Staying the course: Tech-savvy companies maintain ERP investments during economic downturn

While the global economic downturn that began in late 2008 is slowing the overall ERP software market, there are some bright spots for ERP vendors. There is anecdotal evidence that small and midsize businesses (SMB) are more likely than large enterprises to be moving forward with ERP projects, even as one analyst firm says the ERP market has slipped to near-zero growth.

02/01/2009



While the global economic downturn that began in late 2008 is slowing the overall ERP software market, there are some bright spots for ERP vendors. There is anecdotal evidence that small and midsize businesses (SMB) are more likely than large enterprises to be moving forward with ERP projects, even as one analyst firm says the ERP market has slipped to near-zero growth.

At GSI Group , a midsize but global manufacturer of grain bins and other agricultural equipment, it took all of five minutes for a project steering committee to decide to proceed with a second phase of its global implementation of ERP software from SAP .

According to CIO Peter Sarsany, the committee—which includes the CEO—felt it unwise to trim some IT costs but miss out on major efficiencies expected from a single ERP system to run everything from ordering and financials to production management.

“The management team here is technically savvy,” says Sarsany. “They understand the importance of automated processes, and of integrated data. There was absolutely no one on the steering committee who wanted to take a step back and not have that integrated data.”

But while some enterprises like GSI are forging ahead with deployments, the ERP market as a whole has hit a downturn along with the rest of the economy, according to Jim Shepherd, a senior VP with Boston-based AMR Research .

“The economy is definitely hurting [ERP vendors],” he says. The best we'll see for calendar year 2008 is flat growth for the ERP market.”

But AMR had been expecting high single-digit growth for the ERP market for the year. That was before financial markets tumbled in the fall, and the downturn spread, says Shepherd.

“Some software segments are healthier than others, but fundamentally, spending on enterprise applications has been hurt across the board,” he says. “Even with companies in sectors that haven't been directly hit hard, like food or health care, we are seeing a huge amount of caution. Everyone has [in essence] paused their capital spending.”

The ERP market does have some factors working in its favor, says Shepherd, including vendors with diverse geographic reach, and those that offer multiple categories of software besides ERP—such as supply chain management. With core ERP, says Shepherd, vendors reap a large percentage of revenue from maintenance and services, and this constitutes a more stable source of revenue.

“Many of these ERP expenditures are not 'nice-to-haves'—they are requirements to run a business,” says Shepherd.

Well on the way

At GSI, the first phase of its ERP deployment covering financials, order management, and customer service is scheduled to go live April 2009. Since the first phase was well on its way to completion, says Sarsany, halting it to trim IT costs was not even a serious consideration. The only real question for ERP budgeting, he says, was whether to delay phase two, which added inventory and production management functionality down to the plant level, and is slated for a pilot go-live date of October 2009.

Sarsany says the executive committee didn't want to lose out on multiple benefits of the complete project, which include:

  • A real-time grasp of inventory levels and work-in-progress tied into order-management and customer-service functions from phase one;

  • A much quicker ability to close the books, thanks to better audit trails and controls in the new system;

  • Stronger financial controls and audit trails for compliance purposes should GSI decide to go public; and

  • The ability to share data and processes across its acquired companies, and realize the full synergies of those deals.

To meet these goals, GSI will continue its rollout of SAP's All-in-One edition of its ERP software, along with services from itelligence , a SAP services partner, and itelligence's it.manufacturing solution.

The All-in-One flavor of SAP's suite and itelligence's it.manufacturing solution preconfigure the settings in the ERP suite to match the needs of midsize discrete manufacturers, according to Sarsany. Another key project partner GSI has lined up is IBM , for SAP application hosting and support.

Having such help onboard, and the internal project team and executive committee primed for phase two, says Sarsany, were factors in favor of a continued rollout, but were secondary to realizing fully integrated processes. As of late 2008, for instance, the company still has more than a dozen ways to track inventory movements within its plants, and 175 people authorized to tweak parts data on legacy systems.

“SAP allows us to replace those disparate systems from acquisitions with a single global instance so that you do have software and data that are centralized, and therefore, a much better chance of achieving shared services functions such as centralized access to common finance, inventory, or engineering information,” Sarsany says.

Retooling for pain points

Vivek Bapat, VP of suite solution marketing for SAP, contends that smart companies still invest in IT during down markets, but they tend to avoid “big bang” implementations in favor of focused solutions that attack specific pain points.

“What many companies are doing is seeking out those areas where they can make rapid improvement and emerge as stronger and better companies once the downturn is over,” says Bapat. He points to solutions such as SAP's lineup of 14 “Best Run Now” packages that bundle SAP software with pre-configuration and services as options for rapid improvement.

For example, SAP offers a Manufacturing Visibility, Intelligence, and Integration Best Run Now solution that pairs SAP's xApp for Manufacturing Integration and Intelligence with services from partner Tata Consultancy Services .



Vivek Bapat, VP of suite solution marketing for SAP, contends that smart companies still invest in IT during down markets, but they tend to avoid "big bang" implementations in favor of focused solutions that attack specific pain points.

However, for investor guidance, SAP is being cautious on growth predictions. When SAP announced its third-quarter 2008 results at the close of October, the company decided to no longer provide a specific outlook for Non-GAAP software and software-related revenues for full-year 2008, citing “uncertainties surrounding the current economic and business environment.”

Other ERP vendors are feeling pinched by the economic downturn as well. At SoftBrands , which partners with SAP around SAP's Business One suite for SMBs and smaller operations, but also has its own ERP business, the economic conditions have been a mixed bag, says Randy Tofteland, president and CEO.

With its independent ERP business, says Tofteland, some user companies are delaying global rollouts of ERP packages from major vendors at smaller sites, which helps SoftBrands' maintenance revenue because its ERP offerings often are running those sites. On the other hand, SoftBrands is seeing a few small manufacturers in its customer base go out of business because of the down economy.

For the SAP side of business—which revolves around a SoftBrands-provided flavor of BusinessOne called FourthShift Edition for SAP Business One—the pipeline for sales to SMBs remained strong as of late 2008, says Tofteland. But larger enterprises that sometimes use this solution at plants or smaller site have clamped ERP spending since the economy plummeted, he adds.

“The larger the company, the faster it seems to tighten spending,” says Tofteland. “But our SAP channel pipeline [to SMBs] is as strong as it's ever been. We are encouraged that the bread-and-butter part of the SMB market appears to be dealing with the economic conditions fairly well.”

Both Tofteland and AMR's Shepherd say it's hard to pinpoint when ERP market conditions will improve. Both said they will watch the 2008 fourth-quarter results of publicly held ERP vendors to see if they meet license sales expectations. Multiple vendors slipping below expectations would indicate the ERP market is in for a tough 2009.





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