Lack of usage impairs ERP

According to a report released by AMR Research, based on the Boston firm's recent survey of 271 companies that have already purchased the systems, some 46 percent of all ERP "seats" remain uninstalled. ERP applications, marketed by vendors such as Oracle and SAP, typically address the automation of fundamental business processes such as accounting, finance and human resources.

AMR said the high number of unused licenses most likely explains the relative sluggishness of the ERP market over the past several years. The research company believes many customers purchased more licenses than they actually needed during the economic downturn from 2001 to 2003. Those companies were likely attempting to invest in systems they had already installed rather than spend on new technologies and subsequently went too far, AMR said.

According to AMR Analyst Jim Shepard, many customers put their internal ERP expansion plans on hold as the economy slowed, which helped contribute to the high proportion of unutilized licenses. In the worst cases, corporate downsizing might have eventually left some companies with more ERP seats than employees.

"This is clearly much more overhang in terms of unused licenses than anyone expected," Shephard said. "It's an indication of how much spending there was in the late '90s and to what a large extent companies shut down their projects during the recession."

As a result of the trend in unused ERP seats, AMR said, software makers will likely shift their long-standing strategy of offering widespread volume discounts that encourage customers to buy larger numbers of licenses up front. Such a strategy change could also help quell customer complaints regarding the maintenance fees they're required to pay for unused seats, according to the report.

"The vendors simply haven't had much choice; people won't buy everything up front. They're still giving discounts, but the deals are coming in much smaller increments," Shepard said. "The good news is that once a customer is committed to a vendor, they're going to keep buying from them. But we're seeing the deal size plummet because people are only buying what they can use right now."

As a result of the overspending on ERP, the study found, most customers are demanding more-flexible licensing plans, whereby they start out buying a smaller number of seats with the option to expand later. Companies are also installing central ERP tools before buying licenses for workers to begin accessing the software, AMR said.

Despite the high level of unused ERP tools, researchers are predicting that companies will be increasing their budgets for the enterprise applications again. AMR found that 71 percent of the companies it surveyed expect to increase their ERP spending over the next 12 months, with an average budget growth rate of 14.6 percent. The study concluded that only 15 percent of all workers at those companies currently have access to an ERP system, which AMR identified as another potential factor for growth in adoption of the systems.

"Core ERP has been slow for quite a while, with most revenue coming from installed base and customers buying add-on applications like CRM," Shepard said. "But now we're seeing a lot more new ERP projects, and a lot of efforts aimed at consolidating systems."

"Ultimately, the vendors have to spend more time with the customers," he said. "They have to be back in each account every few months selling them the next module and the next batch of seats, that's the new reality of how people are going to buy these products."