(FORTUNE Magazine) – For investors, it has been so lucrative that it can almost be called a cyberfantasy: a tech phenomenon consisting of software that has become indispensable to deep-pocketed corporations, which seem not to mind that the stuff is so complex, teams of consultants are required to install and maintain it. Microsoft backs the product category but doesn't threaten it. The stocks of the top companies have returned an average 62% annually over the past two years.

Web chic this ain't. This software goes by the dull name of enterprise resource planning (ERP) systems, and what it does is help corporate techies manage a lot of blah stuff. ERP systems automate manufacturing processes, organize accountants' books, streamline corporate departments like human resources, and a whole lot more--they are the software applications that made reengineering possible. They even help the Mormons build new meeting houses; ERP gets pews, doors, windows, and carpets to the church on time.

The people who install and run such systems aren't young glam-cool experts wearing hip glasses and trendy clothes. If your company gets an ERP makeover--FORTUNE 1,000 companies spent $1.4 billion on ERP software in 1996--you'll be visited instead by an army of tie-wearing consultants and systems integrators, humorless clones from a Big Four accounting firm who will nest in a floor of your building for so long that you'll probably think they're part of the family.

Needless to say, all this costs money. Lots of money. Last year, according to Advanced Manufacturing Research in Boston, corporations paid $7 billion to ERP companies, a figure that's expected to rise to $10 billion in 1997. Then there is the ERP support industry, an ecosystem of services and consultants whose bills can exceed the price of the original software by a factor of ten. For large companies that means buying and nurturing an ERP system can cost hundreds of millions of dollars.

Chevron decided to use SAP's software back in 1992, in an effort to rein in purchasing costs. The gas company's number crunchers estimated that SAP could help them cut costs by 25%. Five years later, Chevron has spent around $160 million to get SAP up and running. The installation won't be finished until January, but costs are already down 15%. Technology manager Bob Washa says that Chevron has reaped unexpected benefits: Purchase orders, for example, are filled much more quickly now that most transactions take place electronically by way of the SAP system, instead of through the old system, which often involved faxes of handwritten forms.

Despite the customer plaudits, despite the rapid growth and soaring stock prices, some observers are starting to wonder whether this market has already matured--and whether investors will remember the past few years as the golden age of ERP. Says industry analyst Erik Keller of the Gartner Group in Stamford, Conn.: "The potential here is not infinite. ERP software-license growth could drop to 10% or less--from 35% today--in the second half of 1998. And 1999 could be a very, very cold year."

That's not the message you hear from the ERP industry's five leading players, which this year have 63% of the ERP market share. In descending order of share, they are:

SAP. The granddaddy of ERP, founded in 1972 by five former IBM engineers, SAP today is the biggest of the group by far. Its software, called R/3, is complex stuff designed to address even the most arcane business processes. R/3 initially focused on helping companies tear inefficiency out of manufacturing processes and accounting. SAP now offers R/3 modules for logistics and human resources, all of which can be linked in a sort of uber-program that gives managers great control over--and extensive information about--their business processes.

SAP, for one, shows no sign of slowing. The company sold 1,000 units of R/3 in 1993, the year of its release; last year it sold 9,000. In 1996, SAP hit $2.4 billion in sales and $621 million in profits, beating its 1995 performances by 38% and 43%, respectively. In October the company reported that third-quarter earnings were up 86% from the year before, on sales growth of 82%. Its stock, which trades on the German exchange and which U.S. investors can follow with ADRs, is up over 100% this year.

ORACLE. The $5.7-billion-a-year software plant has been selling ERP applications designed to work with its hefty databases since 1987. Under the guidance of President Ray Lane--second in command to CEO Larry Ellison--the applications business has become Oracle's fastest-growing division. Sales for the division totaled almost $1.2 billion in the fiscal year ended May 31 and are expected to grow to $1.9 billion in 1998, according to Morgan Stanley analyst Charles Phillips. Oracle sells most of its applications to manufacturers and consumer goods companies, putting it in direct competition with SAP. To get an idea of just how complex the ERP business is, consider that Oracle, whose databases are infamously difficult to manage, markets its ERP applications as the easy alternative to R/3. "It's so Germanic," complains Oracle executive vice president Robert Shaw.

J.D. EDWARDS. Even though J.D. Edwards has been selling corporate software for decades, bringing in $478 million in 1996 revenues, it seems like the new kid on the block. That's because it just went public in September, with a $363 million IPO. The stock has fallen 14% from its October high of $40, but the publicity has helped. According to CEO C. Edward McVaney, the IPO has led more corporate customers that have been running their operations on all kinds of different networks to start thinking of his company as a valid ERP competitor. Billionaire McVaney jokingly complains that Forbes remembered him for its list of the 400 richest Americans but left him off its list of the 100 richest people in technology (the latter considers only publicly traded stock, and when it was last published, J.D. Edwards was still private). "Privately held companies get no respect," he laments.

PEOPLESOFT. The petulant adolescent among ERP companies is PeopleSoft, which made its name with human resources software. Now the company is targeting the service sector, with products designed to help advertising companies, for example, get a handle on their intangible costs. PeopleSoft's stock has tripled over the past two years. With $450 million in 1996 revenues, the company is less than half the size of Oracle's applications division and less than a fifth as big as SAP. Nevertheless, when PeopleSoft executives dismiss, er, discuss the competition, they sound like hot-blooded seniors at a high school pep rally. CEO Dave Duffield promises that someday PeopleSoft will be as big as SAP. Senior vice president Aneel Bhusri dings another rival: "We think Baan is going to be left in the dust!" Later in the same conversation, Duffield boasts: "We'll pass Oracle in licenses this year!" ("Absurd!" scoffs Oracle's Shaw.)

BAAN. Says Chairman Jan Baan: "Our enemy isn't SAP; it's complexity." He and his brother Paul have turned their 19-year-old Dutch company into a $388-million-a-year outfit with a $6.5 billion market cap by selling manufacturing software to companies wary of SAP. In the past year, Baan (pronounced "bahn") has used stock to buy up smaller software outfits, so that it now has a breadth of offerings. Devout Dutch Reformed Calvinists, the brothers have placed nearly all their stock--$2.7 billion--into the Baan Foundation, which donates millions to build infrastructure in locations like Bosnia and Haiti. The foundation also has a business purpose: It provides venture capital to software developers and runs the Baan Institute, a training ground for consultants and young ERP developers, the "groene bonen [green beans]," as Jan Baan calls them.

One way that the Baan brothers and their four competitors have fueled their growing market is with massive conferences, where users, analysts, consultants, and company employees get together to share ERP mantras. These shindigs are mostly massive love fests that attest to the industry's snowballing growth--SAP's conference last August in Orlando attracted 12,100 devotees, up from 8,000 in 1996.

Recently, however, some believers have begun to voice doubts. The most common complaints are that ERP is too complex to install and that customers wait months and months to see results. In November, Baan invited some customers to address a meeting of industry analysts. What, one analyst dared to ask, was the manufacturers' return on investment? A CIO spoke up. "We're all still in the implementation phase," he said. "Uh...but we are beginning to see some returns. I don't know; maybe it's 1%." He paused. "One percent is enough." He paused again. "Sort of."

The fact that ERP companies haven't yet figured out how to make their products easy to use is one thing--customers are willing to accept complexity in exchange for getting streamlined operations. More worrisome are trends that lead observers to think the industry may be headed for a big slowdown. Some analysts, for example, fret that most manufacturing companies that need ERP software already have it.

Others see a millennial threat. A big selling point for ERP is that it can help solve the year-2000 problem--by installing a new ERP system, you update computer systems across your company, thus ensuring that when the calendar flips to Jan. 1, 2000, critical applications won't think they're back in the Administration of President William McKinley. According to Morgan Stanley's Phillips, companies looking to ERP as a year-2000 solution account for 15% to 20% of current sales. That demand, obviously, will soon be gone.

Hasso Plattner, co-chairman of SAP, sums up his industry's problems with a pretty basic question: "How do you grow over 50% each year when you're already so big?" For starters, you offer products to industries that you've yet to conquer, like health care, retail, and utilities--bureaucratic latecomers to the efficiency game. PeopleSoft, for example, has recently sold programs to such unlikely candidates as the Mormons, the Treasury Department's U.S. Mint, and the University of Michigan. "We're kicking ass in higher ed.," boasts CEO Duffield.

"So what?" you ask. George Gilbert, an analyst at Deutsche Morgan Grenfell in San Francisco, estimates that there are 2.5 million potential ERP users in higher ed. At an estimated cost of around $4,500 per user, that could be an $11 billion market. More financial services companies are likely to adopt ERP for high-powered portfolio and risk management. According to Gilbert, that's another four million potential licenses, or $18 billion in revenues for SAP and the other companies.

In the past, ERP vendors would sell a generic product to such new customers, promising to adapt it to their particular needs. Such customization, unsurprisingly, could take forever. Now the ERP makers are offering industry-specific software that is easier to install. SAP likes to create the stuff itself. PeopleSoft and Baan, on the other hand, have used their high valuations to acquire companies that make the kind of software they want to sell. In October 1996, PeopleSoft handed over $228 million in stock for Red Pepper, a $10-million-a-year company in San Mateo, Cal., whose software helps manufacturers forecast demand.

Besides pushing ERP into new industries, the new software lets SAP and PeopleSoft offer added features to existing customers. The idea is that companies that have successfully used ERP software to revamp their manufacturing, accounting, and human resources departments will be willing to turn over other parts of their business to such software. Sales forces are benefiting from new ERP applications. Baan recently acquired Aurum, a company in Santa Clara, Cal., whose software gets information from corporate databases out to sales and support staff in the field. The data help them provide customers with quicker estimates on the prices of products and better support for products in need of repair.

According to some analysts, the most promising avenue of growth for ERP companies is what is vaguely referred to as the "midmarket"--businesses with annual revenues between, say, $50 million and $500 million. According to Carey V. Azzara, an analyst at IDC in Framingham, Mass., ERP companies may sell $7.3 billion of software to such customers in the next two years.

That represents a turnaround: In the past, ERP applications have often proved too expensive for such companies. To serve them, all five vendors are cobbling together or buying software that supposedly will not require a swarm of expensive consultants or elaborate customization. Still, the new market poses big challenges. While most ERP vendors are furiously adding salespeople (SAP and PeopleSoft will increase sales staffs by at least 80% this year), they can't afford to lavish as much attention on small accounts as they do on FORTUNE 500 customers. So they have to develop new channels of distribution, working with computer resellers accustomed to getting software into midmarket companies. And they have to work even harder than they do now at managing their own business processes.

Even so, demand from the midmarket is likely to boom. Big businesses that have gone through the agony of an ERP implementation are requiring their suppliers to have ERP software that works with their own systems. For Rollerblade, a privately held $500-million-a-year maker of in-line skates in Minneapolis, ERP software from J.D. Edwards makes it possible to supply major retailers like Wal-Mart and the Sports Authority. Says Al Sussman, Rollerblade's vice president for information technology: "Even though we're a small company, we do business with big companies. They expect a certain level of sophistication." Now the company, which doesn't make skates itself but rather contracts the work out to manufacturers around the world, is demanding the same sophistication of some suppliers. Says Sussman: "If we walk in and don't see an ERP system, we figure they can't support our business."

There's another little thing fueling ERP's push into the midmarket: Microsoft. To be clear, Microsoft doesn't offer ERP applications, and it can't make ERP installations simple. Says Charles Stevens, vice president in charge of a new 600-person division that lends marketing and development support to enterprise-applications developers: "Building big enterprise applications never even came up as a discussion here. We did a small-office accounting product, but it wasn't very successful."

For Microsoft, ERP installations represent an opportunity to sell more plumbing. The ERP setups used by most large companies run on the Unix operating system and are designed to mine data from Oracle databases. Microsoft is cooperating with the ERP vendors to push less costly setups that run on PCs equipped with its Windows NT operating system and its SQL Server database. SAP, for instance, has a dozen developers at Microsoft headquarters in Redmond, Wash., working to optimize R/3 on NT; Baan says eight of its developers will move to Redmond soon. Says Paul Wahl, CEO of SAP America: "NT lets us bring our product to the smaller companies. Before, if you didn't have a mainframe, we couldn't sell to you. Now we can sell to companies with annual revenues of $5 million. Over 40% of our new customers this year are running R/3 on NT."

Microsoft sees ERP systems as a key way to get NT into the corporate marketplace. You can't run a successful ERP system on a stand-alone desktop operating system like Windows 95. But, argues Microsoft, with NT you can get ERP without the expense and hassle of Unix and Oracle. Needless to say, others in the Wintel cartel have lined up to help with this push. Hewlett-Packard, Dell, Compaq, and other PC makers now ship computers to corporate customers preloaded with NT, SQL Server, and a customized enterprise application.

Bill Gates' ambition isn't limited to the midmarket, of course. While most large companies still swear by the Unix operating systems and Oracle databases, NT is gaining ground fast, and SQL Server is moving up too, albeit more slowly. Says SAP co-chairman Plattner: "NT is only 18 to 24 months behind Unix. Fifty percent of our customers today could use NT effectively. It is eating up the Unix base." And just how much does Gates count on ERP to help popularize Windows NT? At a meeting of SAP customers in Karlsruhe, Germany, in October, he claimed that SAP influenced Microsoft product development "more than any other company we work with."

Most ERP vendors couldn't be happier with Gates' support. Microsoft and the Wintel PC companies have the distribution channels the vendors need to push their applications into the midmarket. For Oracle, though, Microsoft is a problem. Explains IDC analyst Clare Gillan: "The other ERP vendors want NT and SQL Server to succeed. While they all partner with Oracle and use its database, they can't really trust it, because it's also a competitor." Oracle makes ERP applications that work with NT but has no plans to develop programs for SQL Server. After all, why help Microsoft attack its core product? While Oracle may seem to be swimming against the tide, the strategy doesn't seem to be hurting Ellison & Co. "Oracle is successful in business applications despite itself," says Gillan.

There seems little that can spook the ERP leaders. They're hiring aggressively and building new facilities all over the world. SAP's brand-new Palo Alto offices are half-empty, awaiting more employees. Hasso Plattner sits in a lonely corner office. He says that he hates bad press, that he hates the "American hype machine." He worries that his developers are out of touch with the company's far-flung customers. He worries that SAP will keep turning customers off. But finally his attitude can be summed up in four words. "I am not afraid," he says. Down the hall young SAP developers continue unpacking their boxes.