Key Trends in ERP/ENTERPRISE APPLICATIONS

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Consolidation

It’s happening at all levels of the market, among those that serve the G3000 (e.g. Oracle and PeopleSoft, Retek, ProfitLogic and Siebel; SAP and TomorrowNow), SMB customers (Lawson and Intentia; SSA; GEAC; Sage; Microsoft), and even those targeting the smallest customers. Consolidation will be an ongoing trend within the ERP space for several reasons:

1. Among the largest organizations, most major ERP decisions have been made and won’t change for some time. Significant ERP implementations can last 10 or more years, so aside from acquiring customer bases, there is little an ERP provider can do to drive new business (other than to diversify – see below). Whether it’s to gain customers and cross-sell, fill out a technology portfolio, or simply to eliminate a competitor, consolidation will continue.

2. However, acquisitions in enterprise or business applications in the future are likely to be more focused, such as adding to a CRM portfolio or rounding out a manufacturing effort with better Product Lifecycle Management (PLM) capability (see below). There are many companies that were created over the past several years, either during or just after the bubble, that are now facing crunch time, and whether it’s due to the hardships of becoming a public company (i.e., Sarbanes-Oxley requirements) or the impatience of investors, this form of an exit strategy is becoming more popular.

3. As businesses become more complex due to outsourcing, partnering and increasingly complex channel strategies, so must application providers offer solutions. Thus, applications will reach further into supply chains, out toward customers, and within organizations to provide better information about its ongoing performance.

Verticalization

Most application providers have at least some notion of verticality, but it tends to be a mixed bag. SAP, for example, thoroughly understands and builds to fairly deep levels in vertical markets (as does IBM, though it is not an application provider per se). Oracle, however, has a more rudimentary technology approach to most vertical markets, and Microsoft tends to rely on partners for vertical specificity and customization. We believe that these and other providers must continue to drive deep into vertical markets to add value to key processes, both those that are well understood and recognized as critical (e.g., order management) and those that are more collaborative in nature and less addressable by traditional applications (e.g., product development). This will also enhance the value of vertically oriented service providers, in some cases to the software companies themselves but also to the broad set of upstream and downstream sourcing and services companies.

This will also provide opportunities for ancillary technology providers that can target vertical markets as well. For example, enterprise content management capabilities can add value to financial, legal, product development, and other processes within organizations through integration to ERP systems. Analytical applications, particularly those that focus on vertical or specialized performance issues (e.g., supplier relationship management, product portfolio management), will also be attractive both to users and to ERP vendors. Growing and highly competitive vertical markets (e.g., oil and gas, pharmaceutical/life sciences) will also drive investment by ERP providers as they build out their portfolios.

Diversification

SAP’s move to become a platform provider through its ongoing development of the NetWeaver platform (now a “Business Process Platform”) and associated acquisitions (Top Tier, In-Q-My, A2i) has thrown down the gauntlet to Oracle, IBM, and others across the enterprise software space. While competitors already possess many pieces of the puzzle, integrating them, beefing them up in some cases, and providing “soup-to-nuts” capabilities across the spectra of integration, information management, etc. – as SAP is trying to do – will be a challenge. Areas that should see movement in response include web services development and management (given SAP’s and others’ directions toward composite applications and requisite environments), enterprise information management and integration (bridging structured and unstructured information), analytics and business performance management, and business process management among others.

In concert with the above trends, diversification among other platform and IT operations oriented companies will continue as they move up the stack to meet growing demands for distributed and mobile management, security, asset management, and other areas impacted by the advent of component software and web services development. Traditional analytics and BI companies will continue to add capabilities to target compliance, unstructured information analysis/ mining, etc. under the burgeoning moniker of business performance management. These are not only requirements given the evolution of technology and user demand, They are necessities given the predilection of major application and software infrastructure vendors like SAP and Oracle to extend to these areas as well.

Finally, it appears that geographic expansion – diversifying into new markets – has been a driver in the SMB space for ERP. Examples of acquirers include Microsoft, Adonix, Sage and Infor. With a degree of unrest expected to continue among JD Edwards customers in light of Oracle’s ongoing development/maintenance decisions, not to mention the continued pressure of Microsoft and SAP, we believe that ERP acquisition interests will continue to span geographies, particularly in growing markets.