Spending Smarter in 2004

The Issue: No new investment catalyst exists to drive significant new application investment.Most organizations are spending on the basics; as a result, application software sales slowed to just 7 percent in 2001, and shrank 1 percent in 2002. Long-term spending is expected to grow just 6 percent annually through 2007, as AMR Research’s Market Analytix reports for 2003 show. Several trends continue to define application technology spending:

• Companies are spending more money on implementations to get the most value from existing investments. In 2002, more money was spent on services than on licenses. License revenue declined by some 13 percent in 2002, while implementation services rose 6 percent.
• Economic growth is expected to be considerably slower in almost every geographic region. Slower economic growth and, in particular, the slower growth in profits, will constrain capital investment and spending on discretionary IT budgets. The result is smaller, more incremental software purchases and restricted strategic IT investment because of the fixed costs to support and maintain infrastructure.
• Spending has shifted back under the control of the centralized IT organization. One result is a shift toward a shorter, consolidated list of suppliers. This favors a resurgence of spending with ERP vendors. ERP vendors have become a major force in strategic product extension areas like supply chain, customer management, and procurement and sourcing. Although ERP vendors generated 56 percent of the $35.8 billion Enterprise Applications market in 2002, more than one-third of that revenue is now coming from strategic extensions outside of traditional ERP.
• The major enterprise application market segments are consolidating; more revenue is going to the top vendors. In the core ERP market, AMR Research forecasts that from 1999 to 2003, the top five vendors will grow their respective market share positions by some 7 percent. In CRM, the top five will grow their share position by 12 percent.
• Microsoft presents a credible and viable new market entrant. It will be a growing alternative in the underpenetrated midmarket. None of the major applications markets fared well in 2002. But underlying demand offered by these applications continued to grow:
• Larger ERP vendors fare better than average because of large installed bases and diverse revenue. The global ERP market, while flat in 2002, still generated $20 billion in vendor revenue. The ERP vendors shifted much of their attention to new account acquisition to expand relationships with existing customers. Software license revenue declined from 2001, but this was offset by modest increases in maintenance and services revenue. The major ERP vendors achieved better penetration in their key accounts and significantly increased their market share in other application areas, such as customer management, supply chain management, and business intelligence.
• Customer Management struggles to provide tangible ROI; customers respond with fewer, smaller purchases. The customer management market saw its first year of negative growth in 2002, and this time, the economy isn’t entirely to blame. Lack of Return on Investment (ROI), end-user adoption problems, and difficult-to-digest pricing models all played a role in the market’s slight decline. Consolidation of the market continued as the prolonged economic slowdown wiped out a slew of small vendors. Three out of the big four suitesSiebel, Oracle, and PeopleSoftwere able to deliver relatively flat or somewhat negative growth by bolstering their businesses with services revenue. SAP executed better than the other major suites and fueled real license growth.
• The Supply Chain Management market fell 6 percent in 2002, but will rebound with renewed emphasis on supply chain execution and slower growth in planning applications. More cautious customers indefinitely moved away from big-vision Supply Chain Planning initiatives and are now looking for the incremental improvements to be mostly derived from Supply Chain Execution applications aimed at reducing costs and inventories and improving order fulfillment. The ERP vendors now play a very significant role in this market. This year, AMR Research expects the market to grow once again, at slower, single-digit growth rates.
• Best-of-Breed Procurement application vendors were hardest hit, but Strategic Sourcing remains strong. The Sourcing and Procurement market bottomed out in 2002, shrinking 9.5 percent to $1.7 billion, because of a clampdown on new applications spendingparticularly for hard-hit best-of-breed applications vendors, whose market shrank 20 percent. Conversely, the top three ERP vendors’ market and top seven services-oriented vendors’ market grew 10 percent to a 43 percent market share because of the respective e-procurement upgrade market and the services-intensive nature of Strategic Sourcing. As strategic forces and triple-digit ROIs accelerate the convergence of Sourcing and Procurement with the supplier-facing portions of SCM and PLM, this integrated view of Supply Management will fuel a 10 percent CAGR for 2002 to 2007, gated primarily by the organizational change management associated with these efforts.

Managing customer interaction gains attention

As the economy recovers, expect a renewed interest in applications that manage customer interactions. Many organizations are stuck in a CRM holding pattern with customer applications that are not delivering value combined with tight budget control, leaving no additional funding to fix them. Furthermore, many faulty business cases claim amazing cost savings through CRM investments, but top-line growth is the real impetus for these investments. Companies have spent the last two years squeezing inefficiency and head count out of customer management processes, so the next wave of investment will be geared toward revenue enhancement.

Overall expenditures in CRM applications were hurt by the general slowdown in the market, but investment also slowed as organizations realized that the systems were not delivering as promised. Application vendors are partially to blame for this through sales teams that over-promised and marketing hype that was too good to believe, but the reality is that organizations left much of the value of these investments on the table by not defining business cases, realigning processes, and delivering system-based as opposed to scenario-based training. Lessons learned from these experiences will lead to better results from the next wave of CRM application investments.

Systematic, closed-loop supply management also popular

Most companies still seeking quick hits through spending analysis and competitive bidding events are beginning to desire more systematic, closed-loop supply management. Applying new packaged applications is clearly not the solution to close performance gaps in supply management. Instead, more pragmatic, services-intensive and value focused benchmarking that is guided by best practices and industry-specific implementation of technology needs to be conducted in lockstep with process and organizational change. This will lead to a slower, albeit lasting, spending on procurement and sourcing applications the next five years.

Recommendations

Think of your ERP investment as a very long-term or even continuous project. Companies are no longer inclined to purchase the entire system in the initial transaction, and they recognize that the deployment is likely to take several years. As a result, the vendors have restructured their products to allow more modular purchases and they have changed their pricing to accommodate customers’ desire to gradually add users and locations. Many organizations are committed to establishing a “corporate-standard” ERP vendor, and they are strongly encouraging all sites and divisions to use that vendor for core ERP, as well as most other application categories. This has led to companies evaluating a vendor’s entire product offering, but then making a series of relatively small, incremental purchases. Consider your supply chain investment in light of several new supporting technologies:

• The extended supply chainAs companies reach out to their trading partners, they look to do so by using the Internet and other electronic-connecting technologies. In response, many SCM vendors have rewritten their applications using Web-based technologies for cross-company business processes with suppliers, customers, and logistics providers, sometimes via simple Internet browsers.
• Internet-based supply chain visibility and SCEMThis is functionality that companies are increasingly interested in as they outsource more of their supply chain operations and ask suppliers to allot more of their inventories and production capacity for them.
• The wireless supply chainInvolves tracking goods as they move along a supply chain using Radio Frequency Identification (RFID), Global Positioning System (GPS), Wireless Fidelity (Wi-Fi), and bar-coding technologies. RFID has been the most influential in the SCM market, as some SCM vendors, most prominently Manhattan Associates, have started to play a thought leadership role. In addition, homeland security has piqued the interest in wireless supply chain technologies.

David O’Brien, Pierre Mitchell, Larry Lapide, Jim Shepherd, Lindsey Sodano, Rod Johnson