Big ERP Vendors Making Same Mistakes as Big Three Automakers

ERP vendors just don’t get the big picture regarding SaaS. They’re building big, expensive Chevy Suburban-style software at a time when customers want lean, easy-to-use business apps that have more in common with a Toyota Prius. That’s according to Bruce Richardson, the chief research officer at AMR Research, in a blog post that’s based on a recent AMR report.

Here’s Richardson’s telling anecdote, which offers both a glimpse into enterprise software vendors’ mindsets in 2009 and beyond, as well as a cautionary and familiar tale of denial and hubris. (Think: Big Three U.S. automakers groveling to the government to bail them out from their atrocious decisions and their ignorance regarding reality, i.e. gas guzzlers aren’t selling, and the desires of their customers, i.e. more fuel-efficient automobile options.)

“Executives from one of the best-known ERP vendors recently talked to us about their 2009 product plans and strategy,” writes Richardson. “At the end of the call, I expressed my astonishment that there were no plans to offer any part of their company’s product line as software as a service.”

As Richardson expected, the vendor’s executives first response was to emphasize the advantages from an integrated suite versus a hybrid on-premises or on-demand strategy. “This quickly segued into a discussion of the challenges in making money with software as a service,” he adds. “While I continue to agree with them on SaaS economics, they are missing the larger picture.”

That larger picture, Richardson contends, is this: SaaS is for real. And much like the U.S. automakers that chose to ignore hybrid and electric-car technologies for so long and focus more on expensive SUVs, ERP vendors are going to have to play catch-up with their SaaS ERP offerings, now that enterprise software customers expect a SaaS offering, just as consumers now expect hybrid car options. (Across the board, Richardson notes, AMR clients’ top inquiry is about SaaS deployment options.)

Therefore, “like the Big Three domestic automakers, the largest ERP vendors will have to embrace and develop a hybrid strategy,” Richardson writes. “In this case, it means supporting multiple deployment options. They don’t have time to develop their own multitenant platforms. Instead, they will have to buy to fill the gap.” SAP’s troubled experience in launching its hybrid offering—the huge technical and profitability problems with multitenant architecture in Business ByDesign—offers further evidence of just how hard it’s going to be. “The hybrid model is not perfect,” Richardson adds. “There are issues on integration and master data management.”

Right now, the Toyota Prius of the SaaS ERP world would most likely resemble Workday’s on-demand human-capital management (HCM) and finance applications. (To read a Q&A with Workday’s cofounders, see “Can Two Legacy ERP Guys Get IT Executives to Buy into On-Demand Applications?”.)

But that ERP Prius still can’t pull an 18-wheeler’s trailer. “As for a complete ERP-as-a-service offering for large enterprises,” Richardson writes, “it’s still way off in the distance.”

Nevertheless, on-premise vendors are in a perilous state right now, especially with the economy in a free fall, analysts warn. Hybrid SaaS R&D takes loads of time and money. “The most vulnerable flanks for on-premises ERP vendors are in CRM, human capital management, and supply chain,” Richardson notes. “That leaves financials, inventory management, some supply chain processes, engineering, and manufacturing.” And judging by the growing number of SaaS pitches I receive from new SaaS supply chain and manufacturing-specific tech vendors each week, the on-premise vendors better change course soon.

Otherwise, we may soon see executives from the big ERP vendors on Capitol Hill, asking for their $14 billion bailout.