INDUSTRY ANALYSIS

ERP Consolidation Is a Cop-Out

It’s time the software industry quit ducking the tougher questions of growth by blindly claiming that every segment will either be conquered by or collapse into the domain of ERP systems.

It’s getting tiresome to have so many industry insiders, financial analysts, journalists and commentators put forth this overly simplistic view of enterprise software markets.

Here’s a quick reality check: If ERP systems could satisfy the multiplicity of needs being met today by best-of-breed vendors, those vendors would not exist.

The continued battling by Oracle to acquire PeopleSoft and its recent win in court underscores a more fundamental point. The ERP vendors are themselves consolidating, and there are those that have a clear strategy to be industry consolidators.

Best-of-breed vendors will be around for quite a while. Let’s take a look at the real culprits of the software shakeout.

Real Culprit 1: Promises of a Market of One

Three years ago predicting the consolidation of entire sectors of the market was a no-brainer. When you compared the annual sales of all vendors in the enterprise software market with the venture capital invested in them, you could see there was a massive shakeout of smaller vendors on the way.

The consolidation was driven not by ERP vendors but by a lack of business for many vendors who had somehow convinced investors their products and services were a market of one. If there’s one major take-away from the last series of flameouts, it’s this: There is no such thing as a market of one.

A few of those small vendors went public and have had sporadic profitability at best. Now they have cash and short-term asset positions that open the opportunity up for them to be consolidators. Many of these vendors can hang on. If the more cash-rich ones have their own plans to play industry consolidators in their corner of the market, they will start to look a lot more like the very ERP vendors who many say will subsume them.

Let’s face it: the vendors who delivered little if any value are already gone. Overhang in investment dollars was created by promises of entirely new markets being created in which the small company pitching the idea would become the next Cisco. With little or no return from investments for so many years, it’s amazing how patient some venture capitalists were with these companies.

Real Culprit 2: Shifting Company Visions

Smaller vendors who have gone under — or are about to do so — have one thing in common: CEOs who can’t seem to stay focused on one vision for more than four quarters.

You can spot these companies today. Although their go-to-market strategies have the latest buzzwords — data synchronization, ETL functionality, predictive analytics — the companies show clear signs of desperation.

Here’s a question for everyone who blindly claims that ERP consolidation would serve everyone better: How in the world could small companies with less than 150 employees can be so many things to so many people? Better for these small vendors to call themselves professional services vendors and be done with it.

Real Culprit 3: Competitive Ignorance

It’s not that these small, best-of-breed companies don’t know their competitors in the software arena. Any Google search worked for ten minutes can produce that list. No, these small best-of-breed vendors fail because they are clueless about the competitors that Google can’t find, like substitute processes in their prospect base or resistance in an entire industry sector to their approach to order management.

This ignorance also pervades in-depth vertical market knowledge as well. Smaller vendors fail because of this, not because of an ERP vendor trouncing their small customer base.

These are three of the main reasons why smaller vendors fail. The companies most resembling these characteristics are already gone or soon will be

Why ERP Consolidation Is a Copout

The reality is that there are going to be plenty of small, scrappy vendors beating the world’s largest ERP vendors on deals every day. Here’s how they will continue to survive:

  • They have cultivated years of customer trust by being transparent and have references to prove it. You would think that the ERP vendors everyone thinks of as dominating the market (Oracle, SAP, Microsoft and others) would have the resources to cultivate strong customer references not just their best-selling applications but also in the tertiary ones. Not so. Smaller, more focused vendors beat the ERP players on this point hands-down. The reality is that many ERP vendors really struggle to get user references — and on this point specific best-of-breed vendors excel.
  • They have no bloated professional services organizations. The best-of-breed vendors I know of can easily undercut the services costs of ERP vendors by a factor of 10, and some of these smaller vendors aren’t even getting greater than a five times multiple of services to product costs.
  • They outperform their ERP competitors on integration on the ERP vendor’s platform. One discussion with a local aerospace aftermarket supplier told me her team chose a smaller best-of-breed vendor over SAP because the small vendor “understood and did integration work on SAP better than SAP.” That is a direct quote.
  • They avoid sending a cast of thousands on sales calls. I’ve heard companies say that they become nervous when there are three times as many Oracle or IBM people on sales calls as there are people in the department implementing the software. They wonder if the professional services fees cover all these people. In one situation a best-of-breed vendor would have had to send in 40 percent of the company to match the headcount from Oracle — and the best-of-breed vendor won.
  • They will create for cash. For smaller companies, the deal pipeline could be made or destroyed with just a few simple but bad decisions. Successful smaller companies take longer to make product decisions but once done attack the project with intensity.

    Bottom line

    Claiming that all of enterprise software will consolidate into just the ERP vendors is a lazy view of the world. Best-of-breed companies constantly work customer bases for references, generate new product ideas and operate at a higher level of intensity. For these reasons, they will continue to survive and thrive.


    Louis Columbus, a CRM Buyer columnist, is a former senior analyst with AMR Research and is founder of LWC Research, a firm specializing in CRM, sell-side e-commerce, sales and product configuration and guided selling.


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