The Enterprise Resource Planning (ERP) market was on a tear in 2006, growing its revenues to over $28 billion, with total revenue growing by 14 percent and license revenue up 18 percent over 2005, according to AMR Research Inc.’s ERP Market Sizing Report, 2006–2011. And while sales of traditional ERP applications were up in 2006, many of the key players realized revenue growth from the acquisition of other software companies that allowed them to go from offering a single, internally-developed product line to a broader portfolio of products and services.

More ERP providers are adding “logistics and supply chain management software” to their lineups. More commonly known as SCM, this software is used to reduce inventory, increase transaction velocity through real-time utilities, and grow sales through efficient customer service. Led by the top five vendors SAP, Oracle, Infor, Microsoft, and Sage, the push into SCM is largely centered on helping shippers manage the entire value-added chain—from supplier, to manufacturer, and right through to the retailer and final consumer.

It all makes sense to Jim Shepherd, senior vice president at AMR and co-author of the recent report. “Fundamentally, a key part of the ERP players’ growth strategy involves broadening their offerings everywhere,” says Shepherd. “The next most mature, and attractive, market for them to expand into is SCM. In fact, they’ve been moving in that direction for a long time through a combination of internal development and acquisition.”

Over the last few years companies like SAP and Oracle have not only moved into the space, says Shepherd, but they’ve also convinced shippers that it’s not only acceptable and logical to buy SCM software from their ERP provider, but it’s probably unavoidable. “The ERP vendors have broken down the barrier that says you need to purchase SCM from a best-of-breed specialist,” says Shepherd, who points out that while there are still situations where the latter is warranted, for the most part the ERPs get in with their finance, order management and inventory control solutions. From there, they can “successfully expand their footprints to include SCP (supply chain planning), SCE (supply chain execution) and logistics,” he adds.

In doing so, the ERPs have been able to maintain their core software licensing revenue while boosting profits through “complementary” functionalities, such as SCM. According to AMR, the most significant growth for most of those vendors is being generated from add-on functionalities like CRM, human capital management (HCM) and SCM, with the last two boosting ERP revenues at a rate of over 40 percent in 2006.

“This expansion does not indicate core ERP revenue is declining, but that customers are seeking to acquire as much functionality from a single source rather than endure the complications of integrating multiple best-of-breed applications,” says Shepherd, who adds that ERP vendors have both acquired products and/or developed their own functionality that’s been found to be comparable to many of the best-of-breed applications. “The ERPs are reaping the benefits of these cross-selling opportunities,” he says.

Take Oracle’s acquisition of G-log, for example. Having released several versions of its SCM application since the deal closed, Oracle has reaped the rewards of integrating the small firm’s GC3 transportation management system (now known as Oracle Transportation Management) into its larger solution. “Oracle has made great strides in that functionality,” says John Fontanella, AMR’s senior vice president and research director of Supply Chain Services.

Fontanella sees other ERPs taking Oracle’s lead and going head-to-head with SCM’s best-of-breed players. “They’re not necessarily relying on the fact that just because a company is an SAP shop, that they should also buy SAP’s SCM solution due to a reduced cost of ownership and easier integration,” Fontanella explains. “The ERPs want to appeal to shippers and win on the basis of functionality, and they’re taking the task very seriously.”

Over the last year the traditional lines delineating best-of-breed warehousing, transportation, and global trade management solutions and those offered by the ERPs have blurred significantly, according to Fontanella. He sees Oracle doing “particularly well” in the area of transportation capabilities, and SAP making strides in global trade management. “The ERPs are paying close attention to SCE, and have put supply chain R&D at the top of their agendas.”

Adrian Gonzalez, director of Dedham, Mass.-based ARC’s Logistics Executive Council, concurs, and says that ERPs are making inroads in the TMS and WMS areas, otherwise known as SCE. “The ERPs are trying to close the gap with the best-of-breeds on the planning side,” says Gonzalez, who points to SAP’s expected TMS release as significant for shippers, who will likely find the product to be much improved over the previous version.

But the ERPs haven’t cornered the market just yet. Shepherd says most are still lagging behind best-of-breeds in the transportation management arena, namely because of the sector’s smaller size. “There’s also a lot of debate over WMS, as most ERPs have systems that are good enough for the vast majority of buyers,” says Shepherd, “while WMS buyers with complex requirements tend to favor best-of-breed vendors.”

To fill the void, ERPs continue to acquire smaller, specialized companies while at the same time pouring an increasing amount of money into their SCM R&D spending; thus propelling themselves well ahead of smaller firms that have fewer resources. “We’re talking about companies that are capable of spending $1 billion dollars a year on R&D,” says Shepherd. “Not all of it goes to SCM, but they can certainly outspend the specialist firms to such a degree that even where they aren’t making acquisitions, they can catch up in a hurry.”

Digging deeper, Fontanella says best-of-breed SCM firms tend to surpass ERPs when it comes to content management, or the ability to provide information about trade agreements and terrorist attacks in a timely, user-friendly fashion. “We’re seeing many of the best-of-breed applications providers make the move into these types of managed services,” Fontanella says. “That’s an area that ERPs are ill-prepared to participate in.”

AMR sees good things ahead for the ERP market, and predicts 11 percent growth for the sector through 2011. The research firm doesn’t anticipate any drastic changes to the dynamics of this market over the next five years, but does expect to see revenue growth come from ERP extension segments such as CRM, HCM, and SCM.

“The ERPs will continue to grow as they improve their offerings,” says Fontanella. “At the same time, there will continue to be an active, successful best-of-breed segment of the market. All this talk about ERP vendors blocking out everyone else is nonsense; we will see new entrants on both the software and the service side.”

Gonzalez expects a stronger showing ahead for ERPs like Oracle and SAP, particularly when it comes to servicing the 3PL market. “These guys are becoming more aggressive,” says Gonzalez, who expects shippers to continue outsourcing functions like transportation and inventory management to those 3PLs, which in turn will need robust SCM applications to handle the added workload. “ERP players will be making sure that their R&D roadmaps—and resultant solutions—meet the needs of the 3PL industry,” Gonzalez says.

With his crystal ball in hand, Shepherd says the entire SCM segment is in the midst of a multiyear process of re-architecting its applications over to service-oriented architecture (SOA). A collection of services that communicate with each other, and are self-contained and do not depend on the context or state of the other service, SOA is an architectural design pattern that —unlike traditional systems—has no direct relationship with software, programming, or technology. As a result, software components can be exposed as services on the network, and recycled over and over again for different applications and purposes.

The use of SOA could pose a problem for the best-of-breed vendors, who may lack the resources needed to keep up with the technology developments and handle end-to-end rewrites. On the other hand, it could help the deep-pocketed ERPs gain more traction in the market.

“Ultimately, SOA is going to solve some of the problems that the big ERP vendors have had in terms of flexibility, configurability, and integration based on the fact that SOA is a more flexible platform than the traditional types,” says Shepherd. “And while that could present a problem for best-of-breed vendors, it spells opportunity for shippers.”