeks per year. his means that in every work week the system
can only be down for less than one minute, otherwise the availability requirement is not met. In order to
be able to guarantee the availability, application service providers can implement a variety of measures,
such as redundancy in components, back up and restore of data, a maintenance and repair organisation,
service windows for preventive maintenance and disaster recovery. Nowadays, the norm for availability
is 99.999 percent (or: ive nines) during 7 times 24 hours per week.

Next to availability, reliability is an important aspect of the quality of application services. Information
security measures can be taken in order to ensure the reliability of the ERP system. he application service
provider has to make sure that the information in the ERP system is only accessible for users that have
been authorised by the organisation that owns the information; in addition to this, some users are only
allowed to view information, while others can also update or add new information. he application server
provider can stimulate information reliability by security measures, such as username and passwordprotected
access, user proiles, or encryption of data that are transported via an external network.

Users that have access to the ERP system will oten be employees of the organisation. With the growing
importance of supply chain integration, access will be distributed to more parties, and organisations will
more frequently allow their customers or suppliers access to their ERP systems.

The contractual form that is most suitable for application services is a service level agreement (or: SLA). In
a service level agreement, norms for the quality of the services that the supplier will provide are agreed.
Mostly a ixed price is agreed, potentially with a penalty clause when the supplier does not meet the
contractually agreed service levels.

In addition to the service levels, oten a service catalogue is agreed, in which a description is given of the
additional services the application service provider delivers with respect to the ERP system. Examples
of such service are the authorisation of a new user, the installation of a new workstation, the installation
of patches, corrections of errors provided by the ERP supplier, or the provisioning of extra disk space
for data. For these service the reimbursement oten is a minimum annual amount with a ixed fee per
executed service on top.

Traditionally, the providers of application services are the very large computer services companies, such
as EDS, CSC or IBM. hese companies have a long experience in these kinds of services. hey oten
already provided application services for large administrative processes, such as payroll processing
for governments.

New entrants on the ASP markets are brokers, who connect a European customer to an application
service provider based in countries with lower wages. With the advent of reliable and cheap data
communication it is possible nowadays to develop application services in countries where the cost of
labour are considerably lower than in Western Europe or the United States.

With the growth of the Internet also smaller players have entered the ASP market. In most countries,
hundreds of internet service providers are active. Some of them ofer e-mail and Internet access only,
but others have extended their portfolio with ERP services. hese application services are also known as
Sotware as a Service (or: SAAS); when they are ofered via public Internet, they are called cloud computing.

It is not strictly necessary to outsource application services. Many organisations have their own IT
department that can provide the application services for the organisation’s ERP and other systems. In
order to do this cost-efectively a certain scale is required. A survey with 600 responding organisations
showed that around 7.5 percent of those organisations outsourced their application services. Around
forty percent of these outsourcing arrangements included ERP, the other sixty percent consisted of other
application services [Bakker, 2006].

In selecting an application service provider it is important to focus on costs as well as on quality. It is
unwise to focus on costs only, given the fact that a disruption in the services oten has a severe impact
on the organisation. In many organisations the ERP system is essential for taking orders, which implies
that down time of the system immediately leads to missed revenue. It is important to evaluate the costs
of non-availability, and to make a trade-of between these costs and the costs a service provider calculates
for guaranteed availability of the application services.

It is also important during a selection to take into account that switching application service providers
is expensive and time consuming. For this reason, ASP contracts oten have a duration of several years.
Both the provider and the customer will have to invest in the relationship.