Feb 24th 2010
By Michael Burns
Not long ago, selecting a new enterprise resource planning system (ERP) every 5 to 10 years was the norm. Organizations did this to stay competitive and because ERP systems were still relatively new. Vendors were able to attract new customers because they leapfrogged the competition with new features. But now, the more successful products have matured and much of them offer the same basic functionality. Today, organizations typically don’t select and implement a new system unless they have no choice.
They have no choice because they are using a legacy system that is no longer supported or their existing system has outgrown its usefulness because of more complexity and volume of transactions. But IT departments will not be able to convince management that a new ERP system is needed to stay competitive or will generate significant return on investment (ROI). In fact, the opposite is more likely. My experience is that a new ERP system will often have negative ROI. This is not to say that there are not intangible benefits, but they can’t be calculated.
The costs of implementing a new system are not just the software and external services. Of course there also is computer infrastructure changes and maintenance. But the biggest hit can be the internal costs. Often many of the best people are assigned responsibility to help implement their system. The costs to replace them also need to be considered.
So organizations are reluctant to spend the money on new ERP systems in a difficult economy and when there seem to be more pressing needs. Organizations also are fearful of a failed implementation. Unfortunately, there are still horror stories and risk-adverse management don’t want to take any chances.
The vendors know that it is tough to win new business, which explains the ERP consolidation where many products were purchased by larger companies. These consolidators are in a good position as their clients don’t want to leave, and can be charged 18 to 22 percent per year for maintenance – not a bad annuity. Their clients are also a great source for new business as new products or extensions are offered that require implementation.
So what do you do with an ERP system that has lots of problems that you don’t want to replace? Many reluctantly live with the inefficiency and ineffectiveness. Others want to make changes but where do you go for help? The vendors are eager and capable to help but the perception is that their recommendations will be self-serving. It’s a shame to do nothing as there are many ways to extend the useful life of the existing ERP system including system upgrades, improving business process, improving infrastructure, third-party solutions, customization, integration, work flow, and business intelligence and reporting tools.
System upgrades offer many advantages but, unfortunately, some organizations have made so many customizations that the cost to upgrade is significant. The customizations may need to be done all over again and the pain they caused the first time they were done is still fresh in the minds of management. Nevertheless the upgrade may be justified. The customizations may no longer be required in the new version and new features may offer other benefits. As well, the tools for customizations have improved and it may be possible to do the customizations outside of source code.
Improving business process
Business process can be improved without replacing systems. Guidelines to improving business process include:
- Eliminating non-value-added steps – for example, by reducing the number of approvals
- Having a single point of contact
- Reducing reconciliations
- Consolidating job functions
- Making workers the decision makers
- Reducing complexity
Improving infrastructure includes hardware, networks, and physical layout. A small investment in infrastructure can go a long way in improving performance and morale.
Developers such as Microsoft and Sage empower their partners, called independent software vendors (ISVs), to develop third-party solutions that complement the core system. This is a smart strategy for all concerned. The developer is able to extend its product into industries/verticals with which they are not familiar. The ISV’s products can be sold globally through the developer. The end user gets more functionality. However, there is additional risk with an ISV. You now depend on a small organization for part of the solution. This risk is reduced somewhat when the developer has certified the ISV. Another risk and cost occurs when the ISV has not used the same development tools as the developer.
In the early days of ERP, many organizations opted to make their ERP system work the way they wanted. The vendors made it sound easy to customize the system. But the reality was that customizations were costly and caused problems with each new upgrade. Lessons have been learned and the current thinking is to avoid customizations and find workarounds. In my opinion, the pendulum has swung too far. The tools for making customizations are better today and strategic business processes should not be compromised. With appropriate project management, the risks of customization can be managed.
Integration between systems is clearly a good idea if there is any re-keying taking place. But integration can be tricky depending on what is required and the tools available. Importing a transaction file will be easier than synchronizing two different databases in real time. It also helps if the system doing the importing has import tools or API’s (application program interfaces) that will validate the data during the import process. Fortunately, the world is adopting Web Services and XML (eXtensible markup language) standards. Web Services allows any software program, written in any language and running on any operating system, to connect and exchange information with another piece of software. And XML is the language that makes Web Services possible. Hopefully your vendor supports XML.
Work flow tools are another way to improve business process without replacing the ERP system. Work flow has been defined as the automation of a business process, in whole or part, during which documents, information, or tasks are passed from one participant to another for action, according to a set of procedural rules. For example, routing a purchase order for approval if the amount exceeds $10,000 would be an example of work flow. Another example would be routing a sales order to the president if the gross margin is less than a certain percentage.
Business intelligence and reporting tools
Business intelligence and reporting tools offer the biggest opportunity. ERP systems have been notorious in the past for generating lots of data which is difficult to analyze. Business intelligence tools transform the data into useful information to make decisions. There is a spectrum of business intelligence solutions.
On one end there are traditional reports, which can be simple to generate and provide exactly what is needed. On the other end of the spectrum are interactive slicing and dicing tools often referred to as online analytical processing (OLAP). OLAP gives an executive the ability to analyze financial and operational information quickly and easily. In the past, it would have required multiple requests by the executive for traditional reports, delays, and more time to do the analysis.
Dashboards are another form of business intelligence and have become very popular as a way of presenting key information and metrics relevant to a particular role or person in an organization. There also are financial reporting tools designed to make it easy to generate balance sheets and income statements with appropriate formatting.
How to do it
The question is how do you go about extending the useful life of an ERP system or enable Business Process Improvement (BPI). I think the same analysis process used in a system selection should be used in BPI. You need to start at the beginning, which is with an understanding of Critical Success Factors (CSFs) – what an organization must do well in order to be successful. Then you need to understand what management thinks are the best ways to achieve these CSFs, as well as the metrics that measure them.
You also will need to document the AS-IS business process, which includes exposing the problems and their impact. Each problem should be considered an opportunity. You could also identify the functionality that you think will fix the problems. Take the business process document and requirements to your vendors and ask them what they can do to help. Let them show you in a proof-of-concept demonstration.
You may have noticed that I did not recommend designing the TO-BE business process. My recommendation is that you work with the vendor to do this – no point in designing something from scratch when you can leverage existing business processes from the vendors.
With luck, you will be able to extend the useful life of your ERP system. But if you need to bite the bullet, remember that selecting and implementing a new system is the best opportunity for business process improvement.
The best time to do improve business process or select and implement a new system is when you’re not swamped with other work. So if business is slow because of the economy and you have confidence in the future, now would be a good time to retool your processes and systems.
About the author:
Michael Burns, MBA, CA, is president of 180 Systems, which provides independent consulting services, including business process review, system selection, and business case development. He can be reached at (416) 485-2200; [email protected].