What You Need to Know
The Magic Quadrant for Midmarket and Tier 2-Oriented ERP for Product-Centric Companies addresses the needs of product-centric companies or divisions of enterprises with between 100 and 999 employees, and with annual revenue between $50 million and $1 billion. These enterprises have limited IT resources and seek ERP systems that support their differentiating business processes well with deep functionality, but do not require significant overhead in the nondifferentiating business areas (meaning the systems must minimize total cost of ownership [TCO] and complexity).
Although some see this market as large and mature, Gartner sees this market as undergoing a "changing of the guard," with older, established systems with deep functionality being displaced by more modern and agile systems. The key trends driving changes in this market are:
• The packaging of industry-specific functionality
• Technology modernization using service-oriented architecture (SOA)
• The need for global deployments
As this change continues, Gartner concludes that only one offering qualifies as a leader in the market at this time: Microsoft Dynamics AX. The product is robust, it delivers low TCO through integration with other Microsoft products, and, most importantly for the midmarket, Microsoft is adept at managing its channel of resellers. However, this offering has challenges with global implementations, and users are dependent on both Microsoft and the implementation partner for support.
Two offerings are rated as visionaries. SAP Business All-in-One is one of the broadest and deepest solutions in the market, and its Best Practices and the fast-start program reduce the effort needed for the early phases of an implementation. However, challenges with solution complexity and cost prevent this offering from becoming a leader just yet. The other visionary is Epicor Vantage. Epicor released Epicor 9, which, through its use of modern technology, places it as the most visionary and complete offering in the market. Epicor is a comparatively small vendor, and the product isn't as functionally robust as others, which are challenges for Epicor.
There are 10 other offerings in the Challengers and Niche Players quadrants. Some of these offerings have superior functionality in particular parts of the market, so users should investigate these options. However, these offerings do not have a compelling vision for leading the market, or have other critical challenges detailed in the individual product summaries.
Market Overview - ERP Market and Vendors
According to Gartner, the overall ERP software market (for both large and midmarket accounts) was $23.8 billion in total software revenue for 2008; with a predicted growth to approximately $24.5 billion by year-end 2009. Given the current economic and business climate, Gartner has a cautious, but still positive, forecast for the ERP software market. The midmarket ERP market is very fragmented, and is served by hundreds of vendors covering every conceivable geography and industry. According to Gartner's market share data for large and midmarket ERP software in 2007, the top five vendors in market share were SAP (28%), Oracle (14%), Sage (7%), Infor (6%) and Microsoft (4%). Of the top five vendors, three (Sage, Infor and Microsoft) are focused on the midmarket, while SAP and Oracle serve the midmarket with parts of their ERP portfolios: SAP with Business All-in-One, and Oracle with JD Edwards and the Accelerate offerings for E-Business Suite (EBS). Further down in terms of market share, there is a large number of midmarket-focused vendors, such as Epicor, IFS, Lawson, QAD, Exact Software and others, that are specifically focused on regions or niche industries. The diversity of vendors, therefore, demonstrates how important and vibrant this particular segment of the market is.
The following major trends have influenced ERP systems for product-centric companies in the midmarket during the past few years:
• Industry-specific functionality or verticalization of the systems
• A fundamental modernization using SOA to transform the systems into model-driven packaged applications with embedded analytics
• Globalization, which is no longer an exclusive characteristic of large global enterprises
• A consolidation in the market by a number of mergers and acquisitions of ERP vendors
Verticalization is approached in two different ways: Some vendors, such as Lawson, IFS and QAD, focus on specific industries, and are reluctant to enter into those beyond their specific areas of expertise. Others, especially Microsoft, leave the verticalization of a horizontal core system to their partner ecosystem. In another example, SAP's approach is mixed: Its messaging heavily relies on an industry-by-industry approach, but most of the industry-specific functionality for the midmarket is developed and implemented by partners. Therefore, while the midmarket ERP landscape is fragmented in terms of vendors, the choice with regard to industry focus is often narrowed to a small selection. In reference calls made for this Magic Quadrant, there was a consistency to vendor evaluation lists across customers, and there are common patterns of referencing across vertical lines in selection patterns.
Modernization: Many of the ERP systems that are in the market today and analyzed in this Magic Quadrant are rooted in the 1980s, having made the transition from material requirements planning (MRP) to ERP to ERP II. The arrival of SOA has shifted the focus from monolithic, inflexible systems toward collections of services that can be composed more flexibly into applications, and can be adapted more easily to fast-changing business requirements. A vendor's ability to transform its solutions into user-centric and model-driven packaged applications with embedded analytics is directly reflected in its system’s completeness of vision rating. A system with a low ranking might be a good choice to support today's business needs, but will show significant deficits during the system’s use lifetime. Companies that select a system with a low vision score risk falling behind their competition if the competition undertakes a major IT modernization effort.
Globalization has long been a topic only for large, multinational corporations operating around the globe. But, increasingly, midmarket companies are building more of an international presence, either directly or through channel approaches. In many cases, this is not an entirely voluntary decision, but can be driven by their major customers, which require their suppliers to follow them into new geographies. Companies facing a similar decision in upcoming years need to make sure that their ERP systems can support their business processes in all relevant countries. To do so, it is not sufficient that the system's user interface (UI) is translated into the respective languages, to enable use by local employees in their native language. Rather, the systems have to be localized, including legal and statutory requirements. For the most important countries, the vendor should deliver the necessary "country versions" directly; for smaller countries, this could be done by partners. In both cases, the systems need to have the certificates necessary in some countries, and the vendor should have the intention and the means to maintain its presence in the country for many years to come. The vendor has to provide support and consulting resources during and after the implementation, either directly or through channel partners. For these reasons, only systems that are available in more than one geography were included in this Magic Quadrant (see the Inclusion and Exclusion Criteria section).
Consolidation: The fourth major trend that the ERP market has seen is a high level of mergers and acquisitions, with Oracle, Infor and Sage being the most active acquirers. But even if a vendor has a global presence, the same is not true for all of its products. Additionally, within many of the "collector" vendors, there is no vision or plan to consolidate functionality or offerings across acquired products. This means that there may be no plans for converging a vendor's midmarket offerings as there might be in other markets where vendors acquire products that are then consolidated. Therefore, this Magic Quadrant is not based on vendors themselves, but rather on each vendor's particular midmarket offerings individually.
The Role of SaaS and Open Source in Midmarket ERP
Gartner sees an increasing availability of software-as-a-service (SaaS) ERP solutions, and, unlike in large enterprises, where SaaS ERP use is limited, SaaS ERP is playing an increasingly important role for back-office solutions and front-office applications for midmarket companies. Cost reductions in implementation and operation are one of the important drivers for SaaS ERP, and SaaS offerings avoid the need for upfront capital expenditures because they can be funded as an operational expense. However, when analyzing the TCO of SaaS ERP over five years, Gartner finds that SaaS is not necessarily less expensive than on-premises ERP.
NetSuite (www.netsuite.com ) is the largest example for a SaaS-based ERP suite. It offers a broad range of application modules, including financials and accounting, purchasing, payroll, order management, inventory control, and employee management, as well as built-in integration with its CRM and e-commerce capabilities on the same platform. Gartner has spoken to customers that expressed a high level of satisfaction with NetSuite's offerings.
Other notable SaaS ERP players are Plex Online (previously Plexus Online, www.plex.com ) and Glovia (www.glovia.com ). SAP has also announced an on-demand ERP solution called SAP Business ByDesign.
Open source has been used extensively in infrastructure components, but open source has a limited impact on ERP at this point. In the past two years, however, some new open-source software (OSS) ERP vendors have emerged with a focus on leveraging OSS to reduce the TCO of business applications, and to enable customizations that would be difficult to achieve without access to source code. Although we have doubts as to whether OSS business models actually confer these advantages on OSS ERP, these early stage offerings are nonetheless promising and should be evaluated. Examples for OSS ERP suites include Compiere (www.compiere.com ) and Openbravo (www.openbravo.com ).
Although increasing in importance, none of the SaaS or open-source ERP solutions met the inclusion criteria for this Magic Quadrant, due to their number of sales or product focus. Our ERP Magic Quadrant criteria do not explicitly exclude SaaS or open-source solutions. As these offerings continue to grow, we expect their inclusion in future versions of this Magic Quadrant, and are actively tracking their progress.
Microsoft Dynamics AX
Originally known as Axapta by the Danish vendor Damgaard, Microsoft Dynamics AX is Microsoft's most scalable ERP solution in the Microsoft Dynamics product family, the other three being Microsoft Dynamics NAV (Navision), Microsoft Dynamics GP (Great Plains) and Microsoft Dynamics SL (Solomon). Microsoft Dynamics AX is a robust platform with horizontal functionality that is used by Microsoft Dynamics partners to build additional, often industry-specific, functionalities and integrate add-on solutions. Microsoft's Solution Finder lists more than 300 available solutions. Since 2007, Microsoft has intensified its cooperation with selected partners to develop Industry Solutions for application in the service and retail industry, process and discrete manufacturing, and for wholesale and distribution, but the outcomes of this strategy will be slow in coming to market.
Although this approach allows Microsoft to focus on the technological infrastructure and generic horizontal functionality, it lets users benefit from the experience and customer intimacy of a large partner ecosystem. However, users have to manage projects that involve solutions from multiple partners very carefully to avoid issues. It is also very important that partner viability and commitment to any "bolt on" solutions be more heavily scrutinized in evaluating Microsoft Dynamics AX, because a significant part of the processing solution is likely to consist of non-Microsoft IP.
Microsoft Dynamics AX is positioned as a leader in this Magic Quadrant. Its ability to execute is proven by a long track record in the midmarket, its Microsoft Office-like UI, which is considered to be very intuitive and easy to learn and use, and by its functionality, which is a healthy mix between horizontal, industry-neutral functionality by Microsoft combined with industry- or customer-specific, “long-tail” functionality built by or together with partners. Its architecture is well-designed to support this joint innovation model, and the channel gives access to a variety of solutions. The partner channel is international and growing fast, and Microsoft is committed to ensuring its quality by continually improving certification processes. The Windows infrastructure is widely used in the midmarket and allows for a low TCO with easily available resources, such as administrators and developers. This adds up to a strong performer in the market today.
Microsoft's completeness of vision is among the highest. The company is working more closely with the channel to concertedly build a layer of industry-specific functionality for the industries mentioned above. This initiative is exclusive for Microsoft Dynamics AX. These solutions will be made available to other ISVs and value-added resellers (VARs), which will use this layer as a broader base on which to build. Microsoft is continually building out its integration with other components of its technology stack; examples comprise the use of SharePoint Server and embedded BI based on the SQL Server Reporting Services. The role-tailored UI further improves the usability of the solution. The major missing component is a swifter move to a model-driven application to ease the adaptation to specific business processes through an explicit process model, and a comprehensive strategy for embedded analytics. Microsoft no longer targets the large enterprise space with Dynamics AX in order to allow a higher focus on the specific needs of midmarket customers.
The role-tailored UI and the Microsoft Office look-and-feel with which most users in midmarket companies are familiar make training and adoption by end users easy.
Dynamics AX is built on Microsoft's infrastructure, which is the most used among midmarket companies, although it does not yet fully embrace the latest .NET technologies.
The scalability of Microsoft Dynamics AX was improved in the last releases, so several hundred users and multiple legal entities can now be supported in one central instance.
Within the latest release of Microsoft Dynamics AX 2009, prepackaged BI functionality is included, specifically offering BI components, prebuilt BI cubes and BI reports.
Microsoft has extensive certification programs for this product's partners in place, and encourages partners to use the Sure Step methodology; however, the latest and highest level of Certified for Microsoft Dynamics (CfMD) is not yet adopted by the majority of partners.
The broad partner ecosystem delivers a variety of industry- and customer-specific solutions.
Microsoft is building a layer of vertical functionality for selected industries in manufacturing, professional services, wholesale/distribution and the public sector, which will make it easier for partners to complete the long-tail functionality needed by most companies.
Dynamics AX is easy to customize, and offers high flexibility for adapting to process changes and enhancements.
The tight integration to Microsoft Office is a highlight that has been consistently praised by customers, enabling users to work in an environment that they are very familiar with, thus increasing user productivity.
Most Microsoft Dynamics partners only have a local or national reach, which continues to make global deployments challenging.
Beyond core modules, functional depth may be insufficient for many midmarket companies that require significant partner contribution in order to match competitive offerings. Microsoft Dynamics AX's business functionality and industry strategy relies almost completely on partners, although Microsoft gets more directly engaged in the development of new branded Industry Solutions.
If not managed properly, partners tend to overly modify Dynamics AX, which makes it hard to upgrade the solution or roll it out across a group of companies, and the level of governance and discipline that is required on the client's side can be too demanding for midmarket companies on their own.
Although the technical integration to SharePoint has been performed, the business-process-level integration out of the box is still incomplete. Also, Microsoft does not offer an out-of-the-box integration to Dynamics CRM.
Microsoft Dynamics NAV
Originally know as Navision, Dynamics NAV is now part of the Microsoft Dynamics family. In November 2008, Microsoft released Microsoft Dynamics NAV 2009, which succeeds the 5.0 release from March 2007. This is a year later than originally planned, but the latest version represents a significant architectural and UI shift to the previous version, with the introduction of a new role-based UI, Web services, enhanced reporting service capabilities and a three-tier deployment model. Business-process-wise, the latest version does not represent a major shift from the previous release. Therefore, Gartner expects the majority of customers for Microsoft Dynamics NAV 2009 will be net-new customers, with the majority of existing Microsoft Dynamics NAV 5.0 customers likely to defer upgrading to the new architecture until a later release, where significant new functionality and business functionality is added.
The current installed base is delivered by approximately 3,400 partners across 40 localized versions. Language support is mainly focused on the European marketplace (including the Nordics, eastern Europe and southern Europe), although one recent addition was support for Thai. Microsoft Dynamics NAV is among the most advanced in terms of progress within Microsoft's certification programs (for partner implementation skills and industry solution certification), with approximately 143 solutions certified or tested against the CfMD criteria. Similar to Microsoft Dynamics AX, Microsoft Dynamics NAV is a highly configurable solution delivered exclusively via the channel, and targeted toward single-site operations with up to 100 users. It is noteworthy that, although the product has some manufacturing ERP capabilities, without partner contribution, it is likely only to fit the basic requirements of many small and midmarket, discrete assembly manufacturers.
Implementation success is highly dependent on the quality of the partner's execution, and partner longevity to support the end customers through upgrades and enhancements, which can be an issue with some of the very small partners. (Gartner is aware of a few cases where the original implementation partner ceased to exist, and the customer was faced with no clear path for ongoing support needs). Gartner has also been made aware of some situations where partners have customized and extended the solution well beyond the recommended number of users and use scenarios, and this has resulted in upgrade, scalability and performance issues. But overall, in conversations with reference customers and client inquires, it was found that most customers are satisfied with the application.
Microsoft Dynamics NAV is well-suited to the needs of small and midsize businesses with single-site requirements, but less appropriate for upper midmarket businesses seeking multisite management and a requirement for deeper, prebuilt industry IP "out of the box." As a result of this and the information gleamed from Microsoft and reference calls, Gartner has placed Dynamics NAV in the Niche Players quadrant.
Microsoft Dynamics NAV has a high brand awareness and equity among midmarket businesses in EMEA, making it easy for prospects to talk to existing users to gain additional insight into the product in live use.
Microsoft Dynamics NAV is a long-established product in the marketplace, and benefits from a large number of experienced local partners who can tailor it to customer requirements.
Microsoft's partner certification programs (CfMD) and Sure Step implementation methodology have increased the quality of partner implementations with the rollout of CfMD, which is most advanced among Microsoft Dynamics NAV solutions.
Due to Microsoft's ownership, customers of Microsoft Dynamics NAV have a high assurance level of longevity and financial viability in the marketplace.
Microsoft Dynamics NAV is a highly flexible application designed for partners to add and extend core functionality to suit microvertical situations.
Microsoft Dynamics NAV has been designed specifically for lower midmarket businesses, so it is well-suited for Tier 2 ERP deployments. It has consistently been named as the preferred solution for smaller subsidiaries and business units.
Although the core application code is Microsoft, it is sold and implemented exclusively by the channel partner, who often is the first point of contact for technical support issues. Customers should, therefore, exercise a high amount of diligence when choosing their implementation partner, as the relationship will likely run for many years after the initial implementation.
Microsoft Dynamics NAV is primarily intended as a single-site solution, which is poorly suited for running multiple sites within the same application instance.
Microsoft Dynamics NAV has become more scalable over the years, but there remains a need for an unambiguous central positioning statement from Microsoft to help prospects decide whether Microsoft Dynamics AX or Microsoft Dynamics NAV is the most appropriate solution for their needs.
Microsoft Dynamics NAV is better-suited for distribution and light assembly manufacturing scenarios, but its production modules are significantly weaker than Microsoft Dynamics AX and other midsize manufacturing and distribution ERP solutions.
The business and industry functionality relies exclusively on partners who, in some cases, have overly modified the solution, which has limited the ability of the customer to easily move to newer product versions.
Although it is an international solution, Microsoft Dynamics NAV has the most user traction and the bulk of partner resources in EMEA. Therefore, prospects in other locations need to carefully assess the certification and financial viability of partners, as well as Microsoft's local resources to support users in the long term.
As with AX, the process-level integration to SharePoint is still incomplete. Also, Microsoft does not offer an out-of-the-box integration to Dynamics CRM.