ERP at the Precipice: Unbundling North to South and East to West

Technology works in cycles. This time is no different.

Three enterprise systems of record that matter in running a business are HCM (talent), CRM (demand), and ERP+Finance (resources). All three are massive markets, but I find ERP the most interesting. Part of this comes from my background in engineering and manufacturing, which forms a core part of the ERP suite. Part is an affinity with ops, which is a key ERP-using constituency.

But more than that, ERP is the most at risk from the seismic changes in how organizations use software and data, and how technology has shifted to support that:

• APIs now enable low-friction connection of services, at scale and high mission criticality, weakening the need to tightly bundle into one suite
• Data is spread across sources, and increasingly in sources that carry significant signal not captured by traditional business data structures. ERP can no longer own the breadth of that data.
• Users and teams have much higher expectations for UI and workflows

ERP is at risk because it is stretched so thin - between disparate parts of an organization, and between organizations that perform radically different functions from each other. To date, the NetSuites of the world have tackled this by doing everything, adding more surface area, and enabling a bloated, dependent industry of consultants and integrators. But we’re at a point where the costs are high, the patience is low, and the off ramps from traditional, generalized, monolithic ERP are growing.

This is unbundling ERP in two directions: north to south, and east to west.

North to South: Unbundling The Technology Stack

The three core enterprise systems have long held huge value by owning their function as systems of record and complementing that with systems of basic logic and interaction that allow stakeholders to add and access information.

But enterprise needs have changed. We have varied and complex systems of interaction, where traditional ERPs have not met the challenge. We have new systems of intelligence, which draw from much broader data than ERPs in the past. The core systems of record — essentially data storage — has not changed but the competition has wildly increased as enterprises have become sophisticated in managing massive data using modern tools. And add to that a new generation of native or deeply integrated automation that was nonexistent in past generations.

All of that is shifting ERPs to a more complex, messier, and tougher arena to compete in :

The base systems of interaction are being displaced by other, more powerful third party tools and the tools employees use to communicate, like slack and more aggressive email inbox integration.

The business logic is being replaced by smarter automation, intelligence, and prioritization. And the core system of record is threatened by advances in data management and storage, epitomized by massive third party vendors.

The core advantages of previous gen ERPs are shrinking in the value stack to much smaller portions, and new areas are emerging. It looks pretty stark in visual form:

This is opening up architectural cracks for new players. We’re starting to call this ‘composable ERP’, which is mirroring the shifts toward headless/composable commerce infrastructure. Whether that means one modular provider or multiple interconnected solutions, the fact that it’s a new category shows how much stress the model is under.

East to West: Unbundling Organizational Needs

Historically, ERP emerged as a bundling of tools, serving and connecting different operational and financial parts of an enterprise. That made sense in an era with software development and data storage costs were high, and low organizational interconnection.

But that has changed. Through changes in management theory and modern communication software, the parts of an enterprise are much more connected than before. The cost of developing software catering to these different areas has dropped (see the depth of the sales tool universe, just to pick one area). Data is being captured by and shared between areas more than ever before. All of this has created higher software expectations for different parts of an organization. Tools that are rising to meet that challenge, supported by ever-lower integration costs via API.

This means that we no longer need all of these to be owned by one solution:

What does this mean for ERPs?

New tools are popping up to serve different organizational areas much faster than the large ERP providers can improve their solutions, as their existing architectures, code bases, and ecosystems hold them back.

The net is that there’s less reason that all of these functional areas should be held within the same ERP banner, or centrally coordinated by one ERP system. For example, the benefit of moving to Brex for expense management far outweighs the benefit of having it all within ERP. I believe the current ERP surface area will fragment into a small number of key areas that produce massive new companies. These will better serve their organizational areas, and be deeply connected to each other.

Then, The Re-Bundling

The counter to all of this argument is simple: businesses need one place to put basic operational and financial information, and they don’t want to mess around with a complex set of interconnected products or a high total cost of ownership.

I agree with that.

Technology shifts happen in waves, and new players replace old ones. Eventually we’ll see a re-bundling of operational and financial information into the new ERP. It’ll use modern data structures, enable role-based prioritization and action, and have a host of powerful new traits.

But to get there, we’ll first unbundle for a period, and enable a new set of generational winners to emerge from the white space.

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My old colleague Jerry Chen has a similar general view of the world, and lays it out very nicely in The New Moats.