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Cloud a Key Part of 'Postmodern ERP'

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Posted May 26, 2014 By Tim Wilson     Feedback

For big vendors like Oracle and SAP, cloud ERP means a change in culture. But what about their customers?

ERP is changing. Large ERP vendors like Oracle and SAP are now active participants in software-as-a-service (SaaS) and cloud ERP platforms.

True, they were late to the party, mostly because they didn't know what to do with technologies and business models that did not revolve around on-premise software. Now, however, few can deny that legacy ERP has to face the cloud.

"The mistake that some people made was the belief that these large, monolithic, all-encompassing on-premise systems represented the end of the line for ERP," said Andy Kyte, a vice president and Gartner fellow in London, England. "The thought was that there was no need to do anything different, because ERP could do everything. But it is pretty clear now that was not true."

Cloud ERP Offerings

The big vendors know it. Oracle recently announced its Oracle Customer 2 Cloud program, bragging that over 29 million people are using Oracle Cloud applications. Microsoft, also slow to embrace the cloud, is aggressively engaging its partner community for hosting its cloud-based SaaS platform for Microsoft Dynamics.

And SAP, the market ERP leader according to Gartner with $6.1 billion in software sales in 2013, argues that it has the most comprehensive cloud computing portfolio on the market, with 35 million business users. That is set to grow further, particularly given the recent news that SAP's partnership with Microsoft is stronger than ever, with SAP's software soon to be certified for deployment on the Azure cloud infrastructure service.

"The big vendors have a very strong forward revenue stream from the huge amount of embedded spend," Kyte said. "They will have a solid future on just that; but the broader question is how the IT landscape will change over time, particularly given that the cloud represents such a diverse portfolio of services."

The big ERP vendors' investment dollars make it clear they are betting on the cloud, and that they want their customers to follow. The Oracle Customer 2 Cloud program, for example, is specifically geared to help more Oracle customers adopt its cloud applications by allowing Oracle HCM and CRM customers to convert their on-premise support spend to Oracle Cloud Applications. But the shift isn't only technological; it's cultural, too.

Cultural Shift

If the big vendors agree that the technology is moving to the cloud, can the same be said for their internal cultures? Despite the very real initiatives in support of the cloud, large ERP vendors are still challenged to address remuneration models for the sale of cloud-based solutions, and a workforce - much of it at the executive and managerial level - that grew up with on-premise ERP.

"The fundamental challenge for the large incumbent providers is to change their internal culture - to really believe that the cloud is the future," Kyte  said. "These are organizations with a very large number of senior executive and middle managers who have developed 25-year careers based on successful on-premise sales and deployment; for many of them this is a clock that will not stop ticking until they retire."

Despite this vendor vacillation, Gartner sees at least 30 percent of service-centric companies moving the majority of their ERP applications to the cloud by 2018. It then makes sense to have a program like Oracle's which addresses both the technical and financial challenges organizations face when transitioning from on-premise software.

Service Integration and Security

"The challenge is for CIOs to develop the skills in terms of service integration," said Kyte. "I stress the word service; they will need to take advantage of low-cost components, and make things work in environments with customized code."

A big part of the cultural pushback, and one that on-premise folks like to tout, is with regard to security. Though the cloud can make a strong case here - and the cloud's security story is only getting better - privacy concerns can nonetheless arise in the context of data residency and regulatory issues. Vendors that take this issue by the horns can build the viability of their cloud offerings over the long haul.

"Look at Microsoft's applications in Europe," Kyte said. "Microsoft can now say that if you use their cloud-based application suite in Europe, the data will be in Dublin or Amsterdam. It will not leave the European Union. Service providers know that this is a competitive advantage."

Taking Partners to the Cloud

For the big ERP vendors, changes in partner relationships in the context of new cloud-based offerings have been a huge challenge. At the center of this journey is IBM, which has active partnerships and integration practices with Microsoft Dynamics, SAP and Oracle, and which is navigating the new world of mixed on-premise and cloud-based solutions.

"The market for hybrid and cloud-centric implementations is rapidly converging," said Armen Najarian, program director of SaaS marketing at IBM. "Cloud-centric strategies are on pace to eclipse hybrid application architectures sometime after 2016. From our point of view, we observe various flavors of hybrid architectures for broader cloud computing adoption and more specifically for SaaS business applications."

What this means for vendors is that they may end up with more dynamic customer relationships, particularly given that smaller vendors are delivering niche applications off the cloud. It is not that the megasuite is dead but that the application environment is far from static, and ERP vendors cannot expect to own entire relationships.

"In the past, an ERP vendor's best sales rep could sell a large product portfolio and make big commissions," said Carolyn April, director of industry research for CompTIA, a vendor-neutral IT trade association. "That is not necessarily how cloud is going to be sold. The channel is changing very rapidly. It used to be very linear; now it can look different depending on the customer."

Cloud ERP TCO

According to Gartner, most organizations will shift from monolithic ERP to a hybrid approach within five years, but this will not necessarily result in a reduction in the total cost of ownership (TCO). In fact, there is a possibility that TCO could increase. The risk is that customers will be lured by low per-user costs and embrace tactical, short-term fixes. For Najarian from IBM, there are two challenges that enterprise will need to manage.

"First, companies will need to reconcile the strategic and philosophical difference that a blended architecture offers. Hybrid provides a path to flexibility and code customization, while SaaS offerings do not," Najarian said. "And second, on a more practical level, companies will need to manage more complex data and workflow integrations bridging cloud and on-prem architectures."

Najarian said this bridging of two worlds will magnify perceived, but not essential, functional gaps within a SaaS application. Here there may be some benefits of following the cloud migration path of a single large vendor. In the case of Oracle, for example, Oracle Customer 2 Cloud is open to Oracle CRM and HCM customers running Oracle's Siebel, E-Business Suite, PeopleSoft and JD Edwards EnterpriseOne solutions on-premise.

But there will also certainly be a role for services companies to patch things together.

"At IBM we are making investments in technologies that allow organizations to compose together loosely coupled microservices," said Michael Curry, vice president of WebSphere product management at IBM Software Group. "Our BlueMix platform is a good example of this in that it allows services and APIs to be composed together quickly and easily, and it allows entirely new applications to be created around them with minimal coding effort."

Given that systems of record may stay on premise for years to come, for many large enterprises the hybrid cloud will be the new normal. They will be competing against smaller, growing companies that are entirely on the cloud. The good news is that the big vendors are on side, and that hundreds of billions of dollars are being invested in what Gartner calls "postmodern ERP." It promises improved functionality and lower costs. It also promises be a long journey.

A graduate of McGill University, Timothy Wilson joined IDC Canada in Toronto as a research analyst in 1997. In 2000, he began T Wilson Associates and continued to consult for research companies, as well as working directly with large vendors such as Microsoft and SAP. Throughout his career Timothy has contributed to the IT, trade and mainstream press. He has lived and worked in Latin America and is proficient in Spanish. He has received a first place CBC Literary Award and a Gold National Magazine Award for his non-fiction writing.

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