I’ve been wondering a lot lately to what extent service-orientation and capability unbundling will affect ERP vendors. Whilst idly musing on this subject I came across Shai Agassi’s post on the same subject, following on from an article at Infoworld. As a result I thought I’d put down some of the questions that I’ve been asking myself about this subject.
- ERP – by definition – codifies commoditised capabilities as a way of supporting the implementation of standard, tightly coupled business functions within many consuming organisations. Essentially they allow enterprises to standardise the processes that their people use in executing non-differentiating capabilities. As I’ve discussed previously, the main reason that most organisations choose to execute these non-differentiating capabilities is to minimise the transaction costs of collaboration. If new technologies and methods enable us to collaborate with other partners and make specialisation more attractive, however, then we’re likely to see commoditised processes consolidated into specialised providers who rely on economies of scale in their execution. Essentially the mode of delivering commoditised practices moves away from the dissemination of best practice to many organisations in the form of applications to underpin business capabilities and into a few large scale service providers who execute the whole capability (software and services) on your behalf;
- Another issue that I’ve been thinking about concerns the tight integration of capabilities within ERP packages. As Richard Veryard points out, ERP has taken a set of uncontrolled processes and tightly coupled them; such command-and-control models of management are increasingly unsustainable in the face of increasing levels of change, however. Organisations are now looking for increased adaptability, and this will require systematically defined business capabilities that can be ‘pulled’ into dynamic value-chains in place of static processes within a monolithic software system. Such drivers at best lead to a disaggregation of the ERP system into modular software services that support the execution of such capabilities but at this point you again begin to wonder why – if I have defined and metricised these capabilities (and therefore understand the results that I need) – I would purchase and run IT to support my people in executing these capabilities internally rather than go to a specialised provider to do it all for me?
- The next question that occurs to me is if enterprises no longer buy systems that allow them to implement processes they want to unbundle then who will replace them as buyers of ERP? I wonder whether the resulting consolidated service providers are likely to want to offer all of the capabilities codified within such systems either? Consolidated service providers are more likely to specialise on just a subset of the capabilities traditionally offered within big applications in order to a) focus and b) support inclusion within the adaptable value chains that their partners require. Irrespective of service scope, is it likely that providers will choose to have ‘standard’ implementations of practices given that they have chosen to specialise – and potentially differentiate – in one of the capabilities previously provided to enterprises through such standard applications? Currently enterprises want standard outputs but they also want to do it in a well understood, standard way because they don’t care about being better than others in these commoditised capabilities; if my whole purpose is to deliver these capabilities, however, then I may well be more interested in how I can deliver the standard outputs in a way that differentiates me from the competition;
- Even if providers do purchase disaggregated packages to underpin their provision of commodity services, such packages are still consolidated into far fewer, higher scale providers. In this instance is the software still viable given the drastically reduced market? Do service providers in this context not just absorb the software needed to deliver services, offering the results of using software to deliver real value to customers rather than just the tools needed to get results for yourself?
Contrary to all of this, however, Shai contends that ERP systems are more necessary than ever for a number of reasons (I’m paraphrasing):
- Semantic consistency;
- Consistent ‘APIs’;
- Compliance; and
- External partnering.
In many ways I think that these issues tend more towards unbundling than they do towards consolidation within the organisation:
- In my view consistency and the ability to build propositions on top of known ‘APIs’ will come from rigorous business architecture that systematically designs and metricises the capabilities needed by the organisation rather than from software packages. Such organisational practices will need to become common in any case as enterprises seek to understand where value is created and destroyed and to make themselves more adaptable. Mapping the differences in semantics between the architecture of the organisation and the services of any provider would not then appear to be an insurmountable task;
- In terms of compliance there are many laws and regulations being passed on a regular basis that impact particular capabilities within the business and even particular geographies (e.g. employment laws). Where commodity processes remain within the organisation the onus is on the people delivering the capabilities to ensure that they are compliant (which software alone won’t deliver). Where the capability has been outsourced to a specialised provider, however, the onus is on that organisation to remain current. Additionally – given their focus and expertise – they are far more likely to remain so than non-experts working within a non-core capability internal to an enterprise. As a result it may be that replacing your ERP supported internal capabilities is a more robust way of remaining compliant to the myriad of regulations within which an organisation operates; and
- In terms of the last point, Shai more specifically contends that “…the coming wave of implementations will be driven by the need for consolidation, networked value chains and increased speed of process change”. I completely agree with this but feel that consolidation will be delivered from a business perspective (i.e. increasing specialisation) rather than from a software perspective (i.e. more ERP) and that the networked value chains will be complementary partners orchestrated using technologies that enable rapid process change. I feel that these things are orthogonal to the concept of an integrated ERP, however, with horizontal process based technologies pulling together a network of specialised providers who will have taken over many of the tasks that I would previously have needed an ERP to control.
The one area that I did agree with both Shai and Richard was around the fact that none of this unbundling and specialisation can take place just on the basis of granular web services that have been thrown together; we need to get to a level where we can express the capabilities of an organisation as a set of services that represent access to significant business functionality. Only service providers who have been through this exercise will be mature and stable enough for us to place our trust in them. This is not an easy endeavour but I feel that the drivers towards specialisation will compel us to address these issues and that the resulting ability to procure commoditised services from consolidated providers will undermine the value of ERP software.