Defragmenting of the industry gathers pace

The wave of industry consolidation that has been a feature of enterprise software has begun to reach the mid market.

Time was when small and mid-sized companies wanting enterprise resource planning software would have rarely looked beyond a mid-sized software company.

While there is a global market for ERP in the enterprise, the mid-market remains highly fragmented. No vendor has more than 10 per cent, even when such large ones as Oracle, SAP and Microsoft are factored in.

That is changing, however, as the wave of industry consolidation that has been a feature of enterprise software starts to reach the mid-market.

JD Edwards, regarded by analysts as one of the few mid-market ERP vendors with a global reach, has been swallowed by PeopleSoft, only to see its new owner bought by Oracle.

Microsoft’s mid-market strategy is largely based on acquired technology, in particular Navision and Great Plains. SAP, for its part, has said that it sees small and mid-sized companies as its main source of growth.

Consolidation is also being driven by activity within the mid-market itself. US ERP vendor Lawson is in the process of buying Sweden’s Intentia.

SSA Global has grown through a series of acquisitions. Sage, currently ranked as the third-largest ERP software company, has also built its international presence through acquisitions, especially in the Americas.

“There is not currently a global market for ERP in the mid-range,” says Yvonne Genovese, a research vice-president at industry analysts Gartner. “JD Edwards was the closest but it covered only a limited range of industries.

“The best-placed company to fill that space is Microsoft, but it has not done so yet. The market will remain fragmented until someone such as Microsoft steps up to the plate.”

The large ERP vendors have used acquisitions to build bridgeheads into the mid-market, where IT buyers have also changed their buying behaviour, showing a greater willingness to buy from the largest vendors. The security of dealing with a large company is one reason.

Jim Shepherd, an analyst at AMR Research, says: “Mid-market buyers have changed their outlook. They are much more concerned with the viability of their software supplier. Businesses might keep an ERP system for 10, 15 or 20 years, so they don’t want to deal with someone who could be gone in two years.”

For CIOs, choosing the right ERP vendor means striking a balance, between features and performance, and long-term stability. Although very large companies can afford to customise their enterprise applications, smaller comapnies are less able to influence design of software.

The large ERP vendors have also gained a reputation for arrogance in the mid market, adopting a take-it-or-leave-it approach to some customers.

Smaller ERP vendors may be more open to making changes or additions to their software to meet a customer’s requirements.

By focusing on the needs of a particular niche or geography, the hope is that customers will be able to use more of the software “as is”. Smaller companies do not have the time to embark on lengthy software projects.

“Price and the speed of implementation are key factors in the mid market,” says Bettina Pickering, an ERP specialist at PA Consulting. “Smaller software vendors are more likely to work with their clients to try to understand their requirements and are prepared to do more work on integrating the technology.”

Extensive use of custom code makes software expensive to support and to upgrade, regardless of the size of the customer. Vendors are aiming to make their software easier to deploy by building common components, and using local or industry-specific partners to manage customisation.

Customers are realising that more business processes can be made to work with standard software modules and that the high cost of customisation often outweighs the benefits.

Vendors such as Sage, which develops for the Microsoft Windows platform, also leverages off Microsoft core technologies to cut implementation costs.

“In the mid-market, companies think in terms of integrating modular solutions,” says Klaus-Micheal Vogelberg, group CTO of Sage. “In tier one companies, solutions are customised to meet business requirements but often that is far more expensive than the software itself.”

And CIOs with experience of previous ERP projects are more likely to want to deploy software off the shelf.

“It is more common for companies to say ‘This is what I need, and I expect it to work out of the box’,” says Melvin James, ERP practice director at Diagonal Consulting, a systems integration firm and SAP partner. “A few years ago, everybody wanted something different.”

This suggests the gap between ERP vendors and those specialising in the mid market will narrow, at least in terms of the functionality they offer.

SAP, Oracle and Microsoft will continue to acquire to build their markets. Mid-tier vendors are likely to seek their own deals to build scale, and to provide a bulwark against acquisition.

Mid-market buyers might move even further from the monolithic, heavily customised software model in favour of more standardised technology delivered over the internet.

“It is always easier to add the functionality demanded by enterprises to software designed for smaller companies than to redesign enterprise software for smaller businesses,” says Zach Nelson, chief executive of online software company Netsuite.

“Above all, software for the smaller company has a vital characteristic: ease of use.”