ERP Vendors Battle For Mid-Market Customers
Vendors of enterprise resource planning (ERP) solutions are marketing to companies with revenues between $50 million and $500 million. How will the increased competition between large and small ERP vendors affect you?
Identifying The ERP Mid-Market
In the past, large ERP vendors like Oracle and SAP sold ERP software directly to Fortune 1000 companies. Today, the landscape is changing as smaller companies begin adopting ERP systems to improve their performance. As a result, large ERP vendors are now competing with smaller ERP vendors for their piece of the mid-market share.
The ERP mid-market is composed of approximately 40,000 companies, which have annual sales revenues of between $50 and $500 million. This is according to Bill Engel, president of Glovia International, LLC (El Segundo, CA). "The market for ERP solutions is intensifying. There are more ERP vendors than the market needs," says Engel.
The mid-market customers are considered the second wave of customers (tier two) purchasing ERP solutions. The Fortune 1000 customers, most of which have made ERP purchasing decisions, are considered tier-one accounts. It's not unusual for tier one customers to spend millions of dollars on ERP solutions that may take up to several months or years to implement. Tier-three customers, according to Engel, are those companies unable to purchase an ERP solution costing in excess of $150,000.
Glovia develops ERP software solutions, including its Glovia 4.0, for mid-market discrete manufacturers and service operations. Founded in 1997, Glovia is a joint venture between Fujitsu Ltd. and McDonnell Information Systems. Glovia, with 325 employees, reported annual sales revenues of $60 million for 1998. Other well-known, much larger ERP vendors -- those that typically sold to only Fortune 1000 customers -- are among Glovia's competitors in the mid-market Engel describes. These well-known vendors include Baan, JD Edwards, Oracle, SAP and PeopleSoft. Obviously, these vendors want to stake a claim in the rapidly growing mid-market for ERP. The sheer size and scope of these companies often make them forerunners when it comes to ERP vendor selection.
Stiff Competition For ERP Dollars
To compete in the mid-market arena, large ERP vendors typically develop products that fit this market, as opposed to their solutions for Fortune 1000 companies. All potential ERP customers are looking for the same result: automation of business processes. These processes can include human resources, accounting, distribution and manufacturing.
However, the tier-two customers typically look for ERP software solutions that also can be installed within a certain time frame and budget. "You can't offer mid-market customers a dumbed down version of your tier-one solution," says Laurant Pacalin, vice president of mid-market business solutions for Oracle (Redwood Shores, CA).
Pacalin prefers to use the term "enterprise applications" as opposed to ERP. "Enterprise applications have to take into account front-office functions (i.e. order entry) as well as the more traditional back-office functions (i.e. accounting)," Pacalin explains.
Oracle is a prominent developer of database management systems and application software. The company also makes application development productivity tools, including ERP software for mid-market verticals. These financial applications include financials for the public sector and manufacturing applications. FastForwardRPM is Oracle's turnkey offering of applications and services for fast-growing companies with annual revenues under $500 million. Oracle, with 40,000 employees worldwide, reported 1998 revenues of more than $8 billion.
Working Against A "Big" Image
Software giant SAP often has to work against its own image as a tier-one provider when it comes to the ERP mid-market. "Worldwide, 36% of our customers have annual revenues under $200 million," says Jim Whalen, business program manager for SAP's mid-market Accelerated Solutions.
In the United States, where SAP's foothold is still somewhat new, its customers have been high-profile Fortune 500 companies. In Europe, however, where SAP has been operating longer, its customers are primarily small- to mid-sized companies. The company's U.S. headquarters is in Wayne, PA and it has 6,500 employees worldwide and reported 1998 sales revenues in excess of $5 billion. Founded in 1972, SAP is a leader in the development of business software applications, including its SAP R/3 ERP solution. SAP offers a more horizontal solution to meet the needs of various types of businesses, including retailing and manufacturing.
SAP offers preconfigured, preinstalled functional area- or industry-specific solutions for small- and mid-sized customers. Known as Accelerated Solutions, these solutions are geared specifically for mid-market customers. "Our customers can use these tailorable solutions 'out of the box' for specific business needs," says Whalen. For example, a manufacturer can use Accelerated Financials pre-configured with a standard chart of accounts and IT infrastructure, including implementation, for a fixed fee. The same customer can add the human resources (HR) function later. "This allows mid-market customers to have phased implementations at a lower cost. Another advantage is a shortened implementation time," says Whalen.
"The mid-market is definitely attractive due to the maturation of the tier-one market," says David Obershaw, vice president of marketing and industry strategy, manufacturing business unit for PeopleSoft, Inc. (Pleasanton, CA). Obershaw says his company primarily competes with SAP and JD Edwards for ERP solutions. Unlike some vendors, PeopleSoft does not sell through a reseller channel. "We've developed a sales and implementation process for these smaller accounts that makes it cost-effective for us to sell direct," says Obershaw.
In addition to a direct salesforce, PeopleSoft offers a packaged implementation, similar to SAP and Oracle, for its mid-market customers. PeopleSoft is a leading designer of applications for managing operations across computer networks. The company develops software for the transportation and utility markets, as well as others. PeopleSoft was founded in 1987. The company has over 4,400 employees and reported 1998 sales revenues of over $1 billion.
The Benefits Of A Niche Product
For smaller ERP vendors, operating in a market niche helps them compete with larger vendors in the ERP mid-market, says Bill Leete, vice president of Friedman Corporation (Deerfield, IL). Friedman specializes in providing ERP solutions to discrete manufacturers in three areas: build to specifications (i.e. furniture), capital equipment (i.e. recreational vehicles), and consumer goods (high-quantity customized products such as pens). Founded in 1970, Friedman has 140 employees and sales revenues of $26 million.
"We sell features and functions, not flash and sizzle. This means we sell a fully integrated, configuration-based ERP solution," says Friedman President Craig Yamauchi. He admits his company can't always compete against a big name such as SAP. He says his company's strength lies in its knowledge of particular manufacturing markets. For example, Friedman sells ERP solutions to mid-market cabinet manufacturers. "Offering a vertical solution is key for the customer," notes Yamauchi. "ERP vendors can be more innovative, by offering a stronger industry-specific solution," he says. Friedman sells what it calls a customer-driven solution. This approach is effective in addressing the challenges facing today's made-to-order manufacturers.
Conversely, Oracle's Pacalin argues that larger ERP vendors can invest more heavily into product R & D. "We can take advantage of changes in technology. For example, we've built an application that takes advantage of the Internet," says Pacalin. Not every company can do this. "Smaller vendors may have to make a choice of what business they are in," he says. Oracle applications cover both the front- and back-office needs. "We also have the luxury of our consulting resources and numerous installations," says Pacalin.
Glovia, like Friedman, concentrates in vertical markets within discrete manufacturing, including automotive, electronics, capital equipment and telecommunications. Glovia's Engel says that the manufacturing component of any ERP solution is key. In fact, his company routinely looks to piggy-back its solution with existing SAP "backbones" with a dedicated salesforce. "We offer a strong manufacturing component to existing ERP systems," Engel explains. He says Glovia has gone head to head with larger vendors competing for installations and won.
The battle of the larger versus the smaller ERP vendors should continue as the total mid-market grows to an estimated $70 billion (according to industry analysts) within the next three years. The increased competition means customers have more choices when it comes to selecting ERP solutions. Mid-market customers, ready to adopt ERP solutions, should come out as the winners.