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IT evolution: Why ERP systems face extinction

With any luck at all, there isn't a giant asteroid headed our way soon, but in the world of information technology, an extinction event may be on the horizon. Enterprise resource planning (ERP) systems -- those monolithic software packages that evolved to tame companywide data -- may be heading the way of trilobites and dinosaurs. Once in place, ERP systems are rigid, says Julie Smith David, an associate professor of information systems at the W. P. Carey School of Business -- not the adaptive trait that leads to success in a dynamic environment.

2007-02-28

With any luck at all, there isn't a giant asteroid headed our way soon, but in the world of information technology, an extinction event may be on the horizon. Enterprise resource planning (ERP) systems -- those monolithic software packages that evolved to tame companywide data -- may be heading the way of trilobites and dinosaurs. Like today's polar bears and spotted owls, ERP systems now live in an environment changing so quickly they may not be able to adapt. What's more, these systems are battling inherent limitations that could doom the best efforts to revive them. The Stone Age Several factors affect the tentative dominance of ERP systems. One is the sheer size and complexity of the systems. Anyone who has ever watched an ERP implementation at a big company knows that such systems demand epic -- and pricey -- implementation schedules. "An ERP comes with tons of capabilities, and the developers determine which functionalities to turn on or off," explains Julie Smith David, an associate professor of information systems at the W. P. Carey School of Business. This makes ERP systems quite flexible when you're first installing a system, carefully customizing the beast to fit your particular business. The problem is that once you install an ERP, it becomes quite rigid. "It's like concrete," David says. "Pour it out, and you can form it to any shape you want. Once it settles, getting it into a different shape is almost impossible." The reason for this, she explains, is the ubiquitous nature of ERP systems. "Data moves between processes, and processes move between departments. Once you get everybody running on the system, you don't know what ripple a change could create throughout the organization." Not surprisingly, ERP implementations take a lot of time and effort. Brian Sommer has been in the IT business for decades, including 10 years as worldwide director for software intelligence at Accenture, formerly Anderson Consulting. More recently, he founded TechVentive, a firm that provides strategy guidance to major technology companies. Harkening back to simpler days, Sommer says ERP implementations remind him of those old Heathkit build-it-yourself TVs and stereos you could buy from the ads at the back of Popular Mechanics magazine. "They'd send you all the parts, and you'd spend an eternity soldering all that stuff together, hoping like you-know-what that it was going to work when it was done." Even if it does work, here's something you won't get with an ERP: system agility. "Companies need to respond to changing marketplace trends," David says. They can't necessarily do that easily after spending a couple years and $20 million dollars getting an ERP installed, she adds. Mark Nittler, who started his career in the software business in 1984, knows a lot about such implementations. At PeopleSoft, he was responsible for guiding strategy on the company's financial product, and he is now in a similar role as a vice president at Workday, a new software developer. Nittler sums up key ERP problems by referencing the "four too's" one company tried to combat with its advertising last fall. The ads were aimed at the perception that their company's products were "too big, too slow, too complex and too expensive," Nittler says. Diminishing returns There is another significant problem ERP technology faces: The mammoth price tag of an ERP upgrade isn't delivering as much bang for the buck as it used to. The W. P. Carey School's David explains the jump in functionality that happens when a new application debuts in the IT world. "If you drew a graph with 'sophistication' on the vertical axis and 'time' on the horizontal axis, when you introduce a new application, you jump up the sophistication curve steeply, because you're going from nothing to a first generation product. With the second generation, you're still moving up the sophistication curve, but not as steeply." Eventually, however, that sophistication curve flattens out. That can be a problem for ERP providers trying to talk customers into re-automating something that has already been automated 11 times before -- and, it's still really expensive, according to David. There's a shrinking group of stars in the ERP ballgame, also. As David points out: "There's been a ton of market consolidation, and so now there are two big players: Oracle and SAP." Origin of the species On top of all this, the products themselves have serious limitations. "The products on the market today mostly originate from companies that started building them 20 years ago or more," says TechVentive's Sommer. He remembers the early days of computing, as well as the somewhat later days from which ERP systems eventually emerged and hit the ground, perhaps not running, but at least walking on wobbly legs. "Let me tell you about the computers I worked on early in my career," he says. "The first one was an IBM System/34. It had 64 kilobytes of memory and a 64-megabyte hard drive." Since the operating system ran on 16K of memory, users had to share the 48K of memory that remained. Sommer recalls several concurrent users sharing that e-mail-sized dollop of computing capability. Things improved quickly, however. Sommer's next computer had four megabytes of RAM. The third was big enough to accommodate a database of up to eight gigabytes. Still, such systems seem laughable when, as he points out, you can buy a 500-gigabyte hard drive for about $190. "Not that many years ago, it would take eight IBM 3380 disk drives to hold a gig of storage, and that would occupy a space about the size of two normal bedrooms in a house." he notes. "Now I have something that is smaller than a book, and it holds 500 times more data." Between the early days of computing and today's computing environment – in what Sommer calls the "era of constraints" – the ERP got its start. Consequently, software developers chose to automate only the most computation-intensive (i.e., labor-intensive) activities. "What you got was automated bookkeeping systems, payroll processing and, eventually, manufacturing systems that would optimize and schedule production runs," Sommer says. According to him, ERP systems are still held back by their historical roots. Workday's Nittler agrees. "There are two aspects where I think the ERP model is bankrupt," he says. "One is technical/architectural, and the other is functional." On the technical end, Nittler points out that a lot has happened in the 25 years or so that the ERP has been around. The Internet changed the way we do business. E-commerce came along. So did outsourcing. On the accounting or business front, reporting and compliance became issues, "with Sarbanes-Oxley as the poster child" for governance, he says. Unnatural selection Both Nittler and Sommer will tell you that ERP developers met changes in business practices and computer capabilities with add-on functionality. Sommer calls it "slapping a little more lipstick on the pig." Nittler invites you to think about car stereos. "Say you have a 1990 car with a tape deck, and someone gives you a CD player. You can make it work with a cassette adapter, and you're good to go." The same would go for an iPod. That, too, can work with an adapter. Add in your cell phone, your GPS, your XM radio and, yes, every one of them will work with the appropriate adapters. "But there is still only one plug," Nittler reminds us, and, "You can't have any passengers because all of this stuff fills up the passenger seat." Sommer has a car analogy for an ERP system's bolted-on capabilities, too. "It would be like you took an old AMC Gremlin or Pacer -- pick your ugly car -- and bolted on a jet engine, then duct-taped on some monster tires. You don't end up with something that was originally designed for what you're asking it to do today. You end up with a monstrosity that's inelegant, inefficient and ill-suited for the job at hand." All three experts -- David, Sommer and Nittler -- point to on-demand platforms or software-as-a-service solutions as a way around the ponderous architecture of ERP systems today. "The smartest buyers of technology in the marketplace are abandoning the traditional ERP route that has high up-front costs and high licensing fees," Sommer says. "They're voting with their checkbooks and moving to business-process outsourcing environments and hosted solutions. Buyers are moving toward a service provider, not a software provider. They don't need another stack of shiny CDs that comes with a multi-million dollar implementation bill." "ERP is at a breaking point," David concludes. "For the first time in a long time, it's vulnerable to other options." As ERP moves toward extinction, some innovators are reaching into the past and borrowing from another 25-year-old animal, an analysis methodology called REA, which stands for resources, events and agents. Offering a means of breaking apart and analyzing business processes, REA may work well with software-as-a-service applications and service-oriented architecture. This emerging application will come under review in the next edition of Knowledge at W. P. Carey.   Bottom Line

• ERP system -- the massive software packages that manage companywide data and processing -- face serious problems that may render them hopelessly outdated.
• One problem: The complexity of ERP technology adds time and cost to implementations, while it all but eliminates the agility companies are calling for today.
• Despite high costs, ERP systems are delivering diminishing returns for a company's investment dollars because they mostly re-automate processes that have already been automated many times before.
• At the same time, ERP systems are weighted down by all the bolted-on functionality that developers have strapped onto these software packages to deal with changing workplace realities such as the rise of the Internet and e-commerce, as well as governance issues.
• Many companies today are abandoning traditional ERP systems for software-as-a-service and hosted solutions.

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