A growing number of companies are choosing tier 2 ERP and tier 3 ERP systems over tier 1 offerings from Oracle, SAP, and Microsoft, according to a new report by Panorama Consulting Group.
“It looks like companies are looking at smaller solutions,” said Eric Kimberling, president and CEO of the Denver-based consulting firm. The report analyzes 1,600 responses to an online survey of companies that completed ERP projects in the last five years.
The tier 2 vendors include companies like Epicor, Sage, Lawson, and Infor. Among the tier 3 players are ABAS, Activant Solutions, NetSuite and Syspro.
Many companies want smaller and midsize business (SMB) ERP systems for the specialization they can offer, Kimberling said, although the recession also played a part in the increased demand for more budget-friendly systems. Many companies are also opting for niche on-demand applications like Workday or Salesforce.com.
“Most of the growth is at the midmarket,” Kimberling said. Because of that, companies like SAP were putting more time and effort into pushing midmarket solutions like All-in-One and the on-demand ERP suite Business ByDesign.
“Oracle and SAP have done a good job [of focusing on midmarket customers], but I think they’ve got a ways to go to perfect that model,” Kimberling said. Microsoft’s Dynamics product line was also doing well in the midmarket, he said.
SAP commands 28% of the manufacturing ERP market overall, followed by Oracle with 15% of the market. Microsoft comes in third, with 12%, followed by Infor(7%) and Epicor (5%).
“All three of [the tier 1 vendors] are fairly strong in manufacturing and distribution, especially SAP and Microsoft,” Kimberling said, adding that each gets around a quarter of its ERP sales from the sector.
SAP has been able to dominate the manufacturing sector in part because that’s where its roots are, Kimberling said. “SAP started out as a manufacturing ERP solution,” he said.
As for the length of time it takes for an ERP deployment to pay for itself in savings and increased efficiencies, Panorama found that payback periods vary according to tier, with the majority of systems breaking even in less than three years.
Tier 3 systems fare best, with paybacks under three years in 76% of reported projects, compared to 55% for tier 1 and 66% for tier 2, the report says.
That’s largely because the tier 2 and 3 deployments require a lower investment and total cost of ownership compared with tier 1 deployments, according to the report.
At the same time, companies’ expectations are often high -- and much different from what they’re actually getting.
That may be due to sales representatives overselling applications, among other things.
“Expectations can be flamed by ERP vendors who promise the moon in order to close a sale and organizations that don’t adequately define their business requirements before embarking on implementations,” the report states.
The average cost of an SAP ERP implementation is $6.7 million, higher than any of its competitors, the report found. The average cost of an Oracle project is $5 million, followed by Microsoft Dynamics, with $1.8 million. The average cost of a tier 2 implementation is $3.1 million. Tier 3 projects cost an average of $1.1 million.
Kimberling said the cost disparities may be more a reflection of the implementing companies than the ERP systems themselves. “Microsoft Dynamics, tier 2, and tier 3 solutions are often implemented by smaller companies, and oftentimes less complex companies,” he said.
Panorama also found a direct correlation between the amount of time and money a company puts into change management and how much it benefits from the ERP application. Details on those findings will be released in a separate report.
“The irony is that many companies want to cut change management thinking that will save them money at the end of the day,” Kimberling said.