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ERP Cloud Cartels Emerge

 

June 27, 2013

Doug Hadden, VP Products

The rash of ERP vendor/Cloud vendor/Systems integrator partnership announcements has led to speculation. Is it good for customers? Does it represent a master stroke by one or more leaders? Will some vendors be marginalized? Is there any substance to the agreements?

Make no mistake, these agreements, when examining other recent industry moves is no more than creating cartels to lock customers into proprietary technology for a long time.

The ERP – cloud – SI cabal is very much about vendor lock-in.

There is no reason to pussyfoot around the reality of this new era of enterprise software anti-competition. (I’m not mincing words.) It’s Software-as-a-Cartel (SaaC), plain and simple.

And, it’s not going to work. (In the long-run)

It’s a Maginot Line defense in the area of open systems, open source and commodity middleware.

Cold Hard Truth about the “Enterprise Software” Business

Maintenance model: Software manufacturers need to be financially sustainable through repeat business. This is accomplished primarily through software maintenance contracts where organizations pay between 15 and 25% of original license costs to the manufacturer. Maintenance revenue has become the largest revenue line item for these companies.

Maginot Line symptoms:

  • frequent acquisition of smaller competitors with overlapping functionality
  • legal battles against 3rd party maintenance firms that offer support at lower prices
  • software license audits to generate more revenue
  • increases in maintenance fees
  • reluctance to upgrade application infrastructures from client/server legacy proprietary to fully open and web-based

Organic Growth: The large ERP companies are experiencing lower growth than smaller firms in the space. Overall industry growth has slowed. Major vendors have experienced disappointing quarterly results.  

Maginot Line symptoms:

  • frequent acquisition of smaller competitors that are experiencing faster growth and to tap into cross-sell opportunities
  • eliminating large competitors through acquisition
  • in addition to some acquisitions representing overlapping functionality, some involve acquiring companies outside traditional product sweet spots

Stack and Engineered Systems: The larger enterprise software companies provide most of the computing stack necessary to run applications including hardware appliances (engineered systems), databases, and application servers.

Maginot Line symptoms:

  • prevent sharing any of the computing platform revenue with other companies through new products or acquisitions
  • middleware cost continues to tumble because this software is considered commodity with open source equivalents
  • significant marketing efforts made to promote engineered systems and in-memory databases

Let’s face it, the primary business model used by major ERP vendors is to own the customer. To own as much of the software footprint to create barriers to entry for competitors. To make it difficult for customers to switch to alternatives should they become unhappy.

That’s vendor lock-in. (But not quite extortion as a business model.)

Superbig is the new Big and the Illusion of Bigness

The larger enterprise software vendors have good stories. They claim to provide systems that can scale further than alternatives. That it is low risk to deal with these vendors because they enjoy economies of scale. That you’ll miss something if you don’t buy from them – if not now, in the future. Certainly, you’ll lose any ability to run your organization based on “best practices.”

Most of the marketing hyperbole is pure hooey.

It is true that software from larger vendors can scale their software solutions significantly.

That’s the crux of the ERP-Cloud Cabal.

Large e-commerce and social networking vendors have been scaling primarily via open source technology. (Locking out many traditional players.)

But, cloud computing introduces a scale problem: scaling many small, medium sized and large business requirements into super-big data centres. So, ERP vendors with middleware portfolio are getting in the action.

It’s the same way of how these vendors claim to have “big data” portfolios (although they lag behind the innovators and have had to incorporate acquisitions and open source to catch up.) 

After all, these vendors need you to add more users and more data to sell you more stuff to lock you in and get more maintenance revenue.

Why would large systems integrators be a part of this cartel? The introduction of more parameterization in ERP (quick starts, fast starts, head starts, vertical versions) and ease of configuration in many SaaS products has reduced the opportunity footprint. Customization is the life blood for many integrators.

Big cloud represents a new opportunity for these integrators: consolidation, systems governance and integration.

Why would the leading SaaS vendors get on the cabal train? It’s become hard to sustain growth with ERP companies fighting back. The FUD (fear, uncertainty and doubt). The acquisition of SaaS rivals. The competitive environment is red hot.

Cloud détente provides growth predictability. Reduces choices. Cuts down the rhetoric.

Why it Won’t work in the Long Run

I will be surprised if the rash of poor quarterly results from leading enterprise software companies continues to disappoint the market. My sense is that these efforts will result in an uptick in business, but it won’t be sustained in the long run.

Economies of scale vs. Open Source: large ERP companies do not enjoy economies of scale any longer because of highly complex proprietary inventories of software products. The communications among product teams is enormously complex. Other vendors can build new enterprise-scale products directly on proven and open source stacks. Middleware is commodity. And, cloud middleware can be deployed using exclusively or partly open source stacks on data centres and cloud services provided by e-commerce vendors.

Broadcast vs. Social Network: the cartel players are focused on broadcasting positioning – on press releases. You can’t get away with hyperbole in this age of social media especially with the new breed of technology analysts. The press or financial analysts may pick some of this up verbatim without questioning. It’s not going to fly.

Vertical, sub-vertical, micro-vertical: one size does not fit all in global business or global public sector. The sheer scale of ERP and SaaS offerings mean that there is compromise. By appealing to so many horizontal and vertical markets. Across geographies. This software bloat makes it more and more difficult to adapt to your specific needs. The economies of scale are now enjoyed by those vendors who focus on niches.

My sense is that the move to design-thinking, user-experience and social interfaces is also disrupting the status quo.

That’s not to say that we won’t see more cloud-ERP-SI partner announcements. There will be mimicry for some time until sense prevails.

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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