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How ERP Became an Endangered Species

Many legacy systems have fallen to the wayside due to market evolution, but none faster than enterprise resource planning (ERP). Here’s the new solution that’s eradicating the dinosaurs.

Twenty-first-century product companies need more than enterprise resource planning (ERP) to meet customer expectations.

As the wheels of innovation continue to turn at a fast clip, the value we derive from the most critical software categories is quickly shifting along with it. 

Anybody making a physical product—or even those making more software-based products today—primarily need software to perform their key functions. For the last two or three decades these four major pillars of software emerged in the manufacturing space:

  • Customer relationship management (CRM)
  • Human capital management (HCM), or human resource management (HRM)
  • Product lifecycle management (PLM)
  • Enterprise resource planning (ERP)

Hundreds of billions of dollars of solutions have been developed for these four software categories, and even still they have struggled to keep up with the inevitable engine of change.

Surpassing all of the macro evolutions facing the industry today is the universal shift to meeting customer demand—a job currently being cobbled together by PLM and CRM. Consequently, the end-to-end need for enterprise resource planning (ERP) is waning.

CRM has a clear focus on the customer system of record, as does HCM with regard to employees. And up until very recently, PLM has had the most use for product manufacturing needs. 

ERP, therefore, stands alone as a system of record because it’s never quite handled specialization as well as the others, and instead has always performed as an amalgam for different company needs.

That’s why we're seeing more and more specialization or best-of-breed in the other three big pillar categories—think of Salesforce for CRM or Workday for HCM—as ERP continues to shrink.

So what does the future of the great juggle of product software look like? Spoiler alert: there’s a new guy in town.

Due for a Change

The biggest reason for ERP’s decline is the shift toward contract manufacturing.

20 to 30 years ago, when big box ERP systems were in their heyday, product companies manufactured everything themselves. They had captive manufacturing and local manufacturing, well before the advent of outsourced manufacturing.

An ERP system was an imperative, a business mandate. Every company needed an ERP to understand all the raw materials needed because they were manufacturing and building products in-house. 

Today, though, with the movement to contract manufacturing, joint development, co-development, partnering, etc., all that has changed.

Now, the critical use for the bigger box ERP systems is becoming more narrow, typically relied upon as financial systems of record. 

All of the other applications have evolved within each of the four pillar categories mentioned above. And now in the cloud space, the evolution is spurred forward even further.

The so-called best in breed are emerging once again because of the move to industry clouds. There have always been behemoths that consumed their market; and with the pace of digital innovation, nothing is guaranteed. 

There were massive applications in the ‘80s and ‘90s, like Siebel Systems for CRM which has been replaced today by Salesforce. Or in the case of HCM, there once was PeopleSoft, which has been replaced today by Workday.

In the ERP space, however, companies like SAP, Oracle, and Microsoft haven’t kept pace and instead focus on the financial side and the PLM pillar category. 

The “whole product” is now becoming the business imperative versus the original intent of what PLM was designed for decades ago. Beyond simply keeping track of product information while the product is in the development stage, there’s major new revenue potential in the customer experience and post-market engagement. 

So within the big four, both HCM (with the movement from PeopleSoft to Workday) and CRM (from Siebel to Salesforce) have already seen the shift happen. The two biggest systems of record that are therefore due for disruption today are PLM and ERP. 

Why ERP isn’t Extinct (Yet)

The prevailing use today for an ERP system as an end-to-end application, beyond as a financial system of record, is for what I call “long-lifecycle products”: planes, trains, and automobiles. In other words, products that have 10 to 20 to even 50 years of service. 

Consequently, there has been a lot of value for ERP in specific industries such as oil and gas, where the broad domain in connection to the product must still be tied back to an ERP system.

Additionally, ERP systems can still prove useful when there are people involved heavily in the process, or process manufacturing. While still being tailored more toward use as a financial system of record.

It’s only in these niche areas where there are dominant plays for ERP to drive value, and even in those, its prevalence in daily use continues to shrink.

Best-in-breed players are identifying use cases where higher value can be generated in a cloud environment versus their legacy ERP system. They’re seeing better, more robust capabilities than traditional ERP systems, which have failed to innovate as quickly as the market demands.

As companies take on more and more third-party manufacturing partnerships, cloud-based systems naturally suit this macro trend to promote more visibility and swiftness between collaborators.

A More Connected Supply Chain Requires More Collaborative Tools

Pushing ERP even further out of common use is the current swing toward contract manufacturing (CM). 

Because they are some of the largest end-to-end systems, ERP systems are commonly used where there isn't a lot of joint development, contract manufacturing, or outsourced manufacturing. In other words, where it’s not as vital to be nimble and highly collaborative. 

As companies take on more and more third-party manufacturing partnerships, cloud-based systems naturally suit this macro trend to promote more visibility and swiftness between collaborators.

Because of this rise in CM–as well as the recent shift to a remote or hybrid workforce–we’re seeing the advent of more collaborative tools in tech.

The compressed innovation that came immediately following lockdown (seven years of advancement in just a matter of months, according to McKinsey) in conjunction with more global collaboration has driven a shift in technology, driving big box systems to react in a way that they hadn't been forced to before.

Pressure on product companies to get to market faster in an omnichannel market begets the same pressure on technology providers to offer stronger collaboration between CMs and original equipment manufacturers (OEMs). 

Plus, a major influence on this push for better collaborative tools is the increasingly global workforce, and its greater expectations for agility and speed.

For instance, using Slack today to message somebody in Vietnam, and having both video and text messaging capabilities in context is changing the way people are thinking about how they work and how they work together.

Seamless collaboration is paramount to meet the 24/7 needs of the global manufacturing supply chain. That’s why recent cloud solutions have introduced collaborative tools wildly more advanced than even 5 years ago.

Back then, there was a lot of handholding, a lot of back and forth. The relationship amounted to little more than a transaction between a CM and an OEM. Today, these partnerships are much deeper by necessity to meet the needs of a more demanding market.

Having a seamless flow of communication between systems allows all of the constituents and the participants in the entire value chain to see what's in progress, what needs to change, and what can be improved. 

The potential for all collaborators from each side of the partnership to work together to solve problems proactively is driving this macro movement toward contract manufacturing, and pushing ERP to the side.

If ERP is the Dinosaur, Product Value Management (PVM) is the Comet

Today, the need for stronger collaboration has elevated, not just across CM partnerships, but throughout a company’s entire value chain today. The name of the game is to eliminate the silos, the handoffs, and the tradeoffs.

All of these baton passes and handoffs that normally must occur to make up for where older systems like ERP lack, those are points of failure. 

A common system of record for the product that includes everything from concept to customer, must be seamless and elevate the product record to first class, just as the customer record is elevated to first class. That’s why product value management (PVM) is the next revolution in manufacturing software. 

PVM is designed with contextual collaboration at its core. While engineering teams are designing the product for customers, the supply chain and manufacturing teams are making the product for customers, and the marketing and sales are selling the product to customers—all in parallel and with seamless collaboration.

And then once the product is in the customer's hands, it’s all about retaining the customer through proactive service given that, more than ever before, the customer relationship and the brand are inextricably linked. 

When it comes to loyalty, companies have to work toward an elevated relationship between the product and the customer. They have to consider every point along the consumer journey, why they bought a product, why they love the product, why the product works well, and what would make them buy from the brand again. That’s where PVM comes in.

Use of ERP is shrinking because it lacks the global and external visibility required to perform any of these activities. Every macro trend faced by product companies today continues to diminish ERP’s potential while PVM storms the market with its inherent disruption-proof flexibility.

In fact, PVM doesn’t need to raise a finger to push out ERP because the market is already doing that.

As the global market changes, it will continue to amplify the notion that the customer and the product are inseparable. And the people at the heart of these companies—the teams always striving to collaborate more effectively—will be the ones to drive change, to develop and build their company’s market leadership, and to out-innovate their competition. 

To learn more about how other solutions are falling behind (and PVM is taking center stage), watch our Converged Live webinar “Product Value Management in the Age of Disruption.”

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Post by
Ray Hein
Founder & Board Member, Propel

Ray is a SaaS veteran with 20+ years of PLM, development and product launch experience in both hardware and enterprise software organizations. Ray has held multiple executive positions at companies such as Agile Software, Apttus, Vendavo and Centric Software.

Fun Fact: Ray volunteers about two weeks a year with organizations like the American Diabetes Association, Family Giving Tree and Second Harvest Food Bank.

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Ray Hein