The United States today is in the midst of its longest economic expansion since World War II. Many believe a primary driver of this growth has been the productivity gains flowing from the flexible use of information technology.

But while the press talks all the time about how computers in general—and personal productivity tools in particular—are changing people's lives, the role of business software, and particularly management software applications, is less frequently discussed. Key among these applications are enterprise resource planning (ERP) and supply chain management software.

In the most general terms, management applications automate the coordination of tasks. They promote the flexibility needed to achieve mass customization—the ability to manufacture and distribute products tailored to individual consumer preferences. Although this trend has been in evidence for many years, e-business has accelerated the pace.

License and service sales associated with management software applications, and especially ERP, had grown rapidly for five years until hitting a trough in 1999. The dip was commonly attributed to a freeze on new implementations related to Year 2000 concerns. But having weathered the Y2K-related slowdown, these software vendors today face new challenges—and a new opportunity. It is the Internet. On the most elementary level, Internet computing based on Web browser interfaces and multitier applications promises to lower the tremendous expense of maintaining client/server application networks.

Further, users of management applications today can send e-mails and collaborate with vendors and suppliers via the Internet without having to exit to a desktop application. Enterprise application vendors are devising portal strategies in anticipation that their systems will become the focal point of the user's busy workday. These new solutions will combine content, transactions, and services in a single application.

In sum, the promise of intercompany integration, ad hoc over the Internet, means there's no end in sight to the productivity gains gleaned from information technology. The irony of the situation is how self-perpetuating it is. Use of information technology to automate coordination led to recognition of the possibility of mass customization. Accelerating trends toward mass customization emphasize the centrality of coordination work and drive companies to increase their reliance on ... information technology.

Although it seems obvious that the role of information technology and management applications will continue to grow, it is less obvious what the future holds for the leading application vendors. That's especially true for the enterprise systems companies, which face challenges from several different directions.

In simplest terms, enterprise systems use database technology and a single interface to control all of the information related to a company's business—including customer, product, employee, and financial data. But more than simply replacing older generations of software, ERP aims at automating a wider range of business processes than ever before. For example, it's been estimated that R/3, the flagship product of market leader SAP, models more than 1,100 generic process flows.

ERP's functional footprint is constantly expanding, most recently with the incorporation of advance planning and scheduling (APS) capabilities for simultaneous planning of materials and capacity. This has led to use of the term "extended enterprise system."

In the recent past, the enterprise management software market experienced unprecedented growth. According to Boston-based AMR Research, the market had grown more than 30 percent per annum prior to 1999, totaling $16.6 billion for license sales in 1998. When services, hardware, databases, and networking are added, the total market reached $70 billion. The market had been expected to grow only 22 percent in 1999, but it turned out to be essentially flat.

Yet it is not entirely clear that Y2K is the sole reason for last year's slowdown in the sales of enterprise applications. The focus of companies' efforts may have shifted away from the so-called back office, that is, planning, order fulfillment, financials, and human resources. These are all important functions within enterprise systems. For many with enterprise strategies in place, their immediate goals may be to find best-of-breed ancillary applications. Principal among these are front-office applications, including systems for customer relationship management. Historically, the business software market cycles back and forth between the single-system and the best-of-breed paradigms. Problems with large-scale implementations of enterprise systems may be swinging the pendulum back toward a new generation of smaller, focused applications.

On the other hand, e-business is not possible without back-office fulfillment systems. Some say that new vendors, such as i2 Technologies, Siebel, and Commerce One, will continue to add functionality to increase their footprint within the enterprise until they more closely resemble current market leaders. In like manner, today's ERP leaders will continue adding to their own footprint on the front-office side. The resulting front office/back office combination is as yet unnamed.

With regard to the Internet, enterprise systems vendors find themselves in a situation roughly comparable to that of the software industry behemoth Microsoft. In a recent New York Times article, senior Microsoft managers admitted that the company was facing its biggest challenge yet. Software, states the article, "is increasingly becoming a Web-based service whose main goal is to hasten the spread of electronic commerce over the Internet."

As is well known, Microsoft controls the dominant software standard in the PC industry with its Windows operating system, which runs on 90 percent of PCs sold today. In the past, outside software developers had little choice but to write programs to run on Microsoft's technology. But basic Web technology standards are openly available and not controlled by any single company.

Like Microsoft desktop products, ERP systems have gobbled up more and more of the functionality relevant to managing a company's business. The question facing enterprise software vendors—just as it faces Microsoft—is whether they'll be able to subsume the newly emerging functionality for e-business into their systems.

Both Microsoft and the enterprise vendors share another concern: how the shift to Web-based services will affect how they're paid for their products. No one knows what sort of business model will succeed in the new environment. But vendors are experimenting with arrangements that will allow users to pay per-transaction, per-computing load, or even based on the role of the person using the system.

Asked what Microsoft's model would be as software moved from desktop products to Web-based services, Microsoft President Steve Ballmer is reported to have said, "Don't know yet. But if you wait to have a business model in place, you'll be the last guy in the marketplace."

A recent report titled "Reinventing ERP in an Internet World" by James Holincheck of Giga Information Group in Cambridge, Mass., outlines how enterprise applications will evolve into conglomerations of "business transactions, content, and services." Examples of these types of applications already are beginning to appear, Holincheck writes, specifically in procurement, expense management, and Web-based human resources self-service.

Moving forward, the enterprise software market faces many questions: Will the current leading ERP vendors be nimble enough to make the transition to providing not just transaction engines but content and services as well? Will the front office and back office merge? Will the many new companies emerging in this space eventually be absorbed by the enterprise vendors, as were many of the advance planning and scheduling vendors that appeared and disappeared in the last half-decade? Or will these vendors establish themselves as a more or less permanent fixture in the marketplace? (One difference here is that ERP stock valuations are not as inflated as they were when APS came on the scene.)

Only time will reveal the answers to these questions. But one thing is certain. Information technology, and management applications in particular, will continue to be a growing part of the way work is done across the supply chain.