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vr_Office_of_Finance_01_ERP_replacementLike most vendors of on-premises ERP and financial management software, in moving to the cloud Oracle has focused on developing for existing and potential customers the option of multitenant software as a service (SaaS). (I’m using the term “ERP” in its most expansive sense, to include such systems employed by all types of companies for accounting and financial management rather than only systems that are used by manufacturing and distribution companies.) Oracle’s ERP Cloud Service includes Fusion Financials as well as planning and budgeting, risk and controls management, procurement and sourcing, inventory and cost management, product master data management, and project portfolio management. Although to date our benchmark research has consistently found that a large majority of finance departments do not prefer to deploy software in the cloud, we also observe the balance shifting in this direction. SaaS vendors that address finance department requirements have demonstrated faster revenue growth than those that offer products only on-premises. Like other vendors Oracle must establish itself as a credible vendor of cloud ERP and financial management services to be well positioned as market demand shifts further in that direction. The company made sizable investments in acquiring ERP and financial management software in the 2000s (notably PeopleSoft – which included JD Edwards – and Hyperion), and the investments have paid off as many companies have opted to keep their existing systems (and continue to pay maintenance) rather than replace them. Our Office of Finance benchmark research finds that over the past decade the average age of ERP systems in use has increased to 6.4 years from 5.1 years. The longevity of these systems is partly the result of the slow pace of innovation in underlying technologies used for business computing. Even so, modest year-by-year changes are adding up to make replacement a more attractive option while negative attitudes toward the cloud are dissipating. To retain its installed base, it’s important for any established vendor to have solid customer references and the ability to make sales of cloud products as demand for ERP and financial management software in the cloud increases.

Oracle also has faced a broader marketing challenge because it is seen by some industry observers as being late in having a cloud offering and as not being a “real” cloud vendor. On this last point, some IT analysts (and certainly “real” cloud vendors) draw a sharp line between incumbent, on-premises vendors and the newer cloud-based ones. Yet strict definitions of what qualifies as the cloud are becoming less relevant to the market generally and to business buyers in particular. Moreover, the issue of which company is a “real” cloud vendor will become increasingly less important to users of cloud-based systems over the next five years as software environments evolve to a hybrid cloud model that combines multitenant, single tenant and on-premises deployments. As I’ve noted, I don’t believe that cloud vs. on-premises is a binary situation. Finance departments are likely to take a hybrid approach to sourcing software that best suits their needs. As tools that integrate cloud and on-premises systems improve, more companies will elect to deploy some – but not all – parts of their core financial systems in the cloud. For example, in the early 2000s corporations began to switch deployment of their travel and expense management software to the cloud; today very few run this application on-premises. Moreover, I don’t expect cloud ERP to completely displace on-premises installations. One reason is the substantial challenges that SaaS vendors will need to address to make their software more configurable to reach the widest possible market.

Since it wasn’t a first mover in the market, Oracle has needed to apply its products’ strengths to its cloud offerings and take advantage of its market position to generate new sales. It is differentiating its financial cloud offerings by building on substantial depth and breadth of functionality and existing vertical specialization across multiple industries – although not manufacturing and distribution, which almost always require a much higher degree of configurability than services businesses. Oracle also offers Hyperion Planning as part of its cloud offering, simplifying integration between planning and ERP systems. In the past, Oracle has touted the strong capabilities of its ERP and financial management software, but to acquire many of these meant purchasing the entire stack from Oracle, notably its middleware and database; this limited its appeal. The cloud-based offerings are built on the Oracle full stack, which facilitates provisioning, configuration, synchronization and process and data integration of the cloud-based elements, as well as integration with existing on-premises Oracle systems and, to some extent, other vendors’ systems. Oracle’s architecture also facilitates multidimensional reporting without a separate data warehouse, which provides users with considerable utility without added investment.

In the near term, Oracle is likely to be most successful in selling its SaaS offerings to its installed base, either in adding some process or functional capability or as a “tier two” ERP system used in smaller or remote locations or business units. Selling subscriptions to existing customers also is likely to be more profitable in the near term than attracting new ones because for software companies the sales and costs associated with adding contracted products and services for existing customers typically are lower than adding new customers. Selling to larger companies can be more profitable than selling to midsize ones, which almost always have higher ratios of contract acquisition costs to contract value. Both sizes of companies require about the same sales effort, but contract values tend to be higher for large corporations. From the customer’s perspective, adding or replacing existing on-premises functionality with a cloud-based version may be attractive financially or the result of a corporate decision to offload management of its general portfolio of software from the IT department to concentrate on systems that are strategic to the company. The latter may include, for example, Oracle’s project portfolio management functionality, which can be used to manage professional services organizations. Many industrial manufacturing and business services companies have a consulting group that customers employ to assist in making use of the product or service (such as with design, implementation or engineering consulting). It’s much easier to handle these sorts of operations with a single application that manages in an integrated fashion the operational elements (scheduling, time and costs tracking and task management, for example) as well as the financial aspects. Web-based software for managing professional services is particularly well suited to the needs of companies in which professional services are only part of the overall product line because it may be less expensive than using an on-premises approach. Moreover, since Oracle has integrated mobile capabilities, it suits the needs of professionals who spend most of their time in the field with customers. Other add-on functionality capabilities useful to existing customers and attractive in the cloud include revenue management (Oracle’s software is aimed at high-tech companies), procure-to-pay for nonstrategic (indirect) items, sourcing and contract management and product item master management.

Tier-two systems offer another opportunity. In the 1990s, larger corporations that operate in geographically dispersed areas began to standardize the ERP software they use in remote locations with few employees or in offices they could not support their main ERP system. These “tier two” systems typically were software packages designed for midsize companies because they were easier and less costly to implement and maintain. For global organizations, Oracle’s software has localization for more than 50 countries and supports 23 languages. It is also designed to support country-specific statutory accounting and tax requirements as well as enable management of centralized payments and receipts across multiple legal entities and business units. Cloud ERP is well suited to tier-two use. Often, it is attractive because it requires no on-site servers or software that require maintenance and upgrades. Cloud-based systems also make it easier to maintain financial and IT controls such as separation of duties, change management and IT security because potential intruders don’t have physical access to the applications and hardware. The downside is that they also require integration at process and data levels to operate efficiently.

vr_ERPI_01_implementing_new_capabilities_in_erpStressing Oracle’s opportunity to sell to existing customers is not meant to downplay its opportunity in the cloud ERP market. However, as with all other SaaS ERP vendors, its long-term success will depend on how easy it is to configure a system to the needs of the broadest set of users. Multitenant cloud offerings are inherently more economical than single-tenant configurations, and these savings provide a compelling reason to acquire software in this format. The flip side of that is that many companies – especially those in manufacturing or production of physical goods – find that cloud ERP systems do not offer enough flexibility in their configuration to meet their business needs. (This is one reason why Oracle does not address this market now.) While cloud-based ERP has been a hot market, expanding rapidly over the past 10 years, a majority of ERP deployments remain on premises. So the rapid growth in the cloud segment has been driven by the superior economics for buyers that are able to accept the software’s limited configurability and by growing midsize companies that can migrate from entry-level accounting software sooner than was practical with on-premises software.

The biggest challenge – and greatest opportunity – in the ERP software market lies in developing a multitenant cloud ERP offering that provides ample functionality and configurability to address the requirements of a majority of the market. Just one in five companies in our research said that it is easy or very easy to implement new capabilities in their ERP system; one-third said it is difficult or very difficult. The root cause of the difficulty is the forms-based table structure almost all ERP systems use. The first generations of all business computing systems were created as analogs to existing paper-based systems, similar to the way that the first automobiles were “horseless carriages” in their configuration. ERP systems also have mimicked the multiple ledger structure of paper-based accounting systems (which is pointless and even counterproductive in a computer-based system) and the paper-based forms that are the information containers used in accounting processes. In the first stages of business process automation, this simplistic automation was the only practical approach since it was the easiest way for programmers to start. But just as the design of cars evolved into a totally new form to reflect the capabilities of the underlying technologies, business computing systems have to evolve to break out of the shackles imposed by paper analog structures.

To break the configurability barrier ERP systems have to be more flexible in their basic design. Ideally, they should eliminate the need for customizing the underlying application. Companies would benefit if modifications are easier – and potentially less expensive – to make initially and to adjust as business conditions change over time. Easier configurability also can make it possible to reconfigure processes and capabilities faster and more cheaply than is possible today, enabling companies to make their ERP system more adaptable to their business needs. Separating the individual configurations from the core code base means that SaaS vendors can give a much broader set of users the flexibility they need to make the system work as they wish while maintaining only a single instance of a code base to modify, upgrade, debug and patch. A more configurable system also has the advantage of being easier to upgrade in an on-premises deployment and possibly easier to implement in the first place. To remain a leading vendor in ERP in the coming decade, Oracle, like all other ERP software vendors, will need to evolve its software into an attractive choice in the multitenant cloud for an ever widening market by making the software as configurable as possible to reduce the level of consulting and customization required.

Regards,

Robert Kugel – SVP Research

“What’s next?” is the perennially insistent question in information technology. One common observation about the industry holds that cycles of innovation alternate between hardware and software. New types and forms of hardware enable innovations in software that utilize the power of that hardware. These innovations create new markets, alter consumer behavior and change how work is performed. This, in turn, sets the stage for new types and forms of hardware that complement these emerging product and service markets as well as the new ways of performing work, creating products and fashioning services that they engender. For example, the emerging collection of wearable computing devices seems likely to generate a new wave of software/hardware innovation, as my colleague Mark Smith has noted. This said, I think that the idea of alternating cycles no longer applies. It would be convenient if we could assign discrete time periods to hardware dominance and software dominance, but like echoes as they fade, the reverberations are no longer as neatly synchronized as they once were. Moreover, adoption and adaptation of technology by consumers reflected in the design of work, products and services always lags – and lags in different ways, further blurring the timing of cycles.

Adding to the messiness, technologies enter the market and evolve in ways that seem designed to embarrass pundits. In the 1990s, Bluetooth was supposed to be the next big thing for wireless connections; Wi-Fi wasn’t on most radar screens. Today, Bluetooth has an important role, but Wi-Fi is bigger. Some heralded technology breakthroughs sink without a trace. Sadly, that has been the case for multidimensional spreadsheets like Javelin and Lotus Improv. Other technologies appear, are used in trendy ways and then become mainstream. Instant messaging and chat immediately replaced passing paper notes in class for teenage girls. While somewhat passé in this role today, they have become an essential tool in the workplace. Of course the rate at which technology is incorporated into mainstream business use varies greatly. The Internet became central to business and commerce at an astonishingly fast pace while earlier inventions such as voice mail took about a decade to become universal.

vr_sparse_use_of_advanced_analyticsSoftware has dominated as a driver over the past two decades, but devices and business process changes have become increasingly important in amplifying the impact and producing knock-on effects that spur innovations of all sorts. Smartphones and other mobile devices might have become another Minitel except that there were programming tools and business models in place (including the absence of top-down control and regulation) that spurred ingenuity, substantially enhancing the value of these devices and making them highly adaptable to personal preferences and individual business needs. Rapid and broad adoption of mobile devices has been driving change in business software to enable companies to utilize the value of these devices. Yet there are plenty of examples of how organizations have failed to change how they conduct business. Our benchmark research finds that companies have been slow to adopt better methods facilitated by information technology for planning and budgeting, closing the books, managing the workforces or handling customer interactions. Software-driven change will come in these areas over the next decade, driven in part by a generational shift as baby boomers retire, and more attention will be paid to cognitive ergonomics and the resulting increased attention to the design of the user experience in business computing, such as gamification.

Innovation in business often takes longer to appear than futurists hope. One part of today’s answer to the “What’s next?” question includes all the things that software marketing departments have been promising over the past decade or so that haven’t come to pass yet. Usually, this is because there is some confusion on the part of vendors between “easier” and “easy.” Many innovations and enhancements in business software have made them easier to use but not easy enough for mainstream adoption or easy enough to spur process innovation or a change in management practices. One example is advanced analytics. There have been steady improvements making it possible for many kinds of users to employ them in business, but most users today require advanced degrees or specialized training (although I have some hope for new mass market tools on the horizon). Consequently, our research finds that two-thirds of companies make little or no use of advanced analytics.

vr_ibp_few_companies_have_interactive_reviewsAnother example is in business planning. For all the discussion about changing budgeting and planning, practices have remained pretty much the same over the past two decades. One way to make planning and budgeting more useful is to make reviewing results more actionable. This could be accomplished more easily if organizations could immediately drill down into the details of the results rather than having to wait for follow-up information or debate what the likely causes might have been. Yet only about one-fourth of participants in our business planning research are able to get to the numbers behind the numbers while the meeting is under way. Improved software technology is making this easier to do. For example, many ERP vendors have changed the basic architecture of their systems to make them capable of handling transaction processing and analytical tasks at the same time. But technology alone will not make a difference. It will take a change in management and demand that periodic reviews be highly interactive to make a difference.

Even with hidebound management techniques, it’s likely that new devices coming to the market will be major sources of innovation, either those that complement existing business practices and consumer demands (which are obvious candidates for rapid adoption) or as a speculative venture. The loudest buzz is around the Internet of Things. This is an amorphous concept at the moment, and there are considerable technology hurdles that must surmounted for it to become practical (notably the limited address capacity in the IPv4 standard). Still, the concept has a good deal of theoretical appeal when one extrapolates the value already realized by increasing the scope of people-to-machine connections (such as for monitoring processes or the health of devices) and the variety and number of machine-to-machine control and instrumentation (for example, automatically tracking physical assets and optimizing machine performance by monitoring conditions).

As I mentioned earlier, wearable computing is another emerging area of innovation. Thus far, it has had more allure than demand, but that was true also for the personal digital assistant, which had a few notable flops before catching on and becoming a mass-market device, eventually to be subsumed into the smartphone. Devices are already being worn for health, entertainment and augmented reality purposes. Bracelets, fobs and glasses have considerable scope for use in business settings, for consumer applications and for wellness. Glasses and wrist devices in particular have the ability to augment the utility of any computing device as sensors or for input/output. A computer screen is rather like a keyhole through which one “looks” into the computing device. Dual screens are now commonplace because this expands the breadth of view of the user. Glasses can broaden the scope of view considerably more, improving the ergonomics and expanding the utility of any computing device. Any of these devices could augment the capabilities of software applications. They will give software designers added scope to enhance the capabilities and usability of applications.

So the answer to “What’s next?” in business computing probably is “ A lot – and sooner rather than later.” There’s a tendency to view current technology in terms of the major advances of the past. If that is any guide, today’s information technology will soon appear pitifully primitive. Consumer use of technology has outstripped that of business, in part because multiple individual needs are generally less difficult to serve than that of an organization and the tasks the technology performs usually are far less complex: They’re apps, not applications. Yet business computing is on the cusp of a fundamental shift in which devices and software are powerful enough to adapt to the needs of users. In the past, business computing was defined by the limits of information technology and required that businesses adapt to those limitations. Everything from a richer and more enjoyable (or at least less painful) user experience to the transformation of accounting systems from paper-based analogs to a truly digital ledger has the power to change for the better how businesses operate.

Regards,

Robert Kugel – SVP Research

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