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It’s a just about a cliché at this stage to note that cloud computing has been one of the big technology disruptors in recent years. However, according to Gartner, the best — or worst, depending on your perspective — has yet to come. It seems Enterprise Resource Planning (ERP) applications are doomed to legacy status or even the trash bin.

ERP Legacy Systems

According to a recently published report. Predicts 2014: The Rise of the Postmodern ERP and Enterprise Applications World (fee charged), monolithic ERP implementations will start to disappear by 2016, especially as alternatives mature. Gartner describes a legacy system as any system that is not sufficiently flexible to meet changing business needs. This in itself is an interesting definition because it could be applied to many other applications that have failed to evolve in an agile and flexible way to respond to market pressures.

However, in this report Garter focuses on ERP applications only. It reports that as ERP alternatives develop, CIOs and applications leaders will need to act before the reality of ERP in the cloud catches up with them.

"The need for agility and responsiveness has led highly customized ERP implementations to an impasse, creating a subset of legacy ERP installations that must be dealt with constructively," said Andy Kyte, Gartner vice president and co-author of the report.

He also said those enterprises that thought they were getting ahead of the pack in the early days are facing challenges, explaining:

Early ERP adopters, particularly large enterprises in energy, manufacturing and distribution industries, are paying the penalty of a decade or more of excessive customization. Businesses looking to improve administration today can take advantage of lower costs, better functional fit and process flexibility offered by blending cloud applications with on-premises applications in what we now refer to as 'postmodern ERP."

Historic Problems

According to the report the problems that are impacting on ERP are historic. In fact, they go back nearly 20 years. From the mid-1990s, enterprises invested in ERP solutions because they addressed problems that had been inherited from the 1980s, when systems were not reliable enough and did not integrate with newer applications.

To deal with these problems, enterprises invested in ERP solutions at the same time they were also re-inventing in their business processes. There were three groups benefitted from the development and implementation of ERP systems:

  1. Enterprises, because those that implemented these systems were able to implement changes in processes, too
  2. Independent Software Vendors (ISVs) who made huge amounts of money before disappearing
  3. Major consultancies that managed the business processes and implemented the solutions, securing large continuous contracts in the process

However, many of these service provides went beyond implementations. They provided extensive customizations on top of the work that was outlined on the licenses, with many setting up software factories with thousands of programmers to provide those customizations.

As a result, Gartner noted, enterprises have spent 10 times more on customizations than they did on the original product in the first place, on top of the huge service fees to keep those customized applications in order.

The net result of 15 years of continuous customization, the report added, are ERP implementations that are now "arthritic," incredibly slow and expensive to change.

They are also expensive to operate and error-prone.

ERP Systems Today

The wheel is turning again and the ‘postmodern’ ERP systems that Kyte is talking about are likely to change the landscape again.

The ERP suites are being “deconstructed” into a loosely federated group of modules in an ERP environment with many of those modules being accessed as cloud services.

There is also the economic considerations that rise of cloud computing throws into play, particularly in light of the costs around traditional ERP systems.

Business stakeholders still want these same qualities, but now they assume that these qualities will be present in any software solution, and their requirements have switched to the twin concerns of lowering IT costs and seeking increased flexibility. A system that is not sufficiently flexible to meet changing business demands is an anchor, not a sail, holding the business back, not driving it forward."

On top of this, business executive are also looking at the flexibility of the cloud and relegating inflexible ERP to the status of legacy systems.

The Future of ERP

This does not mean that they will disappear overnight, but it does mean that the will disappear fairly quickly if they do not adapt to the way enterprises are using technology now. If they don’t, the combination of specialized cloud-based solutions and advanced business process outsourcing will provide competitive alternatives for enterprises.

This means that by 2018, Gartner estimates that at least 30% of ERP systems will be in the cloud, while legacy ERP will be re-architectured to focus on systems of record functionalities that require little customization while cloud-based IT will focus on the enterprise business.

Longer term, over the next 10 years and more, we envision a scenario where more of the market 'flips' to the cloud. Instead of having on-premises core solutions that are complemented by innovation or differentiating processes being supported in the cloud, some organizations will move all their ERP functionality to the cloud. These won't be single vendor mega-suites but instead will be loosely coupled suites of cloud functionality,” Nigel Rayner, co-author of the report said.

He adds that service-centric industries, such as professional services, business services and digital media, have not been well-served by integrated ERP suites, which have tended to focus on product and asset-centric industries.

Many have already moved key elements of application functionality to the cloud and there will be a greater likelihood that service-centric companies will flip the majority of their ERP functionality to the cloud within the next five years, earlier than the product-centric companies.

By 2017, 70 percent of organizations adopting hybrid ERP will fail to improve cost-benefit outcomes unless their cloud applications provide differentiating functionality.

However the report also warns that while it expects many enterprises to move to hybrid approaches to ERP over the next five years, this does not automatically mean that it will cut costs.
The adoption of cloud services for some components of functionality does not guarantee a reduction in the total cost of ownership. Like all cloud, or hybrid deployments,

The adoption of cloud services for some components of functionality does not guarantee a reduction in the total cost of ownership. Gartner enterprises need to spend time on fully understanding the connecting technology and what overall enterprise needs are before making the move.

Enterprises also need to look at their business processes, assess their human resources capabilities and look at the existing tools before deciding one way or another. At the end of the day the recommendations are common sense and could apply to any set of applications that enterprise managers are thinking of moving to the cloud.


Title image by worac_sp (Shutterstock)