Traditional thinking would have you believe that a downturn in the economy would lead to an increase in interest for hosted and managed ERP solutions. While this may be true for some low hanging fruit and net new custom development that could take advantage of early cloud-based architectures, the expected systematic uptick did not develop. Instead, although budgets were shrinking (rapidly in many cases), labor, hardware, and software costs had stabilized enabling departments to maintain status quo. Add on top of that a heightened sense of risk aversion (perceived or otherwise), many segments of the outsourcing market, especially ERP solutions, suffered a minor cool down period.
This cool down period had several notable impacts on the market. As with most down markets, growth can still be found in strategic purchases and mergers. The fiscally strong ERP hosting and managed services providers began to purchase their weaker competitors. What started out as a marketplace with several dozen niche and generalist U.S. providers for ERP hosting and managed solutions in early 2000 was down to half dozen or so in early 2010. While there may be an expectation that fewer competitors would lead to higher pricing, this did not occur. Instead, while service levels increased, pricing remained stable or retracted slightly. This was due to several market factors, most notably the emergence of India-based competitors in market niches, such as PeopleSoft application support, where they had not previously competed. Hosting providers that grew their market share during this difficult time also invested heavily in moving support components of their services offshore, removing costs from their business model.
The economic downturn also had a reverse effect on the ERP labor market. During the downturn, while hiring was stabilizing or contracting for companies that retained in house ERP management organizations, hiring was ramping up in other technologies and software products hitting the market… many were SaaS organizations. A partial result of this multi-year gap in ERP labor growth was that the labor pool as a whole for ERP talent shrunk. While the market was still suffering and uncertainty was high, employees stayed put. As market trends turn positive again, employee mobility improved leading to higher wages and moderate-to-severe labor shortages. This is a trend that would continue and would help re-define the ERP services market.
Finally, while mergers and acquisitions had a relatively positive impact on the hosting and managed services markets, the consolidation of software and hardware vendors has had roughly the opposite impact on market prices at a time when budgets had not even begun to recover. Acquisitions by Oracle, IBM, Dell, Microsoft, Cisco, EMC, and a handful of others changed—almost overnight—the sales message from price to value. While value lies in the hand of the beholder, the beholder in this case is a few very large consolidated providers of technology. For some companies purchasing technology in bulk and frequency, this was a welcome change to the market. One vendor to negotiate and deal with for support. For smaller organizations that could not garner the same level of discounting and incentives, this value sales message has been a much more difficult reality to deal with.
In a market experiencing higher prices for hardware and software, higher labor costs—if they can find the resources—and contracting budgets, ERP hosting and managed services continues to play a more visible role in corporate strategy. In other words, managed services is once again the “Cool Kid” at the table. While budgets suffered and ERP support costs rose, a company’s ability to innovate through technology was choked. Strong CIOs and CTOs struggled to stay ahead of the needs of the business and market when a huge majority of the IT budget was consumed by ERP support…which adds little to no additional value to the organization. Don’t get me wrong, ERP can be hugely strategic, but the ongoing support, patching and troubleshooting of the application adds little additional value to the bottom line. For the “Cool Kid”…the future is bright.