Why ERP Systems Are More Important Than Ever

CIOs remain committed to ERP systems despite innovation, integration and cost issues. Why? Business can't live without it.

Can't live with them, can't live without them. That pretty much sums up how CIOs and IT leaders feel about their ERP systems, according to a new CIO magazine survey that primarily focused on small to mid-market companies.

What they told us revealed the extent to which companies in 2008 are completely married to and dependent upon their ERP systems. More than 85 percent of respondents agreed or strongly agreed that their ERP systems were essential to the core of their businesses, and that they "could not live without them."

But this marriage is also showing some signs of stress: CIOs are still plagued by complex system integrations, high cost of ownership and ERP systems that are difficult to use. They are also yearning for innovation from their vendor partners.

And yet, CIOs appear unwilling or unable to divorce their companies from their ERP systems and try something new, such as software-as-a-service (SaaS) or open-source models.

The degree to which companies are wedded to their ERP systems comes as no surprise to Amy Doherty, CIO of American Financial Realty Trust, a $426 million publicly traded real estate investment trust. Doherty says that over the past 15 years, companies have attached more and more critical data, including financials, to these systems. "The tighter your integration with ERP," she says, "the more critical it becomes to your business."

Doherty ought to know. For about two years, American Financial Realty Trust has run a JD Edwards ERP module that's specialized for the real estate industry. In that short time, it has become increasingly critical and popular, with more internal business users and external partners wanting to know "what it can do for them," Doherty says. "It's the database of record in our company. We run our business on it."

Doherty was one of nearly 400 IT leaders—all with their own ERP systems and tales of frustration and satisfaction—who responded to our October 2007 survey. Seventy percent of those responding said their businesses fell into the small and midsize category (up to $999 million in annual revenues).

We wanted to know everything about their company's back-office suites of financial, HR and inventory management applications. Who were their trusted vendors? On which areas (maintenance, upgrades, licenses) were they spending the most ERP dollars? How much innovation were their vendors providing? What were their persistent challenges? And were they looking at alternative ERP models, such as SaaS or open-source applications?

Our respondents answered those questions and more: They strongly disputed IT scuttlebutt that ERP systems were now shrugged off as legacy inside 21st-century businesses. Almost 80 percent disagreed or strongly disagreed with the statement, "My company views ERP systems as legacy systems and no longer invests in them."

"There was talk in the past that ERP systems were legacy, lacked the agility and flexibility, and did not support interoperability. Those days are over," says Ray Wang, a principal analyst at Forrester Research. "ERP systems are more important than ever."

In fact, IT leaders are entwined in this marriage for the long haul. When asked if their company would be able to live without its ERP systems within the next five years, more than 80 percent disagreed or strongly disagreed. For better or worse, it seems, ERP systems are here to stay.

The Big Picture

So how are you using ERP? CIOs told us that their core ERP modules were used chiefly for accounting and financial applications (96%); procurement, order processing and supplier management (78%); inventory management (64%); and HR management and payroll functions (55%). (Multiple answers were allowed to the question.)

When asked in which areas of their business ERP worked best, respondents overwhelmingly cited the financial side of the house (70%). Next were procurement, order processing, supplier management (42%), inventory management (33%), and HR management or payroll (26%).

The vendors supporting the respondents' companies were, not surprisingly, a who's who among enterprise software providers. Nearly 20 percent of those surveyed cited Oracle as their organization's ERP provider, followed by SAP (14%); PeopleSoft (14%), which is owned by Oracle; Microsoft (11%); Infor (10%); JD Edwards (8%), also owned by Oracle; Lawson (6%); Sage Group (5%) and QAD (2%).

In an age where all business technology applications should provide some competitive advantage, 76 percent of IT chiefs said operational efficiency was the goal of their organization's ERP investment, followed by support of global business (12%), growth (5%) and IT cost reduction (4%). The survey results did not surprise Forrester's Wang. "If you look at the [ERP] decision makers," he says, "you often find CFOs, CIOs and other operational leaders."

Interestingly, just 4 percent of IT leaders said their ERP system offered their companies competitive differentiation or advantage. However, Wang says that among SMB IT leaders, his research shows that vertically focused solutions (meaning those specific to an industry or business) are the most important attribute for an ERP system, and make it more likely to provide a competitive differentiator.

To CIOs like Doherty, competitive advantage is just that: being able to leverage her JD Edwards real estate applications as much as she can for her business peers. However, "there are some industry differences as to when you can have competitive advantage with ERP," she says. For example, within the financial services industry, where Doherty worked on ERP systems for seven years before joining her current company, "everyone's got it, so there's not really competitive advantage." But in the real estate industry, a robust ERP package that is embraced by users can be more of a differentiator because they aren't as common in this sector as they are in industries such as financial services and manufacturing. "Then it becomes how efficient you are at using your ERP systems," she says.

For IT chiefs like Pam Haney, IT director at Irvine Scientific, a $28 million life sciences company, issues of competitive advantage are overshadowed by ever-present customization needs with her ERP system. "What we're faced with is having to deal with ERP packages that are not designed for process manufacturers" like her company, says Haney, who also took the survey. In turn, she has had to make do with bigger packages that are "revamped" for Irvine Scientific's specific needs. The problem lies in the fact that while her company is small, "we have big company needs," Haney points out, such as operations in Ireland that introduce multicurrency issues. Given those currency and conversion issues, and the fact that her current ERP system can't reconcile all of the application changes (such as in the shipping and invoicing tools), the end result, she says, is that "we're doing a lot things manually or with customizations."

Innovation, Where Art Thou?

The giant ERP vendors, with their workhorse enterprise packages, are not exactly hothouses of innovation for small and midsize companies. (Read "Under Pressure, ERP Giants Struggle to Innovate.) The large vendors provide innovations but no longer can get to the micro-vertical solutions that customers expect," says Wang, referring to highly targeted, industry-specific applications. Yet while 38 percent of those surveyed pronounced themselves dissatisfied with the level of innovation delivered by their ERP supplier, nearly half declared themselves satisfied. Twelve percent weren't sure.

Doherty says there's a significant difference in what ERP innovation means to different CIOs. "I'm satisfied that they're being innovative with their products," she says, in reference to Oracle. "But they're not offering innovation for my business."

For example, "green buildings" are the next big thing in real estate. Doherty says that's an area where she would welcome ERP systems innovation. Her company's tenants as well as prospective ones are starting to ask for such buildings, which can improve energy efficiency and lower energy costs. To make such green initiatives viable, Doherty's company needs to integrate ERP systems such as billing with newer building information management systems that manage climate control systems. The payoff is happier tenants and more efficient and environmentally friendly buildings. But "how do we do that without it costing us a lot of money?" she asks. Given that the market for real estate applications is so small, she says that she can't imagine ERP partners wanting to do that.

Irvine Scientific's Haney also sounds pessimistic. "We're not getting innovation," she says. Although she's a member of QAD's customer advisory board, she says it has taken QAD too long (two years in some cases) to get new features into its products. Her gripes range from the slow rollout of newer initiatives, such as electronic signature features, to still missing functionalities from yesteryear, such as e-mail addresses in customer files. "This is 2008!" she says. "They are so far behind on being innovative." (Haney has since sent RFPs to several new ERP vendors.)

To probe more deeply into how the vendors are doing, the survey asked IT leaders to share how satisfied they were with the level of innovation provided based on access to information, flexibility, integration, total cost of ownership (TCO) and usability. Responses to the first three categories were almost evenly split between those who were satisfied and those who were not.

But when it came to TCO and usability, CIOs reported some interesting differences. On usability, CIOs were quite happy: More than 60 percent were satisfied or very satisfied. On TCO, 54 percent were not very satisfied or not at all satisfied. "Cost of ownership continues to be onerous," Wang concurs. In fact, 26 percent of respondents who were dismantling or considering dismantling their ERP systems in favor of other models cited lowering their total cost of ownership as a primary motivator. (Just under 30 percent cited their desire for increased flexibility.)

Wang says that in order to show better TCO, vendors must deliver more value for the maintenance dollar, reduce maintenance fees and allow third-party vendors to compete.

Despite the persistent challenges and gloomy predictions for the U.S. economy, the majority of CIOs surveyed planned to spend money on ERP software in 2008. While 11 percent were making a new purchase, 54 percent planned a minor or major upgrade next year. Just over 25 percent said they weren't spending on ERP software, and 10 percent were not sure. Total annual ERP costs were split among maintenance (35%), services (including upgrades, integration and consulting work—34%) and licensing costs (32%).

It seems that there are always costs with ERP systems, even if a company isn't upgrading to the next edition. "There's always been something, whether implementing new modules, customizing or paying for ongoing maintenance," Haney says. "And if you don't pay maintenance, and then you let [the contract] expire, when you do an upgrade in the future, you will have to pay."

Into the Arms of Another Vendor?

Beyond ongoing expenses, CIOs face many persistent challenges with their ERP systems. (We didn't offer "costly implementation" as a choice, but it is sure to have been high atop many CIOs' lists.) IT leaders found themselves stymied by complicated systems integration (39%), a lack of customization around particular business strategies (38%), high cost of ownership (36%), difficulty in accessing or extracting useful information (32%), and systems that were difficult to use or not intuitive (31%).

None of this is news to Haney or Doherty. That's the cost of doing business with ERP, they say. What does surprise Doherty, who is president of the Greater Philadelphia PeopleSoft-JD Edwards user group, is that the challenges are both ongoing and so pervasive among CIOs. "It's frustrating that software firms are not jumping through hoops to fix them," she says, "because we all have the same problems."

But just how much have these challenges and struggles driven IT leaders into the arms of another ERP provider? According to our survey, not much.

Just 9 percent of respondents reported using an alternative ERP model. Those models included software as a service, open-source tools and various in-house applications. Forrester's data reveals a similar trend, says Wang. "Our numbers also show SaaS adoption in the high single digits and a reluctance to make significant adoption of new models," he says.

Historically speaking, CIOs have been reluctant to take many chances with their ERP systems. (Can you imagine this conversation: "Should we try something completely untested with our company's most critical data?") Irvine Scientific is regulated by the Food and Drug Administration, which makes Haney leery of untried technologies that could run afoul of FDA restrictions or mess with the company's ERP audit trail or security functionalities. "There's some open source that I'm using in IT, but would I want to go open-source ERP?" she says. "I'm not so sure. I'm pretty conservative."

Doherty says that she's open to looking at alternatives. But with something like open-source ERP systems, she's not so sure.

"It's not proven yet," she says.

The survey results illustrate that reluctance. Nearly 54 percent of those responding said they probably or definitely would not consider moving to an alternative ERP model. And while 35 percent of CIOs said they would probably or definitely consider trying something different, they're not actually doing it. Yet.

So with a reluctance to go whole hog on a new ERP endeavor, Haney, like other IT leaders, will plug away with what she has and work to wring more efficiencies out of the core system that is the backbone of Irvine Scientific's business. "We are trying to continually use more of the products and be more efficient and give the system more functionality," she says. "We are very much dependent on it. I couldn't say enough about that."

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