The ABCs of ERP
Compiled from reports by Christopher Koch, Derek Slater and E. Baatz
What is ERP? How long will an ERP project take? What will ERP fix in my business? Will ERP fit the ways I do business? What does ERP really cost? When will I get payback from ERP—and how much will it be? What are the unforeseen costs of ERP? How do you configure ERP software? How do companies organize their ERP projects? How does ERP fit with electronic commerce?
What is ERP?
Enterprise resource planning software, or ERP, doesn't live up to its acronym. Forget about planning—it doesn't do that—and forget about resource, a throwaway term. But remember the enterprise part. This is ERP's true ambition. It attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments' particular needs.
That is a tall order, building a single software program that serves the needs of people in finance as well as it does the people in human resources and in the warehouse. Each of those departments typically has its own computer system, each optimized for the particular ways that the department does its work. But ERP combines them all together into a single, integrated software program that runs off a single database so that the various departments can more easily share information and communicate with each other.
That integrated approach can have a tremendous payback if companies install the software correctly. Take a customer order, for example. Typically, when a customer places an order, that order begins a mostly paper-based journey from in-basket to in-basket around the company, often being keyed and re-keyed into different departments' computer systems along the way. All that lounging around in in-baskets causes delays and lost orders, and all the keying into different computer systems invites errors. Meanwhile, no one in the company truly knows what the status of the order is at any given point because there is no way for the finance department, for example, to get into the warehouse's computer system to see whether the item has been shipped. "You'll have to call the warehouse," is the familiar refrain heard by frustrated customers.
How can ERP improve a company's business performance?
ERP automates the tasks involved in performing a business process—such as order fulfillment, which involves taking an order from a customer, shipping it and billing for it. With ERP, when a customer service representative takes an order from a customer, he or she has all the information necessary to complete the order (the customer's credit rating and order history, the company's inventory levels and the shipping dock's trucking schedule). Everyone else in the company sees the same computer screen and has access to the single database that holds the customer's new order. When one department finishes with the order it is automatically routed via the ERP system to the next department. To find out where the order is at any point, one need only log into the ERP system and track it down. With luck, the order process moves like a bolt of lightning through the organization, and customers get their orders faster and with fewer orders than before. ERP can apply that same magic to the other major business processes, such as employee benefits or financial reporting.
That, at least, is the dream of ERP. The reality is much harsher.
Let's go back to those inboxes for a minute. That process may not have been efficient, but it was simple. Finance did its job, the warehouse did its job, and if anything went wrong outside of the department's walls, it was somebody else's problem. Not anymore. With ERP, the customer service representatives are no longer just typists entering someone's name into a computer and hitting the return key. The ERP screen makes them business people. It flickers with the customer's credit rating from the finance department and the product inventory levels from the warehouse. Will the customer pay on time? Will we be able to ship the order on time? These are decisions that customer service representatives have never had to make before and which affect the customer and every other department in the company. But it's not just the customer service representatives who have to wake up. People in the warehouse who used to keep inventory in their heads or on scraps of paper now need to put that information online. If they don't, customer service will see low inventory levels on their screens and tell customers that their requested item is not in stock. Accountability, responsibility and communication have never been tested like this before.
How long will an ERP project take?
Companies that install ERP do not have an easy time of it. Don't be fooled when ERP vendors tell you about a three or six month average implementation time. Those short (that's right, six months is short) implementations all have a catch of one kind or another: the company was small, or the implementation was limited to a small area of the company, or the company only used the financial pieces of the ERP system (in which case the ERP system is nothing more than a very expensive accounting system). To do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And that kind of change doesn't come without pain. Unless, of course, your ways of doing business are working extremely well (orders all shipped on time, productivity higher than all your competitors, customers completely satisfied), in which case there is no reason to even consider ERP.
The important thing is not to focus on how long it will take—real transformational ERP efforts usually run between one to three years, on average—but rather to understand why you need it and how you will use it to improve your business.
What will ERP fix in my business?
There are three major reasons why companies undertake ERP:
To integrate financial data. —As the CEO tries to understand the company's overall performance, he or she may find many different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different business units may each have their own versions of how much they contributed to revenues. ERP creates a single version of the truth that cannot be questioned because everyone is using the same system.
To standardize manufacturing processes. —Manufacturing companies—especially those with an appetite for mergers and acquisitions—often find that multiple business units across the company make the same widget using different methods and computer systems. Standardizing those processes and using a single, integrated computer system can save time, increase productivity and reduce headcount.
To standardize HR information. —Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employee time and communicating with them about benefits and services. ERP can fix that.
In the race to fix these problems, companies often lose sight of the fact that ERP packages are nothing more than generic representations of the ways a typical company does business. While most packages are exhaustively comprehensive, each industry has its quirks that make it unique. Most ERP systems were designed to be used by discreet manufacturing companies (who make physical things that can be counted), which immediately left all the process manufacturers (oil, chemical and utility companies that measure their products by flow rather than individual units) out in the cold. Each of these industries has struggled with the different ERP vendors to modify core ERP programs to their needs.
Will ERP fit the ways I do business?
It's critical for companies to figure out if their ways of doing business will fit within a standard ERP package before the checks are signed and the implementation begins. The most common reason that companies walk away from multimillion dollar ERP projects is that they discover that the software does not support one of their important business processes. At that point there are two things they can do: They can change the business process to accommodate the software, which will mean deep changes in long-established ways of doing business (that often provide competitive advantage) and shake up important peoples' roles and responsibilities (something that few companies have the stomach for). Or they can modify the software to fit the process, which will slow down the project, introduce dangerous bugs into the system and make upgrading the software to the ERP vendor's next release excruciatingly difficult, because the customizations will need to be torn apart and rewritten to fit with the new version.
Needless to say, the move to ERP is a project of breathtaking scope, and the price tags on the front end are enough to make the most placid CFO a little twitchy. In addition to budgeting for software costs, financial executives should plan to write checks to cover consulting, process rework, integration testing and a long laundry list of other expenses before the benefits of ERP start to manifest themselves. Underestimate the price of teaching users their new job processes can lead to a rude shock down the line, So can failure to consider data warehouse integration requirements and the cost of extra software to duplicate the old report formats. A few oversights in the budgeting and planning stage can send ERP costs spiraling out of control faster than oversights in planning almost any other information system undertaking.
What does ERP really cost?
Meta Group recently did a study looking at the Total Cost of Ownership (TCO) of ERP, including hardware, software, professional services, and internal staff costs. The TCO numbers include getting the software installed and the two years afterward, which is when the real costs of maintaining, upgrading and optimizing the system for your business are felt. Among the 63 companies surveyed—including small, medium and large companies in a range of industries—the average TCO was $15 million (the highest was $300 million and lowest was $400,000). While it’s hard to draw a solid number from that kind of a range of companies and ERP efforts, Meta came up with one statistic that proves that ERP is expensive no matter what kind of company is using it. The TCO for a “heads-down” user over that period was a staggering $53,320.
When will I get payback from ERP—and how much will it be?
Don’t expect to revolutionize your business with ERP. It is a navel gazing exercise that focuses on optimizing the way things are done internally rather than with customers, suppliers or partners. Yet the navel gazing has a pretty good payback if you’re willing to wait for it—a Meta group study of 63 companies found that it took eight months after the new system was in (31 months total) to see any benefits. But the median annual savings from the new ERP system was $1.6 million per year.
The Hidden Costs of ERP
Although different companies will find different land mines in the budgeting process, those who have implemented ERP packages agree that certain costs are more commonly overlooked or underestimated than others. Armed with insights from across the business, ERP pros vote the following areas as most likely to result in budget overrun.
Training is the near-unanimous choice of experienced ERP implementers as the most elusive budget item. It's not so much that this cost is completely overlooked as it is consistently underestimated. Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software interface.
Integration and Testing
Testing the links between ERP packages and other corporate software links that have to be built on a case-by-case basis is another often underestimated cost. A typical manufacturing company may have add-on applications for logistics, tax, production planning and bar coding. If this laundry list also includes customization of the core ERP package, expect the cost of integrating, testing and maintaining the system to skyrocket.
As with training, testing ERP integration has to be done from a process-oriented perspective. Instead of plugging in dummy data and moving it from one application to the next, veterans recommend running a real purchase order through the system, from order entry through shipping and receipt of payment-the whole order-to-cash banana-preferably with the participation of the employees who will eventually do those jobs.
It costs money to move corporate information, such as customer and supplier records, product design data and the like, from old systems to new ERP homes. Although few CIOs will admit it, most data in most legacy systems is of little use. Companies often deny their data is dirty until they actually have to move it to the new client/server setups that popular ERP packages require. Consequently, those companies are more likely to underestimate the cost of the move. But even clean data may demand some overhaul to match process modifications necessitated—or inspired—by the ERP implementation.
Often, the data from the ERP system must be combined with data from external systems for analysis purposes. Users with heavy analysis needs should include the cost of a data warehouse in the ERP budget—and they should expect to do quite a bit of work to make it run smoothly. Users are in a pickle here: Refreshing all the ERP data in a big corporate data warehouse daily is difficult, and ERP systems do a poor job of indicating which information has changed from day to day, making selective warehouse updates tough. One expensive solution is custom programming. The upshot is that the wise will check all their data analysis needs before signing off on the budget.
Consultants Ad Infinitum
When users fail to plan for disengagement, consulting fees run wild. To avoid this, companies should identify objectives for which its consulting partners must aim when training internal staff. Include metrics in the consultants' contract; for example, a specific number of the user company's staff should be able to pass a project-management leadership test—similar to what Big Five consultants have to pass to lead an ERP engagement.
Replacing Your Best and Brightest
It is accepted wisdom that ERP success depends on staffing the project with the best and brightest from the business and IS. The software is too complex and the business changes too dramatic to trust the project to just anyone. The bad news is, a company must be prepared to replace many of those people when the project is over. Though the ERP market is not as hot as it once was, consulting firms and other companies that have lost their best people will be hounding yours with higher salaries and bonus offers than you can afford—or that your HR policies permit. Huddle with HR early on to develop a retention bonus program and to create new salary strata for ERP veterans. If you let them go, you'll wind up hiring them—or someone like them—back as consultants for twice what you paid them in salaries.
Implementation Teams Can Never Stop
Most companies intend to treat their ERP implementations as they would any other software project. Once the software is installed, they figure, the team will be scuttled and everyone will go back to his or her day job. But after ERP, you can't go home again. You're too valuable. Because they have worked intimately with ERP, they know more about the sales process than the salespeople do and more about the manufacturing process than the manufacturing people do. Companies can't afford to send their project people back into the business because there's so much to do after the ERP software is installed. Just writing reports to pull information out of the new ERP system will keep the project team busy for a year at least. And it is in analysis—and, one hopes, insight—that companies make their money back on an ERP implementation. Unfortunately, few IS departments plan for the frenzy of post-ERP installation activity, and fewer still build it into their budgets when they start their ERP projects. Many are forced to beg for more money and staff immediately after the go-live date, long before the ERP project has demonstrated any benefit.
Waiting for ROI
One of the most misleading legacies of traditional software project management is that the company expects to gain value from the application as soon as it is installed; the project team expects a break, and maybe a pat on the back. Neither expectation applies to ERP. Most don't reveal their value until after companies have had them running for some time and can concentrate on making improvements in the business processes that are affected by the system. And the project team is not going to be rewarded until their efforts pay off.
ERP systems often wreak cause havoc in the companies that install them. In a recent Deloitte Consulting survey of 64 Fortune 500 companies, one in four admitted that they suffered a drop in performance when their ERP systems went live. The true percentage is undoubtedly much higher. The most common reason for the performance problems is that everything looks and works differently from the way it did before. When people can't do their jobs in the familiar way and haven't yet mastered the new way, they panic, and the business goes into spasms.
How do you configure ERP software?
Even if a company installs ERP software for the so-called right reasons and everyone can agree on the optimal definition of a customer, the inherent difficulties of implementing something as complex as ERP is like, well, teaching an elephant to do the hootchy-kootchy. The packages are built from database tables, thousands of them, that IS programmers and end users must set to match their business processes; each table has a decision "switch" that leads the software down one decision path or another. By presenting only one way for the company to do each task—say, run the payroll or close the books—a company's individual operating units and far-flung divisions are integrated under one system. But figuring out precisely how to set all the switches in the tables requires a deep understanding of the existing processes being used to operate the business. As the table settings are decided, these business processes are reengineered, ERP's way. Most ERP systems are not shipped as a shell system in which customers must determine at the minutia level how all the functional procedures should be set, making thousands of decisions that affect how their system behaves in line with their own business activities. Most ERP systems are preconfigured, allowing just hundreds-rather than thousands-of procedural settings to be made by the customer.
How do companies organize their ERP projects?
Based on our observations, there are three commonly used ways of installing ERP.
The Big Bang—In this, the most ambitious and difficult of approaches to ERP implementation, companies cast off all their legacy systems at once and implement a single ERP system across the entire company.
Though this method dominated early ERP implementations, few companies dare to attempt it anymore because it calls for the entire company to mobilize and change at once. Most of the ERP implementation horror stories from the late '90s warn us about companies that used this strategy. Getting everyone to cooperate and accept a new software system at the same time is a tremendous effort, largely because the new system will not have any advocates. No one within the company has any experience using it, so no one is sure whether it will work. Also, ERP inevitably involves compromises. Many departments have computer systems that have been honed to match the ways they work. In most cases, ERP offers neither the range of functionality, nor the comfort of familiarity that a custom legacy system can offer. In many cases, the speed of the new system may suffer because it is serving the entire company rather than a single department. ERP implementation requires a direct mandate from the CEO.
Franchising strategy—This approach suits large or diverse companies that do not share many common processes across business units. Independent ERP systems are installed in each unit, while linking common processes, such as financial book keeping, across the enterprise.
This has emerged as the most common way of implementing ERP. In most cases, the business units each have their own "instances" of ERP—that is, a separate system and database. The systems link together only to share the information necessary for the corporation to get a performance big picture across all the business units (business unit revenues, for example), or for processes that don't vary much from business unit to business unit (perhaps HR benefits). Usually, these implementations begin with a demonstration or "pilot" installation in a particularly open-minded and patient business unit where the core business of the corporation will not be disrupted if something goes wrong. Once the project team gets the system up and running and works out all the bugs, the team begins selling other units on ERP, using the first implementation as a kind of in-house customer reference. Plan for this strategy to take a long time.
Slam-dunk—ERP dictates the process design in this method, where the focus is on just a few key processes, such as those contained in an ERP system's financials module. The slam-dunk is generally for smaller companies expecting to grow into ERP.
The goal here is to get ERP up and running quickly and to ditch the fancy reengineering in favor of the ERP system's "canned" processes. Few companies that have approached ERP this way can claim much payback from the new system. Most use it as an infrastructure to support more diligent installation efforts down the road. Yet many discover that a slammed in ERP system is little better than a legacy system, because it doesn't force employees to change any of their old habits. In fact, doing the hard work of process reengineering after the system is in can be more challenging than if there had been no system at all, because at that point few people in the company will have felt much benefit.
How does ERP fit with electronic commerce?
After all of that work inventing, perfecting and selling ERP to the world, the major ERP vendors are having a hard time shifting gears from making the applications that streamline business practices inside a company to those that face outward to the rest of the world. These days, the hottest areas for outward-looking (that is, Internet) post-ERP work are electronic commerce, planning and managing your supply chain, and tracking and serving customers. Most ERP vendors have been slow to develop offerings for these areas, and they face stiff competition from niche vendors. ERP vendors have the advantage of a huge installed base of customers and a virtual stranglehold on the "back office" functions—such as order fulfillment. Recently ERP vendors have begun to shrink their ambitions and focus on being the back-office engine that powers electronic commerce, rather than trying to own all the software niches that are necessary for a good electronic commerce Website. Indeed, as the niche vendors make their software easier to hook into electronic commerce Web sites, and as middleware vendors make it easier for IS departments to hook together applications from different vendors, many people wonder how much longer ERP vendors can claim to be the primary software platform for the Fortune 500.