Friday, September 07, 2007

Its All In The Substitutes

Anshu responds to the grouse that ERP systems are:

1. Prohibitively expensive
2. Hard to install and implement
3. Even more expensive from a support and maintenance costs angle
4. Vendors do not pass the 'amortized' RnD costs to customers
5. Vendors do not pass the cost savings leveraged due to development and support from offshore locations in low cost labor markets to the customers
6. The costs for implementation have not gone down even after more than 100,000 implementations and past learnings are not leveraged to reduce newer costs (see in relation to 2 above)

Guys like Vinnie have been cribbing about the high costs for ERP systems since time immemorial. Seems even the Utopian promise of Saas vendors like (who offer a fixed, predictable monthly maintenance charge per user with no license costs) is able to quench their thirst to reduce the costs further. Anshu makes the point that if you feel the costs are high for an ERP and costs have been amortized, why dont you do one of the three - build one of your own, keep quiet and think why, or be a reseller to sell the best.

One way to look at this is what are the choices the customer has when she looks at an ERP (assuming the case of being a laggard oops.. a late adopter/Gartner type C and thus expects end of life (?) pricing and costs:
1. Do nothing
2. Build her own
3. Go for SaaS and have a fixed, predictable opex with little capex.
4. Go to the blood thirsty breed of today's vendors and live with the capex and opex.

Out of these, if we rule out 1, the only viable options are 2 and 3 which can classify as economic substitutes to 4. What will happen to SaaS is anybody's guess, so 3 is a do not know yet (comes with its own set of risks and bells and whistles). On 2, I have the following premise:

- It is much much harder to implement than 4 even if you rule out the costs
- The costs will in all probability be higher than what you end up incurring if you go with an ERP vendor.
- Its like reinventing the wheel for much of the already avaliable robust functionality like order processing, payroll, payables and receivables which makes it more bug prone and riskier, even for a type C profile.
- The IT major who implements it is now your new blood thirsty dracula - she has a open field to herself when it comes to costs, maintenance and fixes. Reminds me of the IBM Mainframe situation.

Does anyone have any other option? If not, why do you crib about the costs?


vinnie said...

Nitin, the reason I harp about ERP costs is there is finite IT budgets and the more you spend on utility IT, the less you have left for innvoation. IT budgets are flat and will continue to be. ERP is utility by most's back office, it is well defined etc etc.

How big would our industry be if Intel and Microsoft and Dell PCs today like they were in 1980 - and actually increased prices year on year. How big would it be if calling country to country was $ 2 a minute like it was when AT&T was a monopoly. Why have those costs declined and after 100K ERP proejcts we cannot see economies of scale and repetition? In the ERP sector, more experience means more premium.

Without assured quality. If ERP was a construction company we would all be 30 to 75% over budget, the proejct would be late and we would need to keep paying the contractor for years for continuous repairs.

The attitdue you take is if you are getting mugged and cannot do anything about it, might as well enjoy it. If a buyer wants to say that that's fine. As a vendor, I expect more from you and Anshu at Oracle and other ERP vendors and consutlants. I expect you to be like Intel and Skype and do better with each ERP project. If you don't our industry as a whole is stuck with spending way too much on utility and not enough on innovation.

This is why buisness execs question payback from IT and ask does IT matter.

Anshu Sharma said...

There is always room and scope for better products and solutions. It would be naive to suggest and nor have I that we have reached any kind of optima.


IMPORTANT DISCLAIMER: I also would like to point out that all views expressed here and on my blog are my personal opinions and do not reflect views of my employer or anyone else.

Nitin said...

Anshe - agree with you.
Vinnie - I 100% agree that the ERP vendors need to be innovative and competitive. Also the "pie" for ERP expenses is not fully eaten by the vendor - why not blame consultants and implementors who squeeze the customer and deprive him of innovation $s? We can blame the vendor for not being innovative, but have the rates for consulting assignments gone down with time and experience? Is a consultant in this field billing a lower rate after 20 implementations? I am sure you have the numbers. This problem is not restricted to ERP area.

There are some things in your comments that I do not agree with.

1. If Microsoft is innovative and creative, I absolve the ERP vendors of all crime.
2. AT&T was a monopoly and so an unfair comparison.
3. Dell has been an example where the hegemony of the channel was broken by the vendor. I wonder if the same can happen in the ERP field.

vinnie said...

Nitin, if you read my blog I am just as tough on Accenture and Infosys. But 95% margins on software maintenance, 45% on software SG&A, your own consultants even more pricey vendors like Oracle and SAP can do tons to improve their own performance. And become aggerssive with your service partner ecosystem. They are your "partners" but your customer is your true partner...