The market for Enterprise Resource Planning (ERP) systems sold to small and medium businesses (SMBs) is fragmented, and contains opportunities for most suppliers. The Tier 3 SMB ERP market will grow at a compounded annual growth rate of over 11% to reach $8.9 billion by 2011, according to a new ARC Advisory Group study.

Most Tier 1 and 2 manufacturers made their ERP decisions in the mid 1990s, so the key current strategy of suppliers to this market is to maintain their existing customer base, and to expand their customer's use of their applications. "Within the Tier 3 market, the 10 year ERP replacement cycle remains a major factor, and penetration levels are relatively low, making this an interesting market," according to European Research Director Simon Bragg, the principal author of ARC's Enterprise Resource Planning for Tier 3 SMBs Worldwide Outlook.

The dynamics of the Tier 3 SMB ERP market are quite different than the Tier 1 and 2 ERP markets, in which the gap is increasing between the three leading players--SAP, Oracle and Infor--and the others. The range of SMB purchasing criteria will ensure that this market remains fragmented in the short term. Put simply, some customers want a solution based on Microsoft technologies, because their other applications run on Microsoft. Others want a supplier that focuses on their industry vertical. Some businesses want a local supplier/developer as they perceive they will get superior support and availability of staff. Some see themselves as a large company, and will end up acquiring a solution from a major Tier 1 supplier.

Technology challenges create opportunities for suppliers. Suppliers need to dramatically reduce implementation effort and allow manufacturers the ability to change processes post implementation. The big prize will go to those suppliers that develop a multi-tenanted Software as a Service (SaaS) offering. The key first step is to migrate to a Service Oriented Architecture (SOA), which a few suppliers have already achieved.

Unsurprisingly, the largest growth markets for Tier 3 ERP solutions are China, Asia, and Latin America, albeit from a small base. Local suppliers to these markets enjoy the cost base to exploit these markets profitably, which is a challenge for North American and European suppliers. Nevertheless, in North America and EMEA, market growth will be faster than the overall ERP market.
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