Packaged ERP Software and its Customization

The term enterprise resource planning software, or ERP software, describes the enterprise-wide applications commonly deployed by leading manufacturers and other large companies in a widening array of markets. The most common ERP software "packages" come from companies such as SAP, Peoplesoft, Oracle, and Baan. Unlike the word processor or spreadsheet software package you buy at the local computer store, ERP software packages do require customization during the design and deployment process that can last from six to eighteen months or more. Significant amounts of software development may be required during this process. In addition, your lead software architects will require not only detailed knowledge of the customization being done, but familiarity with the ERP package itself. The use of ERP software packages, as you will see, presents both significant challenges as well as opportunities for a company's software development organization.

In the past, most companies developed their own enterprise-wide applications. While "packaged" software applications have always existed, they often did not have enough functionality when compared to custom-developed code. In the 1970s and 1980s, most large companies owned one or more mainframes and had a resident mainframe application development staff. Many companies did purchase basic financial software packages for their mainframes, and large manufacturing companies sometimes used mainframe-based manufacturing resource planning, or MRP systems (the precursor to today's ERP software packages). Still, the limited, by today's standards, functionality of these systems meant large in-house application development staffs needed to be maintained .

In the 1990s several trends led to the widespread use of "prepackaged" application software for general ledger, order entry, billing systems, accounts payable, accounts receivable, manufacturing, marketing, sales force automation, human relations, and other business functions. First, many companies replaced mainframes with client-server systems, or at least deployed PCs to a much wider percentage of their employees . This not only placed a much higher demand on the amount of business software needed but it also introduced a much higher degree of heterogeneity to the average computing environment. At about the same time, business process re-engineering, or BPR, was nearing its heyday as the cure for everything from excessive middle-management bloat to quality issues. At the same time, advances in software development made it easier for larger ERP suites to provide a greater degree of the functionality needed across a wider range of industries. As a result, most Fortune 500 corporations have now switched from custom development of ERP solutions to acquiring and customizing packaged ERP software applications.

Most ERP initiatives today are driven by three types of business objectives:

Gaining greater efficiency at the heart of the enterprise
Improving integration of functions across the enterprise
Extending integration outside the organization, i.e. through improved supply chain management

This has driven the growth of the ERP market from $5.2 billion in 1996 to $10.0 billion in 1998 and onward to an estimated $19.0 billion in 2001, according to research by AMR and BT Alex Brown. The yearly growth figures are shown in Table 4-1.

Table4-1. Current and Projected ERP Market Growth

Year	Market Size ($billion)
1996	5.2
1997	7.2
1998	10
1999	13
2000	15.6
2001	19.0

The continued demand for ERP software is being driven by six key factors.

The continued move to distributed computing.

All of the major ERP players have adopted some type of multi- tier distributed computing model for their architecture. This makes these solutions ideal candidates for corporations trying to replace their older, mainframe based systems.
Industry specific solutions.

All of the major ERP players tailor their content and capabilities for specific vertical markets. This is expanding the market for ERP vendors beyond their initial target of large manufacturing companies. As a result, new growth opportunities are being found in many service industries. An excellent example of such growth is in the utility industry, where new deregulation mandates have companies struggling to revamp their infrastructure to become newly competitive.
The middle market opportunity.

According to Forrester Research, over half of the ERP license revenues will come from the small to middle market by the year 2000. This market is growing at nearly twice the rate, 37 percent versus 18 percent, as large companies. The move of packaged ERP solutions to small and middle sized companies is aided by two additional trends. First, the base of software architects and engineers with ERP package experience continues to grow. Secondly, as vendor offerings become more robust in functionality, less customization is required.
Expanding geographic markets.

Once again, according to Forrester Research, the North American ERP market share will shrink from 60 percent as recently as 1996 to 40 percent by the year 2000. ERP vendors that provide the best support for simultaneous use of multiple languages and currencies will benefit most as multinational corporations expand their ERP usage.
The Year 2000 (Y2K) and European Monetary Union (EMU) imperatives.

Many corporations adopted ERP systems as a means of solving the Y2K compliance issues of older mainframe MRP systems or custom developed code. A similar imperative affected any corporation doing business in countries within the European Monetary Union, starting in 1999.
The buy versus build preference.

Most CIOs today lean toward packaged applications as opposed to custom programming initiatives. Even in cases where an ERP package must be highly customized, the software development required is significantly less than would be required to implement a custom solution. Given the scarcity of good software development talent, it is no wonder most CIOs would rather save their development resources for other projects.

In the future, ERP solutions are likely to become less monolithic and more specialized and componentized. More and more, CIOs expect any business function to be delivered across an n-tier architecture to a standard web browser platform. Just like today's ERP solutions are distinct software applications from the underlying DBMSs, CIOs in the future may pick best of breed ERP applications from multiple vendors without worrying about the added integration burden this would incur today.