Opportunity knocks: European midsize manufacturers power ‘Tier 3' ERP growth
The European market for small and midsize business (SMB) ERP suites has a projected growth rate significantly higher than that experienced by Tier 1 and Tier 2 systems aimed at larger businesses—and one that represents a significant opportunity for both manufacturers and vendors.
The European market for‘Tier 3' ERP suites—in other words, systems aimed at small and midsize businesses—is registering a compound annual growth rate of 10.7 percent, and will reach annual sales of [US] $4.1 billion by 2011, says new research from Dedham, Mass.-headquartered ARC Advisory Group .
That’s a growth rate significantly higher than that experienced by those Tier 1 and Tier 2 systems aimed at larger businesses—and one that represents a significant opportunity for both manufacturers and vendors, says ARC’s European Research Director Simon Bragg, principal author of the report, Enterprise Resource Planning for Tier 3 small- and medium-sized businesses: Worldwide Outlook .
Most Tier 1 and 2 manufacturers, Bragg points out, made their ERP decisions in the mid-1990s, and today many remain with those original vendors—albeit with a wider application 'footprint' as new functionality has upstream. That’s despite the widely observed 10-year to 15-year replacement cycle that theoretically leaves many of those decisions now open for review.
“In practice, few Tier 1 or Tier 2 companies plan on replacing their enterprise application suites,” observes Bragg. “Most suppliers are doing enough to maintain their customer's loyalty, and most suppliers are achieving maintenance renewal rates above 95 percent. However, where a company has implemented different vendors’ suites in different regions, then it can make sense to standardize on one vendor.”
But while Tier 3 manufacturers follow the same broad replacement cycle, says Bragg, they often find that their current vendor is no longer in business, or not as strong as it once was, or has been acquired by a competitor and consequently has an uncertain technology and development road map. Throw in the fact that significant numbers of smaller, faster-growing manufacturers are making ERP decisions for the first time, and the combination makes for what Bragg wryly describes as 'an interesting market.”
Says Bragg, “The dynamics of the Tier 3 ERP market are very different from the fast-consolidating Tier 1 and 2 markets, in which the gap is increasing between the three leading players—SAP, Oracle and Infor—and the others. At least in the short term, the diverse range of purchasing criteria that characterizes the Tier 3 market will ensure that it remains very fragmented.”
Within Europe, the newly industrializing European Union accession countries—such as the Czech Republic, Hungary, Romania, and Bulgaria—will experience the fastest growth, predicts ARC, growing 30 percent faster than the European average. Southern Europe will see the slowest rate of growth, at 7 percent per year, followed by France, at 7.8 percent; while growth in the U.K. and Eire (at 11.8 percent); and Germany, Austria, and Switzerland (at 11.9 percent) is above the European average ( see table ).
ARC Advisory Group predicts the newly industrializing European Union accession countries—the Czech Republic, Hungary, Romania, and Bulgaria—will experience the fastest growth in the small and midsize business (SMB) ERP market.
In terms of the vendors poised to benefit most from the growth in Tier 3, “Culture match has a lot to do with it,” says Bragg. “Manufacturers with big ambitions will go for vendors like SAP , with its All-in-One solution; while manufacturers with a number of other applications running on Microsoft Microsoft technologies. Small and entrepreneurial companies will be tempted by vendors such as SYSPRO , while others will go for niche specialist vendors with a proven track record in their specific industry vertical, or a local supplier in the belief that they will get superior support or better availability of staff. Meanwhile, vendors like Germany’s ABAS , with its Linux-based offering, will benefit from manufacturers keen to keep the lid on costs.”
So while the ERP vendors in Tier 1 lock horns to protect market share, it seems that vendors—and manufacturers—in Tier 3 have everything to play for.