The Great ERP Unbundling: Seizing Startup Upside in the Replacement Super Cycle

Last fall, Morgan Stanley VP Chris Quintero and his colleagues published a report on the coming back-office replacement super-cycle. Traditional enterprise resource planning systems, the operational backbone of virtually every large organization, are nearing end-of-life. According to the report, fifty percent of CIOs expect to upgrade their ERP systems over the next two years.

As organizations modernize, many are moving away from expensive on-premise ERP vendors like SAP and Oracle and towards modern cloud-based systems that support digital transformation and AI-readiness. But instead of adopting next-gen versions of these monolithic, do-everything systems, enterprises are opting for an unbundled, best-of-breed stack across finance, HR, procurement, supply chain, CRM, and more — tools that snap together like Lego pieces.

Instead of one giant ERP system to rule them all, the back office is unbundling into a lightweight data and integration hub, surrounded by specialized apps that excel in their domains.

The fragmentation of ERP budgets presents a once-in-a-generation opportunity for startups to capture value in specific functional domains. This is more than just a tech refresh; we believe it’s an opportunity to turn the $150 billion ERP market on its head and reset the cost structure and performance of core business operations for the next decade.

The Disintermediation of the Enterprise OS and Emergence of the Orchestration Layer

Legacy ERP suites have long functioned as the “operating system” of the enterprise, handling a company’s critical data and processes. This all-in-one approach created high barriers to entry for new competitors (few could build such a broad system), and it locked customers into a single vendor’s ecosystem.

However, we are now seeing a shift toward disintermediation of the enterprise OS, as companies opt for more modular point solutions. Rather than trying to build an entire ERP suite, many new entrants are targeting subsegments — individual functional areas traditionally served by a module of a big ERP — and doing them better.

There is also an opportunity at the orchestration layer that sits above every module. This layer isn’t a system of record or ledger, but a process-automation conductor that keeps dozens of best-of-breed apps working in harmony. With agentic AI, such a platform can ingest semi-structured/unstructured data, reason across multiple workflows, and route tasks to the right tool with minimal human intervention, delivering maximal output and efficiency.

Because ERP sub-markets like supply chain, planning, and order management are the furthest behind in cloud adoption (70%+ on premise), we think there’s plenty of room for module disrupters and orchestration platforms to capture customers during this refresh cycle.

Where Startups Can Win

We believe the following categories present some of the greatest opportunities for displacing legacy solutions:

Supply Chain Management (SCM): This is one of the largest and most legacy-dominated ERP segments. Complex functions like demand planning, inventory optimization, logistics, and manufacturing execution often still run on old on-premise tools (or even spreadsheets). Solutions that offer node-level visibility, dynamic and intelligent risk scoring, end-to-end workbench solutions, and the ability to use AI to connect local and global supply chains will have the edge here. The SCM market represents roughly 22% of ERP spend, and we believe will likely exceed $20 billion this year.

Business Planning: Even though traditional ERPs include basic planning modules, many firms continue to export data to Excel or niche tools for budgeting, scenario modeling, and what-if analysis. We are excited by startups expanding the scope of Financial Planning & Analysis (FP&A) solutions by going beyond the Finance and RevOps teams, building the collaboration engine across other functional areas within the organization. Usage-based pricing offers an opportunity to marry revenue and cost data. The cloud FP&A market is projected to exceed $8 billion by the end of the decade.

Tax and Compliance: Historically, tax compliance reporting has required lots of manual effort or bolt-on software (like tax calculation engines). As ERPs get upgraded, many firms will opt for specialized tools that can automate tax complexity and ensure regulatory compliance. Startups can seize this opportunity by bridging the gap between “sell the work,” or software and services that deliver outcomes, and the traditional model of simply selling software. Solutions with the best chance for adoption will use AI agents to improve data classification, cross-check entries against rules, and flag anomalies in real time, allowing enterprises to spend less on business process outsourcing. The tax and compliance software segment is significant: around $20 to $25 billion globally, or roughly 20% of ERP budgets.

Procurement: At least one-third of companies still haven’t modernized their procurement tools, which encompass purchasing, contract management, and demand planning. Cost savings is the key ROI driver here for CFOs and CIOs. We are excited by startups developing intelligent procurement platforms that use AI to aid in supplier discovery, assessing vendor risk, contract analysis, spending analytics, and workforce automation. With a starting price at $100K per procurement module, our view is that the prize here is vast. This market is expected to reach $10 billion in 2025, or between 10% and 20% of ERP budget allocations.

Finance: Finance and accounting – general ledger, accounts payable/receivable, financial-close automation, reconciliation, and reporting – are the beating heart of any ERP system. But enterprise financial operations need to become more proactive, agile, and intelligent. We believe next-gen accounting systems that streamline the workflow around data collection and revenue reconciliation, financial-close automation, and tax copilots will be in the best position to thrive. This segment is estimated to be 18% of ERP budget allocation, or between $15 and $20 billion.

The Quantum of Dollar Opportunity

Today, on-premises systems account for 60% of the $155 billion ERP market, with SAP taking the lion’s share. Ninety-nine of the top 100 enterprises rely on SAP, which collects more than €11 billion in annual maintenance fees alone.

Morgan Stanley estimates the true size of the total available market at $220 billion, growing at 17% annually. Roughly 20% of that, or $44 billion, is likely to go to ERP startups and non-ERP companies. Note: this doesn’t take into account the absolute dollars available to startups that augment or replace human workflows, lifting overall productivity per employee.

The obvious assumption is that the key beneficiaries of this ERP upgrade cycle will largely be the same companies with their cloud equivalent offering (i.e., SAP ECC → SAP S/4HANA). As the core system of record, SAP S/4HANA benefits from a highly durable customer base, ensuring stable and predictable revenue growth. Its unit economics are superior to many other software vendors, given the high switching costs and deep integration within business operations. Additionally, SAP has a built-in migration advantage as enterprises transition to the cloud, reducing friction for existing customers, reinforcing its market dominance.

However, we believe with intelligent automation, there is a paradigm shift in the market, with an enormous revenue pool available. At the enterprise level, companies commonly spend tens of millions on ERP overhauls, with individual module budgets often in the millions. So, despite SAP’s dominance, capturing even a slice of one segment can be very lucrative for a startup.

What This Means for Startups and What Comes Next

What can we conclude from this massive super-cycle disruption? We think there are a few obvious takeaways.

• The door is open: Incumbent mega-vendors (such as SAP, Oracle, Microsoft, and Infor) will be preoccupied transitioning their installed base to their own cloud offerings (and turn maintenance revenue into even more lucrative subscription revenue). That leaves startups an opening to wedge into overlooked segments and grab significant market share.
• The time to build is now: Many enterprises are making decisions in the next 12-36 months that will determine their software stacks for the next decade. We believe the startups that emerge as winners in this window, through the next five-or-so years, will likely shape the enterprise landscape through the 2030s, regardless of whether sales and adoption cycles significantly change.
• It pays to be pragmatic: Despite the clear momentum toward cloud ERP, adoption challenges remain. The high cost of re-implementing workflows, integrating legacy data, and retraining enterprise teams means that execution delays are likely. Vendors that simplify migration and interoperability will have the advantage. We believe startups with forward deployment engineers, taking advantage of disparate systems and new unstructured data sets, will benefit enormously.
• AI will be the unlock: Legacy ERPs were built for transaction processing, built around vast data repositories as the system of record. Intelligent systems will deliver proactive decision-making — systems of context and action that are built on top of existing systems of record. The data infrastructure for ingestion, system interoperability, and reconciliation will be key.

Open Questions We’re Asking

As we continue to evaluate opportunities across ERP verticals, here are a few key questions guiding our thinking:

• Where is the system of record shifting to? If the ERP is no longer the “center of gravity,” which product (or layer) becomes the new hub for decision-making and data aggregation?
• What does steady-state intelligent automation look like? Can new entrants leapfrog straight to composable architectures? What workflows are slowly disintermediated away (augmenting workflows and reducing time spent over time in existing systems) vs. completely reinvented (end-to-end workflow replacement)?
• Which domains unbundle fastest? Some functions — like financial operations, supply chain planning, and procurement — are more natural to decouple from the ERP core. Where else can startups offer breakout experiences?
• Are horizontal enablers at a disadvantage in an unbundled ERP world? Are vertical vendors across industries like logistics, healthcare, or manufacturing, where legacy ERPs are most brittle, best placed to accumulate data advantages?
• What is the right GTM for disruptors? Should partner ecosystems or product-led growth be prioritized to overcome long enterprise sales cycles and implementation inertia?
• What is the best approach in a market dominated by implementation complexity? Should vendors lean into forward deployment? What true-ish no longer holds in this new paradigm defined by new open standards for connecting AI assistants to systems?

We’re about to enter a really interesting time in the evolution of back-office operations, and potentially the emergence of new enterprise software leaders.

I’d be interested in hearing your thoughts on where the ERP market is, or should be, headed. Feel free to email me at adrian@lsvp.com.

The content here should not be viewed as investment advice, nor does it constitute an offer to sell, or a solicitation of an offer to buy, any securities. Certain statements herein are the opinions and beliefs of Lightspeed; other market participants could take different views.