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P3338: Forrester - ERP Applications - Market Maturity, Consolidation, And The Next Generation, By Paul Hamerman And Byron Miller

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Government Exhibit P3338

April 2, 2004
ERP Applications — Market Maturity, Consolidation, and The Next Generation
by Paul Hamerman and Byron Miller


 

Forrester logo Helping Business Thrive On Technology Change

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MARKET OVERVIEW


April 2, 2004
ERP Applications — Market Maturity, Consolidation, And The Next Generation
by Paul Hamerman and Byron Miller
with Erin Kinikin and Liz Herbert

EXECUTIVE SUMMARY

ERP is maturing and consolidating as vendors seek to acquire a critical mass of customers and maintenance revenues. License revenues will rebound from declining to minimal growth, with maintenance becoming the bulk of the business. Significant opportunities exist for large companies to consolidate their ERP system environments for efficiencies. New opportunities are also developing for better business-process support, deeper verticalization, and integration middleware. Toward the end of this decade, we anticipate the emergence of the next generation of application packages, extensively leveraging service-oriented architectures (SOAs).

TABLE OF CONTENTS NOTES & RESOURCES
2 Company ERP Environments Are Often Fragmented And Customized
 
4 The ERP Market Is Mature
 
6 SOAs Will Transform The Market
 
8 Enterprise Changes Drive Better Business-Process Support
 
8 The Big Vendors Will Continue To Dominate

RECOMMENDATIONS

10 Make The Most Of Your ERP Investment

WHAT IT MEANS

10 More Consolidation, Then Opportunity

ALTERNATIVE VIEW

11 If Companies Don't Invest, ERP Will Continue To Shrink
Research for this report is based on market revenue analysis and ongoing discussions with major vendors, including MAPICS, Microsoft Business Solutions, Oracle, PeopleSoft, SAP, SSA Global Technologies, and others. We also incorporated end-user feedback from client inquiries and consulting activities.

Related Research Documents
"Comparing the Comprehensive Enterprise Application Vendors"
July 22,2003, Planning Assumption

"Market Overview 2003: Comprehensive Enterprise Applications"
April 3,2003, Planning Assumption

"Market Overview: ERP in Transition"
March 26,2002, Planning Assumption


Forrester logo © 2004, Forrester Research, Inc. All rights reserved. Forrester, Forrester Oval Program, Forrester Wave, WhoeView 2, Technographics, and TechRankings are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. To purchase reprints of this document, please email reprints@forrester.com.

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COMPANY ERP ENVIRONMENTS ARE OFTEN FRAGMENTED AND CUSTOMIZED

ERP software runs the core operations of a business, including finance/accounting, production, inventory, order management, procurement, and human resources (HR) management. However, implementations have often been fragmented and departmentalized, and different applications have had varying levels of success. Financial and HR applications have been the most successful in supporting the needs of many types of businesses, while companies have struggled to implement packages that support other core business operations or processes that span multiple departments or functions.

Complex ERP Environments Present Several Challenges

Most companies have complex ERP environments consisting of packages from multiple vendors that have been customized, as well as an array of internally developed software that must integrate with the packages. Businesses face ongoing ERP software challenges:

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Companies Are Simplifying Their ERP Environments

Many companies implemented ERP systems in the mid to late 1990s, a prosperous time for the application software industry. Technical challenges and implementation time and resource constraints, however, limited success. Scalability limitations of client/server software packages caused multiple instances to be deployed at plant or division levels. Software customization was encouraged by some vendors and consultants, leading to protracted implementations and upgrade problems. Alternatively, rapid implementation methodologies were promoted that failed to align software capabilities with business processes. Realizing value from these ERP investments proved to be elusive for most companies.

In the past few years, the situation has improved. ERP vendors continue to strengthen their products and most companies are refining their ERP environments to improve business value and ROI. The following trends are emerging:

  • Companies are standardizing on a single ERP vendor. Forrester survey data shows a clear trend toward standardizing on a single vendor in large companies that have been using multiple ERP vendors.1
  • Companies are moving toward fewer software instances. Previous research has shown the benefits of a single global instance of an ERP system.2 Consolidation of the number of software instances is being driven by improved technical scalability, as well as an opportunity to reduce hardware and support costs through centralization.
  • Comprehensive ERP offerings reduce the need for best-of-breed bolt-ons. The large vendors have focused on expanding integrated suites to replace functionality provided by best-of-breed vendors. This has occurred in broad areas such as CRM and supply chain management as well as narrow areas such as recruiting and expense management.
  • Industry-specific functionality is getting deeper. ERP has its roots in manufacturing, but support for other industries continues to improve. SAP, for example, has expanded its industry solutions in many areas, including retail, banking, chemicals, oil and gas, and aerospace/defense.
  • Integration capabilities are improving. The major vendors are now providing integration tools and exposing more open APIs. Even Oracle, the last bastion of the single integrated suite, is now emphasizing its ability to also integrate with legacy and best-of-breed systems. Infrastructure-based toolsets have been developed by ERP vendors and are being marketed as products to enhance integration and interoperability.

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THE ERP MARKET IS MATURE

As an industry segment, the ERP market has reached a high level of maturity. License revenue declined the past three years. This decline can be blamed to some extent on the economic downturn, but the fact remains that fewer and fewer large deals are occurring. Most large companies and governmental organizations have already committed to one (or more) ERP vendors. The majority of license revenue for the large vendors is coming from existing customers and average deal sizes are declining.

Maintenance Revenue Is the Market's Growth Engine

License revenues for the core ERP applications — finance, HR, and operations (e.g., purchasing, inventory, production, order management) — will remain relatively flat, especially at the high end of the market. This means that the growth engine will shift to recurring maintenance revenues, as well as new modules outside the traditional ERP footprint. PeopleSoft, for example, has aggressively grown its maintenance subscriptions business to more than 40% of its revenue stream, while licenses have declined to 24% of the business (consulting and training comprise the remainder). For the market as a whole, growth in maintenance revenue results from two factors — gradual increases in maintenance fees by the vendors and growth of the license revenue base.

Forrester's market forecast for ERP is as follows (see Figure 1):

  • The ERP market size is $5.4 billion in license revenues and $19.7 billion overall. From a historical perspective, this market experienced high growth until 2000, when it peaked at $6.1 billion in license revenue, then declined to its current size of $5.4 billion. We are including the total revenues of the comprehensive enterprise applications (CEA) vendors in these figures, even though a significant portion falls outside the traditional ERP footprint (see Figure 2). Previous research showed the traditional ERP market size is now approximately $3.8 billion in license revenues and $14.2 billion overall.3
  • The market will see a modest recovery in 2004 and then level off. This is good news for a mature market that has declined each of the past three years. There is some pent- up demand for ERP applications that will enable companies such as SAP and Microsoft Business Solutions (MBS) to achieve applications revenue growth in 2004 and 2005. Overall, however, this market is still consolidating and is very mature. Software license revenue will be flat (zero growth) through 2007, while overall revenues will grow by approximately 3%, largely driven by maintenance. Recent earnings announcements from vendors, such as Oracle and Lawson Software, show some strengthening in applications licensing activity. In addition, SAP has forecasted a 10% improvement in license revenues for 2004. SAP's gains, however, are likely to come at the expense of its competitors as the market consolidation continues.

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Figure 1 Forecast: Global ERP Market Revenues, 2002 To 2007

Line graph for ERP revenues, 2002 to 2007, as defined in table below

  2002 2003 2004 2005 2006 2007 CAGR
License $5,298 $5,422 $5,585 $5,641 $5,624 $5,455 0.6%
Maintenance $5,792 $6,573 $7,493 $8,045 $8,616 $9,207 9.7%
Services $7,010 $6,784 $6,640 $6,427 $6,275 $6,263 -2.2%
Total (US$ millions) $18,100 $18,779 $19,718 $20,113 $20,515 $20,925 2.9%

(numbers have been rounded)


  Source: Forrester Research, Inc.

The ERP Market Consists Of Three Major Customer Segments

The ERP software market falls into three primary segments by customer size: large companies, the midmarket, and small businesses (see Figure 3).

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Figure 2 ERP And CEA Compared
ERP
 
Production
management
Procurement
management
Distribution
management
HR Finance Supply
chain
optimization
CRM

CEA

  Source: Forrester Research, Inc.

The Midmarket Is The Battleground

With the decline in the number of high-dollar deals in the large company ERP market, the three CEA vendors are turning their attention more and more to the midmarket. This was a key driver for PeopleSoft's acquisition of J.D. Edwards in 2003. SAP has been ramping up distribution of its lower midmarket product Business One as well as refining its All-in-One offering for the upper midmarket. Oracle is also focusing on the midmarket with a scaled-down offering called Special Edition. There are two key challenges for these vendors:

SOAs WILL TRANSFORM THE MARKET

A message-based component architecture is a fundamental necessity of ERP/CEA systems. And we are seeing this more and more in products spurred on by the adoption of SOAs. Adoption of SOA will evolve from the fringes to the application core, with most vendors moving through the following stages:

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Figure 3 ERP Market Segments By Customer Size
Market
segment
Size
range
(annual
revenues)
Solution
characteristics
Representative
vendors
Large companies $1 billion plus Global functionality, high network and transaction scalability, sophisticated reporting and analysis SAP, PeopleSoft, Oracle
Upper midmarket $250 million to $1 billion Multinational functionality, but less scalability. Often sold through channels rather than direct to customer Microsoft, Lawson, SSA Global, Geac, SAP, PeopleSoft Oracle
Lower midmarket $50 million to $250 million Multinational functionality but significantly less scalability. Often solf through channels rather than direct to customer. Microsoft, Epicor, Exacta, Sage, NetSuite, SPA BusinessOne
Smaller business Under $50 million Single location, country specific, PC- or LAN-based. Standardized packages with lower cost and complexity. Sage, Intuit, ACCPAC, NetSuite

  Source: Forrester Research, Inc.

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ENTERPRISE CHANGES DRIVE BETTER BUSINESS-PROCESS SUPPORT

Enterprises are continuing to work at driving out costs while creating greater value. For manufacturers in particular, it has meant virtual manufacturing where many plants no longer have excess capacity for sudden increased demand. This has resulted in some manufacturing being done in contract facilities while maintaining control and status. For others it has meant making changes and tracking the business in near real time. In every case it has driven the demand for better business process support.

THE BIG VENDORS WILL CONTINUE TO DOMINATE

It is interesting to note that in the last 10 years the companies in the top three revenue slots have been the same for seven of those years — Oracle, People Soft, and SAP (see Figure 4). The only change in position among the three occurred last year when the No. 3 company (PeopleSoft) bought the No. 4 company (J.D. Edwards) and became the No. 2 company.

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Figure 4 ERP Market Leaders Based On Revenue, 1994 To 2003
  #1 #2 #3 #4 #5
1994 SAP Oracle SSA J.D. Edwards Baan
1995 SAP Oracle SSA J.D. Edwards PeopleSoft
1996 SAP Oracle J.D. Edwards PeopleSoft Baan
1997 SAP Oracle PeopleSoft J.D. Edwards Baan
1998 SAP Oracle PeopleSoft Baan J.D. Edwards
1999 SAP Oracle PeopleSoft J.D. Edwards Baan
2000 SAP Oracle PeopleSoft J.D. Edwards The Sage Group
2001 SAP Oracle PeopleSoft J.D. Edwards The Sage Group
2002 SAP Oracle PeopleSoft J.D. Edwards The Sage Group
2003 SAP PeopleSoft Oracle The Sage Group Microsoft

  Source: Forrester Research, Inc.

Market Consolidation Will Continue

One aspect of this market is sure: Big is in. The top five vendors in 2003 accounted for more than 70% of the ERP market. Companies seeking to purchase enterprise systems want to purchase from a vendor that will be around for a while — this generally means a purchase from the major players. Growing without acquisition in this mature market is very difficult. The vendors have gotten the message, and there haven't been a lot of new entrants, so movement has been largely due to vendors buying established vendors.

Microsoft Business Solutions Has Joined The Top Tier

Microsoft is an interesting case because it got into the ERP/CEA market by purchasing an established vendor and has grown by purchasing other established vendors. However, now that it is in the market, it is attempting to grow further by applying its massive resources to redefine the acquired vendors in its own image. All of its acquired products are moving toward a common architecture and code base that will require Longhorn — Microsoft's next-generation operating system. The new architecture will be SOA out-of-the-box. The breadth of the offering and Microsoft's distribution capability has brought it into the top five in terms of revenue. However, it is a different play focusing on the bottom end of the market. Microsoft will have the broadest number of clients but only small numbers of users in each.

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RECOMMENDATIONS

MAKE THE MOST OF YOUR ERP INVESTMENT

WHAT IT MEANS

MORE CONSOLIDATION, THEN OPPORTUNITY

ERP consolidation and architectural renewal will change the dynamics of the market:

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ALTERNATIVE VIEW

IF COMPANIES DON'T INVEST, ERP WILL CONTINUE TO SHRINK

The position that ERP will experience a modest recovery after three years of decline assumes that there is some pent-up demand for large company applications and a growth opportunity in the midmarket. Many companies, however, have put their ERP systems into a holding pattern, with no plans to upgrade. Also, second- and third-tier vendors continue to consolidate, taking some products out of play. SAP seems to be gaining share as other vendors falter, but the industry may suffer a net decline overall as ERP becomes less of an IT investment priority.


ENDNOTES

1 For Forrester's Business Technographics November 2003 North America Benchmark Study, we spoke with technology decision-makers at 818 North American firms with at least $500 million in revenues about their 2004 application software spending plans. See the December 1, 2003, Brief "Outlook for 2004 App Budgets: Conservative Growth."

2 For those that meet the criteria, single-instance systems make a lot of sense. The concept will be most popular among high-tech manufacturers with revenues between $750 million and $3 billion. See the June 13, 2003, Planning Assumption "One Global Enterprise System: When and Why."

3 The large tier-one vendors will grow at a faster overall rate than tier-two and tier-three vendors due to their breadth in faster-growing sectors, like CRM, supply chain management, supplier relationship management, PLM, and analytical applications. See the April 3, 2003, Planning Assumption "Market Overview 2003: Comprehensive Enterprise Applications."

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Updated February 1, 2022