How Do ERP Software Companies Survive?

By Mike Hart

You cannot operate an ERP software company out of your garage.  Overhead costs are substantial and are primarily people-based.  You need marketing and sales people, implementers and trainers, support staff, programmers, and administrative personnel. 

In my blog's Manufacturing Software Directory, I've compiled a list of 45 "mid-market" ERP systems.  With so much competition and high overhead costs, how do all these ERP software companies survive? 

ERP Is a Mature Industry

Investigate this list and you'll find that virtually all these ERP software packages are older products that were originally developed in the 1980's and 1990's.  ERP software is a mature industry with virtually no startup companies.  The reason there are no startup companies is because a new software company relies on new licenses for its revenue.  With so many companies in the market, competition for new license revenue is intense.  The startup company is at a disadvantage because it has not built up any recurring revenue to help absorb its overhead costs. 

How Important Is New License Revenue?

The fact is, for established ERP software companies, new license revenue is a relatively small contributor to overall revenue.  Most revenue comes from recurring revenues such as annual maintenance, support, and consulting services. To illustrate this, let's take a look at the first quarter 2010 revenues for Epicor Software Corporation, one of the leading publicly traded ERP software companies. 

License Fees        $16,236,000    16.4%
Consulting          $31,089,000    31.3%
Maintenance         $47,960,000    48.3%
Hardware and Other   $3,996,000     4.0%

Total Revenues      $99,281,000

As you can see, half of Epicor's revenue comes from maintenance alone, for annual license fees and support.  All that revenue comes from the existing customer base, as does a large portion of consulting revenue.  It is also typical for a portion of license fees revenue to come from existing customers from the purchase of additional user licenses.  The point is, an established ERP software company can survive tough times by trimming its overhead and living off its customer base. 

Acquisition Is the Fate for Most ERP Products

Many ERP software companies do not survive. Instead of going out of business, they get acquired.  Their ability to generate recurring revenue is what makes ERP companies attractive.  The acquiring corporation can cut duplicate overhead costs, slash research and development spending, and make a good return on maintenance and consulting revenue, even if new license revenue dwindles. 

An astounding number of ERP products have been acquired over the past 20 years.  The ERP Graveyard Blog has an ERP Graveyard Scorecard that lists approximately 150 ERP products (represented by tombstones) that have been acquired by software holding companies. 

ERP Systems Never Really Die

Some of these acquired products are still viable, but many have been absorbed into other products or have simply disappeared over time. As Ned Lilly, the ERP Graveyard Blog author, says in one of his posts:

"Like soap opera villains, ERP systems never really die - but they can only come back so many times before it gets silly.  So it's a fair point to say, 'such and such a vendor has thousands of installs and is still selling the product.' Maybe so - but if that product/company has been bought and sold a bunch of times, and it's one of many disparate offerings under a single corporate umbrella, the emptor should certainly caveat."

What Does this Mean for the Small Manufacturer? 

Is there a lesson to be drawn here for the small manufacturer?  Only to point out how important consulting and maintenance revenue is to ERP companies.  If you go with an ERP system as your manufacturing software solution, you will incur substantial ongoing costs over time and you will likely be dealing with a big corporation such as Epicor, Sage, or Microsoft.  If you go with a small business manufacturing system, your ongoing maintenance costs will be modest and your consulting requirements minimal.
 
Mike Hart is the co-founder and President of DBA Software Inc., a leading provider of manufacturing software for small businesses.

Comments

[Grey]

Hi Mr. Hart,

I fully agree with your conclusion. For any SMEs to compete, specially small manufacturers, lean and mean is the only way to go.

Thanks for your blogs... simple and practical, I learned a lot!

Grey

[Pallavi]

Hi Mike,

I think you hit the nail on the head with this one. A lot of small companies start up with limited start up capital and think they will make a quick killing when it comes to selling ERP Software. Although this is a lot harder than it looks. Time and competition are huge factors in the success of any ERP software company.

[company registration Philippines]

ERP needs some time before being fully integrated to the system. Start-up firms may need to have a look on it.