More midmarket firms choose open-source ERP

When Mark Alperin went looking to replace his aging ERP system in 2006, he found himself in the same place as many CIOs of midsize companies -- not feeling terribly sought after by software vendors that prioritize large enterprise accounts, and facing few choices.

Alperin serves as chief operating officer with CIO responsibilities at Vertex Distribution, a manufacturer and distributor of rivets, screws and other fasteners. He wasn't happy with the two main packages for his industry, from Activant Solutions and Microsoft (neither of which he was using, nor wanted to use.)

"I had lots of concern over the consolidation of the industry. I felt locked in to those two guys," recalls Alperin. That lock-in made him nervous, since he was already frustrated by lack of flexibility with his old homegrown ERP system, which was not built around a relational database. Also, customization was a vital need when Vertex acquired other companies or needed to integrate with new customers. "We've grown because of our flexibility," Alperin says. He didn't want to risk that growth.

So to avoid being subjected to a vendor's shifting priorities, Alperin chose to use the Compiere open-source ERP suite. "The primary motivation was the ability to control our own destiny," he says.

Alperin shares that desire with plenty of midmarket CIOs, more of whom are now tapping into open-source ERP, for reasons of cost and flexibility.

Custom fit

Open source addresses a key concern in this instance. Often, ERP vendors pitch to smaller enterprises packaged applications that they can run as is, requiring little or no IT investment. It's a logical pitch in environments with scarce technology resources. But a substantial percentage of smaller companies want or need to customize the applications to fit their specific business needs -- just like larger enterprises, notes Paul Hamerman, vice president of enterprise applications at Forrester Research Inc.

"There's such a diversity of needs. Some companies want a system they can mold to their business, which gives them more inherent flexibility. And open source is designed to be customized," he notes.

And open source can be customized without astronomical cost. In Alperin's case, he first asked a systems integrator he's used over the years, Transitional Data Services (TDS), to develop a custom ERP application. Alperin wanted an ERP system he could directly control, with functionality equivalent to getting a customized version of commercial software, he says. But TDS suggested a money- and time-saving solution: Base Vertex's new ERP application on the open-source Compiere project. "They said it doesn't make sense to develop all that code when there's an open-source basis to get started from, eliminating 30% to 50% of the coding needed," Alperin says.

The results? Alperin can now delve into the source code to move quickly on business needs. "We have our own programming staff, and the ability because of that to customize services on our own and respond to customer needs is an advantage," he says. "So the direct access to the source code is very important."

Prevention Partners Inc., a maker of health program posters, buttons and other signage, had a similar desire for customization when it decided to replace an aging ERP implementation. As the company grew, its Windows-based ERP software couldn't scale with it and was becoming unreliable, among other faults. "I assumed the Oracles, SAPs and Baans would be out of our price range," says Scott Rosa, chief technology officer at Prevention Partners.

So he looked for midmarket-oriented vendors.

Rosa found that they were cheaper than the large vendors, but says licensing costs were "still six figures" -- and even more money would have to be spent on customizing whatever the company bought. "We didn't want to spend our limited budget on licensing," he says. By saving licensing dollars with open-source ERP, Rosa says he could redirect monies to additional customization efforts -- getting a better fit at the end for the same outlay as commercial software. The company has deployed the open-source WebERP software for its manufacturing arm.

"Flexibility means money to me," says Rosa. His experience with the company's previous commercial ERP system made it clear that, no matter its source, ERP software would require significant customization effort.

"We had to build a whole ecosystem around our existing ERP to fill the gaps," he recalls. "Every business does something outside of what the software has in its business process," whether that software is commercial or open source, he says, "so if I need to have that customization, I'm going to do it myself."

Truly, control ranks right up there with costs on the list of CIO concerns regarding ERP. The open-source community, of course, values individual control as a key part of its culture.

When Galenicum, a three-year-old supplier of raw materials for the pharmaceutical industry, sought its first ERP system last summer, customization and control were key requirements. The company looked at two commercial applications -- SAP Business One and Microsoft Dynamics -- but chose instead the Openbravo open-source ERP software. For COO Erich Buchen, "the most important factor was that it is easier to customize Openbravo than the other two. SAP and [Microsoft] Dynamics are much more rigid in what they can do, or at least in what their consultants say they can do."

Given that any ERP software would need extensive customization (for example, for interacting with Galenicum's customs management and logistics partners), commercial software offered no advantage, he says.

That's not music to the ears of SAP, but Buchen's not alone.

Retail distribution firm Frilac chose Openbravo to ensure control over the ERP system's capabilities when it decided to replace its hodgepodge of disconnected back-office applications with a unified ERP suite. "An open-source software system meant we were in full control -- with customizations suited to us, the software adapted to our particular needs and with no restrictions from the product manufacturer," says Carlos Villanueva, Frilac's sales director.

Flexible support system

Midmarket CIOs also have to be realistic about support options -- and the need to not only manage costs but also keep a few exit doors open in case of trouble. An aspect of open source that attracted these open-source ERP adopters was flexibility with who could support their development and maintenance needs.

"It's easy to switch if one consultant doesn't work out," Buchen says. "We could easily change suppliers if we were unhappy with the service," echoes Villanueva. "I'm not tied to any proprietary vendor who tells me what I can do," says Rosa.

Because smaller businesses usually have small IT staffs -- sometimes just a few developers and a few network and desktop support staff -- they're used to working with IT consultants who specialize in their industry. That makes it easy to adopt open-source software, since smaller companies can often turn to the same independent consultancies that support their other software.

That was the case at Vertex, whose preferred consultant recommended the use of open-source software. Or they can turn to the commercial arm of the open-source project to customize their deployments, ensuring that the development team intimately knows the software. That's the approach taken by Galenicum. But even in this case, familiarity with the consultant played a role: Because Openbravo and Galenicum are both Spanish companies, "we knew them," Buchen recalls.

"The reality is that the people who do all the work [in ERP deployments] are in-house teams or system integrators, not the commercial software vendors," says Martin Schneider, senior analyst for enterprise software at The 451 Group market research firm. "The availability of open source points out that disconnect in the value chain," he says. "It's almost a miracle that SAP got as big as it did; they're just selling a skeleton."

However, anyone relying on open-source software should understand what kind of support mechanism is actually available, says Peter Bohnert, a principal at TDS, the integrator Alperin used. For example, some projects (such as Compiere and Openbravo) have a services division, while others (such as Apache Open For Business) do not. All have independent consultants who offer support as well.

Future outlook

Analysts are split on how wide the appeal of open-source ERP will be in the coming years. When you consider the entire universe of ERP deployments, few companies have adopted open-source ERP software. Even the most established and longest-lived project, Compiere, mostly attracts companies that have significantly customized their commercial software and thus are more likely to do the same for open-source software, says Forrester's Hamerman.

There's little hard data on deployments because the software isn't licensed through normal sales channels.

"The vast majority of companies prefer the vendor to maintain the system for technical support and compliance," says Hamerman, who expects that approach, not open-source adoption, to remain the norm.

Early adopters tend to be the smaller companies. "Many developers are intrigued by -- and therefore gravitate toward -- open-source solutions," says Timothy Burks, a principal at PTRM Management Consultants. "But these developers typically report to CIOs and CFOs who are far more risk-averse and unwilling to jeopardize their careers. Consequently, open-source ERP solutions aren't likely to take off too quickly in the commercial space." Burks expects smaller companies to be more willing to take that risk.

However, Gartner research director Laurie Wurster doesn't think that companies are so cautious. "Today, ERP is very low on the list in terms of open-source adoption," she says.

But it's on a growth path. According to recent Gartner research, among companies currently using or considering using open source in any form, 12% are using open-source ERP today. And 14% plan to do so in the next 12 months. Open-source ERP should have increasing appeal because of the wave of ERP consolidation -- mostly acquisitions by Oracle, Microsoft and Infor Global Solutions, she says.

"SAP and those guys are not serving the midmarket -- they provide more functionality than customers need at a price they can't afford," she says, "but open source is meeting the needs." And open source has proved itself in many other enterprise applications, so any concerns center around the software's fit and support system, she says.

"Open source will become more rampant," agrees The 451 Group's Schneider. "People using old SAP R3 and pre-Version 11 Oracle Financials systems in a few years will be looking at [SAP's] NetWeaver and [Oracle's] Fusion [middleware platforms] and say, 'We don't want your middleware,'" he predicts. That opens the door for a serious look at open-source ERP.

Sidebar: My ERP story

At first blush, Scott Rosa's experience parallels that of other successful open-source ERP adopters. But the path to success wasn't straight. The CTO of Prevention Partners, which manufactures and distributes health-related posters, buttons and other signage, says his company outgrew its vertical-market, Windows-based ERP system. So Rosa hired a consultant to customize the Apache Open For Business open-source ERP software for his firm's distribution arm.

But the project management spun out of control, causing the effort to go over budget. The first problem: The consultant had no experience with Open For Business, and its learning curve was steeper than expected. The second problem: Because Open For Business is very customizable, both Prevention Partners and its consultant "got caught up" in much customization, Rosa recalls. And Open For Business is based on Java, which Rosa's developers aren't experienced in, so they couldn't take over.

But Rosa didn't move back to a commercial product. Instead, he adopted WebERP open-source software to develop a custom version for his company's manufacturing arm, which needed a quick and easily deployed ERP solution.

WebERP uses the PHP language, which his developers know, and Rosa can manage directly.

He plans on completing the Open For Business-based ERP effort as well. "I've got the code. I just need to find someone to finish it for us. I would not buy a proprietary solution," Rosa says.

Ultimately, Rosa plans to migrate one business to the other's ERP, but he hasn't decided which of the two open-source options will prevail.

Sidebar: Open-source ERP's Big Three

At least five open-source ERP projects exist today, but just three of those -- Compiere, Open For Business and Openbravo -- have gained traction, analysts say. In order of age:

Compiere: Founded in 1999, this project has the most adoption and "has grown into a significant level of functionality," says Paul Hamerman, a Forrester Research analyst. Compiere particularly suits sales, CRM and retail uses. But for manufacturing, it lacks shop floor management capabilities, says Martin Schneider, an analyst at The 451 Group.

Open For Business: Part of the Apache group of projects, the first version was released in 2005. It's best suited for online businesses, says Peter Bohnert, a principal at Transitional Data Services.

Openbravo: First released in 2006, Openbravo is designed for customization, rather than for a specific type of industry. It's Web-based, so companies with remote offices and traveling executives can provide browser-based access to simplify deployment and client management -- attributes that won over pharmaceuticals supplier Galenicum's COO, Erich Buchen.

Less established open-source ERP projects include WebERP and ERP5. Note that a few ERP applications are often considered to be open source but are not: OpenMFG, a well-regarded commercial application for manufacturers, lets licensed users access and modify the code for their own use, but they can't redistribute the code. Tiny ERP, a free ERP application, is licensed, and its code is not available.

This story, "More midmarket firms choose open-source ERP" was originally published by CIO.

Copyright © 2007 IDG Communications, Inc.

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