Don’t Fall for the Myth of Integrated ERP Procurement

The diminishing role in business is going forward of ERP. Aivars Lode avantce

Don’t Fall for the Myth of Integrated ERP Procurement

PIERRE MITCHELL - April 15, 2014 2:34 AM

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.” 

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.