¶ … Small & Medium Enterprises (SME) Can Gain the Strategic Benefits of ERP

Agility, time-to-market and insights into market dynamics are a few of the many benefits of standardizing the operations of an organization on an Enterprise Resource Planning (ERP) system. Up until about a decade ago, the economics of enterprise software relegated these systems to larger, more diverse and well-capitalized enterprises, with the majority of ERP systems being installed and customized in Fortune 1,000 corporations (Velcu, 2010). These ERP implementations began to be pervasively supported by Service Oriented Architectures (SOA) during the later 1990s and continue throughout today. As SOA architectures have permeated organizations, the lessons learned from a business process re-engineering (BPR), distributed order management and software engineering gains have contributed to the success of Cloud computing in general and Software-as-a-Service specifically (Moore, 2002). In addition, Open Source Software (OSS), Cloud- and SaaS-based ERP systems (Passion for Research, 2012b) and a complete redefining of the economics of enterprise software have taken place. All of these many determinants of enterprise software economics have in turn changed the ERP landscape significantly over the last decade. Today, Small & Medium Enterprises (SME) can afford, via the economics of Cloud computing, to have the same level of functionality enterprise had in the past. SMEs can now can gain the same benefits that Fortune 1,000 companies could only afford in the past. The intent of this analysis is to evaluate these underlying economics of cloud computing, specifically looking at how Open Source Software (OSS) and Cloud computing are re-ordering the economics of enterprise software in addition to discussing the limitations, advantages and disadvantages for SMEs interested in gaining the benefits of ERP systems. Finally, strategies for implementing ERP in SMEs is analyzed and presented including an assessment of a successful Cloud implementation.

How OSS and Cloud Computing Are Making ERP Systems

Accessible to SMEs

The economic foundations of enterprise software are going through a disruptive level of change due to the impact of OSS technologies and their associated pricing models, combined with the myriad of pricing models of Cloud-based and Software-as-a-Service (SaaS) technologies. For purposes of this analysis, Cloud-based technologies will refer to the entire technology stack of Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (Paas) and at the presentation or application layer of the Cloud Model, Software-as-a-Service (SaaS) (Wolfe, 2005). Many of the components in the Cloud technology stack described are based on OSS components and software, which significantly drops the overall cost of launching a company offering SaaS-based applications. The foundations of the very profitable Amazon Web Services (AWS) initiative is predicated on the integration of the IaaS, PaaS and SaaS components into a cohesive, enterprise-ready technology stack capable of supporting globally-deployed applications including ERP systems. NetSuite initially launched its core applications on the AWS platform as a means to test how this SaaS-based ERP system would perform (Koslowski, Struker, 2011).

The combining of OSS-based components in the Cloud-based technology stack, rapid development of SaaS-based, enterprise-level applications and the continual pace of innovation in SaaS-based ERP systems are together drastically re-ordering the economics of enterprise software sales and service cycles. In the past, when only licensed ERP systems were sold, the purchasing cycles were very lengthy and complex. As ERP systems when sold in licensed configurations only would average well over $2M (Moore, 2002), typically companies would need to pay for them as part of their Capital Expense (CAPEX) budget (Moore, 2002). CAPEX expenditures often had to be approved by a company board of directors, and would often go through very lengthy review cycles. The result is that a typical ERP system, while budgeted for $2M in software alone, would end up costing up to 10 times that in services and customization fees (Nah, Delgado, 2006). The costs and time constraints of system integration, along with a lack of senior management commitment in many implementations would lead to these large-scale implementations often failing (Rothenberger, Srite, 2009). Licensed, on-site software was a business model that was very vulnerable to disruptive innovation. Its many limitations made it a perfect target for the economics of Cloud computing in general and the exceptional versatility of pricing and costing that SaaS-based application delivery provides. The greatest impact OSS-based technologies have had as part of the Cloud computing technology stack is to force a completely different set of purchasing dynamics into enterprises. No longer do companies have to pay for software using CAPEX-based expenses. The advent of the SaaS-based model of delivering enterprise systems in general and...

The lessons learned from SOA platforms of the past has contributed to this rapid acceleration of business models on the SaaS platform (Koslowski, Struker, 2011). In conjunction with this rapid pace of business model and pricing innovation on the SaaS platform, there continues to be very rapid acceleration of new application development, specifically in the area of ERP systems for SMEs (Darrow, Lingblom, 2002) (Passion for Research, 2012b).
The shift from CAPEX-based purchasing of enterprise software to OPEX-driven purchases is the single greatest economic factor opening up ERP systems for SMEs globally today. This conclusion is drawn from the many sources cited in this analysis and from anecdotal conversations with many SMEs locally who cite the convenience of using their credit cards to get started with trials of SaaS-based ERP systems entirely online. Being able to expense the costs of an ERP system on a monthly basis, only paying for those functional areas of the system actually used is of significant value to any small business owner. Nearly all SaaS-based ERP providers also allow for a trail period of their software to determine if a small business owner will find it of value or not. This is another aspect of how quickly the economics of enterprise software are changing based on OSS technologies, lessons learned from SOA frameworks and the rapid adoption of Cloud infrastructure and SaaS-based ERP systems.

Many of the world's leading research firms whose primary business model is to advise their clients as to which enterprise software application to purchase are actively tracking OSS, Cloud computing and SaaS market dynamics. The combined effects of these market dynamics are quantified by Gartner. Inc., in their installed base and forecast analysis shown in Figure 1. ERP systems delivered on the SaaS platform are projected to generate $1.9B in revenues in 2012, growing to $2.8B in 2015, generating a Compound Annual Growth Rate (CAGR) of 14.3%. Clearly the economics of Cloud computing are propelling the growth of this market, with OPEX-based selling and ERP customization strategies on the part of ERP vendors drastically lowering the barriers to entry for SMEs looking to gain the advantages of ERP systems (Nah, Delgado, 2006).

Figure 1: Analysis of Enterprise Software Application Sales on the SaaS Platform

Installed Base and Forecast Estimates, 2007-2015

Source: (Passion for Research, 2012b)

Assessing the Limitations, Advantages and Disadvantages for SMEs Adopting SaaS-based ERP systems

SMEs can gain a much greater level of visibility into their entire operations through the use of ERP systems and often can penetrate entirely new markets as well. Often globally-based companies whose subsidiaries are in fact independent SMEs struggle with unifying their entire corporation in a single SOA architecture (Rothenberger, Srite, 2009). This was the case Olympus, who has a very decentralized organizational structure, with their subsidiaries throughout Southeast Asia being considered SMEs. The reach of the Olympus SaaS ERP project shows what is possible already with this nascent technology. Figure w shows how the company had a very diverse, fragmented ERP system architecture. Olympus wanted to unify their SME-based subsidiaries throughout Southeast Asia, China and Australia. Figure 2 shows how they were able to do this.

Figure 2: Olympus and their SaaS ERP Implementation -- Unifying Many SME-based Global Subsidiaries On A Common Platform

Source: Analysis of filings and presentations by Olympus senior management on ERP initiatives (Olympus Investor Relations, 2012)

What is significant about this implementation is the fact that Olympus pushed SaaS-based ERP systems to its limits. While SMEs will rarely create such a diverse architecture, this example illustrates the limitations, advantages and disadvantages to SMEs of using SaaS-based ERP systems.

The limitations of using SaaS-based ERP systems are the extent of integration, as the graphic in Figure 2 illustrates. It is one of the most expensive aspects of ERP installation and configuration, and also the most time-consuming (Nah, Delgado, 2006). As many Cloud-based architectures do not support legacy system integration through the use of common Application Programmer Interfaces (APIs) and other means of creating automated system connections, these integration points often have to be hand-coded. This results in a typical 10:1 ratio of consulting and services costs to the actual cost of the software. Another limitation is the lack of ease of legacy data migration from stand-alone or legacy ERP systems into SaaS-based ERP systems. This is also exceptionally time-consuming and difficult as well. A third limitation is often the customization to specific transaction workflows and types of transactions, which often vary significantly across each area of…