Hidden Risk: What Every Industrial Distributor Should Know Before the Next ERP Upgrade An I.B.I.S., Inc. Whitepaper by Brent Gover Evergreen Consulting, LLC with Steve Epner Brown Smith Wallace Consulting Group
Table of Contents Introduction 2 Proposition 4 Four Types of IT Users 4 Survey 5 Analysis 6 Constraints 8 Recommendations 9 Conclusion 9 About the Sponsor 11 About I.B.I.S., Inc. 11
Why You Should Read This White Paper Your information system is the backbone of your industrial distribution business. It is not an exaggeration to say that many distribution managers run their companies through the information system. Good systems provide best practice capabilities and give the distributor competencies based on input from, and enhancements written for, hundreds of users. As advisors to leading distributors, and a former distribution business CEO and owner myself, our firm has a front row seat to how our clients manage (and fail to manage!) their information systems. This research and analysis looks into why so many distributors are running obsolete software and some of the reasons they are putting off critical actions that could affect their ability to compete in the future. We also point out some pitfalls we see in upgrading with your current software vendor without looking into potential advantages of switching to a different vendor. Brent Grover & Steve Epner www.ibisinc.com 1
Introduction The Distribution ERP is at an Inflation Point Software Supplier Consolidation Continues at a Torrid Pace In recent years, Activant (Prophet 21, Eclipse, Prelude, others) merged into Epicor, and ownership of Epicor changed hands. Infor (SX.enterprise, A+, FACTS, others) acquired Lawson. Microsoft acquired popular packages for distributors: Dynamics AX (formerly Axapta), Dynamics NAV (formerly Navision) and Dynamics GP (formerly Great Plains). Ongoing consolidation results in fewer players and larger vendors. We can t confidently predict how the large software vendors will manage their product portfolios as consolidation continues. How will the changing industry climate ultimately affect the remaining smaller software vendors? One factor is that most of the smaller distributors find many of the offerings from the large software vendors to be beyond their appetites and budgets. That being said, the remaining small software companies should continue to do well, especially with distributors who prefer the close personal touch and specialized services of a smaller vendor. Emergence of Cloud, Hosted, SAAS The transition from each distributor owning and operating its own IT department and data center to the cloud is underway. Epicor, for example, in May 2012 announced its alliance with Microsoft who will host Epicor s distribution ERP systems in its data centers. We can t foresee how rapidly distributors will embrace off-site data processing and storage but the appeal of doing so is already evident. The right pricing methodology will emerge to make cloud computing compelling to a broad range of distributors. Forces of Change in Industrial Distribution As National Association of Wholesale-Distributors (NAW) notes in its popular series of Facing the Forces of Change reports, fundamental shifts are ongoing in the many trade lines in the wholesale www.ibisinc.com 2
distribution industry. As active consultants in and commentators on the industry, we highlight the following trends because of their powerful effect on information systems for industrial distributors: The convergence of business to consumer (B2C) and business to business (B2B) electronic commerce is evidenced by the launch of amazonsupply.com in April 2012. The bar has been raised for customer expectations for their distributors electronic commerce. Reports from W.W. Grainger and MSC Industrial about their customers accelerating adoption of electronic commerce is indicative of a long-delayed, seismic shift. Changing smaller customer attitudes about electronic commerce may be due in part to the transition of business ownership to the next generation of the family. The changing role of the distributor sales rep is demonstrated by the ways customers choose to obtain information and place orders. Distributors are dealing with three generational cohorts: Baby Boomers (born before 1960); Generation X (1960-1980) and Generation Y or Millennials (born since1980). Each of these groups has its own preferences for how to do business. The generational shift suggests that the outside sales rep s job of providing information and taking orders has dramatically changed to one of being a true consultant. Multichannel marketing places demands on archaic information systems. Distributors can t afford to maintain multiple data bases for customers, products and prices in separate systems for each type of marketing. The needs of outside sales customers, inside sales customers, web customers and direct mail customers are different. For example, a clear pricing plan may be needed to attract sales from online customers without compromising profit margin from traditional customers. The financial supply chain is stressing older IT systems as payment preferences shift toward procurement cards, electronic funds transfer and new methods of check processing. Vendor rebate tracking and transaction reporting for vendor cost support have pushed some distributors toward new information systems. Distributor demand for strategic pricing and customer profitability analysis is another force that many existing systems cannot handle. The increasingly complex and constantly changing supply chain between suppliers and endusers places burdens on outmoded IT systems such a foreign currency translation, taxes and freight management. www.ibisinc.com 3
Proposition A large portion of the industrial distribution market will soon need to upgrade ERP systems. We propose that while industrial distributors traditionally felt that changing information systems vendors was risky and expensive, now it can be as risky to upgrade with the current vendor than to make a change to a system and vendor that better meets current and anticipated future needs. As noted in the Introduction, many systems that have not been kept up to date cannot keep up with big data, customer demands and vendor needs. They cannot support the applications management needs to run the business such as CRM, warehouse management, truck routing, electronic commerce, remote access via tablets and smartphones, etc. Four Types of IT Users We divide the industrial distributor market into four types of IT users (segments), each with different considerations about the need to upgrade their IT systems: Legacy systems, often from the 1980s, are still in use by some distributors. These proprietary systems are sometimes homemade and supported by internal staff or an outside IT consultant. They tend to be poorly documented. It may be difficult to find people to support the systems, and management fears the loss of one or two experts who are the only ones who know the system. Industry-specific verticals are still popular in distributor trade lines with more specialized needs such as gas and welding or fluid power. The verticals are usually supported by smaller boutique vendors who offer personalized service and an intimate knowledge of the distributor s industryspecific needs (sometimes tailored to the demands of a large industry vendor). As many distributors get into new product lines, the boundaries between the distributor trade lines are getting blurry. Large software vendors have built highly flexible systems that can meet needs of distributors in many different trade lines. The systems are highly complex, yet fairly adaptable without doing excessive customization. This seems to be the fastest-growing type of information system for distributors. Many users have fallen several versions behind the current offering, sometimes due www.ibisinc.com 4
to concerns about redoing heavy customization. Information systems from other industries such as manufacturing have found their way into the distributor world, especially distributors who do converting, assembly or light manufacturing. These systems offer manufacturing features such as bill of materials but some don t have enough order entry and inventory management flexibility to satisfy distributor needs. Survey In August 2012 Modern Distribution Management (MDM) conducted a survey of distributors for this report. The purpose of the survey was to find out about how diligent distributors are about keeping up with the current version of their ERP systems, the reasons why some have chosen not to upgrade, and their plans (if any) to upgrade. The survey did not ask about the distributors feelings about their current system or vendor. The survey inquired about reasons for not upgrading to a more current version, focused on: Cost of the upgrade Difficulty/distraction the upgrade project might cause for the staff Problems anticipated due to a large amount of customization in the current software Risks posed by such a project Survey responses came from distributors in trade lines such as industrial supplies, electrical, plumbing, HVAC, pulp and paper, janitorial supplies, electronics, oil and gas products, chemicals and plastics, and building materials. The ERP systems mentioned most often were Epicor, Infor, Microsoft Dynamics and SAP. The respondent size ranged from very large multi-location distributors to single-location distributors. www.ibisinc.com 5
Reasons for Not Upgrading Analysis We all know that time flies. Every once-in-a-while, we get a stark reminder. This happens often in the world of application software. All of a sudden, a distributor gets a notice that their current software application or release is no longer going to be supported. Holy cow! What do we do? Upgrade? Change? Hope for a buy out? The options are endless; the reality is much more focused. In conjunction with MDM, a short survey was done to look at what is the reality in the marketplace. How do distributors manage their software applications? Do they stay up-to-date or do they fall behind? For those that fall behind, the question is why? We looked at about 60 responses and can report the following findings. Please understand the sample size is too small to provide a rigorous, scientific analysis. There www.ibisinc.com 6
are some inconsistencies that are capable of skewing the results. Still, there is enough data that we can be statistically significant, but with a lower confidence level. That is statistician speak to say that we are at least as accurate as a weather forecast for a 60% chance of rain while it is already a downpour. Given that caveat, we can draw some interesting conclusions: About half of the distributors in the sample are not on the current release of their application package. This is an interesting trend that Brown, Smith and Wallace wrote about in a previous whitepaper. Distributors are staying up to date more, and changing software less, than in the past. They treat software as an ongoing investment rather than a limited life project. Prior to the mass updates for Y2K, it was common for a distributor to stay on software maintenance for about 3 years and then live with the system until a new killer app came out. That would give them the impetus to change. With a 10 to 11 year cycle, we would see about 60% of distributors on older releases waiting for the pain threshold to rise to the level of changing. Of the distributors on older releases, about half of the respondents are more than one version behind. That is the 25% of users that are prime candidates for a change. Historically, many users will wait for a new release to be debugged by others before being willing to adopt it themselves. Difficulty or fear of conversion is the single strongest reason for not staying current. It may be traceable to previous bad experiences or a lack of a strong CIO type person on staff. It becomes a tossup whether it is easier to do a multi version upgrade or change. In most cases there is a stalemate that puts off the change for a little longer. Existing modifications to the code are not a significant deterrent in single location operations. In multi-location operations, modifications are a significant barrier to change. It would be interesting to see how many of the old mods have since been handled in upgrades and enhancements by the current version of the software or other vendors. Cost of an upgrade or conversion is cited by about 60% of the respondents as a barrier to change. Anecdotally, that may be a soft barrier. Companies only remember what it cost to build the mods last time. They have not done any research to understand how many of the required capabilities are available in the new release. Plus, many more could be accomplished easily using modern tools to provide customizable processes without customizing the code. If you are using an old version of your software, it is probably a good idea to consider an upgrade or a change. Document what are the critical issues that required modifications in the past and see which (if any) vendors provide those capabilities out of the box. You may be surprised as to the availability of new functions within modern software packages. www.ibisinc.com 7
Data was gathered through a Distribution Survey conducted in August 2012. Constraints Ego, Fear, Greed, Hope The idea I d like to sell to you is to conduct a thorough process when it s time to upgrade your current ERP system to a newer version. See Steve s acronym to the left. Is someone s ego preventing your company from considering all of your options? The system you chose the first time around may have been the right one for your company at that time. During the interim, your company s needs have changed, the offerings from your current vendor have changed, and the options available from your vendor s competitors have changed as well. Is fear on the part of your leadership team or other managers blocking you from considering vendors other than the one you re currently with? It may be riskier to stay with the incumbent than to make a switch to a system better suited to your current and future needs? Is an element of greed on someone s part perpetuating the illusion that your company can get something valuable for less than it s worth? Is starving the current system of needed changes analogous to running a faithful old car into the ground? Does management feel it can force the current vendor to provide upgrades for next to nothing in order to hold onto their customer? Finally, does management simply hope that the current vendor will stay at the front of the innovation curve and perpetually remain the best possible ERP resource? www.ibisinc.com 8
Recommendations Doing Nothing is a Decision The research seems to show that many distributors may have waited too long to upgrade already, for any of a number of reasons both good and bad. Software Costs are Rising There doesn t seem to be an economic justification to hold off in the expectation that there will be better buys in the future. Computer hardware may no longer be the major cost factor it once was, however the cost of connectivity and data storage is becoming a significant ongoing cost. Return on Investment (ROI) Justification Does Not Depend on Lowering Your Operating Costs Whether you decide to upgrade your ERP system to a more current version from your current vendor, or cross the Rubicon to migrate to another system, the payoff will come from keeping your company relevant to your trading partners (customers and suppliers). As seasoned observers of the distribution software marketplace, we are seeing a sea of change. More Independent Software Vendors (ISVs) and value-added resellers (VARs) are becoming players in the Industrial Distribution space. These vendors and resellers are making very powerful ERP software such as Microsoft Dynamics AX accessible to middle-market wholesale distributors Conclusion Running a recent version of your ERP software vendor s package is the right IT strategy. When you decide to make your move, which should be soon if you have fallen far behind, staying with your current vendor may not be the surefire answer. We strongly recommend a thorough process of comparing the features and functionality of your vendor s current version with what the competition is offering. Engaging an outside expert who is intimate with the available systems, and can match them up with your current and future needs can be an excellent investment in avoiding problems, saving time and of course making the best choice for your company s future. www.ibisinc.com 9
About the Authors Brent Grover, Evergreen Consulting, LLC Brent R. Grover is a nationally recognized distribution industry consultant, speaker and writer. Brent is a NAW Institute Fellow and the author of six NAW books, including Strategic Pricing for Distributors. Brent founded Evergreen Consulting in 2001 as a boutique firm to advise companies in the wholesale distribution channel. He had been CEO and co-owner of National Paper & Packaging Co. Brent is also an Adjunct Professor at Case Weatherhead School of Management. Prior to his distribution industry career he was with Arthur Andersen & Co. Brent won the Elijah Watt Sells Medal and Ohio honors for his performance on the Uniform CPA Examination. Brent is a member of several non-profit boards and is Past Chairman of the National Paper Trade Association. He currently serves as a board member of B.W. Rogers Co., Petroliance LLC, Millcraft Group, Famous Enterprises, Snavely Forest Products and Elkay Plastics. Brent is a member of the Cleveland Racquet Club, Mayfield Sand Ridge Country Club and the Union Club. Steve Epner, Brown Smith Wallace (BSW) Consulting Group Steve is the founder of BSW Consulting Group LLC. During his 40+ year career, he has built a reputation for assisting clients with the integration of strategic business planning, information systems and tactical requirements. He has also become a highly regarded industry expert. Steve earned a Bachelor of Science degree in computer science and a Master of Science degree in technology from Purdue University. Additionally, he is the Innovator in Residence at Saint Louis University. He pioneered in early on-line systems and database environments and selected and implemented one of the first voice recognition systems in the United States. In addition, Steve has published more than 800 articles in major business and trade publications. He has been quoted in the national business press, including the Wall Street Journal, and has authored or contributed to eight books. He is the founder and past president of the Independent Computer Consultants Association, a founding member of the EDI Coalition of Associations, and a member of the National Speakers Association (NSA) Gateway Chapter. In 2000, the NSA awarded Steve the Certified Speaking www.ibisinc.com 10
Professional (CSP) designation. About the Sponsor Advanced Supply Chain Software, powered by I.B.I.S., Inc., combines deep understanding of the industrial distribution industry together with the latest Microsoft technology to offer software that goes much deeper than the out-of-the-box generic solutions offered by generalists. With 25 years of experience serving distributors, I.B.I.S. has the industry knowledge and expertise to make a real difference to your bottom line. Through a strategic relationship with Microsoft, we provide world class solutions for Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Business Intelligence, and Application Development for Industrial Distributors. I.B.I.S., Inc. is AMR Research Industry Certified in Distribution and committed to the distribution industry. About I.B.I.S., Inc. I.B.I.S., Inc. is a premier Microsoft Dynamics Partner with over 25 years of experience implementing Microsoft Dynamics AX, GP, and CRM solutions along with Advanced Supply Chain Software for distributors and manufacturers. With four Microsoft Gold Competencies, including enterprise resource management (ERP), customer relationship management (CRM), business intelligence (BI), and application development, I.B.I.S., Inc. has the expertise to implement, customize, and support a wide range of Dynamics business applications. I.B.I.S., Inc. is a twotime winner of Microsoft Dynamics Outstanding Partner of the Year Award, the winner of Worldwide Partner of the Year Award for Microsoft Dynamics GP, a Worldwide Finalist for the Microsoft Dynamics AX Partner of the Year, a Microsoft Global Independent Software Vendor Certified for Microsoft Dynamics, and a ten-time Microsoft Dynamics Inner Circle Partner. I.B.I.S., Inc. is AMR Research Industry Certified in Distribution and Discrete Manufacturing. www.ibisinc.com 11
ERP Upgrades in Distribution Industry: Findings from Modern Distribution Management Survey A recent study conducted by Modern Distribution Management (MDM) investigated how diligent distributors are about keeping up with the current version of their ERP systems and why some have chosen not to upgrade. Survey Findings Sixty distribution company executives were surveyed for the study. With a limited data set, the survey is not intended to provide a rigorous, scientific analysis but does provide enough responses to be statistically significant. Given that caveat, we can draw some interesting conclusions: About half of the distributors in the sample are not on the current release of their application package. Of the distributors on older releases, about half of the respondents are more than one version behind. Difficulty or fear of conversion is the single strongest reason for not staying current. www.ibisinc.com 12
Cost of an upgrade or conversion is cited by about 60% of the respondents as a barrier to change. Anecdotally, that may be a soft barrier. Companies only remember what it cost to build the mods last time. They have not done any research to understand how many of the required capabilities are available in the new release. If you are using an old version of your software, it is probably a good idea to consider an upgrade or a change. Document the critical issues that required modifications in the past and see which (if any) vendors provide those capabilities out of the box. You may be surprised by the availability of new functions built into the latest software packages. www.ibisinc.com 13