"Crystal Ball for Business," Feature Article, March 2007

crystal ball for business

Future ERP systems will look outside the company, and may be located outside it, too.

by Jean Thilmany, Associate Editor

it's time to say goodbye to the golden age of enterprise resource planning systems, say some analysts who follow the industry closely. In the old systems' stead will be more outwardly focused applications that not only give decision-makers a bird's-eye view of all company functions, but also let them tie that information in a meaningful way to events happening in the outside world. It's that tie that can offer crucial feedback for business planning, according to
Brian Sommer, president of Techventive, a technology research firm in Batavia, Ill.

The way companies acquire ERP services in the future will likely change radically, too. Midsize companies can expect to say goodbye to the large-scale systems and their steep training curves by letting someone else house the system and worry about maintenance, Sommer said. We'll leave alone the question of whether a golden age ever really existed, although certainly ERP came to prominence in its earlier manufacturing resource planning incarnation in the 1970s.

The buzz about ERP began in earnest in the 1980s, when companies large and small, in businesses that ranged from banking to retail to manufacturing, were lining up for the expensive systems. They had plans to tie all business functions across a common database, Sommer said.

ERP systems link manufacturing with business processes like new orders, purchasing, credit, accounting, supply chain management, and planning. They stretch from headquarters across multiple factories, warehouses, engineering centers, and even sales offices. By linking these operations with profitability, ERP helps executives understand and forecast all the factors—from sales and purchases to asset utilization and hiring—that might affect profits.

But implementation was usually costly and took what seemed like eons to carry out. Once ERP was in place, executives had to get up to speed on how to most effectively crunch the numbers their systems churned out. With all that out of the way, most companies did indeed see their bottom-line financials nudge up, thanks to the broad view into operating numbers, and the zoom-in and cross-section focus the system provides.

Now, more than two decades after the ERP buzz began, nearly every company—no matter its size—has a system of some sort in place, said Frank Scavo, president of Computer Economics, an information technology research firm in Irvine, Calif.

"The very smallest ones, maybe they're running Quickbooks or an accounting system," Scavo said. "So even though they don't have anything that could properly be called ERP, those systems function in ways like ERP."

Irrespective of their size, many companies, envisioning headaches and expense ahead, aren't looking to update, no matter how much they'd like to. Rather than pay for a new system and take the downtime needed for training, those companies are looking to extend the life of their current systems by using workarounds that get the software to perform as needed, Scavo said.

"Some of those systems may be very old, maybe from the early 1990s or late 1980s, that they're still nursing, but they're not just taking the bait and buying a new product," he said. "A lot of functionality of those systems maybe has fallen into disuse, so they're doing things manually or offline in terms of spreadsheets or supplemental databases."

Other companies buy new modules and incorporate them into their old systems to gain additional functions without a massive upgrade.

No two ways about it, the ERP industry has been altered greatly since the days when potential buyers were ripe for picking and anxious to hop on board. The vendor base has consolidated into a few big players who have gobbled up many of their smaller competitors over the years. Developers like Oracle of Redwood City, Calif., and SAP of Walldorf, Germany, can offer a range of products suited to many types and sizes of businesses, thanks to vendor acquisitions and massive in-house development teams, said James Holincheck, a research vice president at Gartner Group. He works in Chicago.

Vendors are looking to catch the attention of potential clients and get them back on board and away from the workaround.

Meanwhile, according to Sommer, with nothing really revolutionary released on the application front during the past several years, the ERP industry is poised for a shakeup. Vendors are looking to catch the attention of potential clients and get them back on board and away from the workarounds. They're now proffering service-oriented architecture to try to win new converts, Holincheck said. SOA isn't a technology; rather, it's a way to use middleware to loosely couple a company's already-installed and varied software systems, regardless of platform or protocol.

As Holincheck sees it, such an ERP system—all of a manufacturer's disparate applications linked by a connecting software architecture—comes with many benefits. Because SOA can be Web-based, executives can access crucial company information in ways they're used to. Information technology employees don't have to take time to be trained to work with a new ERP system, and that saves money.

The middleware approach makes planning systems more affordable for small and medium-size companies. There's no need for one large, dedicated software system when each department's applications, tied via middleware, can get the job done.

Sommer is more skeptical. He said that SOA isn't likely to be the new holy grail that developers are seeking because it doesn't offer an entirely new way of ERP—just a new way of coupling existing applications.

"With SOA, you're replacing the old ERP system that maybe ran Fortran with another that maybe works over the Web, but the functionality is the same," he said.

Instead, businesses looking for the capabilities that ERP can give them minus its headaches will more often turn to outside services, Sommer said. In an outsourcing scenario, a company uses some or all of the modules in an ERP system over a secure network link to the service's computer center. A manufacturer would rent hardware and software, and pay for various services—implementation, product integration, customization, and the expertise to operate and support the hardware and software.

The concept of outsourcing ERP is nothing really new. It's been around for at least a decade. But the difference now is that the main players are getting behind the idea, likely because it has so many potential converts. In a slightly different way of doing things, the big names are throwing their hats behind hosting a company's ERP applications. In that way, they act as outside sources although they're using their own software and hardware for the task, Sommer said. They say that they're hosting ERP rather than providing outsourcing.

"The big boys like SAP and Oracle can run ERP software for you on their machines and do maintenance and keep releases current, and do it cheaper than your company could do it," Sommer said. Nevertheless, smaller services like NetSuite of San Mateo, Calif., are still around. NetSuite says it can manage financials, order fulfillment, purchasing, inventory, billing, payroll, and a Web presence, among other things, for its clients.

Companies that go the externally hosted route can expect to reduce their fixed overhead costs, and to gain flexible and scalable hardware and software. Most suppliers have disaster recovery programs in place to retrieve lost information, according to Eric Kimberling of Pano- rama Consulting Group LLC in Denver.

But there are drawbacks. Although the initial investment may be lower because companies won't be purchasing hardware and software, ongoing, annual costs will likely be higher. And companies don't own the software or even the data in a hosted environment, which can make many executives very uncomfortable, Kimberling said.

ERP IS DUMB

Beyond the hosting and outsourcing scenarios, real change in the ERP world will likely come in light of the revelation many users have after crunching the numbers their new systems spit out.

"ERP is dumb," Scavo said.

By that he means the numbers ERP systems return are only as accurate as the information entered in the first place. The systems can't account for the validity of the input information.

"Companies aren't suffering because they don't have ERP with SOA. They're suffering because their bills-of-material are only 70 percent accurate and those go right into the ERP system," Scavo said. "This hasn't changed since the 1970s. This is something we've faced all these years."

(Alan Brown wrote about this issue in his story "Lies Your ERP System Tells You," which appeared in the March 2006 issue of Mechanical Engineering.)

ERP vendors will likely never be able to control the human in the machine—and the accuracy of the information that a person enters. But Sommer said ERP vendors could take some of the insularity from the system by giving it the capability to look outside the company. After all, no company functions in a vacuum, and executives need to have access to outside-world information as well as company information when they make plans.

Businesses seeking the capabilities ERP can give them minus its headaches will more often turn to outside services, an analyst says.

"They need a system that's externally aware, that pays attention to things like oil prices, interest rates, military takeovers of governments," he said. "They should be able to integrate external events and be able to figure out internal operating costs based on that.

"They might want a software package that notices the Federal Reserve bumped up interest rates today," Sommer added. "The software should recompute capital expenditures based on that rate hike so they can figure out if they should cancel construction projects or should be buying spare inventory."

He also provides an example that's quite relevant to manufacturing.

"One problem, as we've moved to lean manufacturing with zero inventory, is that we've created long global supply chains where people are sourcing stuff from China and the African coasts with no ERP system that tracks congestion on the docks," he said. "Maybe I'd like an ERP system that watches for weather problems in the Pacific to know the container ship took a detour to get around a typhoon so it'll be five days late getting to San Diego. And furthermore, there's a railroad strike, so your containers will be a month late."

It's clear that different companies will want different outward-looking capabilities. One way to get there might be mash-ups. The mash-up is gaining popularity, is readily doable, and could be useful in the ERP realm, Holincheck said. Mash-up is a new term that software developers use when they pick and choose functions from already-existing applications and combine them in new ways.

Google Maps an example of a mash-up.

"In a consumer world, that's the capability to embed Google Maps into an existing application to show the location of things," Holincheck said. "It's not something that the creators of the existing application developed, but they can use it."

Holincheck, like Sommer, looks for ERP vendors to soon begin integrating their systems with other software's capabilities to deliver greater bang for the buck.

In the enterprise world, SAP combines pieces of its project management module and parts of its human resources module in new ways to solve a company's specific problem, Holincheck said.

"So it's how you assign people to projects, how you manage staff around that as you're looking at alternatives in terms of projects you do, cost implications, staff-coverage implications," he said. "Some of these things are available in independent applications, but trying to figure out where to make your project and people investments—that is new."

Although ERP systems have been perceived as clunky and expensive of late, the industry is far from moribund, analysts say. In fact, the applications are becoming nimbler and have the potential to become even more practical in the years ahead.