Globalization, SMBs driving ERP spending

Large corporations are investing in ERP to adapt to globalization, but small and medium-sized businesses (SMBs) are also helping to create a $38 billion industry, according to AMR.

Implementing an ERP software package is no longer a luxury for manufacturers, according to Jim Shepherd, a vice president at AMR Research Inc. It's a matter of survival.

"Fundamentally, any company with revenue more than $5-10 million will need an integrated business system to function and compete," he said.

As a result, there has been a steady increase in ERP software spending. A recent study by the Boston-based research firm found that the global ERP application market will reach $38.2 billion by the end of 2008, about half of which will be derived from sales to the manufacturing industry. AMR estimates that in five years, the market will be roughly $55.9 billion -- a 10% compound annual growth rate.

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Investment in ERP by large corporations, as a result of globalization, centralization and a desire for performance management, has been the primary reason for the market's growth, but the lower end of the market is driving spending as well. The number of small and medium-sized businesses (SMBs) that need to switch to an ERP package has recently exploded, according to AMR.

Oracle and SAP are still the major players in ERP, but other vendors such as Lawson, Deltek, Agresso and Microsoft Business Solutions all enjoyed record growth rates in 2007 as a result of their midmarket offerings. Part of this success is due to their willingness to move away from a single, internally developed software line to a broad selection of products geared toward SMBs.

"Generally, SMBs are finding that their current systems are inadequate when it comes to dealing with a growing list of customer needs, or when they are trying to do business outside their home countries," Shepherd said. "So there are usually several factors that force an SMB to invest in an ERP system."

Although some SMBs may be compelled to upgrade their ERP infrastructure, it can be a very difficult operation.

"It is a highly invasive and disruptive process that can potentially affect every employee and procedure," Shepherd said. "It can be very healthy for a business; however, it can be a long and painful process."

For instance, a firm looking to implement a business integration system will typically have to spend about $3,000 to $5,000 per user for software licenses and as much as twice that in hardware and consulting. The entire operation, from equipment installation to training, can take anywhere from six to 18 months -- depending on size, need and the company's timetable.

Businesses should also consider the current economic conditions. Shepherd notes that with the U.S. economy sputtering, domestic companies may be reluctant to spend money on upgrading their systems. However, with a strong global economy, he does not foresee the ERP market shrinking or even stalling.

"We've seen dramatic growth in Europe and Latin America as more economies are beginning to develop," he said.

Despite the obstacles, smart businesses realize that they have to spend money in order to make money. According to Shepherd, the key to getting value in an ERP investment is the rationale behind it.

"Companies need to view this as a way to transform and realign their business models," he said. "They will get far less value out of a new ERP system if they are only looking for a software transition."

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