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ERP: Not dead, just extended

ERP: Not dead, just extended

It fell out of favour post-Y2K, but ERP is back. Vendors now offer extended ERP systems, promising fewer integration headaches. Does this mean best-of-breed is history?

Few companies illustrate the potential of enterprise software better than Delta Air Lines. The company is in the process of rolling out supply chain software to manage spare parts inventory and schedule repair time for jet engines. Walter Taylor, Delta’s managing director of operations technology, hopes the software will make the operation a profit centre, enabling Delta to take in jobs for other airlines.

However, Taylor did not turn to a supply chain specialist like i2 Technolo-gies or Manugistics; he turned to SAP, the software giant known for its big, expensive enterprise resource planning (ERP) packages.

“We chose SAP because it was the best single source to support our business aim,” says Taylor.

The deal highlights a growing trend to buy ERP, rather than specialised best-of-breed, packages. The big ERP vendors – such as SAP, Oracle, J.D. Edwards and PeopleSoft – are extending their ERP suites into areas such as supply chain management (SCM), customer relationship management (CRM) and logistics. SAP’s licence revenue figures show it has overtaken i2 in the sales of supply chain applications and is behind only Siebel Systems in CRM offerings.

Why is there renewed interest in ERP? Users say it is because the current crop of ERP products, known as ‘extended ERP’, offers the integration and flexibility they require. If you want a CRM package, the thinking goes, why go to the trouble of integrating a Siebel package when you can buy one from Oracle that will slot right in?

Avoiding integration hassles

Taiwan’s Win Semiconductors, for instance, has opted to go with Oracle’s products. Says Don Mathes, the manufacturer’s vice-president of operations, planning and logistics: “We spent a lot of time researching to pick the vendor we are going to use for our information management systems. We are probably going to talk to systems integrators, but I expect to stay with Oracle as I move into supply chain management.”

To Mathes, the issue was simple. He wanted to avoid the integration hassle and he wanted the optimum system for the company. “Win didn’t want finance to pick the best solution for finance, and procurement to pick the best solution for procurement, but at the cost of overall efficiency to the company. We wanted to maximise efficiency for the whole company, not just for one department.”

He notes that companies taking the best-of-breed approach and “pick and choose their software products and integrators” typically get a service provider to “do it all” for them. “We’re trying to avoid that.”

Mathes’ view is typical of users who want to go with only one vendor. Besides avoiding integration nightmares, these users want a company that will stick around. The non-ERP modules that they purchase from their main ERP vendor are “good enough”.

Extended ERP allows IT directors to increase the benefits of their original ERP systems. Early ERP adopters used the technology to manage core business processes, but today’s ERP enables those benefits to be realised in new parts of the business, says Andrew Bartels, an analyst with Giga Group (now owned by Forrester). “Extended ERP is all about extending those core business applications out to customers, suppliers and partners.”

In the bad old days, using an ERP system from a vendor like SAP could mean risking vendor lock-in. If your financial system was from SAP, you would struggle to integrate anyone else’s procurement software. But the latest generation of ERP suites offers web-based interfaces with improved tools for integrating with other applications, says Bartels. For example, MySAP allows SAR R/3 users to connect with virtually any web-based application.

Extended ERP is a direct response to the success of best-of-breed, and it was inevitable the big software vendors would eventually offer their own CRM and SCM applications, says Roux Cilliers, a practice leader with Deloitte Consulting. “Ten years ago, best-of-breed was the de facto standard, but ERP vendors could offer speed of implementation and integration, which eventually won out.”

Gartner research director Pranav Kumar says the pre-integration of applications is the biggest advantage of going with one vendor: “Many projects have failed because of integration issues. Web-enablement is not the solution to this problem.” Going with an extended ERP vendor “usually costs less, both in terms of software and services”.

Cost not a big factor

However, not everyone thinks extended ERP will beat best-of-breed hands down. A recent report by AMR Research revealed the average cost of adding extended ERP modules is US$1.5 million (NZ$2.5 million), and that actual costs exceeded expected costs by US$100,000 (NZ$167,000). Only 13 per cent of those surveyed said reduced cost was a benefit of extended ERP. Rather, the most oft-cited benefits were improved functionality and the ability to collaborate with partners.

The disadvantage of sticking with one vendor, says Kumar, is the vendor may not have very evolved functionality in all the application areas. A single-vendor offering may be adequate for companies that need only “lightweight” functionality.

“Under very demanding circumstances, the extensions may not work as well as a best-of-breed alternative,” says Kumar.

The other disadvantage is vendor lock-in. Commercially, being locked into one vendor means you have less ability to negotiate on price. Technically, you are beholden to the vendor’s roadmap for new functionality.

Where best-of-breed stands

As for best-of-breed, the advantage is such vendors are usually innovators, Kumar points out. “Users whose strategy is to derive competitive advantage through the use of technology may prefer them.”

Agreeing, Cilliers adds: “Often, best-of-breed is offering functionality that mainstream vendors won’t match for a couple of years. In the meantime, I’d recommend considering niche vendors to deliver that functionality and short-term benefit.

“Best-of-breed has a vital role in providing short-term boosts for business. There is an enormous focus on delivering quick benefits in business today, and ERP isn’t usually the best way to achieve that.”

However, Kumar notes best-of-breed offerings are often expensive. And in this challenging economic environment, going with a best-of-breed offerings is also more risky. “Many best-of-breed vendors struggle to survive since their streams of revenues are limited. This puts their long-term viability at risk, thus making their selection risky for users,” he explains.

Kumar says extended ERP is gaining ground: “The evidence suggests that ‘pre-integrated’ offerings are finding favour with many organisations. SAP’s success is certainly a pointer in that direction.

“However, it is too early to conclude that the ‘pre-integrated’ software model would replace best-of-breed. Organisations with complex requirements may prefer best-of-breed and be willing to live with the complexity and cost of integration.”

In many cases, the decision on whether to choose best-of-breed or extended ERP is taken far too seriously, according to Giga’s Bartels.

“Rather than applying any business analysis, too many companies are adopting an ‘Oracle for us’ or a ‘We love Manugistics’ position,” he says.

“Don’t forget, this is software, not a religious war.”

Cutting the cost of integration

It is easy to lose sight of costs during an enterprise software rollout. Here are some tips to keep a hold of the purse strings:

Keep good integration managers on staff, or risk losing out on a lucrative market.

Look out for guarantees and trade-ins from vendors. For example, SAP offers a discount if users can’t connect by a preset deadline.

Demand web-services interfaces from packaged application vendors. When upgrading, insist on extensible markup language (XML) interfaces. Minimal conformance is not enough – check that the web services expose all the objects you need.

Build web-services and component repositories using new tools like Flashline and ComponentSource to create JCA connector, Enterprise JavaBeans (EJB) and component object model (COM) mechanisms for rapid deployment.

Join the CIO New Zealand group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

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