Enterprise Resource Planning (ERP) describes software that integrates departments and functions across your business onto a single computer system. The intended outcome is a system that improves operational visibility, streamlines decision making, reduces costs and generally allows you to manage your business to better profitability.
Whilst there has been considerable hype - and horror stories - about ERP systems, up until recently only large corporations have implemented comprehensive ERP solutions, mainly because they have been perceived as cost prohibitive for smaller companies.
In recent years however, many small and medium sized enterprises (SMEs) have begun to see the value of ERP solutions as a way to respond to both legislative compliance and industry mandates for electronic trading. The reality now is that companies with a turnover of more than $10 million should be considering implementing an ERP solution, if not actively planning for one.
When to have an ERP solution
There are several things that you should consider before investing in an ERP solution:
What business problem are you trying to solve?
Can the company do more for less?
Will the business be more effective with an ERP solution?
Are your competitors doing this?
Can you grow your business using your current tools and methods?
As you answer these questions you will be better placed to talk to ERP vendors. Understanding the business problem is critical, as ERP vendors cannot easily implement an effective solution if the objective is unclear. Fortunately, vendors can be the best resource to determine your business problems, as their staff should be intimate with the challenges of your industry. Presentations by their presales staff will typically declare broad industry issues then drill into details of specific issues relevant to you. In many cases these may surprise you, as the vendor will speak to as many people in your company as possible to uncover examples of where their system can add significant value. The best part is that vendors usually do this for free as part of their opportunity qualification, potentially saving you from hiring consultants to discover and document basic business issues and limitations.
Things to consider when selecting an ERP solution
Traditionally, ERP implementations occur over a long period of time. In large corporations, this could take several years and require teams comprising hundreds of experts. This is not an option for SMEs, so many ERP vendors promote a 'one size fits all' solution with the capability to customise the solution to better suit your organisation. This pre-configured solution is supposed to reduce implementation times and manage the 'scope creep' that adds costs to many projects.
Depending on the needs of your organisation and budget, you may want to consider only implementing the core modules to start with and then add on other modules over time. Typically, the core will be an accounting framework plus industry-specific modules such as inventory management for distributors, point of sale for retailers, MRP for manufacturers and project costing for professional services. Vendors who argue that this method works against the intrinsic benefit of an integrated solution have a point, but you need to balance upfront functionality against your ability to learn how to best utilise the system, which is going to take some time.
While there is no magic bullet solution that is applicable to all companies, there are a number of common aspects of an ERP system that you should consider:
Functionality: Functionality is the heartbeat of an ERP vendor's product. It will drive your competitive advantage so ensure that the solution has all of the functionality you need to trade right now, plus the features you would love to implement if you ever had the time.
Of course, you need to trade off practicality here as well. For example, think very carefully about any solution that requires more than about 30% customisation - having to write custom functionality for you adds complexity and cost and will make upgrades more difficult. And negotiate extra hard if the vendor is offering you some kind of "R&D rebate" where you become the test case for functionality that they actually want to put in their product. Make no mistake, agreeing to this may seem less expensive up front, but you are a guinea pig with all the risk and effort that entails.
Flexible and Integrated: The solution should be modular so that you can build it up over time, but fully integrated so all modules communicate with each other in real time. That way you can be assured the system can at least deliver on the promise of faster access to business information and streamlined business processes. It should also cater for your business processes without breaking the underlying functionality. While vendors will promote how they can implement industry best practice, there is no benefit in adopting your competitors' business model if you currently beat them by being innovative in the way you trade.
In particular, be wary of larger ERP vendors who want to sell you an "industry template" version of their software. These templates seem to be great value as they are usually presented as a cost-effective option that will streamline the implementation process and reduce the risk to your business. However, such templates are typically based on the way their large enterprise customers work, not how SME companies operate and play to the needs of the vendor not you as a customer.
Indeed, in a recent interview with Datamation, Frank Gens, Senior Vice Ppresident at research firm IDC, made the observation that the large IT vendors attempting to penetrate the SME market "will need to shift more than the size of the products...they’ll need to transform their corporate culture."
As Gens notes, "The business model for those [big] companies traditionally is a relatively small number of very big deals. And to now change your approach, and your operations, and your strategies, is quite a culture shift and a business shift. We’ll see how they do."
He concludes that "History has shown that it’s much easier for the small guys to scale up than for the large guys to scale down."
Single Source: Ideally, all aspects of the solution should be handled by the vendor - many SME solutions are presented as "integrated" but you are actually buying modules from various third parties that are bolted together by the service provider. Retail Point-of-Sale is often sold this way, with a core finance and inventory management system connected - often by an end-of-day batch process - to a standalone POS. Be very wary of this type of solution, as your risk of support issues increases as the number of suppliers to the solution increases.
Vendor Credentials: There has been considerable consolidation in the ERP market over the last few years, and the mergers and acquisitions show no sign of abating. Ask any prospective vendors for contact details of at least three customers who have been installed for more than two years in your industry, then use the web to find some customers they didn't tell you about and contact them.
Request the vendor's financial information and ask whether there are any legal actions outstanding against them. If you have access to a ratings firm like Dunn and Bradstreet, use that service to gain an understanding of the vendor's credit worthiness. And don't be worried if the vendors you consider are not household names. Typically, the vendors who focus on SME do not have the marketing budgets required for general advertising, so talk to your peers and industry associations. The ideal vendor is highly likely to be a smaller, local player with deep expertise in your industry and a history of servicing SME customers.
Support: The vendor's professional services team will be very keen to provide 'feet on the ground' support, where their consultants work with your team to optimise the ERP software, provide training and/or help recover if things go wrong (and it's not just software bugs that cause things to go wrong. Your staff can unwittingly cause chaos if they poke around the database or change administration settings on the fly). Ensure that the vendor charges local rates for these consultants, and unless you are outside a major city, do not agree to pay airfares or accommodation for their 'experts', as the cost of travel is their business expense, not yours.
Telephone, email or web support for general queries is commonly bundled into a support contract, and will likely require that you nominate a limited number of staff who can call the vendor for help. Don't be surprised if the contract limits the number of incidents per month or number of hours of telephone support. Finally, the vendor help desk is rarely a cost-effective training method, so vendors will push back if they feel your staff are taking advantage of the support team to wrangle free consulting.
Finally, ask how the vendor will plan and support software changes that better reflect your business needs. You are unlikely to convince an international vendor to update their core code, but Australian vendors can be more easily influenced, especially if they see that the feature can help drive more sales.
Implementation Expertise: Industry scuttlebutt has it that many large implementations have been undertaken by the 'Happy Bus' method where a few experienced (and expensive) team leaders manage a large group of much less experienced (yet strangely, not much less expensive) juniors. While this is less likely with SME projects, ask to see CVs during the sales process and match those up to the people actually doing the job. Ensure that you are not paying for vendor staff who are training on-the-job, and if you are in any doubt about the skills of the people doing the work, discuss it with the vendor straight away so your concerns can be addressed before the project is completed.
Investment Cost: While your aim should be as inexpensive a project as possible, budget at least one percent of your revenue as a good ballpark for the total project cost when comparing vendor proposals.
For SME projects, the software cost, new hardware/database and implementation services are likely to be each one-third of the total price. Software maintenance and/or ongoing support are typically separate line items that usually range from 15% - 20% of the licence cost. Make sure that proposals cover all the items you discussed with the sales team, and where you decide to delete an item to save cost - such as using your staff to migrate data from your existing system - ensure that the vendor provides some form of written project impact statement so that the implications arising from deleting the item are clear.
And while asking for Return on Investment (ROI) figures is the norm, the reality is that few projects capture the requisite before and after baseline details that provide a definitive ROI. You are better off asking reference customers how the system changed their business practices than studying vendor-written ROI papers.
Solution Type: There is a perennial argument in business circles that advocates either best-of-breed or fully integrated. With best-of-breed you buy specialist products for each business function and bolt them together to build a complete solution. Fully integrated products are typically not as feature-rich in any single area as best-of-breed, but they come from the same supplier and so notionally have a lower purchase cost and overall support cost.
SMEs should approach a best-of-breed project with healthy scepticism, as you will rarely have the skills, time and money required to connect the products together and maintain stability in the face of changing business processes, industry requirements and customer demands.
Upgrade Path: Before you pay for software maintenance, ask the vendor reference accounts about their experiences upgrading the product. While very few upgrades are painless, you need to know whether the vendor provides value for the maintenance charge (i.e. does the functionality included each year add value to the business?) and whether a team of consultants are required at extra cost to actually do the upgrade each year.
Technology: While there is no doubt that technology can streamline your business process, help retain customers and improve profitability, technology for its own sake is a waste of your money. It is also an area where vendors can use smoke and mirrors to hide inelegant products features...or suggest that the next release is a Golden Bullet tailor made for your business.
In particular, make sure that the vendor is not offering you a product today that they know will be upgraded to a different product in the future. For example, one large international ERP company - perhaps more used to consumer software products than business critical implementations - has FOUR versions of their product (actually four different applications from four different acquisitions) that they brand under the same general name. If your business grows then it's very likely you will have to "upgrade" to a different product, which is essentially a new implementation even though it has the same family name as the product you purchased. Another large international vendor - who has considerable database expertise and should know better - is planning on upgrading customers to "new technology" at some point in the future. Access to this new technology may be included in your Maintenance cost, but once again, it is basically a new implementation and needs to be considered a risky proposition. It is highly unlikely that all the features you have already paid for will be in this "new technology" version, at least in the first release.
Conclusion
The decision for an SME to implement ERP represents a major investment that impacts the whole organisation. A well-planned and implemented ERP can change the way you do business and significantly improve profitability but remember there can be pitfalls if you have not prepared properly. Make sure you do your homework - have a clear objective agreed at the outset, prioritise your expected outcomes and solutions, research potential vendors carefully and ask the right questions for your organisation. It may take a little longer at the outset but will prove vital to the long-run success of your ERP.
Enterprise Resource Planning (ERP) describes software that integrates departments and functions across your business onto a single computer system. The intended outcome is a system that improves operational visibility, streamlines decision making, reduces costs and generally allows you to manage your business to better profitability.
