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Like other vendors of cloud-based ERP software, NetSuite offers the key benefits of software as a service (SaaS): a smaller upfront investment, faster time to value and potentially lower operating costs. Beyond that NetSuite’s essential point of competitive differentiation from is broad functionality beyond financial management, including capabilities for customer relationship management (CRM), professional services automation (PSA) and human capital management (HCM). These components make it easier for businesses to manage processes from end to end (such as quote- or order-to-cash) as well as to have transactions and business data available in a single system in consistent forms and synchronized. This in turn facilitates real-time reporting, dashboards and the use of analytics that integrate a wider set of functional data. Midsize companies are most likely to benefit from this integration because typically they have smaller, less sophisticated IT staffs than larger ones. A side benefit of having a single, integrated data source is improvement of situational awareness and visibility for executives and managers. It also enables organizations to reduce their use of spreadsheets for stitching together processes, doing routine analyses and reporting. These sorts of activities waste valuable time and reduce an organization’s agility.

vr_Office_of_Finance_01_ERP_replacementThis year SuiteWorld (NetSuite’s fourth annual user conference) was attended by some 6,500 people. This number as well as the company’s $500 million in projected revenues are evidence that cloud-based ERP has become mainstream. Yet cloud deployments still have a limited share of the total ERP market and an even smaller share of the installed base. One reason is the ongoing (albeit diminishing) reluctance of finance organizations to use the cloud for mission-critical and data-sensitive tasks. The other is the slow replacement cycle for these major systems. Deploying any ERP system is time-consuming and expensive, so corporations prefer to change them only when the situation is urgent. Our forthcoming benchmark research on the Office of Finance shows that companies of all sizes are replacing their systems at a slower pace than before: The average age of an ERP system today is 6.4 years compared to 5.1 years a decade ago.

Companies that deploy their ERP system using a SaaS vendor can achieve faster time to value in part because they do not have to deal with hardware and software integration issues. Those that opt for a multitenant cloud approach can support their business needs without having to customize their ERP system, which is frequently the cause of very long deployment times. The challenge facing NetSuite and other ERP vendors with SaaS offerings is enabling more businesses to configure a range of elements so that the system meets the specific needs of their company and industry. Moreover, the next generation of ERP – the core financials, manufacturing, operations and distribution – must enable line-of-business people to modify the system to adapt to changing business environments and adjust business processes to reflect evolving internal requirements and adoption of new management methods.

vr_ERPI_01_implementing_new_capabilities_in_erpNetSuite’s new SuiteGL moves in this direction. In our research on ERP innovation only 21 percent of large companies said it is easy or very easy to implement new capabilities in ERP systems, and one-third characterized it as difficult. Because of this, the current generation of ERP software is a barrier to innovation and improvement. To be sure, the initial configuration of and major modifications to a new ERP system almost always require a mix of external consulting, internal IT and business people to achieve the best outcome. But even here software vendors must radically reduce the system’s setup cost. Today, the cost of implementation can be up to five times the cost of the software license. In the future, companies must be able to do this at a fraction of that. Cloud-based systems can enable these kinds of savings if managed properly and using the right set of applications.

At SuiteWorld, company executives pointed to a growing list of large customers. Partly for bombast but also to inspire buyer confidence, software vendors that sell to midsize businesses tout their larger customers even though these corporations almost always are buying the product for midsize business units. Since the 1990s, many larger entities have used a two-tier ERP strategy. That is, they buy a system designed for midsize companies because it would be too difficult or costly to implement and maintain their core ERP software at these locations. Cloud ERP is suited to tier-two use. Often, it is an attractive option because it requires no on-site servers or software that requiring maintenance and upgrades. Cloud-based systems make it easier to maintain financial and IT controls such as separation of duties and IT security but require integration at process and data levels to operate efficiently.

NetSuite also has incorporated the professional services automation (PSA) capabilities that it acquired in 2008 with OpenAir. Its Services Resource Planning is geared to professional services organizations such as consultants, engineers or architects as well as the professional services arms of larger organizations that can benefit from automating project management, resources management or time and cost accounting. In the past, relatively few professional services firms embraced a high level of automation in managing their business, partly because of the difficulty of implementing and managing on-premises software. Because they eliminate this aspect of software ownership, cloud-based systems work well for these types of organizations. Also, cloud systems are a more natural fit for the mobile nature of professional services business since the revenue-generating assets are professionals who are rarely in the office.

Since ERP systems require deep functional and technical expertise to configure and implement, good channel partners are essential to the success of any software vendor. NetSuite’s channel efforts are gathering momentum, including accounting and audit firms with technology practices, specialized ERP resellers and business process outsourcing consultants. The ecosystem is growing, too, with application partners such as Kyriba for treasury management (which was awarded our Technology Innovation Award and received NetSuite’s Partner of the Year award in 2014), and Coupa for spend management and electronic procurement. It also expanded its HRMS and talent management offering with the acquisition of TribeHR that helps human resources professionals. Gaining integration with NetSuite cuts the cost of implementation and ongoing maintenance in these and other areas as well as speeding time to value.

There are a couple of areas, though, where NetSuite needs to enhance its capabilities. Social media has quickly evolved from the one-to-many broadcast style of Facebook and Twitter to include options that enable specific, permissioned groups to easily communicate while retaining a record of these communications. NetSuite has some capabilities in this area but in particular it needs to concentrate on meeting the needs of people working in finance and accounting. As I’ve noted, finance organizations are social, but broadcast-style communications often is not appropriate. Groups may be broadly defined (say, everyone in accounting) or more narrowly focused (just those working on the close) or established for a specific project. These systems work best when functionality automatically adjusts to the context of the work the individual is performing. It should “know” when the individual is engaged in the accounting close, budgeting, billing and so on.

From the start NetSuite provided users with basic dashboard functionality to monitor the status of their part of the business. These capabilities have been updated in the current release of the NetSuite platform. While the improvements are necessary, greater investment must be made in enhancing its analytics and reporting. Facilitating the use of more effective analytics would also be useful, especially since its system captures a broad range of financial and operational data in real time in a single store or might need to be shared with other systems. NetSuite has a strategic relationship with Birst, a cloud-based vendor of analytics and business intelligence software, which offers Birst Express for NetSuite. Our most recent Mobile BI Value Index rated Birst as a Warm vendor – that is, it meets basic requirements well but does not offer the full range of available capabilities across smartphones and tablets and range of mobile technology platform providers.

Many companies are finding that cloud-based ERP has advantages. Not only can it have initial and ongoing cost savings and faster time to value, it eliminates the need to devote IT resources to what is a commodity-like operation and is better suited to many businesses with remote and multisite operations. Many will require integration to other business applications that could be on-premises or cloud-based ones that might require data or notification of completion. NetSuite also has functionality that supports the needs of businesses that make or distribute physical goods, which is more difficult to create than services. And cloud-based ERP is an option that any rapidly growing small business or a smaller midsize company (that is, one with 100 to 200 employees) should evaluate if its entry-level accounting software is not able to provide capabilities to manage the business effectively.

Regards,

Robert Kugel – SVP Research

Epicor used its recent user group conference to explain its strategic direction and product roadmap. The company is the result of multiple mergers of business software corporations over the past 15 years; its target customers are midsize companies and midsize divisions of larger organizations. Its most significant products are Epicor (ERP software aimed mainly at manufacturing and distribution companies) and Activant Solutions (software for small and midsize retailers, including a point-of-sale system). The company also has software that manages CRM, HR and human capital and supply chains,  and provides financial performance management (FPM) and governance, risk and compliance (GRC) capabilities. These components of the software suites are adequate for the needs of many of the company’s target customers and are not intended as stand-alone applications.

It’s worthwhile to view Epicor’s situation in market context. During the first decade of the century there was a sharp decline in demand for ERP and other software categories as well as limited technology advances, and this led to a wave of consolidations. For example, Oracle bought PeopleSoft (which had acquired JD Edwards), Microsoft picked up Great Plains and Navision (both of which had just acquired rivals), and Infor was assembled from multiple layers of consolidated companies. These corporate restructurings made sense from both financial and operating perspectives in that they could achieve some economies in administration and R&D in a relatively stable business and technology environment. That era has ended. The challenge facing all vendors of legacy ERP systems is to significantly redesign their core applications to address evolving market requirements. These include a user experience that is more intuitive and productive and reducing the cost of implementing and operating the software. Epicor is positioned to address these challenges, but success will depend on its ability to accelerate its development efforts in enhancing the user experience and lowering the total cost of ownership of its software (whether on premises or in the cloud) while adding users to boost revenues.

vr_bti_br_technology_innovation_prioritiesExecutives at the user conference highlighted their development themes, which are consistent with our research on business technology innovation priorities. Epicor will concentrate development efforts on utilizing Microsoft’s infrastructure and the customer benefits that this makes possible. For example, the most recent release of ERP 10 was presented customers with fewer issues than the previous major release because it didn’t have to deal with the complexities that go with trying to support multiple IT environments. Speakers emphasized five key themes in product design going forward: choice, collaboration, responsiveness, simplicity and mobility. All of these are consistent with the broad market trends that have been under way for a few years. Addressing all of them is necessary for Epicor to achieve its strategic goals. Specifically, the company has been investing in making its applications more granular so that companies can have end-to-end process management as well as the flexibility to deploy only the pieces of the software suite that they need. Epicor is also intent on giving companies the choice to deploy its software on-premises or in the cloud in multitenant or single tenant form. I have written about the importance of this for new ERP deployments. Since finance and manufacturing – not just the front office – are now social entities and because social capabilities facilitate collaboration in managing processes, the company has been beefing up these features of its software. Executives also emphasized that its development strategy is to provide simplicity in deployment and the user experience (including ease of use, ease of upgrades and better performance) and to expand mobility options. Ease of upgrades is essential for the company to compete in the on-premises market and to support a hybrid cloud strategy. The company is planning to offer enhancements to its ERP 10 software every four months, so it’s critical that upgrading be simple or customers will fall behind and satisfaction will decline.

Epicor also has been evolving its reporting and financial performance management capabilities over the past five years; these are essential for an ERP vendor to offer. It has taken the individual budgeting, planning and reporting created for specific applications and built an FPM application that supports its applications and gives users of FRx (a once widely used but discontinued product from Microsoft) a replacement option. Sessions at the conference highlighted numerous small but essential enhancements that Epicor has made over the past two years to all of the applications that deepen functionality and enhance their usability.

At this point Epicor has a large installed base and a product line that is attractive to midsize companies and as a tier 2 package for larger companies. However, after a decade of technology drowsiness, business software markets are becoming more dynamic. ERP systems are about to undergo a considerable transformation, driven by the growing availability of technologies that can address the operational shortcomings of established systems. A demographic shift is taking place in the ranks of senior executives and managers – from the baby boom generation to those who grew up with computer technology – and this will drive demand for a new generation of ERP software. Soon, to be competitive these systems will have to deliver a better user experience, greater flexibility and agility as well as mobility and lower cost of ownership. Epicor is heading in this direction, but it will need to run hard just to sustain its market position.

The company is moving to rationalize its software offerings (while still supporting existing users), which is essential to be able to quickly evolve its offerings by providing flexible deployment options and facilitate ongoing enhancements to its products. It would benefit extending its partnerships to add product breadth. For example, its FPM capabilities are solid for some customers but especially for its larger ones it lacks some essential capabilities that we evaluate in our Value Index on this topic.

Epicor is no longer a public company, and that can be a good thing when management needs to make investments and take chances it might not dare when financials results must be published every quarter. This is especially true for the ERP category since, as a result of the complexity of the product, no single big breakthrough will change the market; a steady and protracted series of incremental advances will in aggregate determine which vendors succeed over the long term. Epicor has a solid foundation, but to achieve its strategic objective of remaining a major business software player, it will need to invest heavily and execute consistently and nimbly over the next several years.

Regards,

Robert Kugel – SVP Research

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