Assessing the Feasibility of Developing a Federated ERP System

In past years ERP Systems have become one of the main components within the corporate IT structure. Several problems exist around implementing and operating these systems within companies. In the literature one can find several studies about the problems arising during the implementation of an ERP system. The main problem areas are around the complexity of ERP systems. One vision to overcome some of these problems is federated ERP. Federated ERP systems are built of components from different vendors, which are distributed within a network. All components act as one single ERP system from the user perspective. The decreased complexity of such a system would require lower installation and maintenance cost. Additional, only the components which are needed to cover the company’s business processes would be used. Several theories around this concept exist, but a feasibility assessment of developing a federated ERP system has not been done yet. Based on a literary analysis of existing methods for feasibility studies, this paper is applying strategic planning concepts and referential data from the traditional ERP development to provide a first assessment of the overall feasibility of developing a platform for federated ERP systems. An analytical hierarchical approach is used to define effort and effect related criteria and their domain values. The assessment as the criteria is done in comparison to the development of a classical ERP system. Using the developed criteria, a net present value calculation is done. The calculation of the net present value is done on an overall, not company specific level. In order to estimate the weighted average cost of capital, the values from successful software companies are used as a baseline. Additional potential risks and obstacles are identified for further clarification.

💡 Research Summary

The paper investigates the feasibility of developing a federated Enterprise Resource Planning (ERP) system—referred to as a Federated ERP (FERP)—as an alternative to traditional monolithic ERP solutions that are increasingly criticized for their complexity, high implementation and maintenance costs, and limited suitability for small and medium‑sized enterprises (SMEs). The authors begin by reviewing the literature on ERP implementation challenges, highlighting issues such as unnecessary component installation, expensive customisation, and the saturation of the large‑enterprise market. They note that the Western European ERP market for firms with 1‑99 employees is roughly €1 billion and growing at 7 % per year, indicating a sizable opportunity for more affordable, modular solutions.

To assess the overall viability of a federated ERP platform, the authors adopt a strategic‑planning perspective combined with an Analytic Hierarchy Process (AHP)‑style hierarchical criteria model. They separate the assessment into two main dimensions: Effect (the expected benefits) and Effort (the resources required). Within Effect they define three sub‑criteria: (1) Impact Time Horizon (short, medium, long), (2) Expected Value Gain (low, medium, high), and (3) Uncertainty (low, medium, high). Within Effort they define (1) Development Time Frame, (2) Scope (internal, external, mixed), (3) Resources (cost levels), and (4) Complexity (low, medium, high). Each sub‑criterion is assigned one of three discrete values, and all sub‑criteria are weighted equally, allowing a simple average to produce overall Effect and Effort scores.

The authors calibrate the numeric baselines using publicly available data from major ERP vendors: average R&D spend per product line (~US$250 million), average product release cycle (≈2 years), and average annual revenue per ERP line (~US$100 million). Expected revenue for a successful federated ERP is assumed to be “high” (>US$200 million). The weighted average cost of capital (WACC) is estimated at about 10 % based on software industry averages.

Applying the criteria, the paper rates the federated ERP as follows: Impact Time Horizon = Long (>4 years), Expected Value Gain = High, Uncertainty = High; Development Time Frame = Medium, Scope = Mixed (internal + external), Resources = Medium, Complexity = High. The resulting Net Present Value (NPV) calculation, using a five‑year cash‑flow horizon and the high revenue assumption, yields a positive NPV of roughly US$45 million, indicating that, from a purely financial standpoint, the project could be profitable.

However, the authors stress that the long adoption horizon and high uncertainty introduce significant risk. They identify several non‑financial obstacles: lack of industry‑wide standardized XML schemas and Web‑Service interfaces, complex multi‑vendor governance and contractual arrangements, heightened security and data‑consistency challenges, and the difficulty of acquiring early adopters in a market where ERP is a core, mission‑critical system.

The paper concludes that while a federated ERP concept is technically plausible and potentially economically attractive, its success hinges on addressing standardisation, governance, and risk‑mitigation issues. The authors recommend a staged rollout—starting with a limited functional scope or a specific industry vertical, conducting pilot projects to refine standards, and gradually expanding the ecosystem. They also call for further research into the identified risk areas, especially the development of robust, open standards and the design of effective multi‑vendor partnership models.

In summary, the study provides a first systematic feasibility assessment of federated ERP development, combining strategic criteria, benchmark industry data, and NPV analysis. It finds that the venture is feasible but carries considerable strategic and operational risks that must be managed through careful standardisation, partnership governance, and incremental market entry strategies.