Growth market

The craze for ERP implementations continues in the Middle East as businesses try to become more efficient. In order to complete an ERP deployment on time, it is easy to overlook certain aspects of it; therefore it is up to CIOs to make sure that his or her IT department knows exactly what it is doing.

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By  Angela Prasad Published  January 25, 2005

|~|shishir1.jpg|~|Today ERP is an accepted solution in the Middle East and around the world and businesses are jumping on the ERP bandwagon. That is why there is a boom, says Shishir Srivastava, executive director of Sage Software Middle East.|~|Despite being one of the most costly technology initiatives that an organisation can undertake, enterprise resource planning (ERP) solutions remain in demand.

Businesses continue to implement ERP solutions in a bid to become more efficient. In addition, growth in the ERP application market is attributed to the general IT spending increase, as well as the pent-up demand for more integrated solutions to boost an organisation’s productivity, profitability and competitiveness.

However, the resource planning aspect of the ERP equation can easily be forgotten. Enterprise is the magic word that is driving the demand not only in the Middle East, but also around the globe. Corporations view ERP as the panacea for the smooth running of their day-to-day operations because it promises to deliver exactly that.

ERP aims to streamline an organisation’s various internal and external business processes such as management of human resources, customer relationship, inventory and financials, so the management is able to access corporate data with one click of a mouse.

An online survey conducted by ACN shows that regional businesses are willing to spend significantly on ERP implementations. In 2004, 30.2% of businesses spent under US$50,000 on ERP implementations, while 26.4% spent over US$1 million and 23% spent between US$250,000 and US$500,000. 504 businesses were polled.

ERP software will gain a substantially bigger market share in GCC countries in the next five years. Madar Research Group predicts the value of this market to be approximately US$270 billion by 2008. “Customisable, packaged ERP suites will increasingly gain new customers from the region’s medium-sized businesses. These customers are driven mainly by their need for better business information and cost savings, in addition to the need to accommodate e-business models and e-government requirements,” says Abdul Kader Kamli, president of Madar Research.


Similarly, IDC is expecting the ERP applications market to reach US$36 billion by 2008. This space will grow as horizontal and vertical vendors increasingly compete against each other to increase their market share. The analyst house also says that emerging forces such as open source ERP and new players like China Dot Com and United Health Group will also help drive growth.

Furthermore, even the consolidation uncertainties triggered by the hostile takeover of PeopleSoft by Oracle in December 2004 is neither causing concern among competitors nor stopping businesses from going ahead with ERP implementations.

Take Lebanon-based Bybalos Bank for instance; it is deploying the PeopleSoft enterprise human capital management (HCM) solutions across its branches in Beirut and affiliated offices around the world. The deployment of the solution is one of bank’s key initiatives to upgrade its IT infrastructure and empower human resources functions with a sophisticated ERP system.

“Byblos Bank is currently expanding its business and the new solution will play a key role in helping us drive departmental results by aligning employee goals with organisational objectives and automating processes through out the bank,” explains Liliane Nohra, human resources manager at Byblos Bank.

Byblos Bank is not alone in implementing ERP solutions. Financial institutions throughout the Middle East are dealing with the changes brought about by deregulation, expansion of the financial services sector and increasing competition; hence the need for flexible technology platforms to help them manage change.

Exact Software is predicting further consolidation in the region’s ERP market this year as vendors react to a series of mergers and acquisitions. The vendor claims there will be a strong demand for ERP solutions from the services sector and increased investment in software from the regional markets of Qatar and the Kingdom of Saudi Arabia (KSA).

Qatar, which will host the 2006 Asian Games, is expected to invest heavily in ERP applications as the country readies itself for the sporting event. Strong profits from Saudi Arabian businesses, coupled with high oil prices that produced liquidity in both private and public sectors, will also be ploughed back into IT.

“There have been suggestions in the market that other companies will merge, a trend I would expect to continue this year. It is an interesting time for the ERP sector. In addition, what happens over the next 12 month will determine the future direction of the industry,” says Nizar Badwan, general manager of Exact Software Middle East.

In anticipation of the expected demand from Qatar and KSA, the vendor plans to start operations in both these countries. Exact Software is not concerned about further consolidation because the company believes it is at the right place at the right time to exploit the new opportunities arising from mergers and acquisitions.

“The changing market does not worry us. The company is well positioned to meet the demands of its customers in the region. Our direct sales and implementation model means we are able to provide the highest levels of quality in implementation, technical support and training,” says Badwan.

The demand for ERP solutions in the retail sector will also drive growth, as major shopping developments and hotels go online. Co-op Islami has teamed up with SAP Arabia to overhaul its IT infrastructure with the vendor’s ERP package. The investment is a result of Co-op Islami’s efforts to enhance performance and improve the quality of its services.

“Our main challenge is to improve business processes by reducing inefficiencies, optimising our supply chain and improving logistics and distribution network. This will allow us to improve productivity and customer satisfaction,” says Hussein Saeed Lootah, board member of Co-op Islami.

“The implementation will also help us reach out to regional markets, especially the Gulf markets, where we started five years ago. Our presence in the GCC markets will play a major role in supporting our current plans of penetrating international markets,” he adds.

ERP market leader SAP Arabia believes its deal with Co-op Islami will lead to more wins in the small-to-medium sized businesses (SMBs) sector, as doubt and uncertainty cloud offerings from ERP rivals Oracle and PeopleSoft during the acquisition period.

“With the deal between our rivals to form one company, there are now only two ERP choices for enterprises in the Middle East. They are Oracle and SAP,” says Nabeel Hamad, business development director at SAP Arabia. “While they take a long time to iron out the merger, SAP is working toward improving its software, expanding integration and producing a wide range of products designed for smaller customers,” he adds.

The tier-one vendor, which has mostly targeted enterprise customers, is now focusing on SMBs because it believes the region’s smaller players are starting to deploy ERP solutions. In addition, the region’s enterprise market is saturated.
“We are going for the SMBs in the Middle East, an area we previously did not play in because the opportunities are enormous in this sector. This will further drive the growth in the region’s ERP space,” says Hamad.

SAP’s aggressive onslaught does not stop there. The vendor has launched Arabised versions of ERP solutions in a bid to secure the region’s governmental and telecommunications sectors. SAP Arabia firmly believes the move will help it exploit opportunities in the public sector where it is a prerequisite to have Arabic.

ERP solutions and implementations are not cheap. Take Nestle’ SA for instance, back in 2002, the company signed a US$200 million contract with SAP to deploy an ERP system for its global enterprise. It also threw in an additional US$80 million for consulting and maintenance.

The Swiss consumer goods giant wanted to use the SAP system to help centralise a conglomerate that owns 200 operations and subsidiaries in 80 countries. The cost of ERP implementations would normally cover investment in setting up the organisation’s IT infrastructure, purchasing the hardware, creating an integrated database for the company and the cost of professional services.

According to analysts, the total cost of ownership (TCO) can vary from an average of US$15 million to a high of US$300 million for enterprises and as little as US$400,000 for SMBs. Implementations can take as long as two years and return–on-investment (ROI) is usually realised after three years.

In addition, training must be conducted as an integral part of the ERP project, and the earlier the knowledge transfer occurs in the implementation process, the better the chances for a successful ERP adoption.

Despite the cost of ERP, the craze for ERP implementations continues. Saudi-based IT and Communications solutions provider Al-Falak says the Middle East’s ERP market is starting to mature. Businesses are starting to realise that ERP backbone is no longer a luxury but a necessity. Awareness is another factor that is driving the growth.

“If one compares Middle East’s ERP market to the rest of the world, the region is having the first generation of ERP implementations, whereas in the US and the UK we are talking about the first and the second-generation ERP implementations,” explains Atif Khan, sales & marketing manager of the ERP division at Al-Falak.

Another driving force, especially in the Eastern part of KSA is SAP customer Saudi Aramco. Khan says businesses see the oil conglomerate as father figure and they want to follow in its footsteps. Aramco has also told businesses to adopt e-commerce if they want to do business with it.

However, most businesses fall under the SMB category and they can neither afford nor need a SAP solution; hence they go for an ERP package from smaller vendors. “Prior to providing solutions to Saudi Aramco, nobody in the region knew SAP. Today, it is a well known company in the Middle East, due to its implementation at Saudi Aramco.”

Verticals like the manufacturing sector and real estate and property management in KSA are also boosting ERP growth. Al-Falak, which has secured two deals in the property management sector, says the main reason why the two customers wanted to deploy an ERP solution was to manage their business that was growing rapidly.

“The last two accounts we closed in December were from these sectors. These companies needed an ERP solution because they wanted to enhance their real estate and property management system,” says Khan.

Booming petrochemical and construction sectors are also helping the growth, as businesses work toward automating their systems. IDC shares Khan’s sentiments. The analyst firm says oil & gas sector was the largest source of demand for ERP in the MENA region in 2003 and a similar trend is expected to continue.

“Discrete manufacturing sector was the second largest with 13.2% share of spending, followed by wholesale, which included trading and distribution companies constituting approximately 11.9%. Other key segments for ERP included retail, construction and telecommunications,” comments Heini Booysen, senior analyst at IDC CEMA’s software group.

Together, the top five verticals accounted for 69% of total enterprise applications sector expenditure in the MENA region.
Human resource (HR) is another big driving force. Take the banking sector for instance; the financial institutions are starting to adopt business-to-business (B2B) banking, which is forcing businesses to adopt automation and integration.

“Businesses do not want to send tapes to the banks for monthly payrolls and that is why they are moving toward automation and integration,” adds Al-Falak’s Khan.

Sage Software says the reason why ERP in the Middle East is growing at a faster rate than rest of the world is because of the region’s immaturity. The vendor believes the Arab World is changing rapidly and the entire market is on the growth path and that is why there is an increasing demand for ERP solutions.

“Today, ERP is an accepted solution in the Middle East and around the world and businesses are jumping on the ERP bandwagon and that is why there is a boom,” says Shishir Srivastava, executive director of Sage Software Middle East. “Businesses cannot survive if they do not run their affairs efficiently; hence the need for automation. ERP implementations are no longer a luxury, but a real need.”

ERP solutions deliver benefits and businesses are starting to realise that. The first stage of an ERP implementation is out of necessity, however once companies start running their businesses efficiently, they start focusing on delivering quality services, which leads to a deployment of a series of different ERP apps.

“The current competitive business climate is driving the demand for ERP. I will give an example without naming the company. 14 years ago, there was an IT distribution company, which bought products in US dollars and resold them in the Middle East at a huge profit and it minted money in the late 80s and 90s. Until about 1995, the finance department of this company consisted of five typists who used to type the invoices. It did not worry about automation or running their business efficiently because they were rolling in money. However, during an audit session it ran into trouble and lost huge amounts of money. The first thing the company did was to invest in an ERP system.”

In addition, the mid-market ERP player believes the Oracle/PeopleSoft takeover is good news for the company. It says the consolidation will create new opportunities for smaller players in the burgeoning SMB space. “For instance, the accounting/ERP market space has three categories of vendors. The tier-one vendors like SAP and Oracle that sell into the enterprise space. However, that space is heavily consolidated and completely saturated, which means growth will come from the SMBs segment of the market,” says Srivastava.

Sage is targeting the manufacturing and retail sectors in 2005.Khan echoes Srivastava’s sentiments. “The consolidation is not a concern for us. We have had a successful 2004 and we are expecting equally good 2005. In the last week of 2004 we closed four deals, which gave us a good start for the new year. The ERP market has been turbulent for the past six months due to the Oracle/PeopleSoft situation and we were worried at the time, however we are glad that it is over now.”

Finally, the deal between Oracle and PeopleSoft, which was finalised last month, will be a major boost to the region’s ERP segment of the market. Oracle says the takeover should add approximately 1% share to its bottom line starting in the fourth quarter of its fiscal year, and 2% per quarter in fiscal 2006. ||**||

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