The Future of ERP: Page 2

Posted November 15, 2006

James Maguire

James Maguire

(Page 2 of 2)

The SOA Factor

Looking ahead, the need to implement Service Oriented Architecture (SOA) will continue to grow as a factor in ERP purchase decisions.

Notes Hamerman: “The way this market is changing is that, it used to be about ‘What is the product capability you have today?’ and now it’s more about ‘What is the product capability that you’re promising to have in a few years?’

“The big shift is about so much more creative marketing around product strategies, versus buying what’s currently available.” In other words, vendors are making their pitch with a clear subtext: “If you want to stay current with the rush toward SOA, you need to be on our platform.”

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Shifting Revenue Models

Significant shifts are taking place in how ERP vendors generate revenues. Echoing changes taking place throughout the software industry, the transition is toward recurring and variable revenue models – with maintenance charges driving industry growth.

Indeed, “Oracle gets about 50% of its revenues from maintenance. It’s a recurring revenue stream,” Hamerman says. Not only is this highly important to them, but “it’s driven some of their acquisitions,” he says.

The other format for recurring revenue, software as a service, SaaS, isn’t working for the big players. “We don’t see SAP or Oracle getting much revenue that way, in terms of the hosted subscription-based applications, but you see a number of players, notably (in some other areas), who get substantial revenue from the subscription model.”

Variable revenue schemes, however, are becoming the sweet spot for big ERP vendors. Faced with scarce possibilities for new large licensing deals, “vendors have adjusted their pricing models so that they can get incremental license revenue though higher levels of usage.”

The vendors' use of variable revenue contracts is pretty clever, Hamerman says. These contracts call for additional payment based on the metrics of their customers' usage. If the customer uses the platform more, the customer pays more.

"So they’re able to generate some license revenues almost automatically."

And pricing can get tricky. “We’re starting to see the pricing become more complex, with some of these variable factors built in,” Hamerman says.

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