TOP 10 REASONS TO BUY A NEW ERP NOW

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1 March 2015 TOP 10 REASONS TO BUY A NEW ERP NOW WHY N OT G ET S TARTED? Maybe you re thinking it s about time to purchase a new Enterprise Resource Planning (ERP) solution. Then again, maybe you re thinking what you use today to run your business is all you need to be successful and competitive in the future. Maybe you aren t sure. Regardless of where you stand today, one thing is certain: Software used to run your business has come a very long way from simply providing a transactional system of record. If you don t have a solution that is helping more than it is hindering your business, if it is not giving you a distinct competitive advantage in today s digital world, if it is not a complete solution that is easy to use, then you are definitely operating at a disadvantage. Data Source In this report Mint Jutras references data collected from its 2015 Enterprise Solution Study which investigates the goals, challenges and status of those solutions that are used to run businesses today. In addition, this and prior similar studies, which may also be referenced, benchmark performance of implementations in terms of results achieved and progress against goals, tempered by current performance of select, universal metrics. Still not sure if you need a new ERP? Here are the top ten reasons to make a move now. BUT FIRST ERP IS NO LAUGHING MATTER Top ten lists have been made popular by the late night talk shows. The host might start with number ten and work his way up to number one, building suspense with a good dose of humor along the way. While that might be fun to do, the software that runs your business is serious stuff, so instead, we ll get right to the heart of the matter. As of publication, the study has collected almost 400 responses (the survey is still open) from companies of all sizes, across a wide span of disciplines. We start with the results of questions posed in the 2015 Mint Jutras Enterprise Solution Study about future purchase plans. First we ask survey participants if they are planning to purchase a new solution within the next two years (Figure 1), either for the entire company or for one or more sites. Figure 1: Do you intend to purchase a new ERP in the next two years?

2 Page 2 of 11 Definition of ERP Mint Jutras defines ERP as an integrated suite of modules that provides the operational and transactional system of record for your business. However most ERP solutions today do much more. We find a significant percentage (43%) with planned activity and half again (21%) still undecided. These might be purchases that would replace an existing system or a purchase for a new site or a location which has previously not been supported by any ERP at all (Figure 2). Not surprisingly replacements outnumbered new site purchases by at least a factor of 2:1. While many companies today might not have a solution that exactly fits our definition of ERP (see sidebar), most have some type of solution that records transactions and helps them run their businesses. New sites most likely represent some sort of growth or expansion. Figure 2: Replacement or new site(s)? Finally, we asked what motivated these planned purchases, or in the case of those that were undecided, what might be motivation. The result (Figure 3) is our top ten list. We ll go through the list, although not individually and not sequentially, as many of these reasons are inter- related. Figure 3: Select all the reasons motivating this purchase

3 Page 3 of 11 But wait! For those of you who are counting, you might notice there are only nine reasons shown in Figure 3. To round out the top ten reasons we have to think back to why you implement a solution like ERP in the first place. To better understand this we asked survey participants to select their top three goals of ERP (Figure 4). Figure 4: Top 3 Goals of ERP Many of these top goals are already reflected in the reasons that prompt a change reasons like outdated technology and the desire to reduce costs and improve performance. But the goal at the very top of the list reducing frustration and improving efficiencies can also serve as a prime motivator for change. Better and more advanced technology, the rise of consumer electronics and the coming of the digital age have combined to dramatically change the face of your typical ERP solution. Level of frustration is also a measure of how easy a solution is to use. Mint Jutras survey participants consistently put efficiency (minimizing the time to complete tasks) at the top of the priority list of ease of use factors (Figure 5). This used to be viewed as soft or fuzzy and yes, it s an intangible. Users of early systems were simply expected to grin and bear it. But your human assets are certainly among your most precious resources today and even the intangibles can cost you in terms of time, effort and cold, hard cash. If your current solution does not get a passing grade in terms of ease of use, it could be hiding many other performance issues and could even negatively impact your ability to attract and retain talent. That alone could justify replacement.

4 Page 4 of 11 Figure 5: Define ease of use by selecting your Top 3 Looking back at the goals (Figure 4) for a moment, notice that virtually nobody views we just knew we had to do something as a really good reason to embark on a new ERP journey. You need a good reason to start, one that will sustain you through the evaluation, selection and implementation. But with one or more good reasons in hand and some clear goals, you can indeed bring significant value and see a good return on your investment. World Class ERP Performance Mint Jutras defines World Class using a composite metric which includes: ü Actual measured results experienced since implementation ü Progress made in achieving company- specific goals ü Current performance in selected KPIs The top 20% of survey respondents comprise World Class. The remaining 80% are referenced as All Others. WHAT KIND OF RESULTS CAN YOU EXPECT? To answer this question we look to the results reported by our Enterprise Solution Study participants. In the charts that follow, you will see a comparison between the results of World Class ERP implementations and All Others (see sidebar). Use the average savings as a first milestone and those experienced through World Class ERP implementations as an ultimate or stretch goal. Figure 6: Cost Savings Experienced Since Implementing ERP

5 Page 5 of 11 The metrics presented are quite general, but were selected as universally applicable to most any business (those specific to manufacturing and distribution are flagged as such). We encourage you to be more specific. Perhaps there are some select elements of operating cost (labor, facility, shipping costs, etc.) or a segment of inventory from which you can gain the most benefit. Figure 7 includes other improvements that may either directly or indirectly impact top or bottom line performance. Figure 7: Other Improvements Experienced Since Implementing ERP *Manufacturing Only While the cost savings and improvements of World Class ERP implementations are typically more than double those of All Others, it is important to note that even the average cost savings can easily cost justify the initial expense. Yet there is no logical reason not to aspire to becoming a top- performing ERP implementation. Setting your sights too low can be a lot more dangerous than setting them too high. Now that you have some insight as to the rewards, let s take a look at the motivation for embarking on such a journey. If you have been running solutions on outdated technology, you are in for a pleasant surprise. Don t let your prior experience constrain your expectations. #1 REASON: FUNCTIONALITY For many years fit and functionality was always the most important selection criterion for enterprise applications like ERP. Yet, early solutions, many of which are still running at companies today, were limited in functionality and unable to keep pace with changing business needs. Today solutions need to do more, in large part simply because they can. Features and functions that were once deemed pie in the sky wishful thinking are now not only available, but affordable. Correspondingly, expectations are higher as companies continue to try to do more with less people. More automation and more advanced technology

6 Page 6 of 11 Selection Criteria Priorities Selection criteria were prioritized using a scale of 1 to 5: 1: Not a consideration 2: Nice to have 3: Somewhat important 4: Important 5: Must have/most important means we all rely more heavily on solutions to do what large teams of employees used to do manually. Cost- cutting measures taken through the most recent economic downturn only serve to exacerbate these issues. If whatever it is that runs your business doesn t have all the features and functions you need, don t sit around waiting for that functionality to magically appear. It s not going to happen, at least not anytime soon. You have one of the very best reasons of all to go for a new solution. But once you start down that path, don t forget what drove you there. Stay cognizant of the features and functions you need during the selection process. As you may have guessed from prior comments, Mint Jutras has been collecting data on priorities during the evaluation phase for years now. As noted earlier, in days gone by, fit and functionality always topped the list. But over the past few years another selection criterion crept up in importance and appeared to squeeze fit and functionality out of the top spot. That criterion was Ease of Use. In many ways, this makes sense. All the features and functions in the world won t do you any good if you can t figure out how to use them. Of course as you saw from Figure 5, ease of use might mean different things to different people. In past years, we presented a list of possible selection criteria and asked survey participants to rate each one s priority on a scale of 1 to 5 where 1 was Not a consideration and 5 was Must Have. The participants could have selected all criteria as Must Have, but in fact they did not, which allowed us to sequence the different factors in order of priority. Table 1 demonstrates how ease of use seemed to take over the top spot in 2013 and Table 1: Selection Criteria Priorities (Scale of 1 to 5) Source: Mint Jutras 2013 and 2014 Enterprise Solution Studies

7 Page 7 of 11 Selection Criteria Priorities Survey respondents were asked to stack rank the different selection criteria from 1 (least important) to 10 (most important). They were not allowed to have two ranked at the same priority, forcing them to decide on the order of importance. But the results were so close we wondered what would be the priority if respondents had to choose. So in 2015 we changed the format of the question, again listing the different criteria, but this time forcing the participants to stack rank them from 1 (least important) to 10 (most important). Given the preoccupation of industry influencers with user experience, we also changed the wording from ease of use to user experience and substituted some of the prior criteria for new factors which had risen in importance in prior research. Of course, in doing that, we violated the first rule of experimentation by changing more than one variable in the equation, but the answer was quite clear. The top three criteria are all related to features and functionality. Table 2: Selection Criteria Priorities (Scale of 1 to 5) User experience is still in the top half, but when forced to choose, it fell in importance. There is an important lesson to be learned here. While many vendors today will emphasize beautiful software and simplicity, make sure you are not sacrificing functionality for either. Because the footprint of ERP has expanded well beyond the traditional basics required to produce a transactional system of record, many assume all those basics are covered in any and all solutions today. But the basics aren t so basic anymore; don t assume all the features and functions you need are there, including any industry- specific functionality. Make sure any solution you are evaluating has the functionality you need now and into the foreseeable future. The more functions that are included in the core solution, the more complete it is. But if the solution provider is relying on complementary (perhaps partner) solutions, also check out integration capabilities.

8 Page 8 of 11 EXPANSION AND CONSOLIDATION At first glance, expansion and consolidation may seem to be conflicting reasons for requiring a new ERP, but in fact they are quite complementary. Expansion refers to the expansion of your business, while consolidation (or rationalization) refers to the solutions that support it. Expansion was the second most likely motivation for a new solution. Expansion often means new sites or locations. Very few companies today operate out of a single location. Indeed 80% of the companies surveyed in our 2015 Enterprise Solution Study reported being multi- location, and the number of locations grows steadily with company size (Figure 8). Figure 8: Distributed environments are very common Company Size In Figure 8 company size is determined by annual revenue. ü Small: annual revenues under $25 million ü Lower- Mid: $25 million to $250 million ü Upper- Mid: $250 million to $1 billion ü Large: revenues over $1 billion Source: Mint Jutras 2015 ERP Solution Study If expansion involves adding a brand new site, and the new site is within the same country, an existing ERP implementation may be able to accommodate the expansion simply by adding more users and some additional complexity to the organizational structure (minimally) within the general ledger. But a lot depends on the nature of the business conducted at the new site. If it is simply as extension of your existing domestic business, your current solution may suffice. If the new site is added in order to diversify, that may not be the case. Also 59% of our survey respondents were multi- national companies operating as multiple legal entities and this increases the likelihood that expansion will

9 Page 9 of 11 Unless the enterprise is the equivalent of a holding company comprised of very diverse and autonomous business units, interoperability has become a core competency. include opening sites in foreign countries. This alone might create an environment your current solution cannot accommodate well. How do you deal with this type of expansion? In the past, each of these locations would be required to report financials to corporate, but were very likely to be left on their own to purchase and implement solutions to manage operations, resulting in a proliferation of applications. However, today 87% of survey respondents report having corporate standards that govern the applications installed at multiple locations. This makes decisions easier at the time of expansion, as well as fostering better interoperability and collaboration across the enterprise. Consolidation strategies can often result in very significant cost savings. If you operate multiple locations with different solutions today and do not yet have a strategy to rationalize these solutions against a standard, it is certainly something you will want to consider. Enterprises have been talking about consolidation or rationalization of ERP solutions across operating locations for years. But for years it just didn t happen. Why? Because this was viewed as a rip and replace strategy that brought little value to the enterprise. Why invest all the time, effort and money to rip out a working system only to spend months and years to get back to where you started? But today it is happening and for good reason. The argument against rationalization made sense back in the day when ERP solutions evolved slowly and painfully. Those days are gone. Today as legacy systems are replaced with new state- of- the- art technology and functionality, the effort to replace them should bring you to a very different place and produce very significant results. And yes, solutions have really changed that much. Not all, of course, but new enabling technology allows leading vendors to innovate faster and provide more flexible and feature- rich solutions. A consolidation strategy can therefore create a need for a new solution even without further expansion, but will also better facilitate continued growth, including merger and acquisition. This will account for many of the replacements we saw planned in Figure 2. OUTDATED TECHNOLOGY Over the past year outdated technology has dropped down several notches on our top ten list. It was number one last year when we forced respondents to select only the top three (this year they were allowed to check any or all the reasons that might prompt replacement, but on average each selected 2.2). Does this mean outdated technology is any less crippling to a business? No, it simply means a lot of that outdated technology has already been replaced (56% of our participants solutions have been purchased within the last six years).

10 Page 10 of 11 Looking for advanced technology? Listen for terms like: ü service oriented architecture ü object- oriented data models ü event- driven and/or message- based technology ü semantic layers ü mobility ü rules engines ü in- memory databases ü HTML5 ü XML When do you consider trading in your car? Typically when the maintenance bills start to escalate. Age of systems alone does not tell us how advanced the underlying technology is. Some very mature systems have undergone technology makeovers and some newly purchased systems remain on outdated technology. Outdated technology tends to make solutions rigid, requiring invasive customization that creates barriers to innovation. And without being able to innovate, you won t be able to respond as your business changes (one of our top ten motivations for a new solution). Without fully understanding the technology platform upon which your solutions are built, it may be difficult to distinguish new and advanced from outdated technology. Here are a few hints you can listen for as vendors describe their offerings: service oriented architecture, object- oriented data models, event- driven and/or message- based technology, semantic layers, mobility, rules engines, in- memory databases, HTML5 and XML. What all these boil down to are new ways of engaging with ERP, ease of configuration versus customization, better integration capabilities (reducing integration costs another of our top ten reasons) and new ways of delivering innovation. If none of these factors have improved in your current system over the last few years, you either don t have or are not taking full advantage of new and advanced technology. POTENTIAL COST SAVINGS There are any number of reasons why your current ERP solution could be costing you more money than it is worth. Although a new solution will require some upfront investment, chances are it can save you money over the long term, not only in terms of the improvements and cost savings we observed in Figures 6 and 7, but also in information technology (IT) costs. Sometimes you need to spend money to save money. Some of the cost savings are obvious, but some are more subtle. Clearly the implementation of newer technology and more functionality should result in productivity gains. Replacement of outdated technology can also save in terms of maintenance, both preventative and remedial. When do you consider trading in your car? Typically when the maintenance bills start to escalate. Of course added mileage and wear and tear on ERP are not the issues. It s more a question of ERP being able to keep up with market and business changes, as well as the accelerating pace of business. Long gone are the days when effective decisions could take days, weeks or months without negatively impacting business. We re talking minutes today, which requires a level of visibility and transparency that few companies have been able to achieve today. Can you? New ERP solutions used to always require capital investment, but cloud options, subscription- based pricing and solutions that are delivered as

11 Page 11 of 11 software as a service (SaaS) provide more options today. Capital investments (CapEx) in hardware and software can often now be replaced with operating expense (OpEx). Of course there will be some up front costs associated with a new implementation, but savings in efficiency and productivity, in addition to hard cash savings, can help defray those short- term costs. RECOMMENDATIONS If any of these top ten reasons resonate, you are a potential candidate for a new system to run your business. If you are still on the fence, you may simply be putting off the inevitable. If your current solution is underperforming, frustrating you and your employees doesn t have the functionality you need can t support your growth or respond flexibly to ongoing change doesn t encourage and support interoperability and collaboration is rigid or based on old technology Why wait? Yes, deciding to purchase a new ERP is a big decision. If you are thinking your situation is not that bad, do you think it will be any easier to fix the problem when things get worse? For years Mint Jutras has been cautioning against treating implementing or replacing ERP like brain surgery you don t do it unless the patient is dying. But selecting and implementing a new system that runs your business, when your business is under distress, is the least optimal timing. ERP should be an ongoing source of cost savings and improvement. Managing change can be a challenge, but with a technology- enabled solution, you can embrace change and use it as a catalyst for growth and profits. Why not get started now? About the author: Cindy Jutras is a widely recognized expert in analyzing the impact of enterprise applications on business performance. Utilizing 40 years of corporate experience and specific expertise in manufacturing, supply chain, customer service and business performance management, Cindy has spent the past 9 years benchmarking the performance of software solutions in the context of the business benefits of technology. In 2011 Cindy founded Mint Jutras LLC ( specializing in analyzing and communicating the business value enterprise applications bring to the enterprise.