Making sense of the cloud ERP conundrum

Den Howlett Profile picture for user gonzodaddy February 9, 2015
SAP S4/HANA adds poignancy to the ongoing debate about cloud ERP adoption. What's really happening?

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The SAP S4/HANA launch opened up a debate around when/whether ERP is moving to the cloud and if so how. Doug Henschen endeavored to answer the question in advance but only got so far, noting that:

But new ERP deals shouldn't be confused with all deployments, a universe still dominated by on-premises ERP. What's more, cloud ERP continues to find favor mostly among small and midsized businesses. Like NetSuite, cloud-ERP pure-play vendors KenandyPlex Systems, and QAD have focused almost entirely on midsized companies or divisions of larger companies. Epicor and Microsoft Dynamics have spun out SaaS-based versions of their flagship ERP software, but these, too, are predominantly aimed at midsized companies and business units of larger firms.

Henschen also observes:

You simply don't see Fortune 100 companies or many manufacturing-and-supply-chain-oriented Fortune 500 companies running SaaS-based ERP today.

The S4/HANA launch didn't change that. What's going on? I'll summarize what we see in the field:

VSBs shift more quickly

Very small businesses that have nothing by way of accounting systems are moving to the cloud. Xero will address this topic later today. Having followed the VSB market for 10 years, I can attest to how this is happening in English speaking countries except the US where the pattern is different. This makes VSB cloud adoption look stunning but as we know, there are for example 29 million small US businesses and Intuit, the claimed incumbent is only reaching two million of those.

Some VSBs are moving to cloud based accounting, normally on the recommendation of their professional advisors where those same advisors have seen the value proposition and understand the creeping commodification of accounting. Regardless of how they count the numbers, you also see that in the secular decline in volume additions at places like Sage.

Mid-market accelerating

Mid-market customers are slowly adopting but the numbers appear spectacular because all vendors are coming at this from low or no base. As Henschen observes, everyone's getting a piece of the pie where they have in market offerings. In this market, the pickings are relatively large but have yet to hit a volume tipping model. NetSuite counts 20,000 customers and is on track to hit $500 million in revenue. Xero counts 400,000 customers and is on target to hit $100 million in the current financial year.

In a recent briefing, SAP confirmed having grown Business ByDesign by 40% at a time when everyone thought it was on its last legs. In short, the VSB market is a volume play, the mid-market is a value play but with values going up. So what about the large enterprise market? This is where it gets interesting - and confusing.

The Workday experience

SAP and Oracle are both deeply concerned about Workday. As they should. But only in one segment. Workday plays best in non-manufacturing markets. It plays well where there is distress in the ERP landscape either because of cost or other economic factors. Witness HP. It also plays very well in landscapes where the customer has good experience of an existing SaaS solution like Salesforce and is liking to drive efficiencies elsewhere. Here you can name any number of brands.

People often ask why Workday is doing so well. The answer is very simple. It's because the competetion has been so lousy. That will change. In a recent briefing, I saw how Oracle has done a solid job in recognizing the need for modernizing the ERP stack and what that means for end users. Right now, they are winning in mid-market and have almost nothing to show in large enterprise.

Reading the large enterprise market

The real question though is who among the various players has read the market correctly? If you look at what ERP is all about then it starts and stops at the transaction. It is all about creating a record. Workday took that regulatory need and made a virtue out of it by ensuring that operational analytics were baked into the solution. It's been a very tough journey but they're kinda there. Hooking the people element via HR makes the virtuous ERP circle complete.

Oracle is doing the same but is recasting older solutions to get there. As a buyer, I'm not sure I care so much at the technical level as long as I can get stuff done at the right price point. And from what I have seen so far, that's a viable strategy.

SAP is still scratching its head on all of this but is taking the view that as long as they own the transactional ERP and can surround with 'network' applications like Ariba, Concur etc then it's in good shape to make a measured if protracted transition. It vaguely talks about new classes of application powered by the real-time HANA core database but hasn't really positioned this with a value add application portfolio the market can easily recognize. In that sense, SAP has a complete vision. It just hasn't executed. Yet.

SAP's challenge today is that it has effectively frozen the existing market. By talking 3-5 years before the S4/HANA transformation is complete, it is basically saying to its largest customers - only buy Business Suite on HANA or stand still while we get this sorted out. In the meantime, we'll help you  on a case by case basis. Viewed from that perspective, it cannot expect to expand the market it already holds by brand name.

So to summarize: SAP and Oracle are working to hold onto core customers. Both are addressing smaller (by their standards) potential customers and enjoying success albeit from a no/low base. They can therefore credibly claim stellar growth but it doesn't exactly get reflected in the big numbers they report to the Street.

In the meantime, the newer players are scooping up everything the big boys can't handle and across multiple markets in the mid-market. View from that perspective, except in a few hundred leading cases, SaaS/cloud adoption is following a natural path but from the bottom up by volume when envisaged as a pyramid.

Wassup? What's next?

That begs the question - what do those few leading customers get that everyone else misses. There are many answers to that question, not least is the elephantine cost investment made in ERP over the years. Some companies run billions. I take the view that's not the point. I take the view that's a distraction. In an earlier piece, Phil Wainewright teases out reasons such as M&A and modernization from a conversation with Infor.

Those who are claimed to be leading the way have clearly understood the commodity value of the transaction but also its necessity for providing data as an input to the next generation of data driven applications. They therefore see ERP as the cost of getting data out from a required transactional system and so do everything they can to drive that commodity cost down. SaaS helps them do that in an attractive manner.

What's next then? SAP opened the barn doors on the cost/value equation with S4/HANA because it exposes the dead weight of maintenance costs. The flip side is that same dead weight is backed up by applications that are highly mature and run millions of lines of code. Hence SAP's mantra of simplification. They are not alone. Oracle, Infor, Microsoft, QAD and a myriad of smaller players all face the same conundrum.

Final words

The only question left: at what pace will the overall market shift? Incumbents are banking on a slow dawdle into the future. In many cases, they may well be proven right. But it is when I look at the portfolio of companies that vendors like NetSuite hold, which is consistently winning among new growing businesses of all stripes, that I see the greatest risk to the large players.

As long as those same companies don't outgrow the NetSuite's then the danger signs for the big boys loom large. That's already happening to a limited extent through 'Tier-2' strategies.

On the other hand, if the Global 2000 believe they can take their time then driving out cost is their priority. Either way, the big boys have tough challenges ahead.

Endnote: SAP's S4/HANA begs many more questions. We will be returning to those in another story.

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Disclosure: SAP, Oracle, Workday, Salesforce, NetSuite and Infor are all premium partners at time of writing.

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