The Post-PeopleSoft Landscape and the Future of ERP

Last February, Rick Beers, Corning's director of business process architecture, brought together CIOs from Bausch and Lomb, Harris Corp., Leggett and Platt, and five other Fortune 500 companies for an extraordinary summit in Atlanta. All shared the distinction of being among the world's largest users of PeopleSoft enterprise software. Beers called the meeting because he wanted to discuss the single most pressing issue facing them: Creating business value from enterprise applications.

In other words, after a year and a half of histrionics and angst, after Oracle paid $10.3 billion to adopt 13,000 PeopleSoft customers (many of which had chosen PeopleSoft precisely because it was not Oracle), the single most pressing issue these giant companies were facing was not the hostile takeover.

How odd.

Or maybe not.

Beers' summit was planned months before the acquisition went through and, he says, it would have happened even if the merger hadn't, and with roughly the same agenda. The Atlanta Eight had already figured out that despite all the speculation in the media and among CIOs themselves, the Oracle-PeopleSoft deal, as Beers says, "hasn't changed much."

What Beers and the CIOs meeting in Atlanta understood was that the current model for enterprise applications—the way they're built, the way they're paid for, the value they create—is breaking down and had been long before Oracle dug deep to buy its competitor.

"What I'm trying to accomplish here," says Beers, "is to get others to pay attention to what's going on. If we can't architect ERP around our business model, we end up with a bunch of systems that don't interoperate. Value has to come from [integration], not from new point features. Otherwise, we can't achieve the value we expect from ERP."

That, not who won or lost in which boardroom, is what's important. In this article, we will present a plan for CIOs who use PeopleSoft (and J.D. Edwards). The plan will address tactical steps for the near-term, and also strategic plans for the profound, long-term change that Beers and many others are convinced is coming.

But first, let's reflect on why this is such an excellent time to be a PeopleSoft user.

Uncle Oracle Wants You!

The enterprise application world is now bilateral. By adding PeopleSoft, Oracle's customer base is now within hailing distance of SAP's. (See "The ERP Customer Share Pie," Page 78.) That was the whole point of the acquisition. Oracle is now Pepsi to SAP's Coke. And since many customers use both platforms—just as many consumers drink both soft drinks—the Big Two will now exert themselves trying to convince you that one is "the real thing" or, conversely, that the other is "the cola."

The back and forth has already started. SAP recently purchased TomorrowNow, a PeopleSoft support company, and is offering a complex set of "support-then-eventually-upgrade-to-SAP" options to lure PeopleSoft users away from Oracle. Oracle returned the serve by promising to support PeopleSoft "longer than most spouses commit" to each other, as Oracle President Charles Phillips put it. Oracle promised to retain 90 percent of PeopleSoft's technical staff, to upgrade the PeopleSoft software to version 9 and then support the PeopleSoft platform until 2013. Oracle also set up a 10-city tour for its executives to meet and greet CIOs. "We can't spend $10 billion and then let customers go away," says Phillips. "We are very motivated to keep the customers happy. When was the last time you heard Oracle talk about customer satisfaction so much?"

Or, as one analyst shrewdly suggests, PeopleSoft customers are getting the kind of access to Oracle that Oracle customers might envy.

What's more, Oracle and SAP aren't the only ones courting the PeopleSoft and J.D. Edwards CIOs. Independent support companies have popped up eager to take CIOs away from the big vendors and those big maintenance contracts. Second-tier enterprise application vendors—Microsoft, Lawson and others—have also put the hard press on CIOs. Microsoft just partnered with a company that does Web-based higher education enterprise applications, a move clearly aimed at poaching CIOs from the education market traditionally dominated by PeopleSoft. Outsourcing and services vendors have also come calling, cheerfully suggesting that, really, could there be a better time to turn over commodity business processes to a services company?

"I'm surrounded by people who want my money," says Bill Means, CIO of Decorative Concepts, which runs on J.D. Edwards. "They're calling left and right. I got three calls today."

Oracle's pledge to support the PeopleSoft platform has given CIOs the gift of time to plan for what comes next.

STEP 1: Figure Out Where You're At

What's next for you will be dictated by where your enterprise platforms stood when Oracle bought PeopleSoft.

At that moment, you were in one of two states: You were stable, or you were in flux.

A. If you were stable, you were happy with your enterprise systems and didn't anticipate major changes in your business.

So the first thing you do is look inward.

Begin a risk-based assessment of your enterprise platform and where you want it to be one, three and five years from now. Think about how much you want to pay, what level of innovation you want, whether you plan to have a single or multiple instances of ERP or if you want it in-house at all. (You were doing this anyway, right?)

Oracle Gets (Surprise!) Customer-centric
We can't spend $10 billion and then let customers go away. We are very motivated to keep customers happy. When was the last time you heard Oracle talk about customer satisfaction so much? - Oracle President Charles Phillips

Now you have the luxury of time. "That's the beauty of the current situation for people who already have PeopleSoft and it's working," says Evan Quinn, analyst at IDC (a sister company of CIO's publisher). "They get to press the reset button and plan a long-term strategy, and everyone's going to offer them discounts."

David Gray, CIO of the University of Massachusetts System, is in the stable group. He says his PeopleSoft implementation is a "facilities-like investment that should last 20 years. There's substantial curiosity on long-term development, though. Many pieces of PeopleSoft's application set are markedly superior to anything Oracle has brought to market. We would hope Oracle would leverage that. We're scheduling a meeting [with Oracle] about this. We won't ask for excruciating detail yet, but I'll need more than I have now."

B. If you were in flux, you were planning to consolidate, upgrade or add to your enterprise applications and probably anticipated a major change in your business.

So you look outward.

Entertain the vendors. Play them off against each other. "Let's say you've been through a series of mergers, and you just got budget for a consolidation program," Quinn says. "You have eight financial systems, four PeopleSoft, one SAP, one Oracle, a Lawson and a Microsoft. Well, here's your chance to hold their feet to the fire. This is the time to be a little extra demanding. Every contract is an opportunity."

Basically, you're starting where the stable folks will be going next, demanding the best possible deal from all these suitors. But you have to think more about your immediate problems.

The manager of enterprise systems at a large health insurance company that just merged with another finds himself in the in-flux group, and he's evaluating vendors as if they were show dogs. "We're setting up two panel discussions with [ERP] vendors so they can explain their plans," he says. "We've also got 20 other vendors related to enterprise software signed on for a fair so they can lay out their strategies going forward. Our focus has been on integrating instances [because of the merger]. I'm sure some CIOs are thinking longer-term, but our activity has been focused on this integration."

Quinn believes you can spend six months to a year planning your future or entertaining vendors. Then, it will be time to move to a transition strategy because even though Oracle gave you time, the company will still try to sell you on switching. It has to.

Uncle Oracle Needs You!

Oracle's promise to support PeopleSoft until 2013 was an easy one to make (who really knows what will be going on eight years from now), but if one divides the price paid for PeopleSoft by the number of PeopleSoft customers, Oracle spent about $790,000 per customer, and the last thing it can afford is an exodus. Oracle bought customers, and every one it loses reduces the acquisition's ROI.

That's Oracle's dilemma. To retain PeopleSoft customers, it must do things in the short term that don't make much long-term business sense. No company wants to support overlapping product lines, ever, but Oracle has promised to do just that—for eight years. Software vendors are used to 18-month product cycles, and yet Oracle's Phillips says, "There's no rush. The products are viable, and we're not asking anyone to switch."

But as author Matthew Symonds notes in his book Softwar: An Intimate Portrait of Larry Ellison and Oracle, revenue from PeopleSoft licenses will generate only $800 million a year for Oracle—not nearly enough to justify a $10 billion acquisition. It doesn't take a crystal ball to imagine that Oracle's sales force will soon convene (or has already) at some tropical resort to hone its pitch for Oracle as a one-stop shop, a place to get end-to-end software solutions. Eventually—much sooner than eight years from now—Oracle will ask customers to switch to Oracle enterprise applications and databases and services or it will raise maintenance prices. Or both.

Oracle spokeswoman Karen Tillman acknowledges much of this. "Obviously, the upsell to other Oracle products was part of the business logic behind doing the deal," she says. "But it doesn't mean," she adds, "that [customers] have to do it."

STEP 2: What to Do Next

There are three basic "next steps" for PeopleSoft users.

A. Sit tight—You're most likely from the stable group, and you continue to be in an enviable position because waiting lets you keep all potential future ERP models available.

UMass's Gray calls his PeopleSoft implementation "fairly stable," and he adds, "Obviously we're at a juncture where we don't want to change it out." But he expects pressure to do just that. "My experience—and I don't think it's atypical—is that a CIO never feels in the catbird seat with Oracle," he says.

For Gray, sitting tight doesn't equal doing nothing. He's planning to meet with Oracle to find out what the company intends to do with what he considers PeopleSoft's superior code. He sent some staffers to a conference in Nevada to discuss the future of Oracle's ERP innovation and pricing. And he's studying how reduced competition in marketplaces historically affects costs and responsiveness to customer needs. That's something he'd been thinking about before the takeover.

"You've got your organization stabilized, the business functions are going smoothly, there's really not a great gain to be had from continuous refinement," Gray says. "We've yet to see a clear vision of where [the vendors] are going to take us or how much they want to charge us."

In a sense, nothing changes for Gray or anyone who can sit tight. Gray just runs PeopleSoft and gets support from some of the same people, only they've switched business cards. The risk he runs is that his maintenance costs could rise. Gray also says the transition to Oracle was "a little bruising. Some support questions were not addressed in a timely manner, and there was a point where we didn't know who was representing us." He attributes that to the physics of merging organizations and says it has since stabilized, although he has quite a few unanswered questions.

Gray isn't hemmed in by his situation. He could stick with Oracle, or he could choose radical change in ERP models down the road—to, say, a services model—if that's what he decides is the best path.

"Obviously," Gray says, "there's a lot to talk about."

B. Move to third-party support—You could be from either the stable or the in-flux group, but you've taken a commodity view of ERP and want to contain costs. You're betting something will come along to replace today's maintenance-and-support model.

When Big Lots senior vice president and CIO John Zavada arrived at the closeout retailer two years ago, he looked at his PeopleSoft maintenance contract and realized that over the past five years, costs had nearly doubled.

The upgrade to version 8.3 of PeopleSoft was particularly painful, he recalls. It cost time and money and took close to a year to stabilize. As far as Zavada could tell, the only reason Big Lots upgraded was because its contract mandated it.

"I'm going through this pain just to maintain service?" Zavada asked PeopleSoft. "You're raking us over the coals for maintenance? No. We're looking for a new model."

The model was third-party support from TomorrowNow, which offered to support his current version of PeopleSoft for 10 years for less than the cost of sticking with his primary vendor. "We'd get no upgrades, but the benefits of those were minimal and always tied to the pain of implementation," says Zavada.

So far, he says, it's all worked out better than he expected. (Though, when SAP bought TomorrowNow in January, Zavada realized they'd be pitching him on their one-stop solutions just as Oracle would have.) He says his ROI is less than two years, and he's already saved so much money that if he decided in five years to start over with a new ERP system, he could. "I'm not sure if the industry understands that CIOs are thinking about this differently," Zavada says. "We're evaluating package by package and asking ourselves if there's any value at all in paying maintenance."

The third-party support option seems to be gaining a significant following because of what CIOs call maintenance's self-fulfilling prophecy: You pay maintenance to get support; the support contract mandates upgrades, which inevitably require more support. Joe O'Neill, CIO of Bridgestone Europe, partially relies on a third-party vendor for SAP support because, he says, "Monolithic situations are not good." Means at Decorative Concepts used to pay $200,000 in annual maintenance to PeopleSoft. He says it would have gone up to $220,000 with Oracle. He moved to independent support and now pays $29,000.

The CIO who chooses third-party support views ERP as a commodity. His vision of the software future is that it won't be innovative, so upgrades aren't worth paying for. He's looking to codify business practices (which he figures won't change significantly), let them run and cut costs on maintenance.

C. Upgrade to Oracle Enterprise Platform—You're probably from the in-flux group, and you were planning to upgrade or switch anyway. You still believe there's innovation left in ERP.

When asked about the impact of the Oracle acquisition on his PeopleSoft ERP, Steve Sutherland, CIO of the commercial real estate firm CB Richard Ellis, first shot over an e-mail:

1. "PeopleSoft consulting should improve as Oracle consulting is more disciplined and professional.
2. Pricing should be more straightforward.
3. Long term there should be better integration between the functional apps and the database."

The CIO who would stay the course with Oracle is generally one in the middle of important upgrades, as Sutherland is. His PeopleSoft implementation was "stable in terms of purchase but not implementation. We're implementing HR now; we own financials and we bought CRM, and we'll start that soon." Simplicity is a virtue for CIOs who tack this way—one vendor, one license.

"For a company like ours, I don't see the current model going away," Sutherland says. "If I look at my annual maintenance costs versus what I'd spend to bring the development in-house, I just couldn't do it. Absolutely, there's value in maintenance for me."

Not that Sutherland isn't monitoring the situation. "We didn't want Oracle to eliminate resources we thought were critical, so we told them which PeopleSoft people we wanted them to keep," says Sutherland. "And so far, they've put up strong support for us."

Some CIOs believe that the virtues of PeopleSoft—both its relatively friendly culture and its extremely solid HR and financial systems—will be lost in translation to Oracle. But Sutherland is not one of them. "When we've acquired companies," he says, "I've seen the strength that comes from all the cultures you inherit. The two of them can make one much better company."

Step 3: What Lies Ahead

That faith in synergy is the principle behind Project Fusion, Oracle's vision of the future of enterprise software. Fusion, according to Oracle, will rationalize the three enterprise code bases Oracle now owns (including PeopleSoft and J.D. Edwards) in one future platform, centered on Oracle databases and application servers, but using a service-oriented architecture (SOA). To date, Oracle hasn't put much flesh on these marketing bones. SAP's promise of an SOA at the end of the ERP rainbow is called NetWeaver. Still, other third-party companies such as IBM will offer tools and services to help companies create their own SOA, so that option will be open even to those who choose to leave Uncle Oracle and Auntie SAP.

When Rick Beers convened the CIOs in Atlanta, he was thinking about SOA.

The idea behind SOA is simple: Technology should be expressed as a chunk of a business process; for example, "credit check," rather than as an arcane application like ERP. Services are just combinations of these different applications used together. They're built with complex, carefully designed interfaces that simplify integration with other services and applications.

In an SOA world, applications will follow business flow, and data won't get stuck when, say, an SAP financial system asks for something from a PeopleSoft HR system. SOA is the integration layer that would obviate the need for going to a single instance of ERP. For Beers, creating value from ERP instead of floundering in a money pit of maintenance, support and upgrade costs depends upon this integration layer. He manages many business units with many distinct supply chains, and says, "I want processes to flow across multiple instances and platforms."

The concept of SOA is a decade or more old, according to Stephanie Race, CEO of Innovation Enterprises, who's worked with many large companies (including Corning). The notion that it will replace ERP is only somewhat newer, but right now it's white-hot.

Still, it's not the only imagined future. Business process outsourcing (BPO) is another. For those who use ERP for commodity functions, BPO could get them off the "upgrade, support and maintenance" treadmill. Let IBM, Accenture or some other vendor manage commodity functions and deal with the software vendors. SAP and Oracle will ramp up outsourcing too. Phillips says right now only "hundreds" of customers subscribe to its on-demand business, but Oracle's goal is to get 15 percent of customers into an outsourcing model within five years.

And there's no reason these two futures couldn't overlap. Services companies can manage business processes using an SOA. Or customers could outsource some of the most basic ERP functions, such as payroll, while keeping other, more complex functions in-house. Bridgestone Europe's O'Neill is moving that way. "Certain areas of the app are standard and aren't going to change," he says. He'll be happy to pay someone else to manage them so that he can focus "on the areas we need innovation."

There are two major implications of these futures. First, big ERP is fracturing. Some functions (supply chain, CRM) probably have innovation left in them; others (payroll, tax reporting) do not. Massive projects to deploy both together are, therefore, inefficient.

Second, the maintenance-and-support pricing model is untenable. It means CIOs have to perform pointless upgrades on commodity processes so that they can get their hands on the innovative pieces. They have to buy the bathwater to get the baby, which they won't have to do in an outsourced or SOA-driven world.

"We're seriously challenging the vendors," says Zavada of Big Lots. "We say, If you come with a standard maintenance model, we're pretty much eliminating you right there. Enterprise packages are no longer assumed to have ongoing value that would justify maintenance."

But then what's the new pricing model? "Is it more based on services? Architecture?" asks Corning's Beers. "Where's the industry going? And how does it support innovation without the funding of maintenance contracts?"

Beers likes to push CIOs to think bigger picture. "Enough with Oracle versus PeopleSoft," he says. "And Oracle versus SAP. Please. That's business as usual. We CIOs are not victims [of these developments]. I don't feel victimized."

But now that the current ERP model is dying, Beers asks, "How do we sustain innovation? How do we create value?

"What does the next-generation enterprise architecture look like?"

Think about it.

Senior Editor of CIO.COM Scott Berinato can be reached at sberinato@cio.com.