As the gloom of the recession lifts, some larger IT shops are becoming more optimistic about the future and are...
slowly abandoning their cost-cutting strategies to focus more on growth.
This new optimism is hardly a harbinger of a return to the lavish spending on enterprise software and hardware products that characterized the 1990s. Most companies will remain generally cost conscious when it comes to many of their purchasing decisions involving existing assets. This year, however, they are more likely to spend money on newer, more flexible technologies that can give them an edge over more fiscally conservative competitors.
“In 2010, we are seeing many companies putting an increasing emphasis on growth," said Vivek Bapat, vice president of SAP’s Manufacturing Industries Solutions. "There is this notion that a fundamentally new business model is needed for companies to compete in this new age. This time, however, they will do it in an incremental way. The big bang days of large-scale ERP are over.”
Analysts generally agree that corporate users are emerging from their cost-cutting cocoons, looking to invest more aggressively in new software that could remove the shackles imposed by their legacy products.
“I think people are looking more at growth strategies now, but they realize a lot of what is holding them back are the restrictions imposed by the technologies they have now," said Ray Wang, a partner with the Altimeter Group. "Some – maybe a lot – of their older technologies need to be replaced.”
What's making it easier for larger businesses to spend a bit more money are a number of enterprise-class products from top-tier players, modularly designed, that allow corporate users to slowly but more smoothly integrate new products with the old.
These modular software products, including SAP’s Business Suite 7 and Oracle’s upcoming Fusion suite of applications, not only allow corporations to meter out investments over a longer period of time, they also afford users more time to make smarter, tactical changes to their strategy as they implement new technologies.
“The big change going on is that customers no longer deploy things all at once. Now, they want to deploy them in a more modular way for shorter-term projects that are self funded,” Bapat said.
As one example, Bapat offered up SAP’s global agreement with 3M, signed earlier this month. The agreement will see 3M standardizing on SAP’s Business Suite 7, rolling out the product worldwide slowly over the next few years.
3M will be using the product to help tie together its business processes as it phases out legacy software from a number of suppliers, including Oracle. It will also use the product to tie together the business processes of an expanding number of companies it has acquired over the past several years, according to the company.
Other IT shops are also welcoming the arrival of more modular enterprise software not just for its flexibility in accommodating rapidly changing IT operations, but for reasons of pure competition.
“A couple of decades ago, IT shops would actually increase spending on new technology during down economic times because it gave them real technical advantages over competitors for when the good times came back," said Eugene Lee, a systems administrator with a large bank in Charlotte, N.C. "I think people have forgotten that lesson this past decade.”
Even though the recession’s iron grip is loosening its hold on IT budgets, along with more flexible software becoming available, analysts believe that corporate users will proceed cautiously with every added dollar they spend. In most cases, they will focus added investments on ways to help them approach business in more innovative ways.
“In this phase after the recession, people are now asking, ‘What can we do differently? What things do we need to replace to make us more competitive? Do I need to put in the same system in all of my subsidiaries,’” Wang said.
One strategic change larger companies are considering in hopes of being more competitive is their approach to ERP systems. Many are now leaning toward replacing their single-tier ERP system in favor of a two-tier system, with the second tier being a much less expensive platform that is flexible in working with a range of higher-end ERP systems.
A recent report by the Altimeter Group contends that market forces -- combined with the adoption of new disruptive technologies, the slowing pace of innovation from top-tier vendors, and climbing maintenance fees -- have made single-instance deployments of ERP systems increasingly impractical.
“The two-tier strategy is pretty useful in hub-and-spoke models. If you have a core system such as Oracle or SAP running all your finances at the corporate level, but if you have subsidiaries in Brazil and Chile, do they really need to run a full-blown suite there? Probably not,” Wang said. “It is getting harder and harder to justify single instances of ERP.”
Wang added that factors including improved Web services and SaaS deployments are significantly improving the success rates of two-tier ERP strategies.