A Brief History of ERP

This year, 1.4 million companies will spend $183 billion on enterprise resource planning software, commonly known as ERP. While nearly every large corporation has implemented some form of ERP system, smaller businesses often don’t invest in these solutions off the shelf, and most engineers probably haven’t seen them in the wild. So for those of us who haven’t used an ERP system… what’s the big deal? How does a company like SAP manage to generate $34 billion annually from ERP software?

ERP systems is where companies store their core operational data. This includes everything from sales forecasts and purchase orders to inventory management, along with the processes that interact with this data, such as vendor payments when purchase orders are fulfilled. In a sense, ERP systems function as the “brain” of a company, housing critical data and enabling data-driven workflows.

But before taking over the modern business world, how did ERP software get started?

The Birth of ERP: From MRP to MRP II

In the early days of business automation, payroll and billing were among the first processes to be transformed by computers. Before this shift, employers relied on large teams of white-collar workers to manually calculate employee hours, multiply them by hourly rates, and subtract taxes and benefit deductions.

During this time, many companies, particularly in manufacturing, started using IBM computers to automate not only payroll and billing but also more complex operations like Material Requirements Planning (MRP). MRP was pioneered by IBM engineer Joseph Orlicky after studying the Toyota Production System, aiming to ensure that materials were available for production and products were ready for delivery while minimizing inventory levels. Early MRP systems were basic, operating on mainframes with punch cards as input, but they quickly demonstrated their value.

Back then, software engineering wasn’t yet a formal discipline. Companies often recruited employees with analytical backgrounds and taught them programming on the job to manage these systems. The first Computer Science department in the U.S. was established at Purdue University in 1962, and the first graduates began entering the workforce a few years later, adding formal training to the growing field.

Programming in the 1960s was a challenging endeavor due to memory constraints and the lack of high-level programming languages, standardized operating systems, or personal computers. Instead, developers worked with expensive mainframes, often at night, to maximize compile time. While today we run application software on top of a few popular operating systems, this wasn’t the case until the 90s. In this era (some say the golden era), 90% of software was custom-built, with only 10% being purchased off the shelf. Companies like GM wrote their own operating systems to get the most out of their mainframes.

This environment had a profound impact on how companies approached technology development. Some envisioned a future where software would be built on standardized industry platforms, including hardware, operating systems, and programming languages—similar to the SABRE system used in the airline industry (which is still in operation today!). However, most companies chose to develop their own isolated software solutions, often reinventing the wheel in the process.

Fun Fact: The first MRP system, installed by Black & Decker in 1964, is often credited as the genesis of what we now know as ERP. This project, named Project MAC (Manufacturing Administration Control), laid the groundwork for future ERP systems.

The Emergence of ERP: The 1990s and the Rise of Software Giants

As businesses grew more complex, the need for a system that could manage not just manufacturing but also financials, human resources, and customer relations became apparent. Enter ERP. The term “ERP” was coined in the 1990s by Gartner, who recognized the potential of these integrated systems to transform business operations. (The authors feel like they’ve been inundated with too many “Gartner terms,” but hats-off to Gartner for coining ERP!)

One of the earliest companies to recognize the significance of this shift was SAP. In 1972, five engineers left their jobs at IBM to pursue a software contract with a large chemical firm called ICI, leading to the founding of SAP in Mannheim, Germany. Initially, SAP operated as a software consultancy, embedding themselves in their customers’ offices and developing logistics management software directly on their clients’ computers. However, over the years, SAP evolved its approach. In 1992, the company released its R/3 system, which became the gold standard of ERP by offering a client-server architecture that could scale with businesses as they grew—marking a significant departure from the monolithic mainframe systems of the past.

From the beginning, SAP’s software was designed with extensibility in mind. For their initial contract with ICI, they built upon a previous project rather than starting from scratch, setting a precedent for future developments. When SAP released its financial accounting software in 1974, they intentionally structured it to allow for additional modules to be added later, making extensibility a core feature. Unlike other companies at the time, SAP’s software facilitated interoperability across different client contexts, which would prove to be a game-changer.

The significance of this integration became especially clear when SAP introduced a manufacturing module that seamlessly interacted with their finance module, thanks to a shared database. This integration made the combined modules more valuable than standalone software—a true “aha” moment for the industry.

Integrated software like ERP systems connects various business processes and data sources, opening up new opportunities for automation. For example, ERP enabled Compaq to shift to a made-to-order model, saving on inventory costs, and helped IBM reduce replacement part shipping times from 22 days to just 3 days.

Fun Fact: SAP’s name originally stood for “Systemanalyse und Programmentwicklung” (System Analysis and Program Development), which is a mouthful even by German standards. The company’s early work involved developing real-time data processing systems, which was revolutionary at a time when batch processing was the norm.

In tandem, MRP evolved into Manufacturing Resource Planning (MRP II) in the 1980s, marking a significant expansion of these early systems. MRP II, created by Oliver Wight in 1983, integrated additional data such as employee and financial needs, offering a more comprehensive approach to manufacturing planning. It included functionalities like master scheduling, capacity requirements planning, and sales and operations planning, which were absent in the original MRP systems. By 1989, about one-third of the software industry was MRP II software sold to American industry ($1.2 billion worth of software).

The 1990s also saw the rise of other ERP giants like Oracle, JD Edwards, and PeopleSoft, each carving out their niche in the burgeoning market. Oracle, already a heavyweight in the database world, leveraged its expertise to create an ERP system that could handle large volumes of transactional data with ease.

The Y2K Panic: An Unlikely Hero for ERP Adoption

As the year 2000 approached, the fear of the Y2K bug—where systems might fail due to the use of two-digit years—led many companies to overhaul their aging IT infrastructure. This was a golden opportunity for ERP vendors, who promised not just Y2K compliance but also a more integrated approach to managing business operations.

The Y2K scare accelerated ERP adoption, particularly among large enterprises. Companies that had been hesitant to invest in these expensive systems suddenly found themselves signing multi-million-dollar contracts with vendors like SAP, Oracle, and PeopleSoft.

Fun Fact: The Y2K crisis was a windfall for the ERP industry, with estimates suggesting that companies spent over $300 billion worldwide to address potential Y2K issues. ERP systems were a significant part of that spending, as companies sought to modernize their operations in the process.

ERP Goes to the Cloud: The 21st Century Shift

In 1998, after stopping his first startup, Evan Goldberg raised $125 million and started NetSuite, then called NetLedger. NetSuite was a pioneer in cloud computing, being one of the first companies to offer web-hosted business management applications beating out Salesforce by a few months. The company's vision was to provide real-time access to business applications via a web browser, which was a novel concept in the late 1990s.

Initially focused on bookkeeping and accounting, NetSuite quickly expanded its offerings to include a range of functionalities such as customer relationship management (CRM) and inventory management. This expansion was part of a strategic move to provide a comprehensive ERP solution.

In 2007, NetSuite became the first company to offer a fully cloud-based ERP system, disrupting the market with its ease of implementation and lower upfront costs. This move forced traditional ERP vendors to reconsider their strategies, leading to a wave of acquisitions and rebranding as they scrambled to stay relevant.

Fun Fact: Larry Ellison, co-founder of Oracle, was one of the early investors in NetSuite, seeing the potential of cloud-based ERP long before it became mainstream. His involvement in both companies led to speculation about how Oracle might eventually leverage NetSuite’s innovations—a prediction that came true when Oracle acquired NetSuite in 2016 for $9.3 billion.

What ERP Software Really Looks Like

ERPs aren’t known for their sleek, user-friendly interfaces. Take SAP as an example; a standard SAP installation includes 20,000 database tables, with 3,000 dedicated to configuration alone. Configuring the system requires around 8,000 decisions before even getting started, making “SAP Configuration Specialist” a real job title.

Despite the complexity, SAP’s ERP excels in integrating various business processes, resulting in thousands of potential use cases. These are organized into “Transactions,” representing business actions like creating an order or displaying customer information. Navigating these transactions can feel like browsing a website, complete with a back button, zoom controls, and “TCodes,” which function like URLs. SAP offers over 16,000 transaction types, making the interface challenging without these shortcuts.

ERP systems enable developers to create custom database tables and manage relational structures with features like foreign keys, value constraints, and permissions. They also offer a proprietary programming language for executing custom business logic and a UI builder, which, though powerful, can be difficult to use for complex designs.

Challenges with Implementing ERP

Implementing an ERP system demands the big bucks. Large companies might spend $100 million to $500 million, with costs spread across software licenses, consulting fees, hardware, and extensive training. And the results vary wildly. A best-case scenario looks like Cisco’s ERP implementation took 9 months and $15 million, whereas Dow Chemical’s took $1 billion and 8 years. The U.S. Navy spent $1 billion on four failed ERP projects! Unsurprisingly, 65% of executives believe ERP implementations have a moderate chance of hurting their business (not something your typically hear when evaluating software!).

ERP adoption requires company-wide commitment, as its value is only realized once fully integrated. This process involves not just installing the software but also reworking company operations. Many companies hire consulting firms like Accenture, spending millions to integrate ERP into their business processes. Training employees on the new system is crucial, with Gartner recommending 17% of the budget be allocated to training alone. But despite the challenges, ERP remains a staple for most Fortune 500 companies.

The modern ERP software industry

Today, Oracle and SAP are the two biggest players in the ERP market, each with distinct approaches to their products. SAP has primarily developed its ERP solutions internally, while Oracle has taken an acquisition-driven route, bringing competitors like PeopleSoft and NetSuite under its umbrella.

Oracle and SAP’s influence is so extensive that even Microsoft, despite offering its own ERP solution, Microsoft Dynamics, chooses to use SAP for its internal operations.

Given the unique needs of different industries, Oracle and SAP offer pre-built configurations tailored to sectors such as food, automotive, and chemicals, as well as specific verticals like sales processes. Despite their dominance, there remains room for niche players, especially those focused on specialized verticals:

• Infor has partnered with McKesson to build specifically for healthcare
• Ellucian Banner is specifically for higher education
• QAD is specifically for manufacturing and supply chain
• Odoo is an open-source ERP and CRM (and we love open source!)

Specialization isn’t the only differentiator, though: a few startups are bringing more modern software platform practices to the ERP “table.” An example is Zuora, a platform specifically focused on enabling companies to integrate (with ERPs!) and manage their subscription businesses. Others like Anaplan and Zoho are doing the same.

The Future of ERP: AI, Automation, and Beyond

Today, ERP systems are evolving once again, integrating cutting-edge technologies like artificial intelligence, machine learning, and robotic process automation. These advancements promise to further streamline operations, reduce errors, and provide real-time insights that were unimaginable just a decade ago.

Although ERPs are a mainstay in business operations, horror stories about integrations gone wrong or systems that inadvertently make companies less efficient are all too common. The truth is, it’s difficult for a single piece of software to address every edge case within a company.

As we look to the future, the lines between ERP and other enterprise software are blurring. With the rise of composable ERP, companies are increasingly choosing best-of-breed applications that can be integrated with core ERP systems, allowing for greater flexibility and customization.

The rise of AI-driven ERP systems could lead to a future where businesses can predict and respond to market changes in real-time, dynamically adjusting everything from supply chain logistics to customer engagement strategies without human intervention.

Fun Fact: While researching this topic, we found this list of facts about SAP. Here are some highlights from 2024:

• 99 of the 100 largest companies in the world are SAP customers
• SAP customers generate 87% of total global commerce
• SAP cloud user base: ~300m users
• >27,000 SAP Business AI customers
• Copilot Joule is being embedded across cloud portfolio