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ERP definition and solutions

ERP topics covering definition, objectives, systems and solutions.

By Thomas Wailgum

PAGE 3

• What is ERP?
• How can ERP improve a company’s business performance?
• How long will an ERP project take?
• What will ERP fix in my business?
• Will ERP fit the ways I do business?
• What does ERP really cost?
• When will I get payback from ERP—and how much will it be?
• What are the hidden costs of ERP?
• Why do ERP projects fail so often?
• How do I configure ERP software?
• How do companies organize their ERP projects?
• How does ERP fit with e-commerce?
• How do on-demand and software-as-a-service ERP applications work?
• How do I know my ERP data is any good?
• Just how important have ERP systems become?

Will ERP fit the ways I do business?

It’s critical for companies to figure out if their ways of doing business will fit within a standard ERP package before the checks are signed and the implementation begins. The most common reason that companies walk away from multimillion-dollar ERP projects is that they discover the software does not support one of their important business processes. At that point there are two things they can do: They can change the business process to accommodate the software, which will mean deep changes in long-established ways of doing business (that often provide competitive advantage) and shake up important people’s roles and responsibilities (something that few companies have the stomach for). Or they can modify the software to fit the process, which will slow down the project, introduce dangerous bugs into the system and make upgrading the software to the ERP vendor’s next release excruciatingly difficult because the customizations will need to be torn apart and rewritten to fit with the new version.

Needless to say, the move to ERP is a project of breathtaking scope, and the price tags on the front end are enough to make the most placid CFO a little twitchy. In addition to budgeting for software costs, financial executives should plan to write checks to cover consulting, process rework, integration testing and a long laundry list of other expenses before the benefits of ERP start to manifest themselves. Underestimating the price of teaching users their new job processes can lead to a rude shock down the line, and so can failure to consider data warehouse integration requirements and the cost of extra software to duplicate the old report formats. A few oversights in the budgeting and planning stage can send ERP costs spiraling out of control faster than oversights in planning almost any other information system undertaking.

What does ERP really cost?

One of the most often-cited studies of the total cost of ownership (TCO) of ERP was completed by Meta Group in 2002. (Gartner acquired Meta Group in 2005.) This TCO study accounted for hardware, software, professional services and internal staff costs. Costs included initial installation and the two year period that followed, which is when the real costs of maintaining, upgrading and optimizing the system for your business are felt. Among the 63 companies surveyed—including small, medium and large companies in a range of industries—the average TCO was $15 million (the highest was $300 million and lowest was $400,000). While it’s hard to draw a solid number from that kind of range of companies and ERP efforts, Meta came up with one statistic that proves that ERP is expensive no matter what kind of company is using it. The TCO for a "heads-down" user over that period was a staggering $53,320.

Results from a 2007 Aberdeen Group survey of more than 1,680 manufacturing companies of all sizes found a correlation between the size of an ERP deployment and the total costs. Therefore, "as a company grows, the number of users go up, along with the total cost of software and services," states the Aberdeen report. For example, a company with less than $50 million in revenue should expect to pay an average of $384,295 in total ERP costs, according to the survey results. A mid-market company with $50 million to $100 million in revenues can expect to pay (on average) just over a $1 million in total costs; a much bigger mid-market company, with $500 million to $1 billion in revenues, should expect to pay just over $3 million in total costs. And those companies with more than $1 billion in revenues can expect to pay, on average, nearly $6 million in total ERP costs.

When will I get payback from ERP—and how much will it be?

Don’t expect to revolutionize your business with ERP. It is a navel-gazing exercise that focuses on optimizing the way things are done internally rather than with customers, suppliers or partners. Yet the navel gazing has a pretty good payback if you’re willing to wait for it—a 2002 Meta Group study of 63 companies found that it took eight months after the new system was in (31 months total) to see any benefits. But the median annual savings from the new ERP system were $1.6 million.

What's interesting to note is that according to a the results of a 2007 Aberdeen Group survey of more than 1,680 manufacturing companies of all sizes, those companies that pay the closest attention to return on investment (ROI) at the outset of an ERP engagement "reap far more rewards" than those companies that don't. The companies that Aberdeen Group identified as "best performing" were able to produce, on average, 93 percent more improvement with their ERP systems across a variety of metrics such as cost reductions, schedule performance, headcount reduction or redeployment, and quality improvements, states the Aberdeen Group survey results.

 

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