It's Not Just For Big Companies
Top-tier vendors offer less-expensive, modular, and hosted versions of their software.
By Larry Greenemeier
A growing number of small and midsize companies are deploying enterprise resource planning applications. In the past, many of these companies, typically with annual revenue of less than $500 million, didn't have the budget or time to consider implementing large, complex, and expensive ERP packages. But with marquee software makers such as Oracle, PeopleSoft, and SAP creating less-expensive, modular, Web-architected, and hosted versions of their ERP software, a lot of smaller companies are rethinking their options.
Vendors' strategies for small and midsize businesses fit well with those companies' desire to avoid customization as much as possible, because customization can drive up costs. When Carreker Corp., a $110 million Dallas provider of consulting services to banks, went shopping last year for software to handle accounting, human resources, and performance management, it specified that the winning vendor would need to fulfill 80% of the company's needs out of the box.
Carreker's goal was to transform the business around a new set of integrated applications. The company gave the contract to PeopleSoft Inc. over a host of rival vendors, including Baan, J.D. Edwards, Oracle, and Portera. PeopleSoft had just overhauled its offerings to a 100% Internet architecture.
Faris declines to discuss pricing details but says PeopleSoft's costs were the most predictable and its hosted software model promised a quicker return on investment by providing Web self-service support, which reduces the need for Carreker to hire more support staff.
Because PeopleSoft 8 is Web-based, Carreker employees can access applications from any of the company's 700 desktops and notebook computers worldwide. To move forward with the implementation quickly and without adding to its IT staff, Carreker opted to have PeopleSoft host its human-resources, financial, customer-relationship management, help-desk, and balanced scorecard and analytics software through PeopleSoft's eCenter division.
Faris says she wasn't comfortable before that the company could migrate to a set of products from a single vendor that would accommodate employee and annual revenue growth projections.
"My experience has been that midsize companies have used second-tier products that are limited in function and scalability-at least until they got big enough to move to the top tier," Faris says. But that's changed now that larger ERP vendors have focused their attention on midsize companies, she says.
Carreker took its PeopleSoft 8 financials model live this month and will bring up various CRM modules throughout the rest of this year and next. The HR module has been live since January, payroll since April, and benefits administration and an employee portal since June. The company also plans to bring up a customer portal early next year that will let Carreker clients get online reports on the status of transactions, customer support requests and tracking, and invoice payment.
Better support for small and midsize businesses makes sense for ERP vendors. The strategy has long worked for J.D. Edwards, a provider of HR, logistics, and manufacturing software whose focus has been on the midmarket since its inception in 1977. Half of the company's $1 billion in annual revenue comes from customers with less than $1 billion in annual revenue, although these customers comprise more than half of J.D. Edwards' 6,000 clients.
SAP says that more than 43% of its installations are at companies with less than $200 million in annual revenue, and more than 60% take place at companies that have less than $500 million in annual revenue. "Small and medium businesses don't have different needs from larger companies, but they generally can't afford customized solutions," says Jeff Johanson, director of channel operations for SAP's practice for small and midsize businesses.
PeopleSoft says one out of every three new customers is a midmarket company. At the present, the vendor has more than 1,000 customers in the midmarket. One-third of Oracle's sales in North America are to companies with less than $500 million in annual revenue. Worldwide, small and midsize companies are 25% to 30% of Oracle's sales.
O-Cedar Brands Inc., a Springfield, Ohio, manufacturer of brooms, mops, and scrub brushes for household and industrial use, this fall will migrate to PeopleSoft's supply-chain applications. Like Carreker, it has chosen the software provider's eCenter hosting service. O-Cedar will use PeopleSoft software to manage inventory and orders, track accounts receivable, purchasing, and finance information, and perform production and planning.
Also like Carreker, the company was looking to buy software that it wouldn't have to dramatically customize. The Web-based system will replace heavily customized client-server applications that the company has been using for 10 years. Much of this customization resulted from O-Cedar's work to accommodate electronic data interchange transactions from a variety of supply-chain partners.
"We've really outgrown the software we have," O-Cedar CIO Bob French says. For instance, the applications O-Cedar uses in its distribution area are no longer adequate to meet client demands for tracking order and shipping status. "PeopleSoft applications are flexible enough. We won't get stuck with another heavily customized client-server implementation," says French, who declined to provide details about financial savings.
As with PeopleSoft, Oracle has also come to rely on the hosted-application model to drive down costs and produce rapid implementations for its midsize customers. Much of this is done through the company's FastForward program, which offers customers a subset of Oracle's software suites. In Oracle's fiscal 2001 year, which ended in May, the company says 85% of its application implementations via its hosted model were completed in less than 150 days.
"There's been a perception for years that ERP wasn't for the midmarket because it had a reputation of long, expensive implementations," says Jeremy Burton, an Oracle senior VP. "But applications that are hosted and largely uncustomized have helped ERP shed its reputation."
The advent of more modular packages may spell an end to the stories about small and midsize companies blowing their budgets on big ERP implementations and winding up with little to show for it. ERP packages have sometimes been hard for midsize companies to swallow whole, says Bruce Culbert, global supply-chain practice leader for KPMG Consulting.
Culbert has seen midsize companies spend $3 million to implement and run large enterprise packages, only to later replace those applications with basic spreadsheet software. "The ERP applications were too difficult to use," he says.
Yet some smaller companies have deployed vendors' full-blown ERP applications with success. In the pharmaceuticals industry, smaller companies have turned to ERP systems to replace legacy systems. "The maintenance of legacy systems and interfaces could be prohibitive as the rest of the IT environment grows up around those leg-acy systems," says Joe Cardarelli, SAP's pharmaceuticals industry segment manager.
Endo Pharmaceutical Inc., a Chadds Ford, Pa., pharmaceutical company with annual sales of $197 million, has been using SAP R/3 sales and distribution, materials-management, and financials modules since 1999 to support the complex web of business relationships that defines its industry. VP of IT Eric Bloom says Endo chose SAP because it's a proven leader in pharmaceuticals, and its customized charge-back, rebate, and sales-force automation applications are tailor-made for his company's need to carefully audit the distribution of prescription drugs, he says.
Endo, which makes and markets pain-management medications Percocet and Percodan, is planning to migrate from SAP version 3.1I to 4.6C by next February. The company will also implement a new SAP human-resources module early in the second quarter of next year. Bloom says he's looking to shift his users' interface from menus to a Web-based interface that's cleaner and easier to use.
Bloom acknowledges that SAP has a number of features and functions that aren't targeted at midsize and smaller companies, such as the ability to manage international monetary units and multiple plant-resource scheduling. However, he says, "if you're going to grow, you have to consider the kind of software you'll need. This type of software promotes growth."