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Gartner Says By 2016, the Impact of Cloud and Emergence of Postmodern ERP Will Relegate Highly Customized ERP Systems to "Legacy" Status

CIOs Must Take Action to Address Fast-Approaching Reality of "Legacy ERP"

By 2016, heavily customized ERP implementations will be routinely referred to as "legacy ERP," according to Gartner, Inc. Gartner said that as alternatives to monolithic, on-premises ERP and enterprise applications continue to mature, CIOs and application leaders must take action to address the fast-approaching reality of "legacy ERP." 

"The need for agility and responsiveness has led highly customized ERP implementations to an impasse, creating a subset of legacy ERP installations that must be dealt with constructively," said Andy Kyte, vice president and Gartner Fellow. "Early ERP adopters, particularly large enterprises in energy, manufacturing and distribution industries, are paying the penalty of a decade or more of excessive customization. Businesses looking to improve administration today can take advantage of lower costs, better functional fit and process flexibility offered by blending cloud applications with on-premises applications in what we now refer to as 'postmodern ERP." 

The ERP suite is being deconstructed into postmodern ERP that will result in a more federated, loosely coupled ERP environment with much of the functionality sourced as cloud services or via business process outsourcers. 

"When ERP was in its heyday, CEOs and business executives wanted reliable and integrated solutions, so they seized upon ERP as the way to provide this," said Mr. Kyte. "Business stakeholders still want these same qualities, but now they assume that these qualities will be present in any software solution, and their requirements have switched to the twin concerns of lowering IT costs and seeking increased flexibility. A system that is not sufficiently flexible to meet changing business demands is an anchor, not a sail, holding the business back, not driving it forward." 

Mr. Kyte said that so many business executives have expressed real concern about the lack of flexibility in their business applications portfolio that Gartner now defines legacy as: "any system that is not sufficiently flexible to meet changing business needs." Under this definition, heavily customized ERP implementations are very much at the forefront of the next wave of legacy systems. 

While current ERP implementations are not going to vanish overnight, they will need to adapt. The impact of specialist cloud-based point solutions, combined with very strong growth in business process outsourcing, will provide ample alternatives for business users frustrated by inflexible and expensive ERP modules. Over time the current heavily customized ERP implementations will be rearchitected to focus on "systems of record" functionalities — which should require little customization — while the differentiating processes and innovation activities will use alternative delivery models that are integrated with the ERP system of record capabilities. 

Gartner also made the following ERP predictions: 

By 2018, at least 30 percent of service-centric companies will move the majority of their ERP applications to the cloud.

The concept of a single ERP suite that meets all of an enterprise's needs is dead, and has been replaced by a hybrid ERP approach that combines cloud point solutions with a smaller "core" of on-premises ERP function, such as financials and manufacturings. Gartner predicts that hybrid ERP environments will be the norm within five years. 

"Longer term, over the next 10 years and more, we envision a scenario where more of the market 'flips' to the cloud. Instead of having on-premises core solutions that are complemented by innovation or differentiating processes being supported in the cloud, some organizations will move all their ERP functionality to the cloud," said Nigel Rayner, research vice president at Gartner. "These won't be single vendor megasuites but instead will be loosely coupled suites of cloud functionality, which will create new integration challenges for IT." 

While it will be at least 10 years or more before the majority of organizations decide to flip ERP to the cloud, Gartner predicts there are industry segments where this will happen much sooner. Service-centric industries, such as professional services, business services and digital media, have not been well-served by integrated ERP suites, which have tended to focus on product and asset-centric industries. Many have already moved key elements of application functionality to the cloud and there will be a greater likelihood that service-centric companies will flip the majority of their ERP functionality to the cloud within the next five years, earlier than the product-centric companies. 

By 2017, 70 percent of organizations adopting hybrid ERP will fail to improve cost-benefit outcomes unless their cloud applications provide differentiating functionality.

While Gartner expects that most organizations will shift from monolithic ERP to a hybrid approach within five years, the adoption of cloud services for some components of functionality does not guarantee a reduction in the total cost of ownership (TCO). On the contrary, there is the potential of actually increasing the TCO. 

"Most organizations still fail to recognize and plan for the total lifetime costs of their ERP solutions, whether on-premises, cloud or hybrid. Moreover, with cloud-based solutions it is much too easy to fall into the trap of taking a short-term, tactical approach — lured by the seemingly attractive low per-user costs," said Carol Hardcastle, research vice president at Gartner. "Such an approach actually leads to increased total costs once the additional costs for connecting the solutions together are taken into account. Even the direct costs alone can lead to increased TCO, but there are other costs to take into consideration, such as the need to reskill or hire new staff to deal with data, integration and vendor management." 

Ms. Hardcastle said that looking at the business value outcomes, the outlook is also worrying. Too many ERP investments fail to deliver business value and the hybrid approach may further dilute the focus on the value to be driven from such investments. 

"You should never assume that adopting cloud applications will magically provide value; it's essential to link business objectives to your ERP strategy to ensure value is realized, whether adopting on-premises or cloud applications," said Ms. Hardcastle. "By hybridizing solutions there is greater risk of fragmenting the business case and therefore diluting the value where the sum of the parts is less than the whole. However, there is also the risk of taking a less strategic approach — placing more focus on implementation at speed rather than long-term delivery of value." 

More detailed analysis is available in the report "Predicts 2014: The Rise of the Postmodern ERP and Enterprise Applications World." The report is available on Gartner's website at http://www.gartner.com/doc/2633315.

Gartner's Special Report "Predicts 2014" features 67 reports arming IT leaders with insights and actions to begin exploring the Digital Industrial Revolution now. The special report can be viewed at http://www.gartner.com/technology/research/predicts/ and includes links to reports and video commentary that examine the impact of big data on enterprises. 

Gartner analysts will provide additional analysis on these predictions during the Gartner webinar, "Gartner Predicts a Disruptive IT Future" on March 13 at 8 a.m. and 11 a.m. EST. To register for this complimentary webinar, please visit http://my.gartner.com/webinardetail/resId=2656516?srcId=1-2994690285.

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