Improving Human Performance by Identifying the Gaps

Verónica Inoue: Why is the human performance technology (HPT) model being implemented in companies in the United States and other developed countries, but not in organizations in Latin America and Spain?

Mariano Bernádez: Methodology and practice are two very different things. From the practice standpoint, I think the issue with performance in Latin-American organizations in general—although I'm more familiar with those in Argentina, Chile, Brazil, Mexico, Colombia, Peru, and Spain—is very clear: we have made all the mistakes inherent to practice, and we continue to make them. This is a way of learning and improving. That's why there are companies that are able to survive in spite of having great disadvantages compared to their competitors. The companies that will survive this natural selection process are the ones that will adapt and find solutions for some performance issues. But the fact that they survive does not mean that they are good; they are just not as bad as other organizations.

Now, a few companies are able to apply the methodology successfully. They already have international structures. They are familiar with the methodology and see their companies as systems with a specific priority (that is, to sell, to control expenses, etc.).

What is happening in Latin America is that the environment is ever changing and has become unstable. Therefore, companies adopt strategies to adapt to these changes that don't operate as systems. In cases like this, what helps these companies survive becomes the cause of the next crisis.

As an example, an organization adapts and becomes a government supplier. Later, politics and the government change and favor privatization, which actually happened in the 1990s. However, remnants of a government supplier system remain in the system that is now private. When a company is not perceived as a system, its internal areas develop at different rates, and may become incompatible with each other.

VI: Why is this model not applied? Who in the organization should back this proposal?

MB: In general, these books are written for business people, managers, and directors, whose jobs are to develop new projects or new organizations, and who face the problem of understanding the business as a single entity. This problem starts outside the company, in the market and with the customers, and then attacks the company's internal systems.

This is difficult mainly because when we think of performance, we think of individuals—either the individual who has a problem or the individual who is going to solve it. In other words, [we think of] the individual who shows poor performance, or the leader who will create a new vision and renew the company.

From our experience—and the Rummler Law—we know that in a fight between the individual and the performance system, the system will win 95 percent of the time. This means that we don't perceive the rest of the system components that are not related to the individual. A person can be very competent, but are the goals clear? Are the goals consistent with the market's needs? Is the strategy compatible with the work systems that are in place? Do we reward good performance or bad performance?

For example, take an organization that rewards individuals who achieve a specific sales quota. If the organization lacks sound control mechanisms, it may find that sales are low specifically because its system is stimulating only one area that is potentially harmful to the organization.

We can also end up punishing individuals who do things correctly. An example of this is a company that has a very unorganized system, where competent people are assigned all the tasks that other people in the organization are not able to complete. This creates a situation where some employees do very little work, and others, too much. Such conditions can generate a high rate of turnover, where people leave the organization while new, enthusiastic individuals come in; a few weeks later, these new employees either leave too or start a crisis.

The system becomes invisible. Although a system has seven performance components, we generally only see those related to individuals.

VI: How does the HPT model address this issue?

MB: The performance technology system helps us know what will happen before we take any action. That is, the consequences our actions will have on a given set of factors.

It's like playing pool … hitting the ball is the easiest part, but knowing how it will bounce is difficult. A good player uses the rail cushions, which, in this example, represent the components I mentioned before. Performance technology is like having seven key components that must be taken into account simultaneously. The book [Human Performance Technology] mentions the questions we must ask before implementing a partial solution.

Another important aspect is that the ideas in this book should not be applied only before implementation, because they also help you see the big picture in the organization. Many of the problems we see in human performance arise from applying solutions without having a full understanding of the issues. We launched e-learning, thinking it was this great technology, and although it is useful in making learning accessible to all in an organization, it might not be what we need.

Methodology helps us identify the organization's problems by defining the desired results, the real results, and the gaps, and by analyzing the causes of these gaps before selecting a range of solutions (rarely is just a single solution enough).

VI: Then the key is identifying the gaps?

MB: If we take a look at the cycle model of what we call performance technology, it starts with performance analysis. The first step is to find out what the goals and the desired results are, then to specify the goals we want to achieve and the current standards. We then need to identify the gaps between these two. We can only justify investing in performance management when the gaps affect both the current and the desired results.

We often say things like "This is the fifth time employees have attended training courses, yet they continue to make the same mistakes." Maybe training is not the solution. Maybe the employees have no way of knowing that they are making mistakes, so they have no way of avoiding them. Or it might occur to them that they are making mistakes, but perhaps they receive no feedback to confirm this. Maybe they are selling services that might have a negative effect in the future, but they are unable to see these consequences. Or the customer didn't understand because of a lack of real-time communication. These are but a few examples of possible causes for employee errors.

In these cases, instead of providing more training, we may need to define a process to enable direct inquiries. That way, when we know the causes of errors made, we will be able to decide what type of intervention is required.

VI: Is e-learning just another tool in what we call performance improvement technology?

MB: Exactly. First of all, there is the diagnosis-detection stage, where we see the performance gaps; second, we have the causes for the gaps; and third, the selection and design of interventions. E-learning is an intervention.

A new accounting or enterprise resource planning (ERP) system, or an enhancement to the selection, can easily be considered interventions. According to the methodology, we can see interventions as different types of tools that we can—or should—combine and use in consistent ways. What we do with one, we don't undo with the other. They must be aligned.

Technology's Role in Strategic Human Resources

Most chief executive officers (CEOs) are challenging their human resources (HR) departments to make more strategic contributions to the organization. With HR traditionally viewed as a cost center, it is often difficult to know precisely what that means. CEOs, who are focused on growth, earnings, and shareholder returns, want HR to support corporate business objectives and to have the necessary data to support business decisions. These roles are necessarily integrated with HR's responsibility to ensure that there are qualified and satisfied workers when and where they are needed. The way to fulfill these roles is through process excellence, integrated HR systems, and accurate and actionable data from all HR departments. When these elements come together, HR can have a tremendous and meaningful impact on the bottom line.

It sounds like a lot to ask, but these demands are achievable today. And the HR department doesn't have to go it alone. There are technologies and service providers that can help move HR from the administrative rut, free up manpower for strategic tasks, and employ business intelligence capability to align HR with desired business outcomes.

The Role of Outsourcing

Human resources outsourcers play a critical role. Companies often choose to work with outsourcers to gain access to the latest technologies without having to make the associated capital investment. At most enterprises where HR functions have been outsourced, the initial tier of value is well-established. Processes are standardized and employee interactions are professionalized. Transactions are faster, more user-friendly, and less costly. As employee programs continually become more complex and difficult to administer, outsourcing consistently delivers high levels of service.

But it's that next critical tier where advanced HR outsourcing technologies are delivering strategic leverage by gathering and combining fragmented data from discrete vertical HR systems. When data from various departments is integrated into a reliable, consistent source of centralized information, HR can make better-informed and more strategic business decisions daily. The impacts of HR programs and practices can be assessed, and critical insights into the workforce revealed.

Sophisticated analytics can measure how HR systems and programs affect employee behavior and influence customer behavior (for example), ultimately impacting financial results and corporate growth. Companies are beginning to see that reducing HR administrative costs is only the tip of the iceberg. A new priority is to employ the technologies that provide data and analysis, in order to realize the savings that lie in HR.

Technology at Work

For example, your time and attendance program tracks worker hours and absences, and is the entry process for generating payroll. A separate program handles short-term and long-term disability payments. Both of these systems are important. But viewed separately, they reinforce HR's traditional administrative role. An outsourcing solution that combines information from both systems and employs business intelligence functionality delivers a human asset management program that tracks absenteeism, peak work periods, and turnover. Now your data shows impacts on labor costs, overtime, and the amount of money spent on temps and employee replacement. This business intelligence can be used to closely align the workforce with long-term labor needs, manage absence and labor utilization, and thereby reduce operating costs.

Training, staffing, and recruiting programs can be linked in beneficial ways, too. There are lots of technology tools that enable prospective employees to submit rsums online. But does your HR department use that information beyond the recruiting process? By integrating prospective employee data and skill sets against the company's development plan and training programs, qualified individuals can be "pipelined" into the organization over time, and existing staff can be educated. This ensures more strategic hiring decisions from the outside, and better use of existing personnel.

Succession planning is another key area where HR outsourcing can provide strategic value. For example, if a company has a 10 percent turnover rate, and it typically takes 30 days to fill a job, what does that mean for its staffing at any given point in time? It means the company is nearly one percent understaffed at all times. In an organization of 50,000 employees, that's 400 workers not meeting deadlines or producing, which negatively impacts customer satisfaction.

In that same scenario, add in the ramp-up time required for new hires to fill the open slots, and the "downtime" could be as much as sixty days per opening. Factor in absenteeism, short- and long-term disability, sabbaticals, maternity and paternity leave, job sharing, and other benefits, and the staffing levels are likely to be much lower than imagined. Using business intelligence technologies and analytics allows HR departments to better see and manage what is really happening with staffing levels, and predictive measurements can help plan more accurately for the normal ebbs and flows of business.

Selecting the Right Outsourcing Provider

As important as deciding to outsource HR functions, however, is selecting the right partner. Partnering with an HR provider is a critical business decision, and should be considered with the same due diligence as a merger or joint venture. Companies should be culturally compatible and share a common vision.

An outsourcing partner's service framework and delivery model should be engineered to meet your requirements, and there should be a clear definition of the scope of services and defined service levels. The objectives of outsourcing should be translated into service-level agreements so performance can be measured against stated expectations. Most large enterprises will want a full-service provider rather than one that handles just one element (such as payroll). References should be checked, and the provider should demonstrate capabilities in full-spectrum HR outsourcing (and have the financial backing to be around for the long term).

Remember, working with an outsourcer is not about giving up control. Rather, it is about finding the best ways to deliver quality service, impact organization economics, and provide the data that aligns the HR department with business outcomes.

Thou Shalt Manage Human Capital Better

Administrative human resource (HR) management has traditionally received much more lip service than true respect from businesses and individuals. However, many recent events and consequent realizations promise to transform the HR department from a lowly cost center, a necessary evil, and a gaggle of boring pen pushers and record keepers (and other derided whatnots), into a strategic and crucial part of any competitive business. In other words, for a long time HR management has been the enterprise function or organization responsible for mundane staffing and personnel issues, such as hiring, employment policies, handling pay, retirement plans, and benefits. It encompassed applications for handling personnel-related tasks for both corporate managers and individual employees, and typically included common modules and high-level functions:

* HR administration
Automates personnel management processes, including recruitment; personnel profile; organizational structure; career development and training; reward management; job position and wage profiles; business travel; and vacation allotments.
* Payroll
Handles accounting and preparation of checks related to employee salaries, wages, and bonuses.
* Benefits
Administers a diverse range of benefit plans including health and medical, life and supplemental life insurance, accidental death and dismemberment (AD&D), disability plans, flexible benefits, US 401(k) plans, profit sharing plans, stock plans, retirement plans, and leave plans such as vacation and sick leave accruals.
* Self-service HR management
On one hand, lets workers change their personal information and benefit allocations online, without having to send forms to the HR department. Typical tasks include enrolling in benefits, changing contact information, enrolling in training, applying for a position, etc. On the other hand, such modules deliver key HR information to managers' desktops, such as turnover, competency gap analysis, compensation analysis, headcount, and cost analysis (actual versus budgeted). Web self-service applications enable business line managers to access selected reports, performance indicators, graphs, etc., as well as view information on their employees, complete and transmit a job requisition form, report on interviews with applicants, follow up on upcoming performance appraisals, approve a promotion, change salaries, etc.

Part One of the series Thou Shalt Manage Human Capital Better.

These administrative functions have traditionally been handled by HR management systems (HRMS), whether as stand-alone HRMS application suites, or as part of broader enterprise resource planning (ERP) suites (see Essential ERP—Its Functional Scope). In any case, HRMS customarily involves business applications for the management of HR transactions, best practices, and enterprise reporting, with typical functions like core HR tracking, payroll, and benefits. Lately, their scope has been extended to include recruiting, competency management, training, time management, performance management, and so on. Most of these have been bolstered by the advent of the Internet, with which came the aforementioned manager and employee self-service and e-recruiting tools. In fact, providing employees with Internet-based self-service access to their HR information (for instance, address, dependents, benefits, payroll information, and education) and to corporate HR information (such as job openings or training enrollment) has enabled companies to significantly increase the efficiency and responsiveness of their HR department and improve the overall quality of HR management.

HR—Good, But Not Sufficient

Yet overall, HR management (including processes, technologies, and systems) has thus far done little to support the evolving workforce and its needs. Instead it has focused almost entirely on compliance-driven transaction handling and record keeping, and maybe in part on employee productivity. In fact, many employees are nowadays spending less and less time at their "assigned" offices, cubicles, or desks, while more of their time is involved with the prevalence of project-based workgroups that constantly get created and disbanded. However, the management of physical space, technology platforms, and employee services is still built on the assumption of standard "nine-to-five" working hours, when people are supposedly stationed at a desk, in an office, with a desktop personal computer (PC) and a telephone.

In fact, Hewitt Associates, one of the world's largest providers of multiservice HR business process outsourcing (BPO) and consulting, recently issued the insightful report "Next-Generation Talent Management," which indicates that demographic, economic, technological, and sociopolitical phenomena are driving the most drastic workforce changes in decades, creating a workforce that is more diverse, mobile, informed, and in demand than ever before. The report reveals the five trends reshaping the workforce, which is becoming

1. smaller and less sufficiently skilled,
2. increasingly global,
3. highly virtual,
4. vastly diverse, and
5. autonomous and empowered. The apparent conclusion is that most organizations are not prepared to manage these new generations of talent.

As the economy begins to warm up and the demographic shifts continue with the retirement of the baby boomer generation, look for even more emphasis on improving workforce management practices. The US Bureau of Labor Statistics forecasts a shortage of 10 million skilled workers by 2010. In order to stay competitive amid such a demographic bomb, companies will have to change their hiring, retention, and workforce management strategies to maintain an effective, stable workforce, and to keep their candidate pipeline sufficiently full for future growth.

It is thus no wonder that lately one of the more active areas of more strategic HR-related software has been recruiting or talent acquisition. In this domain, Monster, Resumix, BrassRing, Deploy Solutions, Peopleclick, Taleo, Vurv (formerly Recruitmax), Webhire (now part of Kenexa), Unicru (now part of Kronos), Hire.com (now part of Authoria), and Jobster (including recently acquired WorkZoo) are merely a handful of choices that first come to mind in a software segment that is abundant in niche players. More than just a system that stores and searches rsums for keywords, recruiting software is touted by these providers as a way to save time and money by streamlining the hiring process, and to work more effectively by better matching candidates to available jobs.

Such systems aim at helping organizations improve the processes of recruiting and hiring by more quickly prescreening, sorting, and storing rsums, and then matching those rsums to available job openings. Some systems also include modules for various administrative tasks, such as background and reference checks, and skills assessments, while some vendors go a mile further to offer so-called "talent life-cycle management" software, which encompasses a range of processes spanning recruiting, training, career development, and internal hiring.

Innovation and Change in Human Resources

Veronica Inoue: What is [Federación Interamericana de Asociaciones de Gestión Humana] FIDAGH's perspective on human resources [HR] in Latin American countries?

Paul Rosillón: We have to look at it from different points of view. First, I think that Latin America is undergoing a process of change and transformation—as is the whole world— but this particular geographic region is where we are experiencing the most changes.

On the other hand, a big part of the changes that we are facing in Latin America are related to the needs of individuals and the way people are acting in the social, political, and economic spheres.

Third, and regarding the world of management and organizations, in the last 20 years, the topic of people management has changed dramatically. This has been a paradoxical change, because people have always been the most important factor. However, from a managerial science standpoint, individuals are a different subject now because they are managed differently and they are considered an economic factor. What do I mean by this? When knowledge and innovation become critical, people go from being a resource to being owners and capital. And that is somehow what is leading managerial sciences to focus more on intangibles and make leadership once again the underlying topic.

Another important change is occurring, and that is that people management is no longer part of HR functional management; it now concerns the whole management process. Therefore we, as management professionals, have had to understand that our roles are different—that we are also facilitators, internal consultants, coaches, or internal staff managers. In this sense, we can say that great changes are taking place.

Personally, I think there are two different levels: organizations understand that people are very important, but professionals in this area are not progressing at the same pace. A lack of connectivity exists within managerial education and training programs. Take, for example, an [master of business administration] MBA or similar postgraduate program; the attention to people management is minimal. Marketing and finance are still the more prestigious subjects.

To expand on this idea, we are undergoing change and transformation, but we still have a long way to go. We lack clarity, and we haven't been able to develop the connecting points [that will link managerial education and training programs together]. We could say that we know what we want to stop doing, but we still don't know how to take new steps. Even the way our federation works reflects that since 2001, we have been experiencing a restructuring process. Today, we have completed the first stage, but we must start stage two.

FIDAGH: The Lever and the Engine in the Arena of People Management

VI: How is FIDAGH searching for a way to do this?

Eladio Uribe: We at FIDAGH think of ourselves as a lever, but we also want to be the engine behind the transformation process that Latin America has to experience.

In Latin America, we all speak the same language—in general—but there are many differences in education, criteria, politics, strategic vision, and direction. The domain of HR in this region of the world is living this debate, which is also reflected in our federation. While we ask ourselves, “What does FIDAGH do for me?” others are asking, “Where should we go from here? What should we do with the HR people and people in other organizations and countries?”

I want to clarify here that the main issue is not the HR people; the main problem is our countries, our communities. The people in HR are working hard to help our communities overcome poverty.

We still have to understand that we must accept people from Argentina, Guatemala, Mexico, Uruguay, etc. as equals—as Latin Americans—instead of as Argentineans, Mexicans, etc. But overcoming inequalities is very difficult for us. We are convinced that we will be able to do it because we have a great source of motivation, and this source is that people who do not work in HR have been pushing these professionals to make a change, so there is no other option.

VI: Today, what are the key areas for HR in Latin America? Which other areas need to be reinforced?

EU: An agreement must be reached between the people of HR and employers on one side, and the state on the other, if we want to improve education systems. One of the greatest issues HR people face is the hiring process, the challenge of bringing “new blood” into the organization—people who are capable, competent, and ready to face the challenges that an organization brings. That is the biggest hurdle they have to overcome.

The other challenge is diversity. We still have to learn to accept and believe in diversity—believing that the person who comes from Asia, the US, or any other country in America can make an important contribution, can be helpful for our performance.

I think these two factors are fundamental: educational development and acceptance of diversity.

PR: There are two issues. The first one is corporate social responsibility [CSR]. While it is a common topic, we haven't started managing it and moving forward with it. Nobody expects organizations to become philanthropists, but they do have to play a role in society, and that is a paradigmatic change that is still in progress.

The other issue is the way companies are organized—the division of work according to tasks and descriptions of positions and roles within the organization. This is a model that is in crisis, and though it is becoming less and less common, we still are not certain of what the new trend will be. It's not easy to change a paradigm that has been the standard for almost 100 years, and that is taught in universities and reinforced everywhere. I think this is a golden opportunity for us, as HR professionals, to contribute and make a change. The problem is that we have been educated with the same old paradigms, so abandoning those notions is like getting undressed—

EU: It also means breaking another important paradigm: believing that only our organization can solve its internal problems with staff, management, or processes, without taking into account what is happening around the world.

Furthermore, my actions as HR have to be collective actions. Instead of aiming solely at my company, these actions must generate change in the community and in my daily environment. This will allow me to have capable individuals in my organization that will help realize strategic, sales, and other goals.

VI: How are the 15 member associations of FIDAGH participating in and committing to these objectives?

PR: As I said before, since 2001, we have been questioning ourselves and acknowledging that we have to change the way we think and see things.

We are halfway through the process. We—both the federation and the associations—have been going through this process since 2001. Next week [referring to May 14, 2007] we will have our 20th conference, our board meeting, and our management meeting, where we will change our approach. We are convinced that our current approach is not working, so we have to take a different direction. We don't know exactly what that direction will be, but we will say, “Gentlemen, we must admit that we have to change. We need to find ways to evaluate the changes that we will implement, and how we will work together in the future.”

Tactical Human Resources Evolves into Strategic Human Capital Management

Given the examples of the changes in human resource (HR) management discussed in Thou Shalt Manage Human Capital Better, and the mushrooming number of point solution providers, many enterprises have realized the significant shortcomings of traditional HR (in terms of technology, beliefs, processes, and practices) that require a strategic-level mind-set change. This is particularly relevant during times of economic sluggishness and low investment capacity (which typically translates into layoffs or hire freezes, cost containment, and stalled innovation), when most enterprises and their employees are left wondering if they can (or should) rely on each other for their future.

Part two of the series Thou Shalt Manage Human Capital Better.

In the early 2000s, with the economy in a downturn, HR administration delivered some organizational value by outsourcing an increasing number of HR business processes, either wholly or in part. In many cases, outsourcing to some trusted technology vendors that have already demonstrated their HR domain expertise may help companies achieve additional efficiencies and functionality, reduce head count, and cut costs.

Of the many solutions in the HR realm, the most predominantly outsourced have been payroll processing, employee assistance programs, payroll tax filing, and background screening. The most appealing and achievable benefits of outsourcing are streamlined operations, access to better HR capabilities and industry expertise (when it is not a core competency of the user enterprise), freeing up of internal staff, reduced labor costs, and accurate and predictable monthly costs.

However, the returns from layoffs (often undertaken without much thought to who should really go, potentially resulting in the hasty release of the lynchpins of the enterprise's ongoing performance) and relentless cost-cutting have proved to have only a limited (if not negative) effect. While some organizations have tried to cut labor costs to be competitive in their markets, the most progressive companies have embraced their labor forces and used them as a strategic differentiator.

As products and technologies become commoditized in this information-based economy, companies are beginning to realize that the best way to differentiate themselves and create long-term strategic advantages over their competitors might be through their people. It is no longer what one owns that counts, but rather what one knows, which is particularly critical in information technology (IT) and similar professional services organizations (PSOs), because it is the technical expertise and experience of knowledgeable staff that means the difference between success and failure.

In fact, according to Forrester Research, more than 85 percent of the market value of a typical Standard & Poor's (S&P) 500 company today is the result of intangible assets. For many companies, the bulk of these intangible assets is their people (or human capital), and such companies spend as much as two-thirds of their overall costs on labor. Thus, they should focus on business processes, using technology to more effectively manage employees and improve their productivity. Combining training, incentive management, and compensation management tools delivered through a role-based dashboard, emerging people-centric software category aims to transform each individual in the workforce into an enterprise asset.

Best-of-breed HR Technologies

The most progressive of companies have been using best-of-breed HR technologies for attracting, hiring, training, motivating, and managing their people. Software applications are becoming more and more sophisticated to help companies with these tasks, and as these solutions continue to evolve and communicate with one another, user companies will have a more seamless access to methods and data for managing their employees throughout the employee life cycle.

On the other hand, the laggard companies that do not embrace these technologies will likely fall behind in their quest for market dominance. For instance, by implementing a holistic employee performance management process across the enterprise, corporate strategy can be aligned (and properly communicated) with individual goals and objectives, whereby actual performance against those goals can have ramifications for individual compensation and rewards. This should drive behavior and attitude toward executing on the corporate strategy, with improved employee satisfaction and loyalty as a result.

This certainly comes in handy when the economic downturn ends, when employees begin to feel that they have more employment choices. Enterprises will again need clear, credible, and reliable strategic sourcing strategies and management in order to plan for and engage the competencies (people and companies) needed to accomplish their business strategy (by building the required effectiveness and increasing efficiency). For instance, with the economy improving and IT budgets rising, competition for IT talent—especially in key skill areas—is bound to intensify. At the same time, an improved hiring picture in IT will most likely mean higher turnover, as many unhappy IT staffers who saw workloads increase while compensation and benefits stagnated (during the economic downturn of the early 2000s) will put even more pressure on IT management.

Hence, there is a true need for much tighter integration between performance management and compensation (regardless of the economic milieu), so that exemplary employees can be rewarded more often (and feel truly special to the enterprise), as opposed to the outmoded, blanket-regulated, across-the-board annual basis (which typically produces mediocrity).

Analyzing the workforce and strategically managing the company's human capital has become the focus of human resource management systems (HRMS), as a way to transform these from dull functions to those that greatly affect corporate performance. Integrated business information warehouses, to that end, enable multidimensional analysis on information aggregated from internal and external resources (salary survey, for example), performance indicators (as in turnover), and views on strategic HR information with powerful drill-down features. Some surveys indicate that almost a third of businesses are already using data warehouses, a quarter of them are using workforce performance management or analytics, and one-eighth of them are using workforce planning.

ERP II Demystified

ERP II Demystified
Sean Wheller - March 11, 2010
Originally Published: June 18, 2004
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Featured Author - Sean Wheller

Simply Change

As with everything, technology evolves and is subject to the same "natural selection" and "survival of the fittest" laws found in the natural world. These laws work on a simple principle: Things that do not adapt to changes in their environments do not survive. Business enterprises and their IT systems are not exempt from the influences of these evolutionary principles.

When it comes to technology, the world has witnessed an unprecedented number of evolutionary changes. During this course, products and technologies have come and gone. Others remain with us today, and it's anyone guess if they will be around in the future.

While such uncertainty makes technology adoption a risky business, it is a fact that technology is here to stay. Businesses wishing to remain competitive and efficient will have to embrace technology changes in order to evolve themselves. In fact, technology has become such an integral part of business that today it is considered to be an integral part of an organization's core-competency and a key evaluation factor used by investors and industry analysts.

So change is normal and to be expected. ERP II is simply the next destination in the evolution of resource planning systems. ERP II is a new generation of resource planning with lineage dating back to material requirements planning (MRP), which was replaced by manufacturing resource planning (MRP II), which was superseded by enterprise resource planning (ERP) and two lesser known iterations—extended ERP and enterprise application suite (EAS). If it is as simple as this, then you are probably asking yourself, "So what's all the fuss about?"

Disruptive Technologies

Our brief discussion on technology evolution has not yet mentioned one very important factor: that every now and then, technologies come about that are what we term to be "disruptive."

These technologies tend to catch the world by surprise. The radio, television, world wide web, and the Linux operating system are all examples of disruptive technologies. Each has risen to prominence unexpectedly, against conventional wisdom.

Today we are in the midst of experiencing the effects of a new set of disruptive technologies. These are born out of the last wave of disruption and are as much the product of a business revolution as they are the natural evolution of technology. Unlike their predecessors, these new technologies are being unleashed in an environment where the use of communications, in particular through the pervasive reach of the Internet, is an indispensable part of doing business. The environment is, therefore, conducive to their adoption, and this will propel them into prominence at a rate never experienced. Their adoption in business is, therefore, a given, and the impact is certain to be ubiquitous.

These technologies include

Extensible Mark-up Language (XML): A presentation and platform neutral way to mark-up and describe information so that it may be easily portable between systems and presentation formats.

Managed Code: Realized in Sun Java and Microsoft .NET, which represent the next generation of computing platforms that enable rapid development and secure deployment of robust, mission critical applications across diverse access technologies and computing devices.

Component Architectures: A philosophy born out of object-orientated development methods that see systems as comprised of building blocks that are capable of combination with other building blocks that either already exist or still need to be created.

Combined in a world where business is increasingly aware that the Internet can be used for more than just e-mail and casual operations, such as exchanging web pages, these technologies are bound to disrupt traditional definitions of resource planning systems and with it, our conventional wisdoms about their implementation and applications in the business world.

So disruptive are these technologies and the drivers behind them that ERP II and the world for which they were designed makes no bones about promising to render traditional ERP systems obsolete from an architectural standpoint and inadequate from a business perspective.

So what is ERP II? How do we define it?

ERP II Defined

ERP II is the iteration that adapts ERP to the Internet-based world of today and tomorrow through changes in functionality, technology, and architecture.

The most apparent change from ERP to ERP II is a change in focus from one that is totally enterprise-centric and preoccupied with internal resource optimization and transactional processing to a new focus on process integration and external collaboration. Simply put, all existing and future information technology capabilities that are centered on the enterprise will now be extended internally and externally to the organization.

Internally, ERP II integrates separate and disparate systems so that business processes can be connected in a manner that is seamless and transparent to users at the application or user interface level. The overall result is a free-flow of information throughout the enterprise. A single program interface may load information from one or more separate systems residing in different locations, allow it to be modified and saved back in an orderly manner that does not corrupt or violate data integrity.

These actions may, depending on process requirements, trigger events in any of the systems to which the data was returned. Depending on the complexity of the process, the action will result in a chain of programmed events that may be immediately visible to other users who are using different applications or systems from that used at the event source.

To illustrate how this works, consider for a moment this example of "The Outdoors Company," a bicycle retailer.

The Outdoors Company does not manufacture bicycles. They are also not in the business of stocking or selling stock, one-size-fits-all products. Instead, they specialize in helping customers to assemble bicycles that are their own unique creations. The company has three forms of sales outlets. The first is their own web site, a component-based application that includes a product configuration tool. This allows customers to easily assemble a bicycle from the largest catalogue of bicycle parts in the world. The second sales outlet is a network of affiliate web sites, and the third is a network of traditional high-street retail stores.

Whether a customer uses The Outdoors Company, an affiliate web site, or a traditional high-street retailer, the order process is always the same. First, customers create a profile that stores all their information; then they select the parts for their custom bicycle; and finally, they submit their order and receive a date and time when their creation will be delivered.

Seems like a simple e-commerce application, doesn't it? Think again. Remember, we said that The Outdoors Company is not in the business of stocking? Well, we meant it. They do not hold any stock. Instead, all orders are made on back-to-sales orders. Only when a customer orders a part is it actually ordered by The Outdoors Company. So how do they know if an ordered part is available from the manufacturer?

The answer is simple: collaborating-commerce (c-commerce). C-commerce is a relative new "buzz word" and therefore, most people have not heard of it. Collaborating-commerce is enabled by ERP II application deployment strategies and relates to information that is exchanged when two or more businesses exchange information electronically via the Internet. The applications, process, and data of all collaborating businesses are integrated and loosely connected to facilitate near real time sharing of business data. Our example of The Outdoors Company will illustrate the benefits of c-commerce.

The Outdoors Company is connected to all the suppliers who make bicycle parts by using ERP II application deployment strategies. Instead of storing and maintaining a database that stores the parts' lists and estimated inventory of all suppliers, it simply does a direct query on the suppliers' systems to locate the part. This action is done directly over the Internet, and in the process checks are made as to the availability of inventory. If the part is not available, it simply returns this information back to the customer with additional information giving the lead-time it takes to obtain the part and for The Outdoors Company to take delivery. Furthermore, if the selected part is an assembly and one component thereof is not available, the system simply instructs the supplier's system to query the next supplier's system to again check availability and return information. The customer then sees the final answer, which may be the result of an aggregated calculation and has a choice to accept this offer or select from an already available list of parts with an equal specification, but may cost more or less than the requested item. All these actions are transparent to the customer. At no point in time is the customer experience broken.

In this way the bill of materials (BOM) required to assemble the bicycle is collected with the user making decisions during the process. Each time that the BOM is modified, the new price and total delivery lead-time are calculated. When the configuration is complete and the customer finally submits their order, numerous events are triggered. The payment transaction is processed, purchase orders are dispatched and so forth. The process goes full circle to the point where parts are received into stock by The Outdoors Company.

Items received are tagged with electronic devices that store identification information. These devices are activated by magnetic fields and use radio frequencies to communicate with resource planning systems that are connected to a receiver network throughout the company. At all times, everyone inside The Outdoors Company and everyone external, including the original suppliers and customers, can see the location and status of every part that makes up a bicycle order. This information is not only shared by people, but also systems such as the advanced planning and scheduling (APS) system that is used to managed the production capacity of the assembly plant, the customer relationship management (CRM) system that not only stores customer data but also provides proactive communication with the customer, information of new promotions, and on going status of current orders. There are more systems, but I think you get the idea.

This level of information liquidity is made possible because applications are extensible internally across the local area network that includes wireless technologies and are extensible externally across the Internet to include the business processes, applications, and the data of geographically dispersed regional offices, suppliers, partners, and customers. The overall effect is one of functionality becoming deeper and more specific to industry requirements and a unification of the end user experience.

ERP II starts out as an application deployment strategy but quickly expands out to become a borderless business environment. The result is a virtual entity in which all the key, domain-specific, operational, and financial processes of a community of interest are seamlessly integrated in order to leverage collaboration for increased efficiency. The process footprint of ERP II can, therefore, be described as including all collaborative, operational, and financial processes that have the enterprise at their center.

Understandably, ERP II impacts heavily on business, application, and technology strategies. The traditional role of ERP becomes expanded to now include publishing and advertising IT capabilities in order to facilitate interoperability and collaboration. Furthermore, the domain of ERP is no longer limited to manufacturing and distribution, but has expanded to include areas such as supply chain management (SCM), customer relationship management (CRM), business intelligence (BI), and inventory optimization (IO).

The function of ERP, therefore, also expands to include other functions that are specific to individual industries and sectors, such as utility customer billing, air traffic control, or even disease control. This is the area where ERP II really starts to excel and where the investment in ERP II starts to pay an added bonus by enabling business ecosystems to achieve new levels of efficiency through event driven processes that are exactly tailored for unique environmental and customer requirements.

Conclusion

ERP II is the next step in the evolution of enterprise applications that will align business applications with the new requirements of the Internet world and better enable user organizations to efficiently and cost-effectively conduct their businesses in a global economy.

Considering the pervasive nature of the Internet and the growing economic trend toward globalization, it is realistic to say that ERP II deployment capabilities will be a major driver of ERP upgrades in the years to come and a critical qualifier for vendor selection with new customers.

In this environment, the decision to deploy ERP II technologies will be a strategic necessity as c-commerce increasingly becomes a pre-requisite to doing business. Businesses whose applications, business processes, and data are interoperable and collaborative will be accustomed to a world where demand identified is demand realized, in a matter of nanoseconds. This advantage combined with the dissipation and aversion of costs enabled by c-commerce will drive customers to select suppliers with IT capabilities that will preserve the c-commerce paradigm, excluding those that cannot.

This brings to mind the saying, "No business is and island." To exist in the future businesses must evolve to the changes in the global business environment or become extinct.

This article has been sponsored by SYSPRO

About the Author

Sean Wheller is an author, management consultant and the president of enbaya, a consulting firm that assists hi-tech businesses as they chart a course and get underway with new initiatives-products, markets, partnerships, and entire businesses. Wheller is the author of the book SYSPRO e.net solutions—The Definitive Guide which is available from SYSPRO. Over the past fifteen years, he has been a consultant to leading European, American, Middle Eastern, and African based information services and software firms. Prior to founding enbaya, Wheller held the position of CEO at MediaOneIT. Currently, his clients include Lucent, Avaya, Nortel, IBM, Comverse, SYSPRO, and numerous early stage technology firms. He can be reached at sean@enbaya.co.za.

Technology's Role in Strategic Human Resources

Most chief executive officers (CEOs) are challenging their human resources (HR) departments to make more strategic contributions to the organization. With HR traditionally viewed as a cost center, it is often difficult to know precisely what that means. CEOs, who are focused on growth, earnings, and shareholder returns, want HR to support corporate business objectives and to have the necessary data to support business decisions. These roles are necessarily integrated with HR's responsibility to ensure that there are qualified and satisfied workers when and where they are needed. The way to fulfill these roles is through process excellence, integrated HR systems, and accurate and actionable data from all HR departments. When these elements come together, HR can have a tremendous and meaningful impact on the bottom line.

It sounds like a lot to ask, but these demands are achievable today. And the HR department doesn't have to go it alone. There are technologies and service providers that can help move HR from the administrative rut, free up manpower for strategic tasks, and employ business intelligence capability to align HR with desired business outcomes.

The Role of Outsourcing

Human resources outsourcers play a critical role. Companies often choose to work with outsourcers to gain access to the latest technologies without having to make the associated capital investment. At most enterprises where HR functions have been outsourced, the initial tier of value is well-established. Processes are standardized and employee interactions are professionalized. Transactions are faster, more user-friendly, and less costly. As employee programs continually become more complex and difficult to administer, outsourcing consistently delivers high levels of service.

But it's that next critical tier where advanced HR outsourcing technologies are delivering strategic leverage by gathering and combining fragmented data from discrete vertical HR systems. When data from various departments is integrated into a reliable, consistent source of centralized information, HR can make better-informed and more strategic business decisions daily. The impacts of HR programs and practices can be assessed, and critical insights into the workforce revealed.

Sophisticated analytics can measure how HR systems and programs affect employee behavior and influence customer behavior (for example), ultimately impacting financial results and corporate growth. Companies are beginning to see that reducing HR administrative costs is only the tip of the iceberg. A new priority is to employ the technologies that provide data and analysis, in order to realize the savings that lie in HR.

Technology at Work

For example, your time and attendance program tracks worker hours and absences, and is the entry process for generating payroll. A separate program handles short-term and long-term disability payments. Both of these systems are important. But viewed separately, they reinforce HR's traditional administrative role. An outsourcing solution that combines information from both systems and employs business intelligence functionality delivers a human asset management program that tracks absenteeism, peak work periods, and turnover. Now your data shows impacts on labor costs, overtime, and the amount of money spent on temps and employee replacement. This business intelligence can be used to closely align the workforce with long-term labor needs, manage absence and labor utilization, and thereby reduce operating costs.

Training, staffing, and recruiting programs can be linked in beneficial ways, too. There are lots of technology tools that enable prospective employees to submit rsums online. But does your HR department use that information beyond the recruiting process? By integrating prospective employee data and skill sets against the company's development plan and training programs, qualified individuals can be "pipelined" into the organization over time, and existing staff can be educated. This ensures more strategic hiring decisions from the outside, and better use of existing personnel.

Succession planning is another key area where HR outsourcing can provide strategic value. For example, if a company has a 10 percent turnover rate, and it typically takes 30 days to fill a job, what does that mean for its staffing at any given point in time? It means the company is nearly one percent understaffed at all times. In an organization of 50,000 employees, that's 400 workers not meeting deadlines or producing, which negatively impacts customer satisfaction.

In that same scenario, add in the ramp-up time required for new hires to fill the open slots, and the "downtime" could be as much as sixty days per opening. Factor in absenteeism, short- and long-term disability, sabbaticals, maternity and paternity leave, job sharing, and other benefits, and the staffing levels are likely to be much lower than imagined. Using business intelligence technologies and analytics allows HR departments to better see and manage what is really happening with staffing levels, and predictive measurements can help plan more accurately for the normal ebbs and flows of business.

Selecting the Right Outsourcing Provider

As important as deciding to outsource HR functions, however, is selecting the right partner. Partnering with an HR provider is a critical business decision, and should be considered with the same due diligence as a merger or joint venture. Companies should be culturally compatible and share a common vision.

An outsourcing partner's service framework and delivery model should be engineered to meet your requirements, and there should be a clear definition of the scope of services and defined service levels. The objectives of outsourcing should be translated into service-level agreements so performance can be measured against stated expectations. Most large enterprises will want a full-service provider rather than one that handles just one element (such as payroll). References should be checked, and the provider should demonstrate capabilities in full-spectrum HR outsourcing (and have the financial backing to be around for the long term).

Remember, working with an outsourcer is not about giving up control. Rather, it is about finding the best ways to deliver quality service, impact organization economics, and provide the data that aligns the HR department with business outcomes.

The Metamorphosis

In today's economic climate, all CEOs have a growth agenda that requires a solid and committed workforce—in other words, they need to have the right people in the right place at the right time. The true value of the human resource team will be measured in how well it aligns with this growth agenda. Effectively integrating HR business intelligence technologies is foundational to HR's metamorphosis from administrative cost center to strategic contributor to corporate growth.

Examples of Strategic HR

Here are some quick takes on how companies can strategically leverage HR for measurable gains. The impact areas and results in the list below are far from complete, and are provided here only as samples:

* Staffing levels: Aligning time tracking with disability and leave information fosters greater understanding of staffing needs.
* New hires: Melding rsum data with future business needs "pipelines" qualified individuals for impending job openings.
* Succession planning: Assessing skill sets of existing employees and overlaying it with upcoming job openings promotes hiring from within.
* Benefits cost: Integrating HR survey data with corporate goals can help predict changing corporate contribution rates that would result in more job turnover.
* Hiring assessments: Extracting data from various HR functions allows you to determine if increased hiring is due to growth and skill upgrades, or to unwanted turnover.

Essential Considerations When Selecting an Outsourcing Provider

Beyond general considerations with respect to the utility of outsourcing providers, there are specific questions which enable companies to determine the compatibility of a prospective provider:

* Do the provider's systems have the capabilities to meet specific technology and business requirements? Note that inadequacy with respect to this question can of course come on two counts: either the provider's systems are too "generic" to meet these specific requirements, or else (in the case where they do in fact address the particular requirements) they simply underperform.
* Does the outsourcer have a clear understanding of needed capabilities?
* Will the operation be transparent, both financially and managerially?
* Do the outsourcer and your company share a common vision?
* Does the outsourcer have a partnering mindset?
* Is the outsourcer's culture compatible with your corporate culture?
* Will the outsourcer be proactive in engaging your company to resolve problems?
* Are the scope of services and performance levels clearly defined in a service level agreement?
* Can the provider enable your company to deliver business performance impact?

By conducting a thorough review of the tangible and intangible elements underlying these questions, companies should be in a strong position to ensure that HR is not only a fundamental element for achieving corporate objectives, but an integral driver of success.

Welcome to ERP Showdown: Infor ERP LN 6.1 vs. Epicor Vantage vs. Lawson M3 Discrete Manufacturing Solutions

With enterprise resource planning (ERP) systems being the information backbone of the organization, we decided to take a closer look at three of the more popular discrete ERP solutions for the mid-market. Using TEC's ERP Evaluation Center, we compared Infor ERP LN 6.1, Epicor Vantage, and Lawson M3 Discrete Manufacturing Solutions head-to-head, based on the most recent data supplied to us by the three vendors.

We looked at eight standard ERP modules. To eliminate any chance of bias, and to ensure a level playing field, all 3,600 criteria that make up the modules and submodules in our ERP Evaluation Center were given equal weight and priority. In other words, no area of functionality was treated as being more important than any other.

The chart below shows the overall rankings.

Results

As you can see above, straight out of the box, Infor ERP LN 6.1 ranked first overall, with Lawson M3 Discrete Manufacturing Solutions coming in second, and Epicor Vantage placing third. (Overall scores were based on the average level of support the vendor offers across the entire ERP spectrum.)

As the chart below shows, Infor finished first in five of the eight modules (although by some fairly small margins in a few cases), with Lawson finishing first in three modules (two of which were extremely close), and Epicor failing to finish first in any of the eight modules.

As you can also see in the chart below, there’s an especially wide range of results in Human Resources. Infor ERP LN 6.1 is the only one of the three solutions that currently provides full HR functionality. Epicor Vantage requires third-party functionality, while Lawson M3 plans to offer full HR functionality in future releases. (It should be noted that clients do not always require an HR component in a new ERP system, as many prefer to retain their existing HR solution or add on a third-party solution.)

However, as with most aspects of enterprise software, it's not that simple or clear-cut.

Rankings, either overall or by module, do not tell you everything you need to know. What they do provide is a basic, high-level view of vendors' general strengths and weaknesses right out of the box. However, the fact is, few businesses, if any, can use an ERP solution right out of the box. Businesses have special needs and priorities that need to be supported by any ERP solution they use.

For example, if your business requires an especially robust quality management functionality, even though Infor finished first overall, Lawson scored higher in the Quality Management module, and may therefore be a better choice for your organization.

The same applies within individual modules, where the top-ranking vendor may not necessarily be the right one for your organization's needs. Although Infor placed first overall and in Product Technology, the chart below shows Lawson as stronger in both the Reporting and Workflow and Document Management submodules. If either of these functional areas is key to your organization's business model, Lawson may be a better choice than Infor.

Conclusion

Given that 'out of the box' rankings rarely, if ever, reflect the real-world needs of an organization, and that the rankings can shift depending on what area(s) of functionality you look at, how then do you determine which ERP solution is best suited for your business?

The fastest, simplest way is to do what we did to produce the results you see here: use TEC's ERP Evaluation Center. We got our results in less than 20 minutes, versus weeks—or even months—of struggling with huge Excel spreadsheets.

TEC's ERP Evaluation Center allows you to set priorities that reflect your organization's business model and special needs at every level of functionality. At the modular and submodular levels—even down to the individual criteria—you can tell the system which business processes are critical, important, or not important to your organization. The system then compares your priorities against the vendor responses to produce a shortlist of solutions. You get a custom comparison—one that ranks vendor solutions not on out-of-the-box functionality, but rather on how well that functionality matches the business requirements of your organization.

It's the best way we know of to evaluate ERP solutions, and we invite you to try it out. Simply click on the link below to visit our ERP Evaluation Center and conduct your fast, free custom ERP comparison. After all, there's no other organization quite like yours.

Essential ERP – Current Market Trends – Part II

The growth of ERP has been a direct result of the fierce global competition, short product life cycles, highly distributed operations, and information-driven management that characterize today's business environment. The vast majority of companies have always hoped to purchase an information system as a product, not as a collection of technologies, components and services. Leading ERP vendors have been successful so far because they have been attempting to build such a product.

A typical ERP system today offers broad functional coverage; vertical industry extensions; a robust technical architecture; training, documentation, implementation and process design tools; product enhancements; global support and an extensive list of software, services, and technology partners. While it is not a system-in-a-box yet, the gap between its desired and actual features is becoming smaller every day.

Pressures on ERP vendors (discussed in the TEC Technology Note Essential ERP - Current Market Trends - Part I) lead us to believe that the following trends in the ERP market are the direct consequence of vendors' attempts to 1) resolve current ERP functional and/or technological deficiencies, and/or 2) expand software sales both within their existing and potential customer bases, particularly in the lower-end of the market.

About This Note

The ERP Market Trends covered in the TEC Technology Note Essential ERP - Current Market Trends - Part I are:

1. ERP Functional Scope Expansion
2. Sharper Vertical Focus
3. Flexibility Enabled by Adaptable Architecture

The ERP Market Trends covered in this note are:

4. Web- and E-commerce Enablement of ERP Systems
5. Intensified Market Merger & Acquistion Activity
6. Advent of Application Hosting Services

4) Web- and E-commerce Enablement of ERP Systems

Indisputably, one of the most significant trends in the ERP market today is the advent of e-business. No industry remains unaffected by the changes created by the explosive development of the Internet. As the reality of enabling seamless web-based collaboration between companies and their customers and suppliers becomes more of a reality each day, ERP applications are poised to play a pivotal role.

The concept of e-commerce is not really new to ERP: electronic data interchange (EDI) and electronic funds transfer (EFT) have been a part of ERP applications in varying forms for years, and are now in the process of being redefined (and given a makeover at the same time) to embrace the Internet and Web. The focus of EDI, EFT, and e-commerce in general is on transactions, which is something that traditional ERP applications excel at handling.

While extending these transactions beyond the corporate walls to the world of the Web poses its own set of challenges - namely, maintaining transaction integrity and security - the real challenge for ERP is enabling intelligent collaboration between companies and their customers and suppliers. This is the notion of e-business, of which e-commerce and its transactional focus play a role. Traditional ERP applications have so far proven inadequate in this new world of e-business because their primary focus has been on automating internal processes and coordinating transactions, not on enabling external collaboration between a business and its constituents. However, this is rapidly changing as the notion of extended ERP takes hold. Extended ERP takes a different view of the world, and has been promoted by most of the major ERP vendors in the form of two emerging application areas:

* Supply chain applications - The focus here is on extending the production planning, scheduling, and delivery execution processes to a company's suppliers and trading partners. While there are transactional components to supply chain, the primary focus to date has been on business-to-business (B2B) planning and collaboration. Business-to-business procurement can also fall in this category, yet the focus is often on procuring non-production related goods from suppliers.

* Customer management applications - These applications focus on extending sales, marketing, and customer service/support beyond corporate boundaries to the customer doorstep. There are transactional components here as well, as in the case of Web storefronts and unassisted sales. The broader picture includes Web-based self-service, promotions and one-to-one marketing, and content delivery.

Extending ERP to the Internet stems from the intent of many IT organizations not to reinvent the wheel in their scramble to create e-commerce applications. By extending the existing ERP system to support e-commerce, organizations not only leverage their investment in the ERP solution, but can also speed the development of their e-commerce capabilities.

However, as mentioned earlier, ERP systems have proven difficult to change and extend. Barricaded behind complex, proprietary APIs and based on complex, nearly indecipherable relational database schemas, ERP systems do not readily take to e-commerce. Nevertheless, IT managers are finding an increasing set of options for not only extending these systems to support the Web and e-commerce but for other key activities, such as decision support.

Underlying the new options are ongoing initiatives to break ERP systems into separate components (componentization), open up the core databases and proprietary application interfaces, and provide tools for customization.

Leading ERP vendors have been trying to oblige users' demand for e-commerce capabilities in their ERP solutions. SAP revealed a slew of Web and e-commerce solutions at its last SAPPhire conference in 1999. Since then, SAP introduced mySAP.com, a suite of e-commerce components for SAP. Oracle has numerous initiatives, including one that will allow its ERP, CRM, and e-commerce solutions to share the same database. Baan and J.D. Edwards have both rolled out some e-commerce modules. Finally, Peoplesoft's newest version includes a number of e-commerce capabilities, including support for online procurement and eStore, PeopleSoft's online sales and customer management solution. Lawson Software, Epicor Software, Infinium Software, Great Plains Software, Symix Systems, and American Software are the mid-market ERP vendors with similar initiatives, to name but a few.

The first stage in the ERP's conquest of the Web is to allow browser access through support for HTTP, HTML, and Java. This stage has almost been completed by a majority of ERP vendors. The next stage, which has just begun, is to extend the ERP applications themselves to the Web, where they can be accessed and run by outside partners and customers. These Web-based applications are hybrid in form, bringing together proprietary legacy elements, either host-centric or client/server, with thin client interfaces.

In order for traditional ERP systems to be Internet ready, they will have to be:

1. Fully browser enabled
2. Redesigned to be available to all corporate users, not just the special few
3. Redesigned to be available to customers and suppliers
4. Redesigned to use new data interchange language, most likely extensible markup language (XML), rather than proprietary protocols

With an Internet-only ERP system in place, client-side software upgrades become unnecessary. Browser-based applications significantly simplify the training, and tying together far-flung locations of an enterprise becomes simpler too.

Enterprise portals on intranets leverage this architecture's value in aligning intranet workplace resources more closely with business objectives. Leading ERP vendors have also made moves to adopt web portal strategies.

The basic goal is to create a virtual workplace and marketplace for ERP users, where the ERP applications, other disparate back-end systems, and external content and services (catalogs, directories, travel services, benefits administration, etc.) can be seamlessly and transparently accessed by users via the Web. By personalizing, profiling, and presenting its information, business applications and inter-organizational interfaces in the context of roles and work processes, an enterprise portal provides a thin-client link to work-based resources within the enterprise.

While the concept of an ERP portal is an interesting one, we identified the following challenges for vendors pursuing this route:

* Integration - the success of a portal is predicated on how well it ties together internal and external transactions, content, and services.
* Effective partnering - ERP vendors face a whole slew of potential new partners, many of which are not traditional technology companies.
* Pricing and, more importantly, an ERP portals' business model are still very obscure.

Nevertheless, with these Web initiatives, ERP vendors are falling into line with what their customers actually want and need. We believe that, within the next four years, over 40% of Fortune 1000 Companies will manage their own enterprise portals to enable effective use of personalized decision content, to provide role-based access to internal business applications and workflow, and to facilitate B2B e-commerce integration (70% probability).

5) Intensified Market Merger & Acquisition Activity

The ERP market appears to be consolidating. The top 6 ERP vendors, SAP AG, Oracle Corporation, PeopleSoft Inc., Geac Software, J.D. Edwards & Company, and Baan Co., account for over 65% of total ERP revenue. Consolidation, mergers and acquisitions are expected to intensify.

Over the last two years, the ERP market became stratified into growing and profitable vendors on one side, and stagnating and non-profitable vendors on the other side (for more information see the TEC Market Note on ERP published in January 2000). We believe that this will become more accentuated, with customers becoming more vendor viability wary.

We expect larger ERP vendors to swallow up their smaller brethren, both in ERP and related markets, such as the recent IFS AB acquisition of Effective Management Systems, Inc., the manufacturing execution systems (MES) vendor, MAPICS' acquisition of Pivotpoint, the vendor of extended ERP for mid-market companies, and Symix' acquisition of Profit Soutions, the eCRM vendor.

We also expect companies with related software products to move into the ERP space through acquisition like Invensys, Plc. with its acquisition of Marcam Solutions.

Intensified M&A activity also stems from the fact that while the concept of best-of-breed will not go away. Users will increasingly look for one strategic vendor to fulfill the majority of their business application needs. This is particularly true for the lower end of the market and for the companies operating highly centralized organizations with a conservative bent. This trend, bundled with strong vendor competition, will drive increased merger & acquisition activity in the entire business applications market.

Smaller ERP vendors and best-of breed CRM or SCM vendors will acquire new functionality and merge to protect themselves. We predict that more than 50% of current ERP vendors will not survive until 2004 (65% probability). About half of these will transform into system integrators, while either relegating their product to a niche 'bolt-on' or legacy status. The remaining half will be acquired.

The most likely acquisition candidates will be those vendors with poor financial performance and undervalued market capitalization but with a large customer base and a deep focus and expertise in a certain industry. This should not necessarily be a bad thing for current users of those products. The acquirer will either continue product development and support of the acquired product (40% probability) or offer a relatively attractive migration path to its product (35% probability). However, there is a 25% probability that the acquirer is only interested in milking the maintenance revenue without ongoing product support. These users may find themselves left in the lurch with a legacy product.

In addition, we predict some unconventional acquisitions, such as the acquisition of ERP vendors by best-of-breed CRM or SCM vendors, with a view to offer a more comprehensive solution. We believe that, within the next two years, Siebel Systems and i2 Technologies will have to resort to acquiring an ERP vendor (60% probability). Furthermore, ongoing merger & acquisitions as well as the need to develop new product features will increase R&D investments in the future, measured as a percentage of total revenue.

The large players (i.e., the Big Six) have inherent advantages and incentives to develop or acquire needed competencies: their installed base, their market clout, and their ability to commit resources to development. To separate themselves from the rest of the pack, they will either (1) have to use those internal resources to develop their own extended products and capabilities, as SAP has done, or (2) have to buy/use someone else's superior technology/product, which was the route generally pursued by other large vendors.

Small vendors should either (1) try to develop the above mentioned required competencies and build up as much market share as possible, either under their own steam or by means of mergers & acquisitions, thereby strengthening their position, or (2) align themselves with a major vendor.

6) Advent of Application Hosting Services

Application Service Providers (ASPs) have arisen on the Internet in response to such ERP woes as support expenses, misbehaving application, and server downtime. Assuming an organization ports all application functionality to an ASP, the only real concern for internal IT individuals would be ensuring a rich and stable connection to the Internet.

ASPs use a "Thin Client" configuration, which means that any hosted application accessed by an end user, such as e-mail or word-processing application, is transmitted to the desktop via a series of streaming screenshots, thereby minimizing the need for excessive bandwidth and software installations on the client machine.

The downside is the long-term cost of "leasing" the service. One of the primary benefits of outsourcing is the initial negation of "up-front" costs associated with the implementation of a production system. However, after certain period of time, the outsourced system will cost more than an "in-house" production system. An analogy may be made to a group of 3 college roommates who need a big-screen television to watch football. Each roommate pays $20 per month for 3 years, totaling $2160 when the television could have initially been purchased for $1200. The appeal is immediate gratification coupled with reduced initial financial pains.

The main challenge facing most ASPs is how to drive down long-term costs while accumulating a solid revenue stream. One of the cost inhibitors for ASPs is the amount of dedicated bandwidth they must maintain to support thousands of users. Another challenge facing ASPs is Service Level Agreements (SLA); if for some reason the ASP loses Internet connectivity, customers will lose connectivity to outsourced production systems, which negatively impact their internal SLAs.

The key to an ASPs success will lie in the targeted marketplace. Those ASPs targeting large organizations will most likely fail (probability 75%) or scale back their profit margin in order to gain business. Those ASPs who can successfully market to small-to-midsize enterprises (SMEs) and emerging '.com' companies while providing good technical support coupled with frequent software and hardware upgrades will experience good success. We believe that, within the next three years, application hosting will be the dominant delivery model for packaged delivery for SMEs (70% probability).

Outsourcing Advantages:

* Predictable, fixed cost for a customer
* Reduced setup and configuration time, and greater operational simplicity
* All upgrades applied to ASP servers. No need for client or desktop upgrades.
* Limited funds required for initial startup Reduced need for internal IT support
* ERP package maintenance performed automatically by external experts

Outsourcing Disadvantages:

* Outsourcing is still in its infancy, first customers being early adopters
* Potential security risk since customers' confidential and mission-critical data reside at the ASP's location
* Becomes more costly over the long run Offers little or no support for software modifications/customizations
* Decreased control over infrastructure and deployment
* Limited to Direct Access Points for your ASP or need for secondary Internet access account depending on user travel plans
* Little to no control over hardware and software upgrades
* Support costs are essentially negated and a monthly per user charge is assumed

The following types of enterprises should consider using ASP services:

1. Those with limited investment capital and those that do not have an IT department
2. Those that do not anticipate a high rate of change in the way they do business
3. Those investing in an application to streamline costs rather than to enhance revenue
4. Those that lack resources for the rapid implementation of a distinct project that possibly does not require complex integration with existing applications (e.g., HR/Payroll administration, e-mail, etc.)