Unbundling and Third Wave ERPs
August 20, 2024
Este ensayo también está disponible en español.
In 2001, as the dot com boom popped, InfoWorld wrote that the rise of B2B software was driving the rebirth of seemingly obsolete enterprise resource planning (ERP) technologies. In 2024, we are seeing another such ERP revival, but in this third wave no one is trying to build a monolithic one-size-fits-all tool anymore. The market is becoming increasingly fragmented, and we’re about to see a thousand flowers bloom.
I spent a good chunk of last year going deep into accounting software, and ERPs in particular, trying to figure out what made companies choose one tool over another, what users needed from their internal systems, and what bits forced them to upgrade. I quickly realized that “ERP” is a marketing term, and not a super meaningful one - few companies have a real single operational source of truth, and most are in a constant synchronization battle across data sinks supported by a small army of engineers, consultants, and faulty pipelines.
ERPs promise the integration of different business processes into a single centralized system. In theory teams across Finance, HR, Sales, etc. should all be able to operate out of the same integrated tool, ensuring consistency and reducing redundancy. In practice, teams feed data through SaaS solutions and an overworked accounting team reconciles what those tools produced to deliver as clear of a picture of the business as possible to the executive team, knowing full well that their reports are not accurate.
After talking to many finance professionals and operators in the fintech ecosystem, it became clear that the majority of modern companies don’t need beasts like NetSuite or Workday, but they are also not served well by Quickbooks, Xero, nor other small players. They just don’t have better options. All these tools are clunky, with 20-30 years of history and accumulated features, but finance and accounting teams are risk-averse and wary of trying unproven software that requires such deep connection to their business processes. New single-purpose systems are brought on piecemeal on top of the systems already in place, enhancing or automating processes as needed. This means that as companies scale, their centralized systems become ossified chimeras full of tacked-on API integrations and their path-dependent custom objects, causing both technical and organizational debt. Almost everyone I spoke with saw their ERP as a necessity, painful to maintain and operate, but also the only tool they trusted to get their work done. Mike Bianco puts it well when he describes NetSuite as terrible software “that’s good enough for the people who need to use it every day.” This dynamic is largely favorable to the incumbents.
The reason incumbent ERPs will lose relevance to entrants is not new AI-powered workflows or better and faster UX but the fact that they will be unbundled into niche versions of themselves, each with a small subset of the whole. The bajillion FP&A, billing, invoicing, and close management tools in the market show that there are feature-specific plays worth building. As software interfaces become more flexible, migrating processes out to new systems will become easier and easier. Beyond the startups cutting out horizontal slices, others are increasingly taking a vertical targeted approach, building end-to-end ERPs tailored to specific industries or business models. Companies like Turbine, for example, are creating comprehensive accounting and operational solutions for ecommerce brands, while Rillet is doing the same for SaaS businesses. Specialization allows startups to understand the pain points and requirements of their target market, enabling them to deliver better solutions. Each of those vertical solutions will be good enough in their own way.
As the concept of an ERP becomes more fluid, more and more functionalities are being extracted and offered as standalone products. Today, ERP software is at the center of business processes, but as the current players get chipped away into a composable stack the landscape will shift and fragment significantly. Companies are already picking and choosing what they need, rather than being forced to adopt an entire suite of mediocre and irrelevant but integrated features. What makes an ERP an ERP today is its centrality, but in this new environment, the companies that succeed will be those that embrace the fragmentation.
Photo: Reforma, by me. Previously posted on CDMX.
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