IS IT TIME TO PURCHASE A NEW ERP? THE SEQUEL

Just in time for your long weekend reading pleasure, I thought I would post an excerpt from a paper I recently completed. It’s a (not-so-subtle) reminder that ERP is not brain surgery.

In 2012 Mint Jutras posed the question, “Is it time to purchase a new ERP?” Based on data collected in the second half of 2011, only one in four of you said, “Yes!” Another 24% were undecided but over half (51%) gave us a resounding, “No.” We explored the possible reasons for replacing existing solutions and for taking the plunge for the first time. We shared with you the average and “World Class” results that could be achieved, suggesting that those of you not in the market for a new ERP might want to reconsider. New technology and robust feature functionality available today will put older solutions to shame and you might be missing out and missing out big time.

Many of you listened. The percentage of those looking to purchase a new solution more than doubled in our latest survey and therefore we revisit the topic here in hope that we can help you make the right decision for your company. And we’d like to remind you once again, it’s not brain surgery. Don’t wait until the patient is dying.

ERP is Not Brain Surgery

Last year we acknowledged that many of you do indeed regard ERP as you would brain surgery – don’t do it unless the patient is dying. We also suggested you might not want to wait that long and that perhaps joint replacement might be a better way of looking at it. After all, when do you replace a joint and why? You undergo replacement to improve your life. If you wait until you are on your death bed, it’s too late. You replace a knee or a hip when the pain becomes too great or you simply can’t function the way you want or need to. There are a lot of parallels when it comes to ERP and running your business.

It seems at least some of you might be reconsidering ERP as brain surgery, because in our most recent 2013 ERP survey,  when we asked the same question, many more of you (56% to be exact) said, “Yes, we intend to purchase a new ERP within the next 3 years.” Twenty percent (20%) of you are still on the fence but only 24% of you said, “No.” Of course some of you that said no may well have made that purchase within the past year and are well down the road to reaping the benefits. For those of you still on the fence, maybe we can help you decide. For those ready to make a move, we can definitely help you understand what to look for and what to expect from a new solution. In doing so, we might even convince a few more of you that perhaps it is, after all, time to purchase a new ERP.

New or Replacement?

Purchases of ERP solutions fall into two general categories: first time purchases and replacements. While some may find it surprising, it is sometimes hard to tell the difference. This is partly because the acronym is used rather loosely and many find it difficult to define ERP. Mint Jutras defines it as an integrated suite of modules that provides the operational and transactional system of record for your business. Although most ERP solutions today do much more.

This definition allows for a lot of variability in the scope of solutions. Some of that variability results from different types of companies having different needs. All companies, large and small, and even non-profits and government agencies have basic accounting needs. All make purchases, often controlled by purchase orders. Most have sales orders or contracts against which they deliver goods or services. ERP must be able to manage the basic business processes of procure-to-pay and order-to-cash and record all transactions in a general ledger in an integrated fashion. For manufacturers and distributors, this also means managing inventory.

It may be possible to address the basics (albeit inefficiently) without a fully integrated ERP. Therefore you might be purchasing your first ever ERP, but also replacing something. Or you might be calling your solution “ERP” when in fact you are running disparate commercial or home-grown applications with batch or real-time interfaces. Our research shows ERP solutions in place today replaced a lot of custom developed applications, some integrated, some not. Only a small minority replaced another ERP but also very few had nothing except manual processes and spreadsheets before implementing their current solution.

Many industry observers have been talking about the ERP market being saturated for years now. Yet Mint Jutras research estimates the overall adoption rate of ERP to be approximately 66%, although a bit higher (76%) in the manufacturing sector.   While all companies need to manage and maintain a system of record of their business transactions, some might think they can adequately serve those needs with something less than basic ERP. What is more likely is they need more (not less) than the basics of ERP. Indeed the footprint of ERP has expanded tremendously over time, reaching the point where it is often difficult to understand where ERP ends and other applications begin.

The bottom line: It really doesn’t matter whether you are making your first purchase of a “real” ERP solution, or replacing one. What is really important is that you make a decision that will bring significant value and return on your investment. Don’t underestimate the potential.

Motivation

So, why do companies purchase a new ERP? We asked this question of those that had actually replaced an ERP solution and also asked what might prompt a future replacement. Lack of functionality, outdated technology and the inability to scale with growth of the business have traditionally been the top three reasons prompting actual replacements and this year was no different.  In terms of potential replacements: functionality and technology also claim the top two spots, but the possibility of reducing the overall total cost of ownership through a replacement appeared as a significant driving force, along with the emergence of standards being applied across the enterprise. Compared with the quest for fit, functionality and enabling technology these are relatively new motivations.

Reducing Total Cost of Ownership

Sometimes you need to spend money to save money. Given the scope, purchasing an ERP will typically require cost justification in order to estimate the expected return on the investment. But return on investment (ROI) is different than total cost of ownership (TCO), particularly in terms of enterprise applications. ROI calculations often only include up-front costs. The cost of the software and services for installation, implementation and training are pretty straightforward. Traditional on-premise deployments also include hardware costs and the maintenance associated with that hardware. But these costs are also quite easily quantified, even if the hardware runs multiple applications. Alternative deployment options for hosted models or software as a service (SaaS) might re-classify costs from capital expense (CapEx) to operating expense (OpEx) but can be quite easily accounted for.

Personnel costs also must be factored in. These resources might also be shared across multiple applications and, particularly in smaller companies, might have duties totally unrelated to applications. The same people (or a single person) might support ERP and also keep networks, telephone systems and email up and running.

Harder to calculate are the post-implementation costs in managing change. And managing change remains as the top challenge identified in achieving the goals of ERP. ERP solutions based on outdated technology are likely to be rigid, making adapting to change expensive. If you are running something less than ERP, say multiple disparate applications (either commercially available or home-grown) the problem and the expense is compounded as it is likely to also impact interfaces or integration.

Change can occur as a result of changes to your business caused by market volatility or growth. Growth might be organic, through the introduction of new products or expanding territories. Or it might be through merger and acquisition. Change can be imposed on you through new or evolving regulatory requirements or it can be self-imposed with organizational restructuring, financial management changes or new or changed business processes.

If this business change was not anticipated when you first purchased and installed your current solution, it may also have resulted in the need for customization. Customizations have traditionally been implemented down in the depths of the source code and often had the unintended consequence of building in barriers to moving forward. This can be quite costly both in terms of ongoing maintenance of the customized code, but also in the lost opportunity cost in being able to take advantage of innovations and enhancements provided by your software vendor.

ERP solutions based on newer technology are far more flexible and adaptable than the rigid systems of old and they also change the very nature of “customization.”

With the most flexible and adaptable solutions on the market today, the vast majority of “customization” can be accomplished without ever touching source code or building in barriers to upgrades and new releases. And even some of what might be viewed as custom logic could also be accommodated through the use of externally defined business rules and other adaptations. So the cost to maintain these newer solutions is reduced considerably and this has a major impact on the TCO.

Definition of Standards

Very few companies today operate out of a single location. In spite of a large percentage of survey participation from small to mid-size businesses (SMBs), 75% have more than one operating location. These locations might be sales and service, distribution or manufacturing sites. In the past any location of any size and substance would likely have been left on their own to select and implement ERP.  Very small locations often struggled with no enterprise applications at all. If there were remote employees, they were not well-supported.

Today we live in a very different world. The need for collaboration and interoperability extends beyond the traditional manufacturing concept of feeder plants, where one division provides components to another, which ships a finished good to the end customer. Many global manufacturers have implemented the philosophy of “build globally; ship locally.” This means products might be built in any manufacturing facility around the world, generally the one closest to the customer. This reduces lead times and shipping costs and builds intimacy with the customer, but requires a level of standards and consistency across multiple divisions or operating units that is is impossible to achieve without careful planning and standards.

Even in non-manufacturing industries, customers shared across multiple operating units increases the need for standards and consistency in business processes and quality of products and service. Unless the enterprise is the equivalent of a holding company comprised of very diverse and autonomous business units, interoperability has become a core competency. And yet any level of competency is difficult to achieve without standard business processes and with a proliferation of ERP solutions.

As a result enterprises have been talking about consolidation or rationalization of ERP solutions across operating locations for years. But for years it just didn’t happen. Why? Because this was viewed as a “rip and replace” strategy that brought little value to the enterprise. Why invest all the time, effort and money to rip out a working system only to spend months and years to get back to where you started? But today it is happening. The majority of organizations have not only developed standards for business processes and metrics, but for ERP as well. Indeed, 100% of “World Class” ERP implementations have defined such standards and are 40% more likely to have successfully implemented them, with all business units in conformance.

The argument against rationalization made sense back in the day when ERP solutions evolved slowly and painfully. Those days are gone. Today as legacy systems are replaced with new state of the art technology and functionality, the effort to replace them should bring you to a very different place and produce very significant results. And yes, solutions have really changed that much. Not all, of course, but new enabling technology allows leading vendors to innovate faster and provide more flexible and feature-rich solutions.

The paper goes on to offer some help in cost justifying a move, and also some advice on selecting the best solution. It concludes with:

Conclusion and Recommendations

Still not sure if you should purchase a new ERP? If so, learn to recognize the signals. Here are some examples:

You lack control: Processes are manual; data is scattered in file cabinets, offline spreadsheets and across desktops.  Data is transferred between desks repeatedly, adding little value and introducing the risk of errors.

You want to grow but you are running blind: Your business is growing. But you have no visibility as to where you made your best profit. Was it in your newest product domestically? Should you expand into emerging markets? What about your established products? Are they still profitable?

You can’t meet customer demand: Your inventory levels (or maybe your service staff levels) are rising, yet you still can’t seem to meet customer expectations for delivery. How do you better forecast demand, best utilize staff, lean out your inventory, and produce product just-in-time?

Cash is tight: Should you finance your supply chain costs? Invest in growth? Credit is tight. Can you prove to yourself and your investors or creditors that you are credit-worthy?

As we said last year, deciding to purchase ERP is indeed a big decision. Our recommendations this year are quite similar to those we proposed a year ago, but while the cost savings and other improvements have always been quite dramatic, this year they were even better. Those of World Class ERP implementations were nothing short of spectacular. Are those companies really so different or is it just a question of discipline mixed with the right tools?

A reminder of those recommendations for a successful ERP journey:

  • Don’t wait until the patient is dying. Making a selection and running an implementation project when the business is under duress does not create an atmosphere of careful consideration, planning and execution. You will be tempted to take shortcuts that you may later regret.
  • Need it but can’t afford it? Consider the potential cost savings. Most ERP solutions pay for themselves within a two to three year time period. If capital funds are not available to support the project, talk to the ERP vendor about other licensing and payment options. Many solutions are available in a software as a service (SaaS) model that eliminates a hardware purchase and allows you to pay a subscription fee and account for costs as operating expense (OpEx) rather than capital expense (CapEx). Even if SaaS is not for you, special financing and/or subscription pricing models are becoming more common.
  • Set goals and measure. Before embarking on your ERP project, decide which metrics will measure success. Establish a base line, set goals and measure progress against those goals. When you reach them, set another goal. Continue to measure and continue to reap more benefits.

ERP should be an on-going source of cost savings and improvement. Managing change can be a challenge, but with a technology-enabled solution, you can embrace change and use it as a catalyst for growth and profits.

If you are interested in learning more or getting access to the full paper, along with its pretty charts and pictures, please contact Lisa Lincoln (lisa@mintjutras.com).

Have a great weekend!

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