Best Practice I 4 Step ERP Evaluation Methodology White Paper
Introduction Typically, a company approaches ERP when its current business operations are causing it to suffer unbearable and costly pain. In most cases, unbearable pain becomes manifest through some combination of business process inefficiency, reporting limitations, inability to support growth, and exposure to excessive risk. Companies generally set themselves up for project failure when they search for an ERP system with a narrow focus on solving a few acutely painful ailments instead of a broader focus on all critical business requirements. Ultimately, they omit consideration of less obvious needs - ones that might not be causing evident pain but are nonetheless critical to business operations. The first major point to note is that ERP is not a localized solution for a localized problem. It is a broad and far reaching solution that touches all four corners of a business. The purpose of ERP is to unify a company s various business functions in a common transactional and data processing environment. By committing to ERP, a company stands to benefit from the software to the extent that functionality aligns with business needs. However, ERP can be a double-edged sword. When software functionality is incapable of supporting business needs, it can cause inefficiencies, bottlenecks, and unanticipated costs. A Case Study on the Wrong Approach to ERP Selection As a supplier to big-box retailers, this company is subject to revenue penalties for failing to meet a prescribed four day delivery window. Further, its big-box customers require shipment of complete orders. Partial orders are not accepted. The company s already thin margins are being further eroded because of its consistently late deliveries. Further, a customer that accounts for 80% of its order volumes is threatening to revoke the company s preferred vendor status. The company identified inefficient inventory management processes as the culprit. Currently, inventory receiving and movement of data are transcribed on paper and entered into a standalone inventory management system at the end of each day. However, inventory is oftentimes received the same day it is needed to meet delivery obligations. This delayed recording causes system inventory records from which order fulfillment is planned to be out of-sync with actual inventory statuses. Why Projects Fail Companies generally set themselves up for project failure when they search for an ERP system with a narrow focus on solving a few acutely painful ailments instead of a broader focus on all critical business requirements. Ultimately, the company purchased and implemented an ERP system that supported real-time warehouse data collection. During implementation, however, the company learned that the system couldn t support its transportation planning and container loading requirements. After significant investment and business disruption, the company merely shifted a bottleneck from one part of its distribution operations to another. 2
Step #1 Requirements Analysis The case study drives home the following point: although particular business pains might trigger a need for ERP software, the focus of ERP evaluations shouldn t be narrowly focused on just those pains. Further, a company shouldn t confuse an identified pain with a requirement that s sufficiently defined for ERP evaluation purposes. For example, a manufacturer might know that it has a problem with cost control. If it were to approach ERP vendors with a general costing pain, each vendor would probably say that its software supports costing. Although the answer might appear to be satisfactory, relying on it could lead to an ill-advised ERP investment decision. What would happen if the company is an engineer-to-order manufacturer with a project costing need, and the software it chooses only supports standard costing in a repetitive manufacturing environment? In this case, the company would have invested tremendous time, resources, and expense implementing a system that couldn t solve its costing pains. Ultimately, our manufacturing company went wrong by not defining its requirements in more detail with consideration to the impact on all business operations before evaluating ERP solutions. ERP selection is not rocket science. Relatively speaking, it s not very difficult when compared to the complexity of ERP implementation. Nonetheless, the volume of ERP projects that fail because of limited up-front planning and poor requirements analysis continues to be common. Picking the right system and the right vendor are fundamental, baseline, non-negotiable project success factors. If a company can t do this properly, it risks an unsuccessful implementation project that can be very costly to the business. Define Requirements Although particular business pains might trigger a need for ERP software, the focus of ERP evaluations shouldn t be narrowly focused on just those pains. Therefore, the starting point for ERP selection is an internal due diligence process designed to discover and document all critical business processes and ERP requirements. 3
Step #2 Defining Project Feasibility & ERP Requirements Internal due diligence can take several forms. Two of the most common are described below. Feasibility Assessment This form of internal assessment is intended to justify the potential investment in an ERP project. In effect, it is used to support a go / no-go project decision. Critical elements in a feasibility assessment include: Determine if the Return On Investment (ROI) and other quantifiable gains justify an investment in the project. Compare the benefits of ERP against the associated risks. Assess human resource capacity and skill sets to support the implementation project. Confirm executive sponsorship, organizational support, and capacity for change. Business Process/Systems Review (BPSR) This form of internal assessment is intended to identify, define, and document all of the critical business requirements for ERP. This includes a complete review of business processes as well as IT/server systems that support the business applications. The result is a comprehensive report that documents workflow, processes, and reporting requirements and provides a complete set of ERP requirements that can be given to each ERP vendor to communicate needs. It can also include a software Fit/Gap Analysis that catalogs identified disconnects and shortcomings of the current software and systems configuration as matched against the primary functional requirements of the business. Critical elements in a BPSR include: Corporate growth objectives and business models. Reporting requirements. Business process analysis, including: o Business process maps o Core, non-negotiable requirements o Performance improvement requirements Internal control and risk management requirements IT systems and technology requirements Due Diligence An effective assessment requires a deep understanding of business operations and ERP capabilities in order to determine how those capabilities are likely to translate into benefits, costs, and risks given a company s particular circumstances. Although feasibility and BPSR assessments are treated separately above, they re oftentimes undertaken together during a common internal due diligence phase. In both cases, an effective assessment requires a deep understanding of business operations and ERP capabilities in order to determine how those capabilities are likely to translate into benefits, costs, and risks given a company s particular circumstances. 4
Step #3 Evaluating ERP Solutions Once a company has determined project feasibility and defined its requirements, it s ready to begin evaluating ERP systems and vendors. By this juncture, you should have a formally defined and precise set of requirements that can be used as a foundation to evaluate ERP vendor candidates. By anchoring software and vendor evaluations based on clearly defined business needs, a company can position itself to perform more meaningful apples-to-apples comparisons. It also becomes far less susceptible to sales bias. Sales bias is a process by which an astute sales person can influence a sale in a way that may not be in the best interest of the buyer. The challenging part of software and vendor due diligence is devising an approach that drives the following three objectives: 1. Effectively communicating actual business requirements to vendors. 2. Enabling structured and meaningful evaluations. Control the Process By anchoring software and vendor evaluations based on clearly defined business needs, a company can position itself to perform more meaningful apples-toapples comparisons. 3. Establishing fail-safe processes to guard against false-positive results. Generally, there are a three common due diligence components. Each component has strengths and weaknesses, and each creates risks of false positives. For this reason, a company shouldn t restrict its efforts to any single component. Instead, it should undertake as many as possible with the intention of performing a full 360-degree assessment that mitigates risks of making a poor decision. The following chart breaks down the three typical due diligence components, together with a description of risks and benefits relating to each. Due Diligence Key Risk Benefits Written Written responses are Enables a broad and Questionnaires often not indicative of true detailed discovery of system capabilities. capabilities and functionality. Software Demonstrations Interviewing Implementation and Support Resources Not all processes and requirements can be tested or demonstrated. Barring specific contractual agreements, does not guarantee the resources interviewed will be assigned to the project. Enables a deep test drive of how the software will handle requirements. Provides an opportunity to assess expertise, methodology, and cultural fit. Best Practice Conducting a formal Business Process/Systems Review (BPSR) with a Fit/Gap Analysis can ensure all requirements are identified and documented correctly providing a comprehensive template to manage software and vendor evaluations more effectively. Best Practice Conducting a formal Business Process/Systems Review (BPSR) with a Fit/Gap Analysis can ensure all requirements are identified and documented correctly providing a comprehensive template to manage software and vendor evaluations more effectively. 5
Step #4 Contract Negotiations Don t ignore the details contained in the vendor agreements. These agreements will ultimately have a material impact on each party s rights, duties, and obligations over the course of the relationship, which will probably last longer than 10 years. Implementation/Training Professional Services Estimates Often times the implementation/training services can make up as much as 80% of the total project cost. In most cases, these services are proposed as estimates only and not fixed-fee contracts. It is very common for implementation/training services to be severely under-estimated leading to change orders during the implementation project that result in much higher services costs than originally quoted by the vendor. To avoid budget overruns and to ensure service estimates are realistic, companies must verify what functionality is included/omitted from the software proposal and ensure that all of the critical services components are identified, defined, and included in the services cost estimate. Critical Services Components Project planning & preparation o Document creation Server equipment & software installation o Create company databases; initial company setups Business requirements analysis o Analysis of GL and other modules o Chart of Accounts analysis o Requirements documentation Module setups and training o Training documentation Financial reports o Balance Sheet, P&L, Trial Balance o Custom reports Data migration o Mapping activities; migration and balancing Forms and reports Processing procedures and documentation Integrations to other systems o Define, scope, and build integrations Customizations o Modified screens o Modified reports o Custom Application Development Go-live and post go-live support o User acceptance testing o Help desk support Project management o Overall project management, coordination, reporting Consultant travel time and expenses Avoid Budget Overruns To avoid budget overruns and to ensure service estimates are realistic, companies must verify what functionality is included/omitted from the software proposal and ensure that all of the critical services components are identified, defined, and included in the services cost estimate. 6
Conclusion In the final analysis, companies should treat ERP selection as more than a quest to fix just a few existing business pains. As a complete and auditable system of record, ERP has the ability to help organizations gain visibility into operations, communicate across geographic boundaries, streamline processes, promote efficiencies, manage demand, increase employee productivity, service customers, and cut costs. Truly ERP has the ability to transform growing businesses into ones that can perform on a larger scale. The more time, effort, and focus that is dedicated to the front end of the ERP selection process to identify critical business requirements and analyze corporate growth objectives, the more the ERP solution will deliver substantial ROI and competitive advantages. ERP represents a serious investment in capital and resources for any organization, and it is vitial to the future success of the business. As such, a great deal is at stake. The ERP selection process should be regarded as a top priority. Successful companies are approaching the ERP selection process with a structured methodology and clear plan to identify the right solution, affect a smooth implementation, and immediately begin to help accelerate business growth. The benefits of a comprehensive plan are twofold. First, companies with a clear plan are more likely to find a solution that most aptly fits their needs. Second, once the solution is chosen and the implementation project begins, the organization already has a well defined path to follow. Any company that wants to gain control of their ERP evaluation and ensure a structured approach that will lead to a successful implementation project should follow these 4 proven steps: 1. Take a broad focus on critical needs and opportunities across all business units instead of a narrow focus on a few acute pain points. Methodology Matters The more time, effort, and focus that is dedicated on the front end of the ERP selection process to identify critical business requirements and analyze corporate growth objectives, the more the ERP solution will deliver substantial ROI and competitive advantages. 2. Conduct a comprehensive Business Process/Systems Review (BPSR) that will identify, define, and document the critical requirements that a new ERP system must support. 3. Use the formal business requirements analysis as the foundation to anchor and drive the software and vendor evaluations based on clearly defined needs and business goals. 4. Verify that all of the critical services components for the implementation project are identified, defined, and included in the vendor s services cost estimate. 7
About AcumenIT AcumenIT s approach is a deliberate focus on Business Performance Improvement (BPI) through the effective use of technology to help clients gain a competitive advantage and enable growth. AcumenIT helps clients develop a greater alignment between business strategy, process, and technology. AcumenIT s ERP division offers a team of business advisory and technology consultants who combine specialized skills in all business functional areas including finance, operations, sales, supply chain, manufacturing, and technology. By taking a holistic approach to business performance improvement, Acumen helps clients leverage technology more effectively. Empower Your People To Be More Productive Strategies, organization, and leadership all set the stage for business success. To see results, you also must give your people the right tools and solutions they need to do their job efficiently because success ultimately comes down to your people. Companies excel when they empower their people to drive the business forward and improve performance. Streamline Your Business Processes Poor business processes can result in errors, delays, unhappy customers, frustrated employees, and the risk of failure. IT systems and business management software are instrumental in how we harness information and support business processes. Technology can automate and integrate your processes and give your company a competitive advantage. Improve Your Product Quality Your business depends on delivering a quality product to your customers. To be successful, you must make it easy for your customers to buy from you and get the support they demand. Effective customer service can mean the difference between a one-time customer and a long term customer relationship. Technology will empower your people with the information and systems they need to be responsive to your customers and streamline your business processes to ensure your product supply chain runs efficiently. The AcumenIT Approach The better your systems are designed to support your business strategy and processes, the more effectively you can improve business performance. Toby Stansell President & COO Acumen IT Leverage IT Systems Organizations have become increasingly dependent on IT systems to support business operations. But to be competitive, you must find new ways to leverage technology to improve the efficiency and productivity of your business. Your data and the systems that collect, manage, and protect your data is at the core of your business operations. Success depends on how you turn this mountain of data into useful, intelligent, and actionable information that will empower your people to make better decisions. 8
AcumenIT is a business consulting firm headquartered in Greenville, SC dedicated to Business Performance Improvement (BPI). AcumenIT specializes in helping companies automate and integrate business processes to streamline operations, operate more efficiently, reduce costs, and enable growth. AcumenIT will help you improve business performance by empowering your people to be more productive, work more efficiently, have access to the information they need to make informed business decisions, accomplish measurable results, and grow your business to the next level. For more information about Acumen BPI, visit www.acumenit.com or call 864-751-3295. Ray Scarborough Managing Partner AcumenIT Ray.Scarborough@AcumenIT.com 864-751-3295 2013 AcumenIT. All rights reserved. The information contained in this document represents the current view of AcumenIT on the issues discussed as of the date of publication. Because AcumenIT must respond to changing market conditions, this document should not be interpreted to be a commitment on the part of AcumenIT, and AcumenIT cannot guarantee the accuracy of any information presented after the date of publication. This White Paper is for informational purposes only. ACUMENIT MAKES NO WARRANTIES, EXPRESS, IMPLIED, OR STATUTORY, AS TO THE INFORMATION IN THIS DOCUMENT. Complying with all applicable copyright laws is the responsibility of the user. Without limiting the rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of AcumenIT. 9