Don’t Fall for the Myth of Integrated ERP Procurement

I can’t tell you how many times I’ve been on calls with procurement organizations who are frustrated with their IT departments that mandate the selection and use of an ERP vendor.

Actually, I can. Literally hundreds.

Back in 1999, when I started doing inquiry calls with procurement and IT departments while at AMR Research (now Gartner), these discussions were fairly straightforward. They centered on trading off the value of integration and stability of an ERP vendor (and its product) and the functionality/agility of a best-of-breed vendor.

At that time, I made a distinction between the ERP vendor and the ERP product to help parse out the two issues of vendor stability and product integration, respectively. I did this to “unpack” those issues so as to help these groups assess and hedge the respective risks. Still, in procurement at least (as CRM was a different matter), the benefit of selecting an ERP vendor was synonymous with selecting an integrated application suite.

A Brief History Lesson

I’ll ignore the SAP / Commerce One saga in this story. That was driven by SAP hedging its bets to buy its way into the eMarketplace craze, and not by buying BuySite for its massive functional depth. Interestingly, just over a decade later, a more sophisticated incarnation of MarketSite might have been more interesting as a form of a procurement PaaS (Platform as a Service) that could be used to build a public cloud business network like the Ariba Network or a private/hybrid cloud private network. We wrote about this in our piece here.

Anyway, let’s get back to the story. As cloud-based applications began taking off and SAP and Oracle (the Big 2 ERP providers) had to respond not just to best-of-breed vendors (which was fairly easy to do with a playbook of learn, freeze, promise, delay, etc.), but also new cloud ERP vendors (such as NetSuite and Workday) that were entering at the mid-market and working their way upward. SAP went for the home run going down market with SAP Business ByDesign, but struck out. Interestingly, I once heard a rumor that the maker of ByDesign was also involved in SRM – wouldn’t that be ironic.

In contrast, Oracle has been trying to hit singles with Oracle Fusion, but the game is still all-too-early for them.

More important, the quest for growth to feed the beast of Wall Street led to the land grab of acquisitions over the last five to 10 years. Acquisitions in infrastructure that could be loosely coupled and introduced incrementally were generally fine (e.g., Business Objects by SAP, Endeca by Oracle, etc.). But when you make your way into the cloud by acquiring big best-of-breed applications, then things change. The promise of integration can no longer be bestowed on the vendor, but only on the product suite.

Back to Waldorf

The story must therefore turn to SAP. In procurement, Oracle can (for now) stay with its ERP roots and try to slowly transition its on-premise oriented ERP suite to a cloud-based suite. Of course, if it bought a supply chain information network provider like E2open or others, then it’d be a very different story (something to return to in future posts).

For SAP, what is ironic is that it was best known for slowly expanding “The Borg” of its integrated application suite that was German-engineered to work together. But, that changed when it bought Success Factors and Ariba (and one can argue Frictionless Commerce too). For SAP, as the Ariba “application suite” (let’s ignore the Ariba Network for now – and ignore what’s under the hood within the Ariba product) becomes another set of products on the price sheet, IT groups can still be hopeful that the promise of integration can be fulfilled within Ariba (in the cloud) and SAP on-premise (to a lesser extent).

This is why I used to call the Ariba suite the “mini-ERP” of spend management. They obviously didn’t like that term, but used the ERP integration story to sell against narrower niche competitors. This is why you see more best-of-breed suites out there again like Coupa, Zycus, Ivalua, b-pack, and many others.

Of course, for those who want Ariba on-premise, you are dead to SAP. And if you want SAP legacy applications (SRM, SNC, etc.), then you best contact your friendly neighborhood mega-BPO firm to help you out. We discussed this almost entirely forced march of your application suite based on your preference for technical deployment here.

The bottom line of this post is that practitioners, in my opinion, can no longer reasonably honor the promise of cross-product integration that “runs on the PowerPoint platform” to get manifested into actual product at a cadence near what procurement executives should expect (especially given the poor track record of delivering products even close to original promise dates).

The days of “pick IBM because it’s safe and all works together” are over. IBM is a different story though in terms of scope (i.e., much broader than just software), but it’s also the same fundamental story. In fact, just within SAP’s existing procurement line of business applications, there is a shocking level of fragmentation under the hood not only in terms of fragile process integration, but also master data fragmentation (e.g., having to transfer data from different lookup tables between different supplier master files).

Now, add in the complexity of the Ariba Network (which is slowly morphing to become the true Borg in terms of adding business trading partner business logic and external content driven logic) and the announced acquisition of Fieldglass (analysis here), and perhaps even a supply chain acquisition down the road, and suddenly, things are looking a little dicey. The great battleship starts looking like a flotilla of ships trying to avoid crashing into each other.

History Repeats Itself

I remember back to when Oracle embarked on integrating its Oracle CPG product to Manugistics and the admission that there were nearly 1,000 separate points of integration. Now, add in the fact that there is completely new infrastructure coming onto the scene with SAP HANA (not just the HANA database, but also a “cloudy” application development and integration infrastructure) that will be making its way into the Ariba Network and future application products, and let’s just say that some non-trivial orchestration will need to occur.

So, it’s complex, but you might ask: what’s the big deal?

The big deal is that the ones who will end up footing the bill for tying this stuff together will not be SAP. They’re doing quite well in procurement, thank you very much (and tech providers are very good at having customers pay to fund their functionality specifically). It’s not a bad short-term strategy, and frankly, it’s the only strategy that can be made if they want to keep growing the top line in the short term as a public company.

Ariba within SAP is doing great financially, although organizationally there are some kinks to work out. As one of my clients told me based on their experiences from Ariba Live, “It’s like two arrogant people getting married – you wonder how well it’s really going to work out.”

Hey, don’t shoot the messenger, I didn’t say it!

With the vendor viability issue off the table (and it has never been an issue with me personally), Ariba now has an SAP channel to sell its stuff. And let’s just say that the SAP sales force is highly self-motivated to sell cloud-based procurement solutions versus on-premise solutions.

And it won’t be the big consulting firms footing the bill to tie all this stuff together either. Au contraire, they are loving all of these acquisitions that need to be implemented and integrated (note to self: invest in a consulting firm index fund if one exists).

Making the Procurement Organization Pay

Ultimately, it will be the buyers (and sellers of course if it’s going through the network – which it basically is designed to do) who will need to pay for the acquire-and-integrate approach. Eventually, such large-scale acquisitions start to catch up with a vendor in terms of the ability to deliver new functionality (which wasn’t exactly speedy to start with).

You’ll end up getting cast as a vendor in The ERP Graveyard, which is a hilarious site from an open source ERP vendor named xTuple. I need to do a version of this for the procurement vendors. As my old professor Dick Greene (by far the smartest and craziest human I’ve ever met) once said “Use the things that are dead in your life as fertilizer for something good.”

Just as a procurement organization can’t save its way to zero, a procurement technology provider can’t acquire its way to integrated solution excellence. You can become a great “mutual fund” (i.e., holding company), but technology buyers don’t want a mutual fund; they want an integrated product company. And if they placidly accept the answer of “trust me – I’m an integrated ERP vendor and running in the cloud,” then they deserve what they get. The sunk cost fallacy has no room in IT and “Winner Take All” has no room in procurement. Rather, they need to practice good demand management and supplier engagement for their own technology needs.

Any procurement person knows that when you have a supplier with high supplier power, you need to improve your “availability of substitutes” and lower your switching costs. Unfortunately, in the case of SAP, its entire cloud strategy is designed to do the exact opposite.

It’s designed to make the cloud-based, subscription-based commercial relationship “sticky.” When the “application becomes the network” (i.e., when the handset becomes inextricably linked to the network) or vice versa, then you are pretty much giving up your procurement rights to mix and match from the incredible innovations coming out of the broader procurement solutions market.

An Internal Wish List

What do you need to make this work and take back control? Start with a “Procurement Information Architecture.” See:

Beyond architecture alone, IT and procurement need to work together.

You also need a “Procurement PaaS” strategy. And you’ll need to take stock of your application portfolio and capability portfolio and assess whether you have the integrated information/knowledge assets (and underlying IT assets) to allow you to be a “solutions assembler” and an internal supply management services provider, which will give you competitive advantage. If I had to guess, your portfolio likely looks like the table of stuff in the scene in the movie “Apollo 13.”

You need to fix this problem. Your success is too important to be tied down by legacy assets.

SAP and Ariba: What Next?

Keep in mind that we’re not saying to abandon SAP/Ariba at all. How could we? They represent the largest ERP vendor and previously the largest best-of-breed vendor, and they are very smart and savvy. In addition, the Ariba Network is going to be much more than just a horizontal marketplace owned by an ERP vendor used to discover and connect with suppliers. If the network will become the application to some extent in terms of continually adding functionality, multi-firm business logic, and value-added services that actually start to build up application-like services atomically—the network becomes the new Borg, not SAP ECC.

However, customers do need to be smart and realistic in how to work with this critical supplier. There are three or four major strategies that you can pursue, and we’ll be writing about them in future PRO posts. We’ll also be diving more deeply into SAP/Ariba plans (and what you should “read through the tea leaves” and how to make the best trade-offs), so stay tuned for that.

This whole topic becomes even more complex in the direct procurement / SCM space, where there are some big holes in the SAP flotilla. If you can’t wait for this content, then contact us to sign up for a PRO advisory membership and we’ll work through it together. If you are a provider and know a client who is struggling with these issues but their IT groups are not really digging into the dirty details, then please forward them to us. They will need to deal with these issues eventually!

Finally, if you are thinking “What the heck did someone drop into Pierre’s corn flakes this morning?” and wondering why I am the only one in the market spouting off here, the frank answer is the lack of time, effort, and courage in the analyst and pseudo-analyst community. There will be more on this very soon, but to honor our promise to you, we will continue to say the things that must be said in a noisy world where it’s hard to know whom to trust. It’s a personal promise I make not only to you, but also to myself.

Stay tuned. And in the meantime, don’t fall for the myth of integrated ERP procurement.

Comments

  • kris colby:

    Fabulous article. A mutual fund is not an integrated investment. Classic.

    • Michael Schmitt:

      A “mutual fund” of technologies does little to reduce the latency of moving demand signals from the customer across the trading network and the company’s ability to respond. Great commentary and warning for today’s supply chain and procurement professionals.

  • Kevin Brooks:

    Fantastic stuff as always, Pierre. I agree that the network has always been the most interesting and potentially transformative element in the whole mix. But I wonder if the myth of integration is less about functionality than about having a selling point that can navigate the byzantine ways organizations purchase tech. If, as a line of business, you are forced to use an ERP player but can still get the balkanized value prop of best of breed, you’re happy and your IT overlords get to check the box. Win-win?

  • Pierre Mitchell:

    Kris, thanks! Kevin, yes, that’s the whole point around being proactive and not outsourcing your Procurement Information Architecture / strategy (even though you outsource various components). But, there are many strategies. e.g., can I use it merely as my ‘system of record’ and bolt other ‘systems of process/interaction’ and ‘systems of decision’ (analytics) to it? Maybe, but with 6+ vendor master files under the hood from the ERP vendor (vs. the core ERP product like ECC), you need to keep them not just synched, but also augment them and synchronize to external world. So, you need an MDM type capability just to keep your own ecosystem of apps working. Oracle has this with its Supplier Hub product.
    So, in your metaphor, you need a strategy to manage the Balkan states and make sure that your information supply chain is ‘resilient’ to 1) larger players who move into the region and 2) local unrest due to hunger for better tools. If you don’t proactively manage your procurement information supply chain, it will end up managing you, and given the importance of information/knowledge/intelligence to procurement, you can’t let that happen and let IT and its incumbent vendors dictate how you will accomplish your functional/business objectives. God help me, I’m ranting here even in the comments section. sorry. thanks for posting – hope you’re well!

    • Kevin Brooks:

      Thanks Pierre. Doing well! I’ll take the rants any time.

  • Dan Roehrs:

    This is spot-on. Interestingly, I was (just last week) at a CPO conference a week or so ago where I led a roundtable discussion with nearly 40 senior level procurement professionals on this exact same topic. As you’ve done so well to point out, the entire room also echoed the frustration with the misinformation around the idea or notion that a single provider could provide any level of depth, agility, willingness to service and any level of true innovation.

    I would agree with you that is nothing we haven’t seen before and its certainly going to continue in terms of rationalization. Trouble with all that is that it leads to a massive dilution of the very “thing” that made a laser focused niche provider very good at what they did and then (as a result) creates yet another round of market “newbies” that out innovate and take a much more focused approach into specific areas of process to do what massively, big, slow moving and very expensive ERP company simple can not.

    Another fascinating part of your article is around the difference in approaches between SAP and Oracle. To see Oracle struggle with the move to the cloud and/or nimble technology versus SAP’s abandonment of all things BTFW (on-premise). I wonder if this is because of Mr Ellison’s massive interests in NetSuite that has created (really) a completely separate culture while still being somewhat “joined”.

    Lastly, I feel that the other story around all this is that new start-ups (if you will) are no longer really creating IP as much as they are all about the customer acquisition (at all costs and through as many rounds of financing as it takes to create market buzz) to solely spin off and do it again. What they are “building” (rather assembling) is more of their own collection of best of breed providers (widget creators), white labeled to look like their own, and then passed off to the market like they got something revolutionary, when in the end, they’ve done the work of a best-in-class approach by finding the best widget providers (which translated means other up-starts who are raising their own multi-round financing stages and are willing to plug-into one another for pennies) and stitching them into a cohesive solution to address a specific segment of the process/market/geography. Of course with the progress of open APIs and other cutting edge technologies, their efforts of “integrating” (which in the days of the Ariba/SciQuest/Perfect acquisition days meant more like Frankenstein stitching) these things together may in fact be easier than if the CPO world were to do this ourselves. You can spend an entire month on the case studies of industry integration gone wrong.

    However, this approach of simply “banner grabbing” reminds me of the telco days where smaller regional telco service providers set up sweatshop/boiler rooms to simply gain customers away from the large providers only to sell their entire book back to the very same providers they were taking them from in the first place. Meanwhile the true loser (in this case) is the procurement and sourcing enterprise who in the end is left with a paper weight after the very company they left has now acquired the very solution they transitioned to (so they can be “great again”) only to be back out to the market in a very short term doing the same evaluation they did only years ago because the “hip” solution has been left to wither on the vine while even better, faster, more agile solutions have entered the market.

    So what’s a procurement and sourcing professional to do? Quite frankly – figure out how to time these cycles, and just like Mr Buffet does so well in the financial markets, capitalize on the innovation to drive massive value in shorter amounts of time, knowing full well that your investment is probably short term (until the next “better mouse trap” comes along). This business case would involve understanding the level of benefits gain from making more targeted wins with greater velocity and balancing that with the realization that if you stayed in the ERP world, your ability to massively distrupt

    We’re already seeing that in the eProcurement space. While Coupa is all the rage and attracting all the attention, there are other, newer, faster, more responsive, more focused and more business friendly players that have come into the market – signing deals with some of the world’s largest companies (resisting the urge to point out the same thing happening in the sourcing space).

  • Pierre:

    Dan, thanks so much for the thoughtful feedback! It’s good to get the validation from the 40 CPOs / exec’s on the pain point, but they need to be a part of the solution too by not just accepting the status quo and by not practicing demand management in terms of consuming their limited procurement technology funds better. I think it goes beyond just timing the market and accepting the existing trade-offs of the market churn/cycle you described, but rather, reducing the trade-offs by changing the game and improving the ability to mix and match solutions through better ‘architecture’ of procurement services. Similarly, a truly innovative provider can change the game too. It could be a BPO, an “open stack” type of supplier network, a Procurement PaaS play, etc. Whatever it is, we’ll be looking for it, and will advocate for it, because that is where true innovation lies, and such innovation is what Procurement needs to tap and bring to the enterprise proactively.

  • Lars Kuch Pedersen:

    Pierre, thanks for a great article. I completely agree. I am a former sourcing director in the wholesale industry. I was always chocked about pricing and the hazzle whenever we wanted to add-on another module/functionality/DW to our ERP backbone. And I was always surprised why new functionality should take months (if not years) to get implemented. That’s the reason I started LeanLinking.com – a simple cloud based stand-alone tool that only needs simple flat-file input from ERPs and fulfils many of the needs of a strategic sourcing department without all the IT-integration-hazzle. Maybe take a look at us and let me know what you think.

  • Pierre:

    Lars, I checked out your site. Your solution tagline is “the end of silo thinking”, but then you state about that you offer a ‘standalone tool’ with a ‘flat file input’. Seems like a silo solution! :-)

    Seriously, I do like your ‘performance management’ approach, albeit more narrowly focused in Sourcing/Supplier-Mmgt. Check out my DMAIC model for ‘Supply Performance Management’ in my Supply Analytics article… http://spendmatters.nl/wp-content/uploads/sites/9/2014/02/SCMR_Analytics-Pierre-Mitchell.pdf

    thanks for writing in!

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