Two forces for the future

For the past six years, Gartner has conducted a research study of supply chain technology use. That study asks supply chain professionals to identify their key priorities now and in the future, cite barriers to success, quantify their business challenges, and describe how they exploit technology in their businesses.

Based on this year's research—outlined in the report Gartner Predicts 2013: Collaboration, Cloud, and Evolving Strategies Will Drive Global Logistics—we identified two forces that are going to have a significant impact on supply chain management technology over the next three years: cloud computing and "mega-suites" of applications.

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[Figure 1] Lack of functional parity limits SCM SaaS adoption, but growth continuesEnlarge this image

Growing demand for cloud services
Cloud computing is becoming a significant force in supply chain applications, and Gartner believes that by 2016 more than 40 percent of new logistics applications will be delivered via the cloud.

In this context, "the cloud" can mean several things. It can mean providing on-demand access to an application, or it can be a pure multitenant, software-as-a-service (SaaS) application where there is a single instance of the software used by multiple customers simultaneously. There are also variants on the idea of a "private cloud" hosted by either a user or a vendor and involving a single instance of the software dedicated to a single customer.

Consistent with the larger trend within the information technology (IT) market, there has been growth over the past three years in the number of supply chain solutions that are cloud-based (public or private). At the same time, Gartner has seen the preference for sourcing new applications via the traditional on-premise approach decline from a high of 70 percent in 2010 to around 55 percent in 2012.

Despite this growing interest, cloud computing within supply chain management (SCM) is still relatively nascent and has a lower level of penetration than in areas like customer relationship management (CRM) or indirect procurement offerings. However, our research finds a significant intent by companies to source SCM applications through a SaaS model in the future. The most significant driver for the increase in SaaS adoption, according to the survey, is the desire to reduce upfront investment costs.

Gartner has also found that adoption level varies depending on the process complexity, degree of process sophistication, and size of the enterprise. Large, complex enterprises continue to favor traditional on-premise applications, although interest in the cloud is developing. Some of this is driven by large companies' propensity to want high degrees of control and customization/personalization. Small and mid-size businesses (SMBs), on the other hand, have largely made the transition to the cloud. For these organizations the benefits are the perceived time to value, low upfront capital investment, and the ability to shift much of the application maintenance to the cloud provider. Growth will come from more SMBs seeking cloud offerings as well as from large organizations changing their opinions of the cloud.

In our study, Gartner was also able to stratify responses based on various factors. One of the dimensions is "information technology adoption profile." Aggressive adopters of IT tend to be innovators, relatively risk-tolerant, and the first to embrace new concepts. Mainstream companies wait for technologies to become commercially viable because they tend to be more risk-averse, and they want to see evidence of success among companies like themselves. Conservative companies tend to be late adopters of technology; they are risk avoiders and wait for markets to mature and consolidate.

Gartner found notable differences in cloud adoption levels based on a company's IT adoption profile. Conservative organizations are still reluctant to embrace the cloud, preferring on-premise and hosting options. Aggressive adopters of IT, however, are more inclined to consider various cloud delivery approaches. Finally, mainstream companies are the most likely of the three to favor multitenant SaaS applications, which, given their risk profiles, suggests that concerns with cloud viability are waning. (See Figure 1 for current adoption rates and respondents' projections for 2015.)

Rise of the "mega-suite"
The second major trend is the emerging dominance of application mega-suite vendors such as SAP, Oracle, and Infor. Our data indicates that if these vendors continue on their current growth trajectories, they will command more than half of the market for logistics applications. The mega-suite vendors continue to invest in their logistics and supply chain management capabilities. While they might not have achieved "best-of-breed" status in each SCM application category, they do offer solid and reliable capabilities across the SCM application domain. This includes warehousing, transportation, planning, manufacturing, and sourcing and procurement. This is not to say that best-of-breed vendors are all dead. Rather, it just means that those customers that need only "good enough" capabilities will likely find offerings from the mega-suite vendors to be sufficient. To survive, best-of-breed vendors will have to be thought leaders and on the forefront of innovation.

In our study, Gartner wanted to determine how willing businesses would be to adopt enterprise resource planning (ERP) suite offerings. Respondents were asked to identify the likelihood of acquiring technology from their ERP provider versus a best-of-breed provider. While many specialized vendors continue to execute well, the study showed a notable preference toward ERP suite providers today.

The study found significant interest in leveraging ERP solutions when their features and functionality are comparable to best-of-breeds or "good enough" for the needed environment. The study seems to suggest that most respondents are selecting solutions that are "good enough" or support an ERP platform strategy rather than ones that are considered to be cutting-edge.

Indeed, ERP suites are preferred by businesses that consider themselves below-average (67 percent), average (77 percent), or above-average (74 percent). Businesses that consider themselves to be leaders, however, are more likely to prefer a best-of-breed approach. Within the leaders category, 56 percent indicated that, in general, an ERP platform was their preference, while 26 percent preferred a best-of-breed approach, where the focus is on differentiation and where functionality becomes the most important factor. The remainder of the respondents were indifferent. The leaders' preference for best-of-breed vendors was close to triple that of other organizations, which is one reason these organizations are often differentiated in their industries.

Business change is pervasive, and the pace is accelerating. In previous Gartner studies, almost 90 percent of companies indicated that the impact of change was growing, and they must develop business and IT strategies that are responsive and adaptive to change. At the same time, companies continue to live under financial pressures, so they need to invest their IT resources wisely.

Both of the above trends—cloud and the growing dominance of mega-suite vendors—are driven by these demands. Cloud is proving to be a means for companies to invest in newer solutions with less upfront capital, and it allows them to shift some of the burden of application management to the vendor, which will allow them to do more with less. Similarly the mega-suite vendors are now a force in SCM applications, as they offer many organizations the opportunity to more easily enhance their supply chain management processes by extending the reach of software that they already have in place. While neither is a panacea, companies that are considering upgrading their SCM portfolios should consider both of these strategies.