Last December, the stocks of the five biggest ERP application vendors plummeted as low as 65 percent after several investment firms predicted that they couldn’t sustain their soaring growth rates. This prediction came on the heels of the knowledge that more than 60 percent of Fortune 1,000 companies had already implemented core ERP applications. With this realization in hand, ERP firms decided to head into unchartered territory and prove the investment firms wrong.
“The marketplace has become somewhat well-served and most of the large companies that make significant investments in outsourcing have already made their initial decisions,” says analyst Mike Corbett. “So when you look at where the opportunity for growth is, I thing that most companies are coming to recognize that the fastest growing segment of the outsourcing marketplace is in mid-market companies.”
There is also another reason why vendors are now hitting the mid-market. In the early 1990s, Fortune 1,000 companies and other large companies had an enormous amount of cost pressure because the economy wasn’t as strong as it is now, Corbett says. This pressure drove the initial inception of large scale, IT-related outsourcing because outsourcing helped these large companies control their cost structures and save money. Given the amount of time and effort that go into developing an outsourcing relationship, it was reasonable for vendors to cater to large outsourcing relationships that provide long-term potential for the outsourcer. So from a provider standpoint, larger companies meant larger contracts, and therefore were given undivided attention.
“But if you look at the market place over the last year or two, basically what has happened is that most of the initial cost pressures on large companies have worked their way through the system,” Corbett says. “Not that there isn’t always cost pressure on large companies, but costs aren’t the same driver in today’s economy that they were back in the early 1990s. ”
Keeping Up With the Big Dogs
This is good news for mid-market companies that are pushing their way to the top. Medium size businesses have traditionally received little support from large ERP vendors because the profit margins weren’t there, and small ERP companies couldn’t provide adequate service because of their size.
Now the market environment provides the same type of tier one ERP solutions for mid-market companies that have only been available to Fortune 1,000 companies. This means that they can bring the same level of discipline, control, efficiency, and integration to the different aspects of their business processes that larger competitors have been able to do for almost a decade. But the advantages aren’t all in the customer’s favor. Today’s mid-market companies could be tomorrow’s Fortune 1,000 companies. So if a vendor can create the right kind of relationship with a fast growing mid-market company, that may in fact be just as good, if not a better strategy than building a relationship with an already mature, large firm, Corbett says.
Building a Better Model
It is still expensive and somewhat cost prohibitive for mid-market companies to implement ERP applications and the supporting hardware on location. A lot of capital investment is needed to provide this type of infrastructure, and it is difficult to find and retain the skills that are needed for constant operational support. But along with the shifting mindset of a move to service the mid-markets, the model for doing it has changed as well.
“The business model that has leapt to the forefront is the hosting of these highly sophisticated, expensive and complex applications on a remote computer environment that is Web-enabled, Corbett says. “The beauty of this environment is that a company only needs to be Web-enabled and they can tap right into it.”
The applications and databases needed to support them are hosted and maintained at a remote data center by the vendor of choice. Users connect through a Web browser through a T1 or better connection and have access to an ever-increasing number of ERP applications and support. Generally the price structure is on a per-user basis and is usually paid monthly. And in certain cases there will be one time charge to set up the environment.
A Growing Number of Choices
Along with the technology, the vendor selection is growing very quickly. “It is booming. It is fair to say that the number of options is growing dramatically,” he says. “There are at least 100 ERP applications that are available through some type of application hosting business structure today. And that is probably an underestimate.”
Because it is growing so fast Corbett suggests building in a lot of flexibility into the relationship because what is available today is probably only a small percent of the solutions options that will be available a year from now.
“I would encourage executives to constantly engage the marketplace so that they understand all the variations, all the options and all the opportunities that are available to them on a continual, ongoing basis,” he says. “They also need to develop an openness to flexibility and to change and to adapt to whatever is the right solution at that particular time.”
Lessons For the Outsourcing Primer:
- Companies have to understand that they are buying results and decide in advance what results they are looking for.
- Shop around for the best solutions.
- Make sure that the final terms that are agreed upon are scalable from a function and a pricing standpoint.
- Consider outsourcing the support of the ERP applications.
- Reengineer the internal business processes to take advantage of the technology otherwise it’s a wasted investment.
- Think strategically and plan on growth. Make sure the strategy that is selected is one that will support that growth.
- Put in place a management system to direct the outside relationship from day one.