It's sometime in 1999. You're the CFO of a $75 million metals manufacturer, and you've decided it's time to implement an enterprise resource planning (ERP) system--software that automates and integrates manufacturing, distribution, finance, and human resources. Will you consider putting SAP on your short list of vendors? Or Oracle, or PeopleSoft, or Baan?
These Big Four vendors are hoping you will. Because of the success they and other ERP vendors have had selling their complex software to the Fortune 500, many of the largest deals to be had are wrapped up. As a result, the Big Four are turning more attention downstream. Middle-market companies, generously defined as those with revenues of between $50 million and $2.5 billion, constitute a tantalizing $4 billion ERP market, according to AMR Research Inc., a Boston-based consulting firm.
But middle-market companies aren't exactly waiting with open arms. Fairly or not, Big Four systems are associated with a host of evils: high prices, difficult reengineering, lengthy implementations, ruinous service-to- software cost ratios, inadequate support and training. No CFO of a midsized company is anxious to see expensive ERP consultants setting up shop in the corporate offices.
Naturally, the Big Four are anxious to dispel such worries. Ask their marketing reps about their experience with middle-market companies, and they will quickly cite reassuring numbers-- SAP says 34 percent of its 14,000-plus customers worldwide are companies with annual revenues under $200 million; PeopleSoft has more than 450 ERP customers with under $250 million in revenues; and Baan shipped more than 500 systems worldwide to companies with under $350 million in revenues in 1997. (Oracle doesn't divulge sales figures.)
Or ask them about middle-market needs, and they will respond with persuasive analysis. "We believe the midmarket is completely different" from large companies, says Ian Williams, director of product marketing for Baan Midmarket Solutions. "We used to say it was more cost conscious; now we say it's more conscious of where its business is. Computers are a necessary evil for them. They are looking to get current, not gain strategic advantage--no millennium problem, no Euro problem. They want to meet business requirements with minimum disruption." Given their small back offices, midmarket companies are averse to reengineering, adds Williams: "They can't afford to lose key people to the process."
And when you ask the Big Four why a middle- market company should prefer them to one of the many fine middle-tier ERP vendors, they recite a familiar trio of reasons: superior functionality, leading-edge technology, and, perhaps above all, scalability. No matter how large a company grows, they say, it can't outgrow their systems. On the other hand, "If you're a $50 million company and you don't plan on growth," then choose another system, says Phil Rugani, group vice president at Oracle Corp.'s General Business Division.
Better practices in a box
But can the Big Four back up their words and deliver affordable, practical ERP solutions for even a $50 million company? They are trying to do just that, through products and rapid-implementation programs aimed squarely at the middle market. (A rundown of each vendor's offering is provided below, in "Get with the Program.")
For starters, each Big Four vendor is preconfiguring (not "dumbing down," they insist) its product for different types of companies. Baan's solution for the machine- building industry, for instance, will comprise 19 functions that support the main business process, from requests for quotation to delivery and maintenance of machines. These industry-specific packages may not be specific enough for some companies, which may face difficult choices between their own best practice and the software's generic best practice. But smaller companies whose processes haven't kept up with business growth may welcome a set of best practices in a box (see "To ERP, or Not to ERP?" page 98).
Smaller doesn't necessarily mean simple. A midsized company still has complex business processes, points out Doug Sallen, vice president of business development for Baan Midmarket Solutions. From time to time, it's "going to have a weird transaction--say a quote with multiple sign-offs." Baan's ERP software can be tailored for such situations, says Sallen. Although Baan IV has more than 5,000 sessions (screens that come up), Sallen says most people use between 3 and 6 sessions to do their jobs. Unnecessary sessions are switched off; as a company grows, it can switch on functionality as needed. "This allows all of our applications environment to be available to every customer," says Sallen.
In addition to prepackaged solutions, the Big Four have introduced methodologies and software programs to enable companies to model exactly what they want the system to do before configuration. SAP, for example, says companies can model a complete R/3 system in just a couple of weeks with R/3's Business Engineer tool. Baan's tool, which it calls Dynamic Enterprise Modeling, takes this process a step further: once the software is modeled, the tool automatically configures the software.
Middle-market companies may not have the necessary infrastructure to support an ERP system, or the IT staff to assemble it. "There's a capital-cost issue for companies, especially if they haven't been into client/server," notes Jim Holincheck, an analyst at Giga Information Group. To address these needs, the Big Four are teaming with companies like Compaq Computer Co., Hewlett- Packard Co., and Microsoft to bundle their systems into complete solutions, including server hardware, middleware, operating system, and database software.
Bundling is intended to enable small companies with limited IT resources and tight budgets to buy as close to a turnkey ERP environment as possible. Vendors can quote a fully delivered price for a system, including implementation and training. "You can choose your platform, but we tell you what the configuration is," says Williams of Baan. "Initially, we're down to single-site, single-server-type systems. Complex networks? You can't preconfigure them. But a single-site customer can evolve."
With the supply of qualified ERP implementers lagging demand, can the Big Four deliver the support that midsized companies need? Their strategy for doing so is to set up separate divisions, with their own sales and support staffs, and step up reliance on indirect channels. The latter makes economic sense for the Big Four, since their sales costs are most often predicated on $2 million deals, not $250,000 deals.
Doing smaller deals means emphasizing volume and short sales cycles, points out Charles Phillips, an analyst at Morgan Stanley Dean Witter who follows the ERP market. "It's going to be tougher for [the top vendors] than they think," he predicts. "Sales cycles won't be so quick." Adds Giga's Holincheck: "Even middle- market companies need to do the same things high-end companies do to select a package. When you're down to three vendors, you still have to go through the demo stage."
Midrange and low-end accounting systems are routinely implemented and supported through indirect channels. But can third parties handle complex, high-end ERP systems? Three of the Big Four--Baan, Oracle, and SAP--are counting on it. (PeopleSoft plans to sell to the middle market exclusively through wholly- owned, VAR-like units.) They are building authorized reseller networks and certifying implementation partners, although these relationships won't blossom overnight. It takes time to develop reliable third-party channels, and the difficulty is increased by the dearth of experienced ERP implementers.
"Distribution channels are thin on talent," observes David Caruso, director of enterprise applications research at AMR Research. "Think of the number of categories at a software house offering help--supply-chain tools, technical consultants, and so on. If you go to a smaller reseller, it doesn't mean they can replicate that talent."
Training, in particular, is a key issue for companies implementing an ERP system. "You can't minimize training," says Michael Cipriano, chief information officer of General Scanning Inc., a $200 million manufacturer of laser and scanning systems based in Watertown, Massachusetts. "I've never been in a situation where I've trained too much," says Cipriano, whose company is currently implementing an Oracle ERP system.
Indeed, training issues come to the fore during the kind of rapid ERP implementation being touted by the Big Four. There may be a two- or three-week period for training the project team, many of whom will be users. But this may be no more than adequate for the project team, who in turn are expected to train their co-workers. (Vendors also provide CDs, videotapes, and manuals for self- instruction.)
"I'm OK with training the trainer [members of the project team]," says Cipriano. "I think we need to give everyone else more thought."
"Start thinking about training as soon as possible," says Christopher Lippi, manager of technology at Gateway Container Corp., a subsidiary of Bermuda-based Gateway Container International Ltd., an equipment lessor. Gateway recently installed PeopleSoft Financials in an accelerated implementation. "After we went live, it was clear we needed more training," says Lippi.
The story was similar at Digital Computer Integration Corp. (DCI), a Plano, Texas-based maker of computers for use in harsh environments. DCI, with under $25 million in revenues, recently installed Baan IV in three months with the help of a Baan-certified implementation partner. (DCI itself is a Baan reseller.) "A lot of training sort of happened in the last week before we went live," says Darin Dannelly, manager of software business development. "We're a small company; we weren't able to send people off to work strictly on Baan." As a result, he says, "we're still ironing out some annoyances- -we're not sure whether it's the system or user error."
DCI's 20-seat system came bundled with a Hewlett-Packard server, Microsoft Windows NT, and a Microsoft SQL Server database. Making everything work together "is not a science," cautions Dannelly. "We have a lot of tweaking to do. We're still trying to increase the performance of the system."
Generally, though, DCI is happy with its move to ERP. The eight-year-old firm had outgrown its "glorified accounting system," which also had the Year 2000 problem, says Dannelly. "We didn't have a lot of good information coming back from our operations to decision makers." Now, he says, "we have standard cost information about our products. We know whether we're making money."
In the short run, most analysts predict the Big Four will be successful in the upper half of the middle market. As their distribution channels become more robust, they will become formidable competitors in the lower half. But they face formidable competition. The middle market is ably defended by vendors with sophisticated, easier-to-implement products-- and with customers that have scaled up past $1 billion in revenues.
Gartner Group, in Stamford, Connecticut, defines the middle market as companies with revenues under $250 million. According to Gartner's "magic quadrant" for this market--a figure that groups vendors into Leaders, Challengers, Visionaries, and Niche Players, determined by their "completeness of vision" and "ability to execute"--the leading ERP vendors are QAD and Symix. Baan is considered a Visionary, SAP and Oracle are Niche Players, and PeopleSoft isn't on the quadrant at all (primarily because its middle-market offering doesn't have manufacturing functionality yet, says research director Bruce Bond).
J.D. Edwards outranks Baan in revenues, thanks mainly to its middle-market, AS/400 customer base. But J.D. Edwards now has a well-regarded object- and Web-oriented system that runs on Unix and Windows NT (see "Software for the Millennium," CFO, February).
Lawson Software, also in the top 10, has carved deep verticals in retail and health care, and regularly beats out Big Four vendors in those markets. Another top middle-market vendor, JBA International, targets several industries, including automotive, apparel and footwear, and metals. "We'll fit [a business] 95 percent out of the box," claims David Graham, manager of business development services.
Moving up in the middle market are Great Plains and Platinum Software, which are assembling ERP solutions. "Platinum hasn't acquired an HR package yet, but they have sales force automation, and are moving to have the whole product footprint," says Giga's Holincheck. "It's partly a survival move, but it's also a recognition that the middle market is not a homogeneous thing."
In all, there are anywhere from 70 to 100 ERP vendors, according to AMR Research. No matter how specialized the business, chances are several systems will provide a reasonable fit, with experienced resellers to do the fitting. "The [lack of] third-party channels gets in the way of the big vendors," says David Caruso. "The big guys have the verticals, but it doesn't mean the people can speak the language."
AMR Research, for instance, recently reviewed an ERP vendor that specializes in metals companies. The vendor and its third-party channel know this niche inside and out, says Caruso; "They can talk to the VP of manufacturing about heat numbers and mill specs." The vendor has numerous small-company customers--but it also boasts one of the country's largest steelmakers as a customer.
----------------------------------------------- --------------------------------- GET WITH THE PROGRAM
What the Big Four offer midsized companies
Baan Midmarket Solutions
Targeted customers: Companies with revenues under $350 million
Like the programs of the other Big Four vendors, Baan's ERP offering for midsized companies is based on configuration tools, a bundling program, and industry-specific solutions.
Dynamic Enterprise Modeling allows customers to model what they need the software to do, then configure it automatically. This enables companies to reconfigure quickly in response to changing business conditions--as in the automotive industry, where automakers constantly alter the way they run their supply chains.
The bundling program, which is done in partnership with Hewlett-Packard Co. and Compaq Computer Corp., is called Baan On Board. The price for a total system--including server, middleware, operating system, and database software--starts around $6,000 per user for 50 users, says Doug Sallen, vice president of business development.
Baan's system is targeted at the automotive, aerospace, electronics, and process industries. By the end of the third quarter of 1998, Baan hopes to introduce the first of 11 more-specific solutions, initially relating to types of processes, such as machine building and light assembly. "It's not a turnkey solution by any stretch of the imagination, but a framework for a 60 to 80 percent fit," notes Sallen.
To sell and implement its software, Baan has recruited 64 resellers in the United States and Canada. Sallen says this indirect model has been in place outside the Netherlands (where Baan is based) since 1993. "We think the risk management aspect [of indirect channels] is critical, and our reputation is based on customer success," says Sallen.
But resellers have proved damaging to Baan's reputation in another respect. Baan Midmarket Solutions was created in 1997 as the principal intermediary for selling Baan IV software to midsized companies. However, as recently reported in the Wall Street Journal, this unit is 85 percent owned by a private holding company (Vanenberg Ventures BV) controlled by CEO Jan Baan and his brother. According to the Journal, publicly traded Baan sells software to Baan Midmarket Solutions and other Vanenberg-controlled affiliates and counts those sales as revenues--even though the affiliates may hold millions of dollars of software in inventory. The Journal estimated that sales to affiliates accounted for as much as half of Baan's profits in 1997.
Sallen says Vanenberg Ventures is now looking to "realize profit on" (read: sell) Baan Midmarket Solutions and is "going through some processes on valuation."
Oracle General Business Division
Targeted customers: Companies with revenues under $500 million
Oracle Corp.'s General Business Division was created in 1996 to sell Oracle Applications specifically to midsized and smaller companies. Its salespeople are paid according to the number of deals they do. This is good for customers, according to Phil Rugani, group vice president; smaller companies want to implement a system in two to six months, "so you need a sales force that understands how the customer thinks."
Oracle's direct-sales efforts are complemented by a partner network of 16 third-party dealers. While this arrangement increases Oracle's coverage, analysts say it could lead to channel conflicts--the possibility that a company could receive competing bids from Oracle and an Oracle sales partner.
Oracle's own consulting arm, Oracle Consulting Services, has a discrete group dedicated to General Business. This group uses the same implementation methodology and software templates. There is also an Oracle Service Provider program, which certifies third-party implementers for midsized companies.
Unique to General Business is FastForward, Oracle's middle-market package of predefined ERP applications, technology, consulting services, training, and support. Hewlett- Packard is a preferred vendor on the hardware side. FastForward's offering comes at fixed prices that depend on a given configuration. For instance, Oracle Financials Release 11 for 25 users costs $300,000, including consulting, support, and education.
Targeted customers: Companies with revenues under $250 million
PeopleSoft's middle-market division, launched in October 1997, is called PeopleSoft Select. It doesn't sell through third parties; instead, "we've created these separate business units that are like VARs--seven regions with their own P&Ls," says Sean Murphy, director of strategy and marketing. "As they get bigger, they subdivide."
What those units currently sell is 14 or so modules covering financials, distribution, and human resources. (PeopleSoft Manufacturing won't be offered by Select until the end of 1998.) It bundles the software in "The Stack"-- including Hewlett-Packard or Compaq hardware, the operating system, database software, and complementary applications.
Like its competitors, PeopleSoft offers preconfigured templates and a rapid implementation methodology; it also has nine implementation partners that will install the software. Modules are priced roughly from $15,000 to $40,000 each, depending on the size of the company and the total number of modules. A typical bundled implementation, services and all, runs from $250,000 to $300,000.
Earlier this year, Gateway Container International Ltd., a Bermuda-based equipment lessor, implemented PeopleSoft Financials in three months via PeopleSoft Select. "We were looking for a solution that was easy to implement," says Christopher Lippi, manager of technology at subsidiary Gateway Container Corp. The software was bundled with an HP LX Pro server, Windows NT operating system, and an Oracle database. "Everything is very scalable," says Lippi. "They took our machinery and configured it on-site. We just plugged it back into our network."
Targeted customers (for Accelerated Solutions): Companies with revenues under $600 million
No other ERP software is as functional, multivertical, or comprehensive as SAP's R/3-- and few if any are as complex. Complexity is not a big selling point with midsized companies, but SAP is working hard to make it easier for them to put R/3 on their short lists.
At the heart of its efforts is a standard implementation methodology, embodied in a software program, called Accelerated SAP (ASAP). Rolled out worldwide to all SAP partners in 1997, the methodology was also adopted into R/3, beginning with release 4.0. The methodology includes Business Engineer, a program that enables users to map out (typically over a two-to-three-week period) what they want R/3 to do before the actual configuration begins.
Ready to Run is SAP's prebundling of the technology infrastructure--R/3, networking and operating system software, databases, hardware. "We've worked with Microsoft and Compaq to give clients a list of what everything costs" down to the line item, says Allen Brault, director of business development for SAP America.
Last May, SAP launched Accelerated Solutions, prebundled and preconfigured R/3 systems that include technology and consulting. The program is now available for Financials and will soon be ready for automotive and consumer-products ERP. The target time for implementing Accelerated Financials is two to four months. The base price of Accelerated Financials: about $300,000 for 15 users, including technology and consulting, going up to $900,000 for 75 users.
But smaller companies don't have to buy an Accelerated Solution to buy R/3, points out John Burke, senior vice president for SAP America. No minimum user threshold is required; "you can buy SAP at the basic per- user price [$4,180] for a 10-user system," says Burke.
Can smaller companies find R/3 expertise? Not to worry, says Brault. SAP has "60 to 70" certified implementation partners that specialize in the middle market, chief among them Arthur Andersen and Grant Thornton.
----------------------------------------------- --------------------------------- TO ERP, OR NOT TO ERP?
There has been much debate over whether Enterprise Resource Planning software is worth the cost and effort to implement it. After all, an ERP rollout at a large company can take years, cost hundreds of millions of dollars, and require wholesale infrastructure change (see, for example, "Taming SAP," CFO, March 1996). Companies discover they have to reengineer critical business processes according to what the software allows them to do, putting competitive advantage at risk. Reports of failed or failing projects frequently surface in the computer and business press.
Not only is ERP difficult to install, it's difficult to change. A favorite barb of critics is that an ERP system is like concrete- -you can do anything with it as long as it's "wet."
But the problems large companies have with ERP may not be so bad at smaller companies. Large companies usually require multisite systems running on complex networks, supporting hundreds or thousands of users. They may need to make a costly switch from a mainframe to a client/server environment. And they need the long-term services of expensive consultants to make everything work. A smaller company, by contrast, may need only a single-site, single- server system, running on a local-area network- -an installation that can be bundled and implemented by a competent third party.
Also, ERP systems reduce the high cost of systems integration. "We think the ERP-centric approach is pretty ingrained--that using it as a backbone for an organization is something people like," says Jim Holincheck, an analyst at Giga Information Group. "As the ERP footprint expands, the need for integration diminishes."
Even more important than technology considerations is how the software dictates a business will be run. Larger companies complain about process upheaval; they have different processes that need to be standardized, points out Holincheck. And an ERP system offers "a generic solution," writes Thomas H. Davenport in a recent issue of Harvard Business Review. "In many cases, the system will enable a company to operate more efficiently than it did before. In some cases, though, the system's assumptions will run counter to a company's best interests."
Still, smaller companies--which often have labor-intensive processes, or software that automates inefficient practice--may welcome a new set of current business processes. "It becomes a standardizing factor within an organization," says Michael Cipriano, CIO of $200 million General Scanning Inc., which is nearing the end of an Oracle installation. "We don't have to think about everything we do-- this is the way we do it, from payroll to A/P to MRP to inventory."
Finally, many companies say that ERP works as advertised: it tightens up the supply chain, increases productivity, and provides new insight into things like product costs, supplier performance, and inventory levels.