Copyright January 29, 2013 Page 1 of 9 Dr. Peter Green, BellHawk Systems Corp.

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1 Extending the Life of Your Legacy ERP System Dr. Peter Green Introduction My professional mission in life is assisting mid-sized industrial organizations to improve the efficiency of their operations, as well as their customer service, through the application information technology (IT). This white paper addresses a question I frequently get asked: Should we replace our legacy ERP system? Many of these companies purchased new ERP (Enterprise Resource Planning) systems in the years leading up to Y2K. This was the IT event that occurred in the year 2000 when the use of 2 digit year codes (such as 12 for 1912) caused many older systems to have errors in date comparisons for dates in the new millennia. These replacement ERP systems are now over a decade old and companies are starting to address the question of whether they should replace their existing systems with new systems. This paper examines the core issues and possible solutions. It concludes that, in many cases, industrial organizations are better off keeping their existing systems and simply upgrading them and adding to their capabilities. This decision has many similarities to purchasing a new house. While it might be nice to contemplate buying a new house, it is often much less expensive and certainly less disruptive to remodel the bathroom or add a garage than incur all the costs and hassles of moving. A Short History of ERP Systems Many ERP systems started out in the 1980s as accounting systems. To this was then added a Materials Requirements Planning (MRP) capability to create Enterprise Resource Planning systems. This enabled the vendors of these systems to charge more for their software and increase their profits. It also added real value for large multi-facility organizations as it gave them a way of coordinating supply chain and production activities across many plants. Coming up to Y2K many mid-size industrial organizations purchased new ERP systems to replace their existing accounting systems. Many of these ERP systems were sold on the basis that, if they were good enough for companies like Toyota to meet their need for central coordination of production and material movement across dozen of facilities in many countries, then this software must be suitable for use by a 50 person metal stamping shop in Ohio. Of course it wasn t and, as a result, many of the mid-sized industrial organizations simply used their new ERP systems as extended accounting systems. But a sizeable percentage also came to Copyright January 29, 2013 Page 1 of 9 Dr. Peter Green, BellHawk Systems Corp.

2 use the MRP functionality to do materials planning and automatically generate purchase orders for their suppliers. Having sold all those ERP systems, ERP vendors were then left with the question of what to sell next to maintain their sales growth, which was very critical for many venture backed organizations. Many of them tried to sell add on modules such, as for inventory tracking, human resources and customer relations management, to solve the information silo problem. For a while some ERP suppliers were successful but they were never able to repeat the sales growth they had leading up to Y2K and most sold out to consolidators such as Microsoft, Sage, and Infor who purchased these companies for their ongoing maintenance revenue streams. These consolidators ended support for most capabilities that would allow users to customize their ERP software to meet their individual business needs. These customizations made it difficult to apply software upgrades and resulted, in many cases, in customers stopping paying for annual software maintenance fees. Problems with Information Silos In joining the accounting and MRP functionality into one system, the ERP vendors were starting to address a central problem in many industrial organizations, which is the problem of information silos. When a company grows to 50 or so employees, it has to divide its operations into departments, each with its own manager. So we see companies grow departments such as sales, marketing, accounting, human resources, production, supply chain management, warehousing and shipping. The problem is that each department wants to use an IT system that is tailored to its specific needs. So we see sales using customer relation management systems, marketing using campaign management tools, production using production tracking systems, and the warehouse and shipping departments using warehouse management systems. The only two that are typically electronically coordinated, in most cases, are accounting and supply chain management, and even this is starting to break down, with the availability of new purchasing tools and on-line networks. This information stove-pipe problem leads to tremendous inefficiencies and to mistakes that can seriously impact customer satisfaction. These problems are best illustrated by two personal anecdotes. Last year I visited a small single-plant industrial company, with less than 50 employees, that had dozens of paper forms and Excel spreadsheets that were essentially used to communicate between the different departments. By my estimate, their information silos were costing them the equivalent of three full-time employees, at a cost of over $150,000 a year, just in moving information between departments. At the same time they were paying over $40,000 a year in annual maintenance fees for an ERP system that would have supported a major multi-plant corporation. A few months ago, we ordered some barcode equipment from one of our distributors in Kentucky. We moved offices over 3 years ago and notified the distributor of this change of Copyright January 29, 2013 Page 2 of 9 Dr. Peter Green, BellHawk Systems Corp.

3 address when we moved. We also made sure that the correct shipping address was on the order. Unfortunately the distributor has a completely separate system for handling shipping and no one updated this system when we moved or checked that the shipping address on the order was the same as the address in the shipping system. As a result, the equipment was shipped to what is now a vacant office building. It took 10 days to sort out this delivery mess and get the equipment delivered to our current offices. So, as you can see from these examples, these information silos are not only costly in wasted overhead labor but can result in poor customer service, which can result in the loss of customers which might otherwise have a high lifetime value. The Core Myth of ERP Systems One of the promises of ERP systems is that they will solve this information silo problem by providing one system that everyone in the organization will be able to use. By providing one system that will do everything for everyone, the ERP system will eliminate the cost of duplicate data entry and prevent mistakes, such as the one described in the prior section. Unfortunately this vision, while accurate in the description of the problem that the ERP systems are now trying to solve, has proved elusive to achieve in practice. Many ERP systems are still sold on the basis that they now incorporate all the functions that a company could need, built within one system. ERP sales people typically present their prospective customers with a list that shows that, in addition to accounting and materials planning, their ERP system also includes functions such customer relations management, human resources and payroll, sales forecasting and marketing campaign management, production and inventory tracking, and warehouse management. The business model of most ERP vendors requires that they sell (or have sold) their software to tens or hundreds of thousands of companies, often in multiple countries, and that they collect substantial annual maintenance fees for frequent upgrades to their software. As a result: 1. The software that the ERP vendors provide has to be either: a. Bloat-ware that incorporates so many features that the ERP software becomes very difficult to use. b. Limited to a small set of functions that are commonly used by all their customers. 2. The ERP software cannot be customized to meet the specific needs of each customer; otherwise customers will not pay annual maintenance fees for upgrades as the cost of moving the customizations to each new version of the ERP system become prohibitive. I interact with the senior management of many mid-sized industrial organizations each year and find that most of them are only using the accounting and materials requirements planning functions of their ERP systems. They are relying on other systems, which are more tailored to their specific business needs, for other departments or using ad-hoc Access databases or Excel spreadsheets to support these functions. This is becoming increasingly so, with the availability of many of these functions in the Cloud over the Internet at modest subscription prices. Copyright January 29, 2013 Page 3 of 9 Dr. Peter Green, BellHawk Systems Corp.

4 We are seeing, for example, sales departments migrating to the use of on-line CRM (customer relations management) systems such as SalesForce.com or SugarCRM, from using the CRM systems that are available as an integral part of their ERP systems. This is because these on-line CRM systems are easier to use and can be tailored to the needs of each individual sales organization. So I have concluded that ERP systems have failed to deliver on their central promise of eliminating the departmental information silos for most mid-sized industrial organizations. I also conclude that they cannot solve this problem while retaining their current business model on which their very survival depends. But it is important to recognize that most ERP systems do an excellent job of providing support for the accounting and finance departments integrated with materials requirements planning, for those organizations that need to do automated materials planning. Reasons for Replacing an ERP System Having dispelled the myth that ERP systems will solve the information silo problem then we must ask the question Why would a company want to replace its accounting and MRP functionality and what would be the cost? Some of the reasons that I have encountered are: 1. The company that provided the software is now out of business or no longer supports the ERP system. 2. The underlying hardware technology is now obsolete and no longer supported. This is often most easily solved by upgrading to the latest version of the ERP system providing that an upgrade is available. 3. The legacy ERP system is difficult to integrate with systems used by other departments to eliminate the need for duplicate data entry. This again is most easily solved, in most cases, by upgrading to the latest version of the ERP system, which often has a webservices interface. This interface can then be used in conjunction with data integration tools to quickly implement automated data exchange interfaces to eliminate information silos. 4. We are paying tens of thousands of dollars a year on annual maintenance fees for our legacy ERP system and simply not getting the value out of it. Please note that the list does not include Because doing my accounting better will improve my bottom line. Nor does it typically include Because we need to improve our materials requirements planning process. Accounting is typically a stable function that does not change much from year to year except for new regulations and tax codes. Materials planning and purchasing is also typically very stable. The one exception to this is where an organization goes from operating a single self-contained plant to being an integral part of a multi-plant operation, either as a result of growth or acquisition. This can trigger a change in the ERP system being used, often to that of the Copyright January 29, 2013 Page 4 of 9 Dr. Peter Green, BellHawk Systems Corp.

5 acquirer. But then the organization is typically no longer a mid-sized industrial organization, which is the focus of this paper. For most mid-sized organizations, existing legacy ERP systems can be upgraded to the latest version, which can be run on new computers and be integrated with other systems, thus eliminating information silos between departments. But I recommend to my clients that they only purchase upgrades for the ERP modules (typically accounting and materials planning) they use so as to minimize annual maintenance fees. In other cases, we have seen smaller companies switch from ERP systems to accounting systems, such as QuickBooks Enterprise, because they did not need the MRP functionality. One client was paying $11,000 a year in annual maintenance fees to their ERP vendor. They purchased a copy of QuickBooks Enterprise for about $2,500 and are now paying annual maintenance fees of $700 a year. Costs of Replacing an ERP System These are probably best illustrated by two anecdotal examples that I believe are fairly typical: The first is an electronics company with sales under $10 Million dollars a year. They had an older ERP system that they were using as an accounting system. They were persuaded by the ERP sales person to replace this system with a new ERP system installed on-site to improve the efficiency of operation by eliminating information silos. They were sold on all the amazing functionality they would get from all the long list of modules that they could purchase. The company spent over $250,000 on their new ERP system, which is a lot of money for a small company. Of this approximately $100,000 was spent on software licenses and a new server computer and $150,000 was spent on consultants and trainers to help them migrate to this new ERP systems. They took well over a year to implement this system during which time operations were impacted by the need for their small management team to focus on the ERP implementation rather than on winning new business. As of my last information about this situation, the company had its new accounting functionality up and running and was very happy with it. They were working on bringing up their materials planning functionality and had hired a full-time senior staff member to be responsible for managing their materials planning functionality. They had also bought licenses to many other software modules, for which they were paying annual maintenance fees, but were not yet operational. The company s senior management was expecting that these modules would have a beneficial impact on their business just as soon as other departments got around to using these modules instead of the systems they were currently using. What we see from this example is that the cost is not just in the software licenses and new servers needed to run this system but in the cost of consultants and trainers needed to help the organization transition to successfully running their new system. What is not as visible is the cost of the disruption to business operation of training users and changing operational procedures. Was this installation a success? Certainly for the ERP sales person and the consultants and trainers, the answer is yes. But for the company, I think that the situation is best summed up by the CEO of another small company who said No one adds any money to their bottom line profit by buying a new accounting system. Copyright January 29, 2013 Page 5 of 9 Dr. Peter Green, BellHawk Systems Corp.

6 We are seeing a lot of pressure being placed on small and mid-sized industrialized companies to move to the Cloud and use an on-line subscription service. One company that I know decided to change over to a cloud-based ERP system on the promise that it would significantly reduce their IT costs by eliminating the need for in-house servers and would give them access to a wide array of features that would eliminate many of their departmental silos. It has taken this company several years to implement their Cloud-based ERP system and they, like our other example, have got their accounting and finance function up and running. But they found that the production tracking module in the ERP system did not match well with the way they ran their production and so this is inhibiting a full roll out for the materials planning function. It is not known what the training and support costs were for this implementation but, based on other sources, it is estimated that this company is paying over $100,000 a year for the subscription fees for their Cloud-based ERP system. Other Constraints Two further constraints that factor into this issue are: 1. Maximum output (tested lines of code) is achieved in any software development project when the number of programmers involved is 5 or less. This means that a software development team cannot develop and/or maintain an accounting system at the same time as they work on a customer relations management system. 2. Businesses want software tailored to their operational and market needs. A one-size fits all approach will not work for most industrial businesses as each business has to have unique processes and products; otherwise they end up in a lowest-price race-to-thebottom commodity-sales situation. As a result of these constraints, we naturally end up with each company using different software systems, with each department ending up using software that best supports its specific needs. These departmental needs vary according to the industrial sector that the business operates in. So a human resources system for a warehouse distribution company will probably not work very well for a high-tech engineering organization. Once departments have chosen software that meets their specific needs then we see, either: 1. They use a standard off-the-shelf system supplemented by ad-hoc Excel spreadsheets and other reporting tools. 2. They customize the software to meet their specific needs or hire consultants to do this for them. Possible Solutions to the Information Silo Problem You could, by management fiat, order all your people to use an ERP system you select and to modify their operating processes to conform to the strictures of the ERP system. Usually companies that do this quickly go out of business. Their best employees leave due to the impossibility of the task and the weak employees hang on until the company goes under. Copyright January 29, 2013 Page 6 of 9 Dr. Peter Green, BellHawk Systems Corp.

7 Sometimes, the company has enough resources to recover from such a management debacle, such as when Hershey Chocolate mandated the use of an SAP ERP system. As a result they succeeded in running out of chocolate in the weeks leading up to Valentine s Day and Easter. But most mid-sized industrial organizations do not have those resources and so go out of business. Instead of trying to find a one-size fits all ERP solution that will meet the specialized needs of each department in your business, I recommend that companies accept the situation that the bestof-breed solutions for each of their departments will probably come from different suppliers. Application software developers typically specialize in software to support a specific a departmental silo, such as warehouse management, and then often specialize in its application to specific vertical industries segments, such as retail distribution. If we accept that the IT infrastructure in each mid-sized industrial organization will be, of necessity, comprised of a number of software products from a number of suppliers, then we arrive at what some have called a solution architecture approach. In doing this we recognize that we have shifted the problem from finding one solution that will meet all needs of every department to the problem of exchanging data automatically between systems that serve the different silos, so as to avoid the problems of information silos. Automating Data Exchange For many years, software developers have hand coded automated data exchange software to move data between systems. This has been made easier in recent years by the availability of common interface standards, such as ODBC/SQL for databases and SOAP/XML for data exchange over the Internet. But, this software can take many weeks to implement and test for a single interface and, as a result, can be very expensive. A lot of this effort goes into detecting and correcting bad data and handling data format conversions and flow control. Of recent years there have been a number of initiatives to reduce the time and cost of these data exchange interfaces. At BellHawk Systems, we have been developing these automated data exchange interfaces for over a decade. At first we hand coded these interfaces but then came to recognize that we were essentially writing the same code over and over again. So we set out the make the interface software developer s job as simple as possible through the use of reusable code libraries, automatically generated code, and pre-built components for monitoring and controlling the flow of data between systems. Our initiative, called Bell- Connector, is based on the use of Microsoft.Net technology, which is commonly used in midmarket industrial environments. Other similar initiatives, such as that by MuleSoft are Java based and primarily focused on interaction between Cloud-based systems. Yet others, such as Dell- Boomi are focused on data exchange between systems such as SAP and SalesForce.com, which are used by larger corporations. Based on our experience with applying our Bell-Connector data exchange technology, we are able to reduce the time and cost of implementing these data exchange interfaces by an order of magnitude by having Bell-Connector provide over 90% of the needed code. This makes it Copyright January 29, 2013 Page 7 of 9 Dr. Peter Green, BellHawk Systems Corp.

8 feasible to implement data exchange interfaces, which are needed to eliminate departmental information silos, at far less cost than the cost of replacing an ERP system. Expanding the Capabilities of Your ERP System In many mid-sized industrial organizations we find an over-reliance on paper forms and Excel spreadsheets for their operational needs. Using the data exchange technology described in the previous section, it is possible to significantly reduce non-productive labor overhead and prevent expensive mistakes by adding capabilities to an existing ERP system. Some extensions that we have been involved in include: 1. Adding barcode data collection to speed data capture and prevent operational mistakes. 2. Adding real-time production and inventory tracking to give operations managers a better real-time view of their operations. 3. Adding data exchange with inexpensive CRM systems such as SugarCRM. 4. Adding data exchange with E-Commerce websites for order taking and processing. 5. Providing web portals so customers can see the real-time status of their orders. 6. Providing alerts by or text messaging when problems arise that need management attention. 7. Providing on-line order entry and status tracking for sales people. 8. Exchanging labor data with payroll and other human resources systems. 9. Interfacing with EDI and shipping systems. 10. Supply chain integration with supplier systems to track movement of materials in realtime. All these extensions are possible with most ERP systems and can result in dramatic improvements in productivity, cutting of overhead costs and mistakes, and increased sales through improved customer service. Conclusions There can be good reasons for replacing an existing ERP system, such as: 1. Technological obsolescence and/or lack of available support for existing ERP system. 2. Changes in organization from a mid-sized organization to being part of a large international multi-facility organization. 3. Excessive annual maintenance fees being paid for unused capabilities But, for most mid-size industrial organizations, it makes much more economical sense to retain their existing ERP system and then: 1. Upgrade to the latest version if economically feasible. Copyright January 29, 2013 Page 8 of 9 Dr. Peter Green, BellHawk Systems Corp.

9 2. Use automated data exchange technology to solve the problem of information silos. 3. Add capability such as barcode tracking and web interfaces to improve operations. Retaining the existing ERP system not only substantially reduces the cost of software licenses that need to be purchased but also eliminates the cost of retraining employees as well as the cost of consultants and trainers to facilitate the change over in ERP systems. Author Dr. Peter Green is the President and Chief Technology Officer of BellHawk Systems Corporation. BellHawk Systems is a technology plus professional services organization that provides affordable technology solutions to operational problems for mid-size manufacturers, food processors, distributors, laboratories, engineering and other industrial organizations, primarily in the North Eastern USA. Dr. Green received his BSEE and Ph.D. in Electronics and Computer Science from Leeds University in England. He was a member of the technical research staff at MIT and was a Professor at WPI. Dr. Green is a member of APICS (American Production and Inventory Control Society) and is a speaker at their professional development meetings. Over the past two decades Dr. Green and his team have implemented over 100 systems that provide technology solutions to operational problems for clients ranging from small manufacturing companies to the US Air Force and Navy. If you have comments or suggestions, or would like to discuss a specific problem you are trying to solve, please contact Dr. Peter Green by at Peter.Green@BellHawk.com. Also please see for details of our BellHawk and Bell-Connector technologies that we use to solve issues such as those discussed in this paper. Publication Rights This document may not be republished without permission from the Author. Postscript The photo at the beginning of this white paper is of a 1976 Pontiac Trans AM. It has nothing to do with this paper except to illustrate that cars, like ERP systems, don t have to go to the junk yard after a few years but can be maintained in good working condition and provide reliable service for decades. Copyright January 29, 2013 Page 9 of 9 Dr. Peter Green, BellHawk Systems Corp.