analysis Enterprise IT analyst firm Gartner has warned that large, monolithic and heavily customised in-house enterprise resource planning systems will be relegated to the status of “legacy ERP” over the next several years, as smaller, nimbler and often cloud computing-based alternatives eat the lunch of this old mainstay of the IT application portfolio.
“The need for agility and responsiveness has led highly customised ERP implementations to an impasse, creating a subset of legacy ERP installations that must be dealt with constructively,” said Andy Kyte, vice president and Gartner Fellow, in a statement issued last week. “Early ERP adopters, particularly large enterprises in energy, manufacturing and distribution industries, are paying the penalty of a decade or more of excessive customisation. Businesses looking to improve administration today can take advantage of lower costs, better functional fit and process flexibility offered by blending cloud applications with on-premises applications in what we now refer to as ‘postmodern ERP.”
Gartner said the ERP suite was being deconstructed into postmodern ERP that will result in a more federated, loosely coupled ERP environment with much of the functionality sourced as cloud services or via business process outsourcers.
“When ERP was in its heyday, CEOs and business executives wanted reliable and integrated solutions, so they seized upon ERP as the way to provide this,” said Kyte. “Business stakeholders still want these same qualities, but now they assume that these qualities will be present in any software solution, and their requirements have switched to the twin concerns of lowering IT costs and seeking increased flexibility. A system that is not sufficiently flexible to meet changing business demands is an anchor, not a sail, holding the business back, not driving it forward.”
Kyte said that so many business executives have expressed real concern about the lack of flexibility in their business applications portfolio that Gartner now defines legacy as: “any system that is not sufficiently flexible to meet changing business needs.” Under this definition, heavily customised ERP implementations are “very much at the forefront of the next wave of legacy systems”.
While current ERP implementations are not going to vanish overnight, they will need to adapt, according to Gartner. The impact of specialist cloud-based point solutions, combined with very strong growth in business process outsourcing, will provide “ample alternatives for business users frustrated by inflexible and expensive ERP modules”. Over time, the current heavily customised ERP implementations will be rearchitected to focus on “systems of record” functionalities — which should require little customisation — while the differentiating processes and innovation activities will use alternative delivery models that are integrated with the ERP system of record capabilities.
Gartner also made two substantive ERP predictions to add to its analysis, stating that by 2018, at least 30 percent of service-centric companies will move the majority of their ERP applications to the cloud, and that by 2017, 70 percent of organisations adopting hybrid ERP will fail to improve cost-benefit outcomes unless their cloud applications provide differentiating functionality.
The concept of a single ERP suite that meets all of an enterprise’s needs is dead, according to the analyst firm, and has been replaced by a hybrid ERP approach that combines cloud point solutions with a smaller “core” of on-premises ERP function, such as financials and manufacturings. Gartner predicts that hybrid ERP environments will be the norm within five years.
“Longer term, over the next 10 years and more, we envision a scenario where more of the market ‘flips’ to the cloud. Instead of having on-premises core solutions that are complemented by innovation or differentiating processes being supported in the cloud, some organisations will move all their ERP functionality to the cloud,” said Nigel Rayner, research vice president at Gartner. “These won’t be single vendor megasuites but instead will be loosely coupled suites of cloud functionality, which will create new integration challenges for IT.”
While it will be at least 10 years or more before the majority of organisations decide to flip ERP to the cloud, Gartner predicts there are industry segments where this will happen much sooner. The firm believes that service-centric industries, such as professional services, business services and digital media, have not been well-served by integrated ERP suites, which have tended to focus on product and asset-centric industries.
Many have already moved key elements of application functionality to the cloud and there will be a greater likelihood that service-centric companies will flip the majority of their ERP functionality to the cloud within the next five years, earlier than the product-centric companies.
With respect to its second prediction, while Gartner expects that most organisations will shift from monolithic ERP to a hybrid approach within five years, the adoption of cloud services for some components of functionality does not guarantee a reduction in the total cost of ownership (TCO). On the contrary, there is the potential of actually increasing the TCO.
“Most organisations still fail to recognise and plan for the total lifetime costs of their ERP solutions, whether on-premises, cloud or hybrid. Moreover, with cloud-based solutions it is much too easy to fall into the trap of taking a short-term, tactical approach — lured by the seemingly attractive low per-user costs,” said Carol Hardcastle, research vice president at Gartner. “Such an approach actually leads to increased total costs once the additional costs for connecting the solutions together are taken into account. Even the direct costs alone can lead to increased TCO, but there are other costs to take into consideration, such as the need to reskill or hire new staff to deal with data, integration and vendor management.”
Hardcastle said that looking at the business value outcomes, the outlook is also worrying. Too many ERP investments fail to deliver business value and the hybrid approach may further dilute the focus on the value to be driven from such investments.
“You should never assume that adopting cloud applications will magically provide value; it’s essential to link business objectives to your ERP strategy to ensure value is realized, whether adopting on-premises or cloud applications,” said Ms. Hardcastle. “By hybridizing solutions there is greater risk of fragmenting the business case and therefore diluting the value where the sum of the parts is less than the whole. However, there is also the risk of taking a less strategic approach — placing more focus on implementation at speed rather than long-term delivery of value.”
opinion/analysis (the Australian perspective)
The issue of legacy ERP suites has proven problematic for many large Australian organisations over the past several years. It is considered the norm for the deployment of this technology to run substantially over budget and over its deployment timeframe within Australia’s public sector — or even completely fail, as we’ve seen in examples such as Queensland Health’s masively botched payroll systems upgrade.
In November 2011, Victoria’s Ombudsman handed down one of the most damning assessments of public sector IT project governance in Australia’s history, noting total cost over-runs of $1.44 billion, extensive delays and a general failure to actually deliver on stated aims in 10 major IT projects carried out by the state over the past half-decade. A similar ICT audit has been delivered in Queensland, and that state, NSW, Western Australia and Victoria have been forced to substantially modify or even cancel their whole of government IT shared services initiatives, due to their continual failure. Even the Northern Territory has its problems.
Many of these projects related to new ERP installs or upgrades, with most featuring heavy customisation of the style that Gartner believes is going away. Examples of botched ERP deployments in major corporations in Australia are not hard to find, in addition; showing that many of the same problems exist across the public and private sectors.
In general, I highly agree with Gartner’s analysis, and this represents precisely the trend we’re seeing in Australia. Huge, legacy ERP platforms are causing too many problems and represent large risks to many businesses. Smaller, nimber, niche alternatives, increasingly using cloud computing as their base, are going to become much more popular.
One solid example of this can be found in the NSW Government, where NSW Trade & Investment is currently conducting a major ERP consolidation project using SAP’s Business ByDesign platform, hosted in the cloud.