Cutting Through the ERP Hype and Making an Informed Decision

Transcription

1 The Top 5 ERP Myths

2 Title Introduction Cutting Through the ERP Hype and Making an Informed Decision Companies researching ERP are inundated with marketing hype filled with incomplete disclosure and half-truths. For example, does SaaS ERP truly offer a lower total cost of ownership than on-premise ERP? If you ask this same question to two vendors - one selling SaaS ERP and another selling on-premise ERP - you re almost certain to get two different answers. The process of evaluating ERP can be frustrating. Because most companies typically enter the market with a frequency of no more than once per decade, they have little familiarity with the competitive and technological landscapes. And, inevitably, the highest ranking search results return biased and unreliable information information that can t be fully relied upon to support a well-informed decision. In this whitepaper, we endeavor to change the landscape. We debunk five of the most common myths relating to the selection and implementation of ERP software. We also offer impartial, actionable best-practice advice that can be used to support make effective ERP decisions. The Top 5 ERP Myths Compare Business Products

3 Title Myth #1 SaaS 1 ERP is [fill-in-the-blank] than On-Premise ERP SaaS ERP offers a lower total cost of ownership and a higher return on investment The answer to this question is it depends. It depends on the business needs, the software being evaluated, the hardware needs, any IT human resource requirements, and the parties relative bargaining positions, among many other factors. When assessing the alternatives, it s important to understand the general differences in cost structures between SaaS and on-premise ERP. Generally, SaaS software is priced on a subscription basis with payment obligations accruing in the form of recurring monthly fees. These fees provide a right-to-use the software subject agreed-upon functionality and capacity limitations. Some SaaS vendors offer monthly support for an incremental monthly fee. In contrast, on-premise ERP is typically priced as a one-time capital outlay. In consideration, a company obtains a perpetual license 2 to use the software in accordance with the terms of a license agreement. To obtain the benefit of product updates and bug fixes, companies are generally required to pay recurring annual maintenance fees fixed as a percentage of license costs. The financial implication of this pricing model discrepancy is that an investment in on-premise ERP typically requires a heavier upfront investment, while an investment in SaaS ERP typically requires heavier recurring commitments. No discussion about SaaS and on-premise pricing is complete with mention of associated hardware and networking costs. Contrary to popular belief, a certain level of IT infrastructure investment is required to support a SaaS ERP system, though typically not to the same extent as what would be required to support an on-premise system. In a SaaS environment, connectivity and bandwidth are critical to ensure efficient and reliable data processing. These are, in effect, the arteries that pump blood to the vital organs. Meanwhile, on-premise ERP typically requires an investment in servers as well as in networking related infrastructure. Regardless of the alternative, it is critical for companies to understand how their specific transaction volumes and storage requirements impact investment obligations. 1 SaaS or software as a service- refers to software delivered in the cloud. 2 Transfer of rights is a key difference between SaaS and on-premise ERP. With SaaS ERP, companies are effectively renting the software. In contrast, with on-premise ERP, companies obtain a perpetual license to use the software. The Top 5 ERP Myths Compare Business Products

4 Title We conclude this infrastructure discussion with one final piece of advice: ensure reliable, stable, and redundant environments. An ERP system is only as strong as the infrastructure that supports it. SaaS ERP implementations have quicker turnaround times than on-premise ERP implementations Once again, the answer is it depends. And, to the dismay of ERP software marketers, what it depends on isn t the underlying technology or platform. ERP implementation projects are lengthy, complex, and expensive because they involve significant business restructuring. Regardless of the application platform and architecture, a company still has to re-engineer business processes, train users, migrate data, and test the systems. In reality, project scope and resource commitment are two factors that have far more influence over project duration than the underlying platform. A broad project scope will necessarily lengthen the project. Similarly, a relatively reduced human resources commitment will increase project duration. For example, consider two projects: one in which the core team members are assigned for 75% of their working time and another where the core team members are assigned for 50% of their working time. 3 Assuming all else remains equal, the project with the higher resource commitment will be completed in a short timeframe. Data in an on-premise ERP system is more secure than in a SaaS ERP system Finally, and without surprise, the answer to this question is it depends. In cases where data security and privacy are central to core business offerings (e.g. banks, hospitals, and government agencies), outsourcing data processing and management to a SaaS provider probably isn t an option. However, for most retail, manufacturing, and distribution companies, data management is important but not central to their core operations. These companies might be more willing to consider a SaaS ERP alternative. When evaluating data security, reliability, and privacy alternatives, companies should consider the following factors: 3 Under no circumstances should a company proceed with an ERP project if it is not prepared to commit core team resources for a minimum of 50% of their working time. The Top 5 ERP Myths Compare Business Products

5 Title Where and how is data stored? And, what are the security measures? Have there been prior breaches? Which data is backed up? How frequently are backups made? How long would it take to revert to a backup? What policies and procedures are used to support data privacy? Are systems redundant? Where is the redundancy location? What are the system reliability statistics? What are the transaction processing statistics? The Top 5 ERP Myths Compare Business Products

6 Title Myth #2 Lean and ERP are Mutually Exclusive Projects Many companies delay the initiation of an ERP project until they ve completed a process efficiency program. They argue that an ERP investment would not be worthwhile until existing operations are leaned out. In other words, these companies don t want to risk importing suboptimal processes into a new environment. For many companies, this argument contains an inaccurate assumption that an operational efficiency project is mutually exclusive from an ERP project. For companies that run legacy IT environments, operational inefficiencies can oftentimes be traced to inadequate information processing systems. For example, many companies operate an IT environment characterized by unintegrated systems. Because the systems do not speak to one another, a significant amount of time is spent manually entering data, re-entering data, and reconciling data. In the absence of a systems overhaul, there is very little that a lean initiative could do to improve these processes. Oftentimes, ERP provides companies with an opportunity to achieve otherwise unachievable efficiencies. Business process automation is a common source of efficiency gains. Almost invariably, a system is capable of performing previously manual tasks far more quickly (oftentimes in real-time) and with fewer errors (often times with zero errors). Operational efficiency projects and ERP projects can be considered together. It is important to note that ERP merely provides an opportunity for process improvement. Implementation is where the improvements are strategically targeted, planned, and executed. The Top 5 ERP Myths Compare Business Products

7 Title Myth #3 SMBs do not Require Formal ERP Implementation Documentation Small and midsized businesses generally cite budgetary constraints as a reason to cut back on ERP implementation. And, when these companies evaluate which project components to cut, they commonly segregate project activities into two categories: documentation activities and execution activities. Guess which group is more likely to hit the chopping block? What these companies fail to realize is that proper documentation is a prerequisite to effective project management. Here are three examples of commonly discarded yet critical documentation requirements. 1. A formal project plan A project plan is useful for breaking down a complex and unwieldy ERP project into a series of small, actionable, and measurable deliverables. Each of these deliverables acts as a signpost, highlighting the route that the project teams should follow to a successful outcome. Companies that proceed without a project plan are effectively driving in the dark, in a foreign land, without a map. 2. Formal business blueprints These documents provide a process-level roadmap from a current state of operations to a future state of operations. Among other things, these documents include detailed to be process flows together with ERP session (or screen) navigation instructions. During implementation, these maps provide the foundation for customized user training. Following implementation, these documents become reference guides for existing employees and training manuals for new hires. Companies that disregard this requirement expose themselves to avoidable training fees during implementation and elevated new employee training costs. 3. Formal risk management database This document or database - provides a structured approach to prioritizing risk, assigning responsibility, defining corrective action requirements, and tracking resolution. Companies that proactively track and manage risk put themselves in a position to address any show-stopping issues before exposing the The Top 5 ERP Myths Compare Business Products

8 Title project to irreparable damage. Companies that ignore risk management expose their project and organization to potentially devastating consequences. In summary, proper documentation is critical to the success of any ERP project. Regardless of business size or complexity, no company should view documentation as optional. Cutting these components for budgetary reasons is a short-sighted view that generally leads to significant cost-overruns and, in many cases, ERP project failure. The Top 5 ERP Myths Compare Business Products

9 Title Myth #4 All ERP Roads Lead to Nirvana ERP marketing hype is palpable. Not a day goes by without a press release implying that ERP software is the direct and proximate cause of significant business improvements. For example, we hear that ERP leads to multiplication of inventory turns, dramatically increased customer orders, and near elimination of defect rates. But, is any of this true? The answer is that campaigns like these are not untrue. Though, they are intended to press the boundaries of imagination. The unstated implication that ERP is a magic bullet for all business challenges strains credulity. These press releases omit certain key facts. Namely, that the highlighted cases were accompanied by major process reengineering efforts. In all probability, companies that have delivered impressive ERP results used their respective projects as catalysts for change as excuses to streamline and improve their business. They understood that ERP wasn t a simple software or technology project. Rather, they looked upon it as a restructuring and organizational change project. When pursued together with a rigorous operational restructuring project, ERP implementation is capable of yielding significant improvements. The path to achieving measurable ERP-related benefits includes the following steps: 1. Define the intended business benefits 2. Translate the intended business benefits into operational goals and process requirements 3. Select an ERP system capable of satisfying these requirements 4. Execute an implementation plan that targets these same goals and requirements The Top 5 ERP Myths Compare Business Products

10 Title Myth #5 ERP Vendors are in the Best Position to Lead the ERP Sales Process ERP vendors are in the business of selling ERP software. ERP buyers, meanwhile, are not in the business of procuring ERP software. Many enter the market once every 10 to 15 years. Some are entering the market for the very first time. Vendors try to use these imbalances in knowledge and experience to their advantage. They seek to showcase their wares in ways that magnify strengths and minimize weaknesses. The issue, of course, is that a vendor s particular strengths might not align with a company s particular business requirements. An even bigger issue arises when a vendor s hidden weaknesses align with a company s key business requirements. Acquiring a system that fails to support critical business process or reporting requirements can jeopardize projected value and the realization of ERP-driven benefits. A company entering the ERP market would be well advised to grab hold of the reins. It would want to control the pace and flow of the procurement process. Its ultimate goal should be an understanding of how given ERP systems match up against its actual business requirements. The company would want to know the strengths, weaknesses, and risks. For small and mid-sized companies, effective ERP due diligence can take between four and six months. A best-practices approach is one that combines multiple layers of due diligence, with each layer intended to expose new information about the vendor and its software. A common approach to ERP due diligence includes a combination of the following: 1. Written questionnaires; 2. Scripted demonstrations; and 3. Reference checks. In the final analysis, a company undertaking an ERP selection project should only approach vendors once it understands how it is likely to benefit from ERP-driven restructuring, has defined its business requirements, and has decided upon a procurement approach. The Top 5 ERP Myths Compare Business Products

11 Title Conclusion How to Continue Your ERP Research In this whitepaper, we have highlighted five common key myths propagated in relation to ERP software, ERP selection, and ERP implementation. Companies continuing with ERP evaluations should take steps to position themselves to consider information in a critical, balanced way. Here are three concluding tips to keep in mind as evaluations progress: Assess information with a critical eye, and consider the perspectives and biases of the content providers. Vendors and service providers always market with a view to selling their software and services. Although their content may contain valuable information, it is important to strip away the editorial biases. Identify your own biases, and challenge the sources of those biases. Any person entering an ERP evaluation is likely to have certain preferences. The evaluator should reflect on the sources of those preferences and determine whether they re based in rational, complete due diligence. To the extent that they re not, the evaluator should do his best to cast them aside. He would be doing his company a disservice if he were to allow insufficiently well-support preconceptions to influence an ERP decision. Canvass colleagues and business partners for their perspectives. In all likelihood, you know people at other companies that have undergone similar projects. It s worthwhile to poll them on their project experiences, including both successful and unsuccessful elements. The Top 5 ERP Myths Compare Business Products

12 Title About the Expert: Jonathan Gross, LL.B., M.B.A Vice President and General Counsel Pemeco Consulting Pemeco ( is a leading vendor agnostic consulting firm that specializes in business requirements assessments, ERP selection, ERP implementation, and ERP optimization. Jonathan helps manufacturing and distribution clients leverage enterprise software technologies to optimize their business operations. Jonathan is also a part-time MBA professor of systems analysis and design at the Schulich School of Business at York University, Canada s #1 ranked MBA program according to The Economist Magazine. The Top 5 ERP Myths Compare Business Products