INDUSTRY ANALYSIS

The Time Has Come for Hosted ERP

Making inroads into the next major market for software isn’t going to happen from enterprise vendors trying to wedge expensive, large application footprints into a product strategy that appeals to medium-sized companies. Despite Oracle, Siebel and others proclaiming they can make this strategy work, the bottom line is that the financial pain of doing this is just too much for companies with their cost structures to bear.

That’s why so many experiments to get into the mid-tier and small business sectors of the market have failed. The irony of the largest software companies trying to increase software licensing and maintenance fees while also trying to squeeze their business models into the small and medium business segment is already pulling these companies in opposite directions.

The Heart Of ERP

I have talked with managers at a number of small and medium businesses who manufacture complex products and support four or more production centers, and they say the concept of a full ERP system is just too daunting. One IT Director said, “Just meeting with ERP vendors would consume my week!” Such companies approach SAP with both respect and fear — respect for the product and fear no one would be able to really use it. But the benefits of having order management and fulfillment — the heart of an ERP system — made sense to these small companies. Working with industry analysts to find a way around doing a full ERP instance was just one of many strategies.

There are valuable lessons learned from speaking with these manufacturers, who have the information needs of companies 10 times their size yet don’t have the headcount to support an SAP instance.

Lessons to Learn

  • Distributed order fulfillment follows high growth companies geographically. The fastest growing manufacturing companies don’t think twice about installing another order fulfillment location at a manufacturing site once it’s running. There’s no re-locating of inventory to a central location; it is drop-shipped from center.
  • Hosted ERP solves an outsourcing pain point. The higher the complexity of the outsourced hardware product, the greater the need for ERP integration — and this has been where manufacturing outsourcers have had the most trouble. Computer peripherals manufacturers are especially in need of this type of coordination with outsourced production centers. To this point there has been only sporadic and incomplete order management data between manufacturers and their outsourcing partners.
  • Usability and depth of application matters more than method of delivery. The last three years have turned the concept of using hosted applications completely around. Today usability matters more than a wealth of features no one ever really uses anyway. CRM and sell-side applications initially broke down this barrier, and the success of Salesforce.com has legitimized this trend.
  • A drop in maintenance cost increases has helped. For many manufacturers’ IT directors, the escalating prices of maintenance costs from ERP vendors is a source of pain. A hosted solution makes this more controllable, and given that the subscription model is based on a per user basis, companies looking for a way out of contracts that have escalating maintenance costs will consider a hosted ERP solution.
  • Integration on a hosted platform is no longer rocket science. There are many smaller, best-of-breed vendors who offer their CRM, PRM, order management and pricing applications on both a licensed and hosted basis. Salesforce.com’s approach with Sforce has broken down this barrier, as has the work ChannelWave has done on its hosted PRM and order management applications acquired from Aqueduct. Integration on a hosted platform is becoming more and more of a non-issue every day.
  • Outsourcing Help

    SAP’s announcement of a hosted ERP solution with HP as hosting partner plays to both companies’ strengths. The selection of verticals to launch into — oil and gas fuel distribution, consumer products, food and technical service providers — makes perfect sense. These are the verticals SAP excels at.

    The bottom line is that using a hosted ERP system will make sense for manufacturers in high-tech, complex manufacturing who today are outsourcing portions of their manufacturing or have wide distribution geographically of their manufacturing operations. Manufacturers with these characteristics will be the early adopters and will see hosted ERP as a solution to many problems rather than an experiment in cost reduction, as many other enterprise vendors view it today.


    Louis Columbus, a CRM Buyer columnist, is a former senior analyst with AMR Research. He currently works in the software industry.


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