The role of the system integrator is changing almost as fast as the technologies that they are implementing. Can SIs disrupt themselves as well?
When the crumbs from the table are the size of giant Dairy Milk buttons, it’s no surprise that those feeding on the spoils have grown fat. The table in question is the ERP implementation market and those gorging themselves on the resultant upgrades and reimplementations are the plethora of system integrators that have built huge businesses on the coattails of the SAP and Oracle gravy train.
For decades the SI market has burgeoned in pace with the sale of vendor licenses as businesses were faced with a series of problems, to which the only solution was customising the hell out of stock systems so that they worked with legacy processes. A global ecosystem of beneficiaries has boomed, headcount has risen, and profits have soared on the back of traditional ERP project work.
However, the advent of cloud applications and infrastructure has changed the game; not just for the vendors and users, but also for the hundreds (if not thousands) of consultancies, integrators and partners that have made a life’s work out of ERP projects. The fundamental nature of cloud-native applications means that source-code customisation is a thing of the past putting an end to the role of the technical developer. Endless functional workshops used to capture processes are being scrapped in favour of standardised design. And digital infrastructure has all but ended the value of the IT manager and killed off DBAs at a stroke. Those SIs who kept pace with the demand for traditional project services over the last twenty years are looking at a stockpile of resources without the skills and experience being demanded by digital transformation.
So, what is the outlook for the SI market in the face of such a changing landscape? Can the bigger SIs continue to feed the beast, or will they need to embrace the kind of radical disruption that so many of their customers are considering? What demands are CIOs placing on their technology partners and how will the SIs move from a deliverables model to become an outcome-based enabler?
Robin McBurnie, a partner at PwC and leader of the Oracle practice, said: “The role of the SI has to change as customers look at business outcomes. Large scale investment in technology will no longer be measured by questions such as ‘did the system go in?’ But more by ‘were the business outcomes delivered?’
SaaS applications and cloud changing the game for everyone – trust is front and centre
The challenge for SIs to disrupt themselves is almost as great as it is for end users wishing to use cloud applications and infrastructure. The entire business model of the SI has changed and the phrase itself, ‘system integrator’, is almost redundant in today’s market. The process of implementing SaaS applications is so fundamentally different that organisations – that historically had been at the centre of making a system fit with a business – now have to work with a business to make it fit with the system, usually as part of a much broader transformation programme. That change in dynamic puts a completely different emphasis on the SI’s role – and at the core of the new role – is trust.
Customers always needed to trust their partners, so in one sense it’s not a new concept. However, now the trust has to run much deeper as CIOs and CFOs look to their business partners not only to help integrate a new finance or HCM system, but to radically change the way in which their enterprise operates. If you are PwC or Accenture, you land with a good deal of trust in the bank by reputation. But if you are an up-and-coming challenger that has ridden high on the wave of on-prem installations, without the global brand and heavy-hitting partners behind you, the task ahead could be daunting.
Martin Burden, director, ERP offering lead at Avanade, said: “An SI needs to be a trusted advisor and support the CIO in taking technology and turning it into value driven solutions. CIOs also expect industry expertise optimised for their industry with knowledge to support technology implementations. The astute CIOs want to understand and get advice on what they need to do as an organisation to make the overall programme successful. Technology is only one aspect of change. Managing internal client expectations, supporting changing ways of working and making the project land well is often more challenging than the technology itself. I spend time with my clients making sure that they are supported and prepared for the change that is about to happen.”
Rapid ROI and smaller projects – do they create opportunities or threats for the large SIs?
Historically, as soon as Oracle and Deloitte walked through the door you knew, as a CIO, that you were two years away from seeing results. Today, customers expect tangible benefits from investment in ERP technology within months, sometimes in weeks. Small innovations that make a big difference can be integrated in rapid time with much smaller project teams and far less disruption to BAU activities.
There will be very few, if any, projects that follow the time-worn path of historical ERP implementations. Projects with a timeline of two or three years are a thing of the past and have been replaced with much more agile and rapid deployments of technology that can bring almost instant benefit to a business and its employees. A traditional upgrade or reimplementation project would be front loaded with effort and cost and rear-loaded with benefits and results. Digital transformation is much more of a fluid process where small chunks of activity can have a significant effect in a relatively short space of time. It’s an ongoing activity that will likely see businesses in a constant state of evolution as newer technologies emerge and businesses react quickly to adopt the next step in development. The challenge for the large SIs is how they can flex their resources to be as agile as the technology they are implementing.
Iain Fox, Group CEO at KPMG said: “For some time to come there will be the need for ‘the Big SIs’ because big corporates have big needs for their core transformation programmes. Usually these are the only organisations that can deliver at scale, across borders and have the financial muscle to accept the commitments that come with large scale programmes. However, it’s clear many digital programmes are smaller and more agile in their nature, regardless of the size of the organisation undertaking them. For this, the large SIs need to adopt a different approach; they need to be more agile, willing to accept different contracting models, usually more focussed on outcomes rather than deliverables.
“The real question is if large SIs can prosper, not in the FTSE 250 but in the upper mid-market where the majority of transformation programmes exist in terms of volume. The move to cloud and SaaS, especially in the ERP space, is creating a fundamental shift in upper mid-market and low corporate clients, of how they want to consume their digital programmes. They want less customisation and the easiest path to the evergreening future SaaS promises. This means they have to adopt not only from a process perspective but also to traditionally sacred cows such as the design of CoA. To this end, in order to prosper, the large SIs need to evolve solutions that can be adopted rather than adapted to. They need to bring their industry knowledge and investment muscle to develop solutions that can be implemented in a fraction of the time of traditional programmes. Clients will be willing to accept less customisation, less configuration, to speed up time to value and will spend more time focussing on solutions that bring value, often through products like the Microsoft Power set of solutions that support the development of differentiated outcome focussed solutions.”
How are the big SIs repurposing themselves to meet the demands of digital transformation?
We know the projects are smaller and we know they take less time. We also know that the skills required by customers to implement digital technology requires far less heavy-lifting in terms of headcount. Automation may be the happy hunting ground for manufacturers and distributors, but it is also playing an increasing role in the world of tech integration and ERP deployment. Most large consultancies have developed their own integration tools and methodologies, that leverage the very same technology embedded in the ERP platforms, to cut a lot of the grunt work out of ERP deployment. So, what are they going to do with all the people who have historically set up ledgers, tweaked code in applications or run data migration routines?
Neil Thomas, SAP practice lead at HCL, said: “This is definitely a challenge for large scale SIs. In order to meet that challenge, we are investing heavily in automation accelerators in order to utilise the increasing capability of these techniques. This, of course, then presents the challenge of what we do with our head count, but we have (and continue to) repurpose teams to support building the routines and intelligence in the automation and RPA areas to further refine the algorithms. Some of the obvious questions we are asking ourselves are; where is my market? What is my USP? How committed am I to that market? Asking these questions may indeed lead to a change in the resource pool for SIs but in order to mitigate this, successful large SIs have diversified business portfolios. HCL is focussed on digital engineering as a mainstay of future business. This, in essence, means we don’t just provide the ERP solutions with our teams, we can engineer the IoT sensors, the hardware, etc. to provide business outcomes rather than ‘just the ERP bits’.
“We are looking at training and upskilling people in new technologies, such as RPA, in order that we give clients new efficiencies. Equally, in the functional areas we are now spending more time investigating process differentiators, such as the segmentation solution we have developed in Life Sciences, as this is where organisations can make gains in their markets. Undoubtedly, the losers in the new world of projects will be those who don’t gain the broader consulting skills to add value to their clients. Successful people will develop their rounder consulting and advisory skills in order to help develop new and entrepreneurial ways of working for their clients. As it happens, it is a long-embraced philosophy at HCL where we encourage ‘ideapreneurism’ – allowing all staff to develop innovation ideas for our clients and rewarding people for their successes.”
Burden from Avanade also recognises the challenges but argues that while automation will play an increasing role in technology deployment, the functional and softer side of digital transformation still requires a deep pool of talent to assist customers through the changes ahead. He said: “Yes, automation will reduce in particular some of the technology aspects of ERP projects. For example, automated provision of environments using cloud technologies, automated testing and evergreen applications mean that long upgrades will hopefully be a thing of the past. However, from a functional and operations perspective, changes represented by a new ERP are wide ranging in the business. Core consulting skills, both to support clients through change and to best consult on how the technology is to be implemented, will remain a core skill set. The operations side of any ERP implementation requires a lot of attention and effort; at the end of the day you are replacing the heart of your business and with technology change also comes business change both two processes and operations. The role of the SI has never been more important. For any redundancy in technology skill sets also comes opportunity for SIs to focus on innovative solutions for its clients and to focus on further value add.”
Fox from KPMG concluded by saying: “Reskilling, redeployment and reinvention are all part of what is needed for large SIs to adapt and survive. That said this is nothing new in the industry, it’s what the most successful organisations have been doing for 40 years.”
Does this shift towards an outcome-based delivery model built on a deeper trust-led partnership favour the large SIs or does it provide an opportunity for niche consultancies to carve out a place in the digital transformation market?
It’s no surprise that smaller more agile consultancies are often at the cutting edge of emerging technologies. While the large SIs have the credibility and financial clout to take on the biggest projects, it is often the smaller niche consultancies that have the silver bullet to solve the most demanding problems. Smaller consultancies do not have the headcount pressures of larger organisations and they were often born to solve a specific problem so their offering is tightly defined, and their structure is as lean as can be.
But do these niche consultancies pose a threat to the large SIs or is there a space in the market for everyone?
McBurnie from PwC believes that there is space for both types of partner and cites niche consultancies as playing a key role in the overall mix required for successful digital transformation. He said: “The niche consultancies have specialist skills – the traditional SIs need to look beyond the system to add value in integration, data and change management so that ERP solutions deliver sustainable change. At PwC, we no longer consider ourselves to be an SI, but as a Business Integrator (BI). This means we can often work alongside niche consultancies to help them deliver specialist solutions whilst focussing on enabling the business and on transformation.”
And Thomas from HCL agrees, saying: “The increase of niche payers is without doubt a challenge for large SIs – but frankly, the market is big enough for all styles of consulting organisation to operate. The market is focussed more on smaller implementations as organisations develop their solutions post the heavy lifting of global roll outs of the past few years. This is providing great opportunities for niche consultancies and is great to see as good innovation is brought in by these players. Equally though, large SIs have global presence and even with smaller projects, the likelihood is that they will be deployed on a global scale. Therefore, it is entirely plausible that the market provides space for both niche organisations and global SIs to exist. Equally, we at HCL have often partnered with niche players where we see an obvious benefit for a client. I think organisations who liberate the best from the SI/niche partnership get the best of both worlds, and from my experience has certainly meant we can provide symbiotic services rather than seeing niche as ‘competition’.”
Is the ERP gravy train over?
I started this editorial by suggesting that the role of the SI was dead and that the ERP implementation landscape had permanently changed. Whilst the nature of what an SI does has irreversibly shifted, it should not be overlooked that the ERP market as a whole is still growing at a rapid click. Depending on which set of figures you use, the global market will grow to something in the region of $75bn by 2025 with a CAGR of about 10 percent. It’s clear there is no slow down in demand for ERP services, in fact quite the opposite. More money is being spent on enterprise software, environments, licences and consulting services than ever and you only have to walk into one of the big consulting firm’s offices to realise that no-one is expecting a downturn in revenues.
So, who are the likely casualties from the digital revolution, if any? Will we see consolidation amongst the global consultancies, and will the niche players continue to be able to make headway at the cutting edge of technology integration?
Fox from KPMG, said: “As the business applications market continues to shift shape and adapt to new paradigms we will naturally see the least fit organisations fail. Those SIs and ERP implementation houses that do not respond to client demands for more rapid implementations that are outcome focussed, and the demands that true SaaS ERP place upon them through things like evergreening, will naturally fall by the way side or will be eaten up by the bigger healthier SIs, or will fail completely.”
So, who are the least fit and, does casualty mean total failure or is there a less severe type of failure facing those who don’t adapt quick enough? I think it’s certain to say that none of the big consulting firms are facing a squeeze – they are facing many of the same challenges that their customers are, but as long as some of their effort is spent ‘practicing what they preach’ they will continue to prosper. Consolidation at the upper end of the market would be near impossible as many of the global SIs have their tax, audit and advisory businesses behind them which makes mergers impractical. And I think the opportunity at the niche end of the market will also remain strong – niche being organisations that employ fewer than 250 people and have carved out a happy place in the market with a very clearly defined proposition. The big challenge will be for the few organisations that have grown rapidly but not yet reached the dizzying heights of the global consultancies. It will be increasingly difficult for those mid-market players to support their headcount without feeding from the top table or having the agility and problem-specific tech that the niche players offer. Will they fail or will they be acquired? I suspect a bit of both.
Is the ERP gravy train over? Yes, as we once knew it, but that doesn’t mean it’s doom and gloom for those who have the agility, foresight and expertise to remain competitive, and above all, be trusted in this rapidly changing world of digital transformation.
Thomas from HCL, said: “To cut to the chase, if people in consulting organisations can provide value-add outcomes then the basics of capitalism remain. Given the uptake of S/4HANA implementations for the coming years I see demand for the skills outstripping supply, so I would assume the market will be buoyant. However, I do strongly think that the gravy train pulled into the sidings some years ago. Being continually on the front foot of technology, while helping large complex businesses differentiate in a cost effective manner is no ‘easy ride’, to reference the meaning of the term.”
McBurnie from PwC summed up with: “The gravy train is over and the journey to the cloud has commenced…we have entered the next digital revolution. We should be excited at the opportunity that this gives us to help our clients transform their businesses.”