Much skepticism and uncertainty has clouded the ERP industry for the last several years. Bloated and ineffective implementations, high risk, ERP failures, lawsuits and cumbersome software have given many ERP vendors somewhat of a black eye over the last several years.

In the midst of it all, however, Tier III ERP vendors are making significant inroads in the market. For example, pure SaaS and cloud ERP solutions are driving the highest rates of growth in the market, while traditional Tier I vendors such as SAP, Oracle and Microsoft Dynamics are investing increasing R&D dollars in their cloud software offerings. In fact, Panorama’s 2012 ERP Report reveals that the market share of cloud and SaaS ERP systems grew from six-percent in 2011 to 18-percent last year, which quantifies some of the momentum in the Tier II and Tier III ERP space. (View our comprehensive database of ERP vendors for a complete list of Tier I, Tier II and Tier III ERP systems.)

While this growth of smaller ERP vendors is well documented and at times overly hyped, not nearly as much time is spent analyzing what is driving this industry trend. ERP vendors such as Oracle, Infor and Salesforce have built their entire business models on this best of breed trend, and for good reason. Based on what we’re seeing in the marketplace among our clients hiring us to manage their ERP implementations, we can summarize the underlying forces into four categories:

1. The ongoing battle of best of breed vs. single ERP systems. One of the inherent philosophical conflicts in the enterprise software industry relates to the tradeoffs between best of breed and single ERP systems. While neither option is perfect, there is a time and place for both depending on our clients’ situations. And, as outlined in the below graphic, companies generally go through a recurring cycle of leaning toward a central, single system versus multiple systems designed to address their diverse operational needs. It just so happens that for many companies that invested heavily in single ERP systems to address Y2K cycles 12 and 13 years ago, the pendulum is swinging back toward best of breed and niche solutions.

On-Premise ERP vs SaaS

2. Focus of Tier II and Tier III ERP Systems. As much as they may like to think otherwise, ERP vendors simply can’t be everything to everyone. Even SAP and Oracle – the two largest ERP vendors in terms of market share – can’t provide the best Human Capital Management (HCM), Customer Relationship Management (CRM), Business Intelligence (BI), manufacturing, and planning software for every company in every industry, so there is a constant opportunity for smaller, more nimble competitors to fill the void with more focused solutions. For example, Plex Systems focuses largely on auto parts suppliers, among other industry verticals, and Kinaxis targets supply-chain intensive companies.

3. Potentially lower up-front software and implementation costs. As we pointed out in our recent blog about predictions for ERP software in 2013, more companies are looking for ways to spoon-feed their ERP software purchases and implementations to their organizations. This incremental approach can be conducive to best of breed solutions rather than full-blown and tightly integrated ERP systems that don’t work as well in bits and pieces. This is a big part of why ERP systems such as Salesforce and Workday have flourished in the CRM and HCM segments of the industry.

4. Potentially lower implementation risk. Along with potentially lower implementation costs and less disruptive impacts on the business comes lower risk. Since more focused niche solutions can be more conducive to incremental implementations and can be easier to swallow without impacting the entire organization, this can mitigate the potential risk of larger ERP software deployments. CFOs, CIOs and COOs seem to be particularly risk-averse at this moment in time, so the relatively low-risk appeal of Tier II and Tier III ERP systems can appeal to this mindset.

Of course, best of breed, Tier II and Tier III ERP systems have disadvantages as well. Data siloes, complex integration and system architecture, and the costs of managing multiple systems are all potential downsides that may eventually drive some of these same customers back to single-system ERP solutions. In either case, these smaller, niche solutions provide a viable alternative for many educated organizations that have the insight to consider their full portfolio of options.

Learn more by downloading our new white paper, A Comparison of Five Leading SaaS and Cloud Vendors.

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