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SAP, Oracle expand vertical functionality in ERP software systems

SAP, traditionally known for growing its ERP applications organically, will look to partnerships to expand vertical functionality.

Oracle and SAP will offer more vertically focused applications in the coming year, according to a recent Forrester report.

As more companies supplement their core ERP applications with third-party products, offering more vertical functionality will be paramount for the growth of large ERP vendors, according to Paul Hamerman, vice president and principal analyst at Cambridge, Mass.-based Forrester Research.

The market for industry verticals will reach $36 billion in 2008, nearly the same size as the ERP market itself.

"It's not so much a battle for customers anymore," Hamerman said. "It's a battle for seats within those customers."

And SAP won't be left out.

Rival Oracle is typically known for growing by adding vertical functionality through purchasing other companies.

But SAP said adding industry-specific functionality is just as important as its dominant growth strategy of going after more small and midsized customers with SAP Business One and Business All-in-One.

"It's twofold," said Philip Say, vice president for SAP ERP solution marketing. It's just as important to continue working with SAP's more than 2,000 partners to increase vertical functionality in their applications, he said.

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SAP will also look to add customers via industry-specific functionality delivered in enhancement packages, which are delivered to customers through NetWeaver on the latest release of ERP 6.0.

According to Hamerman, however, the two titans will continue to differ in their approach to adding more vertical functionality.

SAP will shift to a strategy that supports side-by-side integration with third-party solutions, either by acquiring or partnering with them, he said.

"I think the market is moving too quickly for them to build all of this stuff," Hamerman said. "They're in a situation where they're going to have to look for acquisitions they have to plug in and take."

It's a situation SAP itself recognizes.

"Clearly, the demand for capabilities … exceeds the capacity to supply," Say said.

Oracle, on the other hand, will continue to go after other companies, Hamerman said, as evidenced by its recent earnings call in which CEO Larry Ellison said that the company is looking at certain industries as opportunities to grow its applications users.

"Oracle's an acquisition machine," Hamerman said, pointing to more than 40 acquisitions it has made over the past four years. Their recent acquisitions in the insurance sector are examples of what Ellison's talking about, he said.

Industries like healthcare, financial services, retail and public and education systems will spend the most adding industry-specific functionality, he said. And companies with SAP or Oracle ERP backbones should continue to supplement them with third-party tools.

That's what companies like Richmond, Va.-based Philip Morris USA are doing.

The tobacco giant added industry-specific functionality from Mincom, a software company based in Brisbane, Australia, which serves asset-intensive industries.

Philip Morris uses LinkOne in conjunction with the SAP plant maintenance module, and an SAP ERP 4.7 backbone, to create graphical equipment catalogs. These help maintenance workers find the parts they need to run the company's two plants in Virginia and North Carolina by sorting through 40,000 equipment records, 3,000 equipment catalogs and 300,000 spare parts.

"I think it's a powerful tool," said David Foley, section leader of maintenance and technical planning. "And with a bill of materials, you're not just looking at numbers and words, it's actually the pictures."

There are other possible growth strategies the two titans could adopt in the year to come, Hamerman said.

"It's a very possible strategy for them to get into the underdeveloped markets," he said. "China is a very interesting market and one that would lend itself to some acquisitions."

But one thing is certain -- no one's going to catch the two rivals anytime soon.

SAP and Oracle still control more than half of the ERP market, which has grown steadily at 6.9% to $38.3 billion. SAP had $14 billion in revenue in 2007, while Oracle had about $7 billion.

"I do think Oracle has some momentum to the extent they're gaining on SAP," Hamerman said. "But it's still about half the size of SAP."

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