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Business software to grow 37%

The enterprise resource planning market will not come to an abrupt halt when the clock strikes midnight January 1, 2000, according to one report.

Despite conventional wisdom, the enterprise resource planning market will not come to a screeching halt when the clock strikes midnight January 1, 2000, according to a new report.

AMR Research in Boston predicts implementations of back office automation systems like those from SAP, Oracle, and PeopleSoft, will continue to grow despite assumptions that the Year 2000 problem has been driving sales and that a slowdown in the market is imminent.

"Given the time it takes to select and implement these major systems, companies have already passed the Y2K deadline," said Tony Friscia, president of the analyst firm. "Most global 1000 firms are well-advanced in their ERP deployments and will now seek to extend ERP and related applications throughout their global supply chains."

AMR reached the conclusion in a massive survey of the market, the Enterprise Resource Planning Software Report, 1997-2002. The report predicts the ERP industry will grow from its current $11 billion level to be a $52 billion market in the next five years with a compound annul growth rate of 37 percent during that period.

"The ERP market is aided by the replacement of systems that are not Y2K compliant, but the market is not driven by this factor," the report stated. "There is a significant base of end-users that are using functional [older material maintenance systems] and will resolve their enterprise Y2K problems before adopting ERP."

AMR contributes the growth to three factors: ERP vendors spreading into new markets, vendors selling back into their existing installed base, and continuing to tweak the products to fit specific vertical markets.

Most of the top vendors are pushing their product to nearly every corner of corporate computing environments. For example, SAP in the past year has announced plans to build a data warehouse, front office applications like sales force automation, and customer service management, a procurement application, and has other additions in the works.

Rival Baan went so far as to buy leading sales force software maker Aurum to supplement its offerings. Oracle and PeopleSoft are following suit with their own initiatives.

The result of the expansion is that the ERP vendors are creating new markets for themselves mainly within their existing customer base, an easy base to sell to compared to cold calling new companies.

Currently, only about 10 percent to 20 percent of the employees in a company use or are licensed to use ERP software systems. But as the vendors add features that allow previously untouched segments of a corporation's population to benefit from the system, licenses for single companies will grow 40 percent to 60 percent within the next five years, the report stated.

"In order to minimize up-front budget costs, end-users have kept purchased seats to a minimum in most ERP deals," the report concluded. "As ERP systems are installed, the ongoing expansion of user application seats has less of an impact on the margin for the end-user. For the vendors however, this represents a steady stream of increased revenue from existing customers. This phenomenon is compounded by the ERP vendors' expansion of their application suites."

The final factor is ERP vendors' division of their companies into vertical segments. This is allowing the firms to sell to industries outside of manufacturing, the traditional ground for ERP systems. The vendors are already pushing hard into such industries as healthcare, retail, utilities, and telecommunications. Deregulation, increasingly fierce competition, and massive mergers are forcing these industries to turn to technology to streamline their business processes, the report stated.