Seeking a niche in ERP

Several small software companies are riding the ERP software extension product wave.

They're the small boys of the Enterprise Resource Planning software business, flourishing by doing what ERP producers often don't do "� customising ERP packages to meet the specific requirements of corporations.

Indeed, few outside the software industry have heard of WAM Systems, AspenTech, Agilisys, Manugistics or even Applied Optimisation Inc, all based in the US.

But they're operating in a niche that even the big boys acknowledge they don't quite cover. Meet the ERP extension software brigade.

Applied Optimisation, for example. The company has a presence in India and develops and implements customised solutions for sales and operations planning, tactical planning, demand management, and other needs not served by traditional ERP systems.

Says Srikanth Sundarajan, chief technology officer at the Nasdaq- listed Cognizant Technology Solutions: "Early installations of the ERP offerings from SAP, PeopleSoft, Oracle required extensive customisation in order to meet the specific needs of customers in terms of business rules and transaction/work flow support."

Cut to the early 1990s. Then, ERP (Enterprise Resource Planning) was quite the rage "� companies that opted for an ERP implementation were regarded as smarter and hard to beat. An estimated 70 per cent of Fortune 1000 companies had an ERP system installed.

The Japanese then came along and proved that a company need not invest millions of dollars in ERP systems to continuously improve their functioning. Many Japanese companies never implemented ERP (they had their own continuous improvement systems, including Kaizen) but managed to extract every bit of efficiency that existed in the system.

Close to 40 per cent of participants in a survey by the US business membership and research network The Conference Board (www.conferenceboard.org) said that they failed to achieve their business goals even a year after having implemented ERP. This was because the traditional ERP systems produced much data and nothing else for users.

Companies eventually realised that ERP systems needed to evolve and customise packages specific to their requirements. They needed to help businesses tackle the issue of driving down costs and increase the flexibility with which they could use these systems to solve business problems.

Says Ranjan Ghoshal, a former GE employee and co-founder of Applied Optimisation, who has helped some of GE's chemical plants in the US cut costs year after year: "We found that ERP systems were restrictive and did not give us enough flexibility to solve issues. They did not help us optimise the use of our assets."

Ghoshal and his team then worked on some cutting edge solutions (complex algorithms) so that data which were lying around could be used in an intelligent manner to drive down costs and increase flexibility in planning production. Ghoshal's solutions interacted with the existing ERP system and worked in tandem.

Indeed, building customised solutions for an existing ERP system has now become a mainstream business (while no estimates of the size of the ERP software extension business are readily available, IDC, the IT data tracking company, forecasts that the Indian ERP market will be worth Rs 800 crore by 2006).

"The inadequacies of ERP software lead to the emergence of a new breed of specialised software, "ERP extension" software. These components can either be installed standalone or bolted on to existing ERP systems. They can usually be implemented relatively quickly and at a relatively low price. ERP add-ons address the limitations of ERP more effectively and at lower cost than ERP," Ghoshal says.

How have the ERP big boys reacted to these challengers? Overseas, they've simply swallowed up several of them. Oracle acquired process manufacturing management vendor Datalogix. PeopleSoft acquired customer relationship management (CRM) vendor Vantive. SAP acquired A21 Technologies for its data warehousing strengths.

Secondly, every time a niche add-on to an ERP system is developed for an industry, they incorporate the add-on in the next version of ERP software. Says S P S Grover, senior director at Oracle India, "ERP systems are evolving. And today Oracle ensures that the 'design point' is from the CEO's point of view."

Satish Subramaniam, general manager, enterprise application services, at Wipro Technologies, backs the point. " Today Oracle and SAP are allowing for just this with their latest generation of products. The consolidation of all applications is gaining ground which will help do all the stuff that these niche add-ons are promising to do."

Sundarajan too points out that all ERP vendors want to move into adjacent spaces and eliminate niche products. For example, SAP has already come out with supply chain management (SCM) products. Oracle and PeopleSoft are offering niche CRM products.

Most large ERP suppliers have begun adding software functions on their own to augment their current ERP capabilities and tell clients that something the supplier has developed in-house can be integrated with existing ERP software far more easily than a software add-on that's bought from an external vendor.

Agrees Ghoshal: "Of course, ERP vendors have not been sitting still. During the last several years, the functional perimeters of ERP systems have been expanding into these adjacent markets. Most ERP vendors have been busy developing, acquiring or bundling new functionality so that their packages go beyond the traditional realms of finance, materials planning and management and human resource and payroll management."

But Sundarajan believes that niche business requirements will always exist because ERP systems will always have gaps, no matter how finely-tuned they are or how broad the functions they offer. Ghoshal also argues that niche vendors offer lower costs, quicker implementation, a solutions (and not software sale) focus and industry expertise. In short, the niche companies will continue to flourish "� unless they're gobbled up, of course.

The ERP story

In the 1960s, businesses relied on traditional inventory management. In the 1970s, Material Requirements Planning (MRP) developed. Next came Manufacturing Resources Planning (MRP-II) as an enhancement to MRP by integrating other manufacturing resources, particularly shop floor, accounting and distribution management.

In the early 1990s, MRP-II was further extended to areas like engineering, finance, human resources and project management. This is Enterprise Resource Planning (ERP) as we know it today. ERP marries management issues with information technology.

ERP has evolved well beyond its origins as an inventory transaction and cost accounting system. In simple terms, ERP systems use database technology and a single interface to control information on a company's business.